ASIC recently announced its focuses for 30 June 2014 financial reports, as well as findings from its reviews of 31 December 2013 reports, Quality financial reporting contributes to confident and informed markets, so financial reports should provide useful and meaningful information for report users. Preparers and auditors should particularly focus on accounting policy choices and accounting estimates.
ASIC surveillance led to material changes to 4 percent of the financial reports reviewed between 2010 and 2013, ASIC now publicly announces when, following ASIC contact, a company materially changes previously provided information, ASIC hopes this will help directors of other companies to avoid similar issues.
Impairment
A number of entities have made significant impairment write downs as a result of ASIC inquiries. Some companies continue to use unrealistic cash flows and assumptions. In some cases, there have been material mismatches between cash flows used and assets tested. The calculation of fair value less costs to sell should use discounted cash flows if forecasts and assumptions are not reliable.
Intangibles amortisation
Intangibles must be amortised over the period of contractual or legal rights. Renewal periods should not be included unless there is a renew right, renewal is expected to occur and renew costs are not significant. Time-based intangibles should be amortised even if they have not yet generated revenue. Assertions that assets have an indefinite life should be tested.
New standards
New standards on consolidation, joint arrangements, interests in other entities and fair value measurement can significantly change the accounting for some entities.
Revenue
Revenue should be recognised when services have been performed and control of goods has passed, having regard to the substance of arrangements.
Expense deferral
Expenses should only be deferred when the definition of ‘asset’ is met, it is probable that future economic benefits will arise and requirements of the intangibles standard are met.
Tax
There should be a proper understanding of both the tax and accounting treatments and how differences between the two affect tax assets, liabilities and expenses. Recent changes in tax legislation should be considered, along with the recoverability of any deferred tax assets.
Disclosures
Disclosures of sources of estimation uncertainty and significant accounting policy judgements should be made and should be specific.
Key assumptions and a sensitivity analysis for asset valuations are important to users, including disclosing where a reasonably foreseeable change in assumptions could lead to impairment.
Listed entities should also disclose segment information that may be important to investors.
Proprietary companies
A review of 30 June 2013 financial reports of proprietary companies found many companies using special-purpose financial reports that omitted significant disclosures, even though there were substantial operations.
Directors
Directors should challenge accounting estimates and treatments, seek explanations and seek appropriate professional advice. Directors should review cash flows and assumptions used in asset valuations.
Entities should have a culture and incentives focused on quality reporting and adequate governance, processes and controls.
And directors should have appropriate financial literacy and ensure appropriate experience and expertise is applied to financial reporting.
