Financial report quality

ASIC calls on preparers to focus on financial report quality and new requirements (Focus areas for 31 December 2017 financial reports)

On 8 December 2017, the Australian Securities and Investments Commission (ASIC) issued Media Release MR 17-423 which:

  • Outlines its focus areas for 31 December 2017 financial reports of listed entities and other entities of public interest with many stakeholders (including certain proprietary companies and unlisted public companies), and
  • Calls on preparers to focus on providing useful and meaningful information in financial reports, including addressing the impact of major new accounting standards.

ASIC notes that surprisingly few companies have to date made disclosures quantifying the impacts of the new revenue and financial instruments standards, indicating that some companies need to give urgent attention to the impact of these standards on systems, processes and the business.

‘As with previous reporting periods, directors and auditors should focus on values of assets and accounting policy choices. ASIC continues to see companies use unrealistic assumptions in testing the value of assets or applying inappropriate approaches in areas such as revenue recognition.’

ASIC Commissioner, John Price 

Besides the focus areas which are similar to the past few years, key points made in the media release are highlighted below.

Role of directors

Following on from previous releases, ASIC remind directors that they are primarily responsible for the quality of the financial report, including ensuring that:

  • Management produces quality financial information
  • Companies have appropriate processes and records to support information in the financial report rather than simply relying on their auditor
  • Companies apply appropriate experience and expertise for the more complex accounting areas that involve estimates, application of accounting policies and taxation.

The message is that management should not rely on their auditor to produce support for amounts in the financial report (e.g. annual impairment testing models) when this is management’s responsibility. Management should prepare information supporting financial report amounts on a timely basis, and this information should include sufficient documentation and analysis of the assumptions used in the models to enable the independent auditor to perform an independent audit.

New accounting standards on revenue, financial instruments, leases and insurance contracts

New accounting standards, AASB 15 Revenue from Contracts with Customers, AASB 9 Financial Instruments, AASB 16 Leases and AASB 17 Insurance Contracts are likely to have the greatest impact on financial reporting since the adoption of International Financial Reporting Standards in 2005.

The media release notes that directors and management need to plan for these new standards and inform investors and other financial report users of the impact of these new standards on reported results and any business impacts, including the need to implement new systems and processes.

Regarding AASB 15 and AASB 9, the media release notes that disclosing the impact on reported results at transition date may well mean quantifying the impacts as follows:

  • Full retrospective method adopted - 1 January 2017 balance sheet and 31 December 2017 profit or loss and balance sheet
  • Modified retrospective method adopted – 31 December 2017 balance sheet.

Similarly, the transition date (‘going live’ date) for AASB 16 full retrospective restatement to the balance sheet is also 1 January 2018. By the time companies release their 31 December 2017 results, these transition dates will have passed, which means ASIC expects companies to be able to quantify the impacts as required by AASB 108, paragraph 30. For more information, refer to Accounting News article Count down to adopting AASB 9, 15 & 16 – Time is running out.

Operating and financial review (OFR)

Expanding on a similar message in its May 2017 media release, listed companies should continue to disclose information on risks and matters that may have a material impact on the future financial position or performance of the entity, such as digital disruption, new technologies, climate change, Brexit or cyber-security. More guidance on OFR reporting is contained in ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review.

Where information is not already required in the OFR, directors may also consider whether it would be worthwhile disclosing additional information relevant under integrated financial reporting or sustainability reporting.

Enhanced audit reports for listed entities (KAMs)

The audit reports of listed entities now include ‘key audit matters’ (KAMs). KAMs are those areas that required significant attention by the auditor in performing the audit.

The media release reminds preparers and directors that KAMs usually relate to accounting estimates and significant accounting policy choices that also require specific disclosure in the financial statements, as well as business matters covered in the Operating and Financial Review.

It also reminds auditors to bear in mind the broad audience of investors and users of the financial statements when describing KAMs and their audit work in a clear and understandable manner. KAMs disclosure should not be ‘boilerplate’ but rather specific to the circumstances of the company.

Material disclosures

In line with the ‘decluttering’ changes discussed above, ASIC will focus on material disclosures such as assumptions supporting accounting estimates and significant accounting policy choices. It will not pursue immaterial disclosures that add unnecessary clutter to financial reports.

The media release also notes that companies should make an effort to communicate information more clearly in financial reports.

Client monies

Client monies held by Australian financial services licensees must be held in separate, designated trust bank accounts, and only applied in accordance with client instructions and the requirements of the Corporations Act. The media release also emphasises to auditors the importance of audit testing to ensure:

Proprietary companies

While ASIC’s financial reporting surveillance programme generally focuses on financial reports of listed entities, ASIC notes that it also reviews financial reports of private and unlisted public companies based on complaints and other intelligence.

The media release also reminds private and unlisted companies of their responsibility to lodge their financial statements with ASIC if required to do so under the Corporations Act 2001. In this regard, ASIC has recently written to more than 1,000 proprietary companies that appeared to be large which had not lodged financial reports.

Focus areas

ASIC still has the seven focus areas that directors, preparers and auditors of financial statements should be aware of. These are generally the same as noted in recent releases over the last couple of years and include:

  • Impairment testing and asset values
  • Revenue recognition
  • Expense deferral
  • Off-balance sheet arrangements
  • Tax accounting
  • Disclosure of key estimates and accounting policy judgements
  • Disclosure of the impact of new accounting standards.

Our June 2016 Accounting News includes details of ASIC’s comments on each of these focus areas. In this latest media release, ASIC also stresses that:

  1. When testing impairment, both corporate costs and corporate assets should be allocated to a CGU on an appropriate basis where it is reasonable to allocate them
  2. Appropriate fair values must be used when testing exploration and evaluation assets during the exploration and evaluation phase
  3. When considering asset values in the extractive industries, entities should focus on the adequacy of treatment of any liabilities required for mine restoration and closure costs
  4. In addition to the risk of digital disruption, asset values may also be impacted by technological changes, climate change, Brexit or cybersecurity.

Resources for directors

ASIC has compiled the following Information Sheets to assist directors: