Appropriate accounting treatment

Almost one in four financial reports reviewed by ASIC result in enquiries on appropriate accounting treatment

As a result of ASIC’s recent financial reporting surveillance:

  • ASIC has sent ‘please explain’ letters to 50 entities, regarding 54 financial reporting matters in 30 June 2017 financial reports. This is almost a quarter of the number of financial reports reviewed by ASIC.
  • Since May last year (2017), $750 million negative profit adjustments have been noted in ASIC media releases.

The Australian Securities and Investments Commission (ASIC) recently announced the results of its surveillance of 30 June 2017 financial reports of 220 listed and other public interest entities (Media Release MR 17-437). Out of 220 financial reports they looked at, almost a quarter, i.e. 50 entities, received enquiries on 54 financial reporting matters.

Between June 2010 and 31 December 2016, ASIC’s enquiries have resulted in material changes to 4% of financial reports reviewed by them. The main changes related to impairment of assets, revenue recognition and expense deferral.

“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 31 December 2017 financial reports.”

John Price, ASIC Commissioner

Results from 30 June 2017 surveillance

The 54 enquiries related to the following accounting matters:

Financial reporting matterNumber of enquiries
Impairment and other asset values20
Revenue recognition8
Tax accounting8
Expense deferral4
Business combinations3
Consolidation accounting2
Operating segments2
Other matters7

At the time of writing the Media Release, ASIC noted that of these 54 enquiries, 18 (a third) have been closed without any further action required but the rest are still to be resolved.

Since May 2017, ASIC has issued media releases relating to entities that have amended their financial statements as a result of ASIC enquiries, resulting in a total adjustment to profit or loss of more than $750 million.

As we draw closer to the application date for the three new accounting standards, AASB 15 Revenue from Contracts with Customers, AASB 9 Financial Instruments, and AASB 16 Leases, we expect to see more enquiries in these areas too. ASIC also notes that some key audit matters in audit reports of listed entities were worded generally (boilerplate) rather than being specific to the circumstances of the entity.

ASIC make it clear that they do not pursue immaterial disclosures which may add unnecessary clutter to financial reports.

Enquiries in each of the above areas are highlighted below:

Incorrectly determining the carrying amount of a cash-generating unit (CGU), including:
  • Level for identifying cash-generating units (CGUs) too high
  • Omitting some assets from carrying amount of CGU assets, e.g. inventories, trade receivables and tax balances
  • Incorrectly deducting liabilities from the carrying amount of a CGU.
Reasonableness of cash flows and assumptions not being supportable, including:
  • Assumptions from external sources not evaluated for consistency and relevance
  • Forecast cash flows exceeded actual cash flows for a number of reporting periods.
Fair value calculations using discounted cash flows with many management inputs (level 3 fair value) which may not represent market participant assumptions
Ignoring impairment indicators such as:
  • Adverse changes in market conditions, or
  • Where net assets > market capitalisation.
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Insufficient disclosures quantifying assumptions used to determine value in use and level 3 fair values and sensitivities.


Please refer to ASIC Information Sheet 203 Impairment of non-financial assets: Materials for directors for more information.
Revenue recognition
Goods or services to be provided in future.
Multiple deliverables (goods and services).
Tax accounting
Adequacy of tax expense.

Refer BDO’s article on uncertainty of income tax treatments
Whether probable that future taxable income is sufficient to enable recovery of deferred tax assets.
Expense deferral
Expenses capitalised as assets should have been charged to profit or loss (i.e. do not meet criteria for recognition as an asset).
Business combinations
Asset acquisition should have been treated as a business combination with goodwill recognised.
Consolidation accounting
Controlled entities not consolidated.
Inappropriate use of ‘investment entity’ exception.
Estimates and accounting policy judgements
Improve quality and completeness of disclosures.
Disclosure requirements are principles-based and should include information to enable user to understand the judgements made and their effect, i.e. disclose:
  • Key assumptions
  • Reason for judgement
  • Alternative treatments and quantify impacts.