ASIC focus areas for 31 December 2019 – Important note for AFS licensees with right-of-use assets

On 6 December 2019, the Australian Securities and Investments Commission (ASIC) issued Media Release MR19-341, which outlines its focus areas for its 31 December 2019 financial reporting surveillance program.

AFS Licensees

The Media Release makes particular note of the impact of the new leases standard, AASB 16 Leases on the ‘financial condition requirements’ of entities with Australian Financial Services (AFS) Licences (AFS licensees). AFS licensees that have entered into leases (previously operating leases) will, for the first time, be required to capitalise a right-of-use (ROU) asset and lease liability on their balance sheets.

Lease liabilities would be included in the ‘net tangible asset’ calculation, but intangible assets, such as the related ROU assets, would not be counted. This could result in some AFS licensees breaching their financial condition requirements.

Similar issues may arise with contract assets recognised under AASB 15 Revenue from Contracts with Customers if these are also considered intangible assets.

Because the financial condition requirements apply throughout the year (referred to as ‘on an at all times basis’ in the Media Release), compliance must be considered from the beginning of the financial year to which AASB 16 is first applied. This is the case even if ASIC were to subsequently change a licensee’s financial conditions to allow right-of-use assets to be counted. Directors and auditors of AFS licensees are therefore reminded to report any breaches of financial condition requirements to ASIC as required by the Corporations Act 2001.

Role of directors

Directors are reminded that they are primarily responsible for the financial report and for ensuring management produces quality financial information on a timely basis. Companies should apply appropriate experience and expertise, particularly in more difficult and complex areas such as accounting estimates (including impairment of non-financial assets), accounting policies (e.g. revenue recognition) and taxation. For further information, directors can refer to ASIC’s Information Sheets:

Governance review

ASIC also notes that it will review the governance processes over financial reporting of several companies over the next six months, those selected for review generally being where reported assets and profits were materially changed following ASIC enquiries in recent reporting periods.

The reviews of governance processes of companies selected will cover how audit committees and directors fulfilled their role in ensuring the quality of financial reporting and supporting the audit.

ASIC will also review the identification and effectiveness of actions taken by the audit firms of the above companies to address root causes from an audit perspective.

Impact of new standards

The impact of new standards remains at the top of ASIC’s priority list, and ASIC expects public disclosure of impacts because it is important for investors and market confidence. This includes if there has been, or will be, no impact.

We expect to continue 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 regarding the impacts on transition).

Focus areas

The nine focus areas in MR19-341 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
  • Operating and financial review (OFR)
  • Non-IFRS financial information, and
  • Estimates and accounting policy judgements.

Please refer to the Media Release for more information.