ASIC renews focus on financial report quality

Accounting estimates, accounting policy choices and key disclosures are the three broad areas of focus by ASIC.

The corporate regulator has again called on company directors and financial report preparers to ensure the information is meaningful to users.

A callout by the Australian Securities and Investments Commission (ASIC) for improvements to the 30 June 2017 financial reports of listed entities and others of public interest with multiple stakeholders might leave directors, management and auditors feeling trapped in a time warp – doomed to hear the same message over and over until they get it right.

“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 says.

ASIC’s priorities

Accounting estimates, accounting policy choices and key disclosures are the three broad areas of focus. More specifically, companies should consider:

  • impairment testing and asset values
  • revenue recognition
  • expense deferral
  • off-balance sheet arrangements
  • tax accounting
  • estimates and accounting policy judgements
  • impact of new accounting standards.

The regulator states it does not pursue immaterial disclosures that may create unnecessary clutter in financial reports. It is notable that all bar one of the seven above has been called out in ASIC’s six-monthly release of its focus areas since June 2012. The exception is tax accounting, which has been on the list since December 2013.

ASIC highlights that directors and auditors should carefully consider the need to impair goodwill and other assets. Care is needed to ensure cash flows and assumptions used in impairment calculations are reasonable, supportable and sufficiently reliable.

Companies in extractive industries (e.g. oil, gas, and mining) or which provide support services to such industries, as well as entities vulnerable to risk of digital disruption, are advised to take particular care when measuring and determining asset values.

Related podcast: ASIC’S financial report surveillance program focus areas for 30 June 2017

ASIC is adamant about the accounting policy choices companies make when recognising revenue. Appropriate application of requirements, including timing of recognition and reflecting the substance of underlying transactions, is critical to a suitable revenue recognition policy.

Further, directors and auditors should ensure expenses are only deferred where there is an asset as defined in the accounting standards; it is probable that future economic benefits will arise; and the requirements of AASB 138 Intangible Assets do not prohibit capitalisation.

Accounting policy choices made in respect of off-balance sheet arrangements is another key ASIC focus. The requirements of AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, and AASB 12 Disclosures of Interests in Other Entities should be considered when determining accounting treatment.

In addition, the three new accounting standards – AASB 9 Financial Instruments, AASB 15 Revenue from Contracts with Customers, and AASB 16 Leases – will significantly change the financial reporting landscape for how entities account for financial instruments, recognise revenue, and lessees account for operating leases.

The changes come into effect between now and 2019 and the importance of disclosures relating to their impact is identified by ASIC. Importantly, it notes this may well mean quantification of the impacts for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report. Subject to transitional arrangements, that is 30 June 2017 for the Financial Instruments and Revenue from Contracts with Customers standards.

Directors and management

ASIC also highlights that directors are primarily responsible for the quality of the financial report. While ASIC does not expect directors to be accounting experts, it recommends they seek professional advice and explanations should an accounting treatment not reflect their understanding of the substance of an arrangement.

Where appropriate, it says directors should challenge accounting estimates and treatments applied by management.

ASIC has also included commentary on key audit matters in enhanced audit reports and the operating and financial review.

It states that auditors should describe such matters and the work they perform in these areas in a clear and understandable manner, having regard to the broad audience of investors and other users of financial reports. Directors need also be mindful that these matters may relate to accounting estimates and significant accounting policy choices that require specific disclosures.

Notably, in its commentary on operating and financial review, ASIC’s position is that listed companies should continue to disclose information on matters that may have a material impact on the future financial position of the company, and that this could include climate change or cyber security.

ASIC has continued its policy of making a public announcement when companies make material changes to information included in financial reports (and other information provided to the market), following initial contact from the regulator.

More detailed information on ASIC’s focus on financial reports for 30 June 2017 can be found in its full report.

Dr Mark Shying CPA is Industry Fellow at Swinburne Business School, Swinburne University of Technology’s Faculty of Business and Law, Department of Accounting, Economics and Finance.

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