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Impairment still the biggest issue for ASIC in its surveillance on 31 December 2016 financial reports

On 30 June 2017 the Australian Securities and Investments Commission (ASIC) issued Media Release MR 17-219 which summarises the results of its financial reporting surveillance on 31 December 2016 financial reports of 90 listed and other public interest entities (including some large private companies). ASIC made a total of 28 enquiries of 23 entities to seek explanations of accounting treatments. These are summarised in Areas of enquiry below.

Public announcements of restatements

While not all enquiries result in a restatement of a financial report, we remind directors and audit committees that ASIC will publicly announce those where a material restatement is made following enquiries by ASIC. This is to improve market transparency and to make directors and auditors of other companies aware of ASIC’s concerns so that they can avoid similar issues in future.

Since December 2016, ASIC has issued media releases regarding an aggregate of profit restatements exceeding $700 million by eight entities.

We therefore urge directors and audit committees to pay attention to ASIC’s focus areas when preparing 30 June 2017 financial reports.

Impairment is still the biggest issue for ASIC

‘The largest number of our findings continue to relate to impairment of non-financial assets and inappropriate accounting treatments. Directors and auditors should continue to focus on values of assets and accounting policy choices in preparing their 30 June 2017 financial reports.’

ASIC Commissioner, John Price

For 30 June 2017 financial reports, directors and audit committees should be referring to ASIC’s Information Sheet 203 Impairment of non-financial assets: Materials for directors to assist when considering the value of non-financial assets in the company’s balance sheet.

Enhanced audit reports

31 December 2016 was the first reporting period for which enhanced audit reports, including key audit matters, were required for listed entities. ASIC noted in its results of surveillance that:

  • Many of these key audit matters were described in general terms but should have been more specific to the circumstances of the entity, and
  • In some cases, the audit procedures performed were not clearly described.

Areas of enquiry

ASIC made a total of 28 enquiries of 23 entities to seek explanations of accounting treatments in the areas outlined in the table below.

Seven of these have been concluded without any changes to financial reports, although the historical average from surveillance from 2010 to 2015 is approximately 4 per cent of entities requiring adjustment to their financial statements.

Area of enquiry Number of enquiries Areas of concern
Impairment and other asset values 10

Assessment of recoverability of the carrying value of assets including goodwill, E&E assets and PPE (most of their enquiries in this area related to assets in the energy and extractives sector).

Areas of enquiry included:

  • Identifying cash-generating units (CGUs) at too high a level despite cash flows being largely independent
  • All assets that generate cash flows for a CGU not being included in the carrying amount of the CGU (e.g. tax balances, inventories and trade receivables)
  • Liabilities being incorrectly deducted from the carrying amount of a CGU
  • Reasonableness of cash flows and assumptions
  • Inappropriate use of fair value to determine recoverable amount where there are significant level 3 inputs
  • Insufficient consideration of impairment indicators, and
  • Insufficient disclosures regarding sensitivity, key assumptions and inputs used for value-in-use calculations, and valuation techniques and inputs used for fair value calculations.
Consolidation accounting 5
  • Non-consolidation of entities, and
  • Relying on the ‘investment entity’ exemption from consolidation when the entity did not meet the definition of an ‘investment entity’.
Amortisation of intangibles 3
  • Non-amortisation of intangibles (i.e. useful life not indefinite), and
  • Period of amortisation.
Revenue recognition 2 Revenue recognition on contracts where services are to be provided in future.
Tax accounting 2 Recoverability of deferred tax assets where it appears that future taxable income may not be sufficient to recover deferred tax assets.
Business combinations 1 No details provided.
Other matters 5 Quality and completeness of disclosures relating to estimates and judgements, including lack of key assumptions, reasons for judgement, alternative treatments and appropriate quantification.
Total 28  

More information

AICD article

Please also refer to a recent article and video by Aletta Boshoff, IFRS Advisory Partner, and published by the Australian Institute of Company Directors (AICD) in its July 2017 edition of The Boardroom Report. It is entitled ‘What directors need to know about FY17 financial reporting’ and explores the four key areas that should be front-of-mind for directors this reporting season.

Accounting news article

Our June 2017 Accounting news article, ASIC calls on preparers to focus on the quality of financial information (focus areas for 30 June 2017 financial reports) and ASIC Media Release MR 17-162 include more detail on ASIC focus areas for 30 June 2017 financial reports.