Quality of financial information

ASIC calls on preparers to focus on the quality of financial information (focus areas for 30 June 2017 financial reports)

On 31 May 2017 the Australian Securities and Investments Commission (ASIC) issued Media Release MR 17-162 which outlines its focus areas for 30 June 2017 financial reports of listed entities and other entities of public interest with many stakeholders. ASIC also reviews financial statements of proprietary companies and unlisted public companies.

‘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 apply 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

There has been a subtle shift in the wording in the media release to emphasise that directors 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, and
  • Companies apply appropriate experience and expertise for the more complex accounting areas that involve estimates and judgements, including impairment of non-financial assets, revenue recognition and application of accounting policies.

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.

The media release does note, however, that directors do not need to be accounting experts but should seek explanation and professional advice supporting the accounting treatments chosen. They should challenge accounting estimates and treatments applied in the financial report and should also seek advice where an accounting treatment does not reflect their understanding of the substance of an arrangement.

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 IFRS 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. This includes disclosing the impact of the standards in notes to the financial report as required by AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.

For AASB 9 and 15, which apply for annual periods beginning on or after 1 January 2018, if the full retrospective restatement method is adopted, 1 January 2017 for December balancing entities, and 1 July 2017 for June balancing entities, will be the opening balance sheet date at which point any adjustments are made for application of the new standards. In ASIC’ view, entities should be able to quantity adjustments after this date.

Enhanced audit reports for listed entities

The audit reports of listed entities reporting at 30 June 2017 will include ‘key audit matters’ (KAMs) for the first time.

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.

Material disclosures

ASIC will continue to only focus its review on material disclosures that are useful to investors and other users of financial reports. In line with the ‘decluttering’ changes discussed above, ASIC will focus on information about 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 2001.

Operating and financial review

A new message highlighted in the media release is the focus on listed companies disclosing information on matters that may have a material impact on the future financial position of the entity such as climate change or cyber-security.

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. ASIC are now proactively identifying and following up such entities that have failed to lodge over a number of years.

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 for June 2016 and December 2016 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:

  • 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
  • Appropriate fair values must be used when testing exploration and evaluation assets during the exploration and evaluation phase
  • 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, and
  • The impact of the new insurance standard, IFRS 17 Insurance Contracts, also needs to be disclosed.

Resources for directors

ASIC has compiled the following Information Sheets to assist directors: