Preparers of financial reports should ensure that they provide useful and meaningful information for users. While the quality of financial reporting in Australia is comparable with that of other major jurisdictions, ASIC continues to identify cases of inadequate asset impairment and inappropriate revenue recognition.
ASIC reviewed the 30 June 2013 financial reports of 280 listed and other public interest entities. Enquiries were made of more than 70 entities on over 100 matters. A number of entities made material restatements to net assets and profits or agreed to provide additional material disclosures. While enquiries of some entities have been concluded without reporting changes, those of other entities are ongoing.
The main areas of enquiry were impairment (34 enquiries), revenue recognition (14 enquiries), consolidation accounting (nine enquiries), intangibles amortisation (six enquiries) and segment reporting (six enquiries).
ASIC does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.
To ensure high-quality financial reporting, entities should:
. focus on providing important information for users;
. have appropriate governance arrangements as well as processes and controls;
. ensure adequate financial literacy in its directors; m apply accounting standards;
. apply appropriate experience and expertise, and;
. consider accountability and internal incentives focused on quality.
The following points are a summary of ASIC’s findings:
1. Operating and Financial Review (OFR)
ASIC released Regulatory Guide 247; Effective disclosure in an operating and financial review in March 2013 to assist listed entity directors in providing useful and meaningful analysis and information in OFRS, ASIC’s objective is not to increase the length of the OFR but, rather, to boost the quality of the information provided as required by law.
Subsequently, there have been significant improvements in the quality of OFRs.
Previously, half of the listed entities sought to rely on an unreasonable prejudice exemption and disclosed no information on business strategies and prospects for future financial years. At 30 June 2013, there was a substantial reduction in the use of the exemption.
Some entities needed to better explain their business models, business strategies, material business risks, underlying drivers of financial performance, and reasons for significant changes in balances.
2. Consolidations and new standards
New accounting standards on consolidation, joint arrangements and fair values applied to half-year financial reports for the first time.
With some entities, ASIC made enquiries into non consolidation and with one, it enquired about the accounting for a joint arrangement.
A number of entities affected by the new standards failed to adequately disclose the impact those standards had had on their business.
3. Impairment testing
As a result of ASIC enquiries, a number of entities have made significant impairment writedowns of goodwill and other assets, and have agreed to improve disclosure on matters such as key assumptions.
Findings included:
. entities identifying cash generating units at too high a level;
. mismatches between cash flows used in determining recoverable amounts and the assets and liabilities tested (eg excluding inventories and trade receivables);
. entities incorrectly including the benefit of tax losses in determining their recoverable amounts
. entities not reporting reasonable or supportable cash flows and assumptions (having regard to historical cash flows, how the entity is funded and relevant market conditions);
. entities misjudging value in use, including cash flows for future restructuring or development plans, or cash flow forecasts going beyond five years, where those entities had a poor history of making forecasts.
4. Going concern
ASIC made enquiries of one entity concerning the appropriateness of applying the ‘going concern’ assumption.
5. Revenue recognition and expense deferral
Material adjustments have been made by some entities that had prematurely recognised revenue. Concerns include recognition of revenue prior to:
. performing services;
. control of goods passing to the buyer, and
. services being provided under contracts involving both the sale of goods and provision of related services.
Many revenue recognition policies were not sufficiently specific to the entity.
Concerns were also raised about deferral of expenses and the absence of controlled assets.
6. Financial instrument values
ASIC contacted some entities in relation to financial instrument values, including the adequacy of loan provisions.
It contended that “a number of entities should improve disclosures to enable users to assess the significance of and the nature and extent of risks under financial instruments”.
7. Estimates and accounting policy judgements
According to ASIC, entities needed to make or improve disclosures in relation to estimation uncertainties and make significant judgements in applying accounting policies. Such disclosures, it maintains, should be specific to the entity and its circumstances.
8. Non-IFRS financial information
While the vast majority of entities followed the guidance given in ASIC Regulatory Guide RG 230: Disclosing non-IFRS financial information, some entities:
. inappropriately disclosed non-IFRS information in the financial report;
. described expenses inherent to the business, including expenses that occur every year, or can be reasonably expected to recur, as ‘one-off or non-recurring’;
. gave greater prominence to non-IFRS financial information in market announcements and/or other documents; and/or
. did not provide reconciliation to the IFRS financial information in all of the relevant documents.
9. Intangible assets
Material adjustments were made where entities had failed to amortise intangibles or had applied inappropriate amortisation periods.
10. Other matters
Other matters included entities not meeting the core principle in AASB 8 Operating segments and disclosing segment information that may be important to investors, or not disclosing the terms and conditions of related party transactions.
Further information can be found in ASIC media release 13-341 at asic.gov.au
