Directors are primarily responsible for the provision of useful and meaningful information for investors and other users of the financial report. While directors are not expected to be accounting experts, they should seek explanation and advice supporting the accounting treatments chosen and, where appropriate, challenge the accounting estimates and treatments applied in the financial reports. Directors should particularly seek advice where a treatment does not reflect their understanding of the substance of an arrangement.
In reading and reviewing the 30 June 2017 financial reports, directors should focus on the following areas:
Users of financial statements, and in particular investors and analysts, have indicated that they are particularly interested in the amount and timing of revenue recognised. Directors should therefore review the entity’s revenue recognition policies to ensure that revenue is recognised in accordance with the currently applicable accounting standards and the substance of the underlying transactions.
Impairment testing and asset values
Non-financial assets are often significant assets of an entity. The value attributed to these assets may affect not only the entity’s reported financial position, but also its reported performance. Directors should therefore think carefully about the carrying amounts of non-financial assets in the entity’s financial report, as well as impairment testing of non-financial assets.
Impairment testing is the process of reviewing the values of assets shown in the balance sheet of a entity to determine whether those values continue to be supportable or should be reduced. Impairment calculations often rely on discounted cash flows and can be complex. However, directors can review management’s cash flows and assumptions, bearing in mind their knowledge of the business, its environment, the assets and future business prospects. Directors should pay particular attention to goodwill, other intangible assets and property, plant and equipment.
Major new accounting standards
Directors should be mindful of the disclosure requirements when an entity has not applied a new Australian Accounting Standard that has been issued but is not yet effective. The entity is required to disclose known or reasonably estimable information relevant to assessing the possible impact that application of the new Australian Accounting Standard will have on the entity’s financial statements in the period of initial application.
As at 30 June 2017, the following four Australian Accounting Standards have been issued but they are not yet effective:
- AASB 9 Financial Instruments
AASB 9 sets out a new ‘expected loss’ impairment model for those financial assets and will replace the existing ‘incurred loss’ model. Under AASB 9, the impairment model is more forward looking, in that a credit event (or impairment ‘trigger’) no longer has to occur before credit losses are recognised.
- AASB 16 Leases
AASB 16 introduces a single lessee accounting model (all leases, finance and operating leases, will be accounted for in the same way) and requires a lessee to recognise assets and liabilities for all leases. A lessee will now be required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.
These new Australian Accounting Standards come into effect over the next two to three years. Directors should therefore ensure that the notes to the 30 June 2017 financial statements disclose the impact on the future financial position and results.
Enhanced audit reports
For 30 June 2017 financial reports, auditors of listed entities are required to issue enhanced audit reports. These enhanced audit reports will outline key audit matters, which are the matters that in the auditors judgement are of most significance in the audit of the financial report for the current period. Directors should be mindful that these matters may relate to accounting estimates and significant accounting policy choices that also require specific disclosures in financial reports.
To hear more insights from Aletta please check out the insights she shared with the Australian Institute of Company Directors.