On 2 June 2016 the Australian Securities and Investments Commission (ASIC) issued Media Release MR 16-174 which outlines its focus areas for 30 June 2016 financial reports of listed entities and other entities of public interest with many stakeholders.
‘Directors and auditors should continue to focus on values of assets and accounting policy choices. We continue to see companies use unrealistic assumptions in testing the value of assets or that have applied inappropriate approaches in areas such as revenue recognition.’
ASIC Commissioner, John Price
In its Media Release, ASIC stresses that even though directors do not need to be accounting experts, they should seek explanation and professional advice supporting the accounting treatments chosen. Directors should be challenging accounting estimates and treatments applied in the financial report and seeking advice where a treatment does not reflect their understanding of the substance of an arrangement.
ASIC has compiled the following Information Sheets to assist directors:
It is important to note that not only listed entities will be affected by ASIC’s focus areas and its financial reporting surveillance programme, ASIC continues to review a sizable number of financial reports of private entities and groups with numerous stakeholders.
ASIC will continue to review the financial reports of proprietary companies and unlisted public companies based on complaints and other intelligence.
ASIC will continue to only focus its review on material disclosures that are useful to investors and other users of financial reports.
ASIC is encouraging entities to communicate clearly to users of its financial reports by removing immaterial disclosures from financial reports that add unnecessary clutter. ASIC will not pursue omission of any such immaterial disclosures.
ASIC has released seven focus areas that directors, preparers and auditors of financial statements should be aware of. These are the same as for December 2015 and include:
These are summarised briefly in the table below. We recommend preparers and directors review these focus areas in detail and pay attention to the reasonableness of assumptions used when compiling impairment testing calculations and models.
Impairment testing and asset
Recoverability of the carrying amounts of assets such as goodwill, other intangibles, and property, plant and equipment continues to be an important area of focus.
Recommend directors to apply the guidance in ASIC Information Sheet 203 when reviewing management’s impairment models to ensure:
Extractive industries and support services
Given current economic conditions and commodity prices, directors need to pay attention to asset values in the extractive industries and those providing support services to extractive industries.
Directors also need to pay attention to the pricing, valuation and accounting for inventories. This includes focusing on the net realisable value of inventories which may be affected by possible technical or commercial obsolescence as well as understanding the substance of pricing and rebate arrangements.
Directors should pay attention to values of financial instruments, particularly where they are not based on quoted prices or observable market data. This includes the valuation of financial instruments by financial institutions.
Accounting policy choices
Off-balance sheet arrangements
Directors should review the treatment of off-balance sheet arrangements, the accounting for joint arrangements and disclosures relating to structured entities (AASB 10 Consolidated Financial Statements).
Directors should review revenue recognition policies to ensure that revenue is recognised in accordance with the substance of the underlying transactions. Revenue should only be recognised when:
Some industries with complex sale and licensing arrangements and ongoing obligations (e.g. software providers) require careful consideration to ensure revenue is being recognised appropriately.
Ensure that expenses are only deferred where the item meets the definition of an asset under Accounting Standards, it is probable that future economic benefits will arise, and the requirements of AASB 138 Intangible Assets have meet met, i.e.:
Items of income and expense should only be recognised in other comprehensive income (rather than profit or loss) when specifically permitted by accounting standards.
Ensure a proper understanding of both the tax and accounting treatments, and how differences between the two affect tax assets, liabilities and expenses.
Consider changes to tax legislation if relevant.
Review the recoverability of deferred tax assets at each reporting date.
Estimates and accounting policy judgements
Ensure disclosures are made for all key areas of uncertainty and judgment.
Disclosures should be specific to the assets, liabilities, income and expenses of the entity.
Disclosure of key assumptions and a sensitivity analysis are important. These enable users of the financial report to make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations.
At 30 June 2016, preparers of listed entity financial reports should be particularly mindful to make these disclosures which may be revealed under the key audit matter disclosures in the new enhanced audit reports for listed entities for 31 December 2016 year ends,
Impact of new accounting standards
Ensure that the impact of the new revenue standard, AASB 15 Revenue from Contracts with Customers, the new financial instrument standard, AASB 9 Financial Instruments and the new leases standard AASB 16 Leases on the future financial position and results are disclosed.
Example of impacts: How and when revenue can be recognised, new hedge accounting requirements and loan provisioning requirements, and lease assets and liabilities that may need to be recognised.