1. Segment reporting. The core principle of AASB 8 Operating Segments requires listed entities to disclose segment information to enable users to evaluate the nature and financial effects of its business activities and the economic environments in which they operate. There are also requirements for identifying segments having regard to components whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM). It is important to correctly identify the CODM, which is a function rather than an individual with a specific title and may be a group of executive directors or others. Segments should be presented on a consistent basis from period to period. The reasons for any change and comparable prior period information should be presented.
2. Control. ASIC reviews identified cases where controlled entities have not been consolidated. In some cases the ownership interest has been as high as 90 per cent. Although one aspect of decision-making may be shared with other parties, directors should have regard to the overall substance of the arrangements.
3. Going concern. The appropriateness of the going concern assumption remains important. Where material uncertainties cast significant doubt upon an entity’s ability to continue as a going concern, those uncertainties must be disclosed. Entities should continue to focus on their ability to refinance debt due for repayment and any foreseeable increases in borrowing costs.
4. Asset impairment. ASIC continues to identify issues with impairment testing, including identification of cash generating units (CGUs), allocation of goodwill to CGUs and use of unrealistic assumptions to calculate recoverable amounts. CGUs should be determined in accordance with AASB 136 Impairment of Assets and should normally be consistent from year to year. Goodwill must be allocated to the units expected to benefit from the goodwill at the time of acquisition.
5. Fair value of financial assets. Fair values of financial assets and liabilities must be disclosed under the three level ‘fair value hierarchy’ that reflects the extent of observable and non-observable market data used in their measurement. Other important disclosures include methods and assumptions used to determine fair values of financial assets, the ageing analysis of financial assets that are past due but not impaired, and financial assets individually determined to be impaired.
6. Financial instruments. There should be adequate
disclosure to enable users of financial reports to understand and evaluate the nature and extent of the specific market, credit and liquidity risks associated with financial instruments use and how those risks are managed. Boilerplate disclosures should be avoided.
7. Material disclosures. Financial reports should include material disclosures necessary for users to understand financial position and performance, including key assumptions supporting asset values, sensitivity analysis for asset values, goodwill allocated to cash generating units, sources of estimation uncertainty, and information on difficult accounting policy choices.
8. Business combinations. Directors and auditors should focus on accounting for business combinations, including the treatment of reverse acquisitions, common control transactions, transaction costs and appropriateness of purchase price allocations.
9. Operating and financial review (OFR). Listed company directors need to focus on the quality of the OFR (also known as ‘management commentary’ or ‘management discussion and analysis’). The OFR must contain information that members would reasonably require to make an informed assessment of operations, financial position, and business strategies and prospects for future years (unless the latter is likely to result in unreasonable prejudice to the company and that fact is disclosed). Financial reports should also disclose key components of statutory profit in accordance with accounting standards to assist investors and others to understand the result.
10. Alternative profits. Alternative profit and other non-statutory measures should only be included in financial reports for segment reporting in the exceptional circumstances where necessary to give a true and fair view. These measures should not be presented in a misleading manner in documents associated with financial reports, such as the directors’ report, market announcements, briefings to analysts and presentations to investors. For more information see www.asic.gov.au.
