ASIC focus areas for 31 December 2018 financial reporting surveillance

On 3 December 2018, the Australian Securities and Investments Commission (ASIC) issued Media Release MR18-364 which outlines its focus areas for its 31 December 2018 financial reporting surveillance program, and also expresses concern about the preparedness of entities for the new standards.

The ‘impact of new standards’ remains at the top of ASIC’s priority list, particularly as the new revenue and financial instruments standards are now applicable for 31 December 2018 year-ends. We expect to see ASIC making enquiries through its financial reporting surveillance program of entities’ application of these new standards (i.e. whether accounting policies adopted are appropriate), as well as the extent of disclosures (both ongoing disclosures, and also regarding the impacts on transition).

‘We are concerned that some companies may not have adequately prepared for the impact of new accounting standards that can significantly affect results reported to the market by companies, require changes to systems and processes, and affect businesses. We will monitor these areas closely and will take action where required.’

ASIC Commissioner, John Price

Two additional focus areas

The previous list of seven focus areas has been expanded to nine, with the following two items added as specific focus areas:

  • The operating and financial review (OFR)
  • Non-IFRS financial information.

The other seven focus areas remain essentially the same, with the ‘impact of new standards’ remaining at the top of the list:

  • Impact of the new standards
  • Impairment testing and asset values (many media releases ‘naming and shaming’ still relate to impairment write-downs)
  • Revenue recognition policies
  • Expense deferral
  • Off-balance sheet arrangements
  • Tax accounting
  • Disclosure of key estimates and accounting policy judgements.

Impacts of new standards

Most entities will be impacted in some way by the new revenue standard, AASB 15 Revenue from Contracts with Customers, the new financial instruments standard, AASB 9 Financial Instruments and the new leases standard, AASB 16 Leases. However, ASIC will also be looking to see disclosure of impacts for:

  • Companies to which the new insurance standard will apply (AASB 17 Insurance Contracts)
  • Accounting policies formulated using the conceptual framework that may change because definitions and recognition criteria in the revised Conceptual Framework for Financial Reporting (applicable from 1 January 2020) have changed.

Key messages stressed in the media release include:

  • Companies that have not already done so should determine the extent of the impacts (i.e. be able to quantify the impact) as these could have a flow-on effect to financial covenants, tax liabilities, dividend policy and remuneration schemes, and may require new systems and processes.
  • Public disclosure of the impacts of new standards is important for investors and market confidence, and directors and preparers should therefore consider any continuous disclosure obligations to ensure the market is kept informed.
  • Directors and preparers also need to consider the impact of the new standards on any fundraising or other transaction documents.
  • ASIC will be selecting December 2018 half-year and annual financial statements to review the extent of compliance with AASB 9 and AASB 15.
  • By the time entities with December 2018 year-ends lodge financial statements with ASIC in 2019, they will be part way through the first year that the new leases standard applies. As such, these entities should be able to QUANTIFY the impacts of AASB 16, and these should be:
    • Disclosed in the December 2018 year-end financial statements, and
    • Incorporated into forecasts disclosed to the market for the 2019 financial year and beyond, i.e. forecasts should be consistent with the accounting basis required by AASB 16.