Performance and uncertain economic conditions
1. Revenue recognition, expense deferral and other comprehensive income
Directors and auditors should review revenue recognition policies to ensure that revenue is recognised in accordance with the substance of the underlying transaction. Services must have been performed and control of goods passed to the purchaser.
Expenses should only be deferred where there is an asset with resources controlled by the entity as a result of past events from which economic benefits are expected to flow to the entity. The requirements of the intangibles accounting standard must be met, including expensing start-up, training, relocation and research costs.
2. Asset values
Directors should carefully consider asset values and the appropriateness of underlying assumptions, particularly in the context of current economic conditions. Disclosure of the key assumptions and associated sensitivity analysis enables users of the financial report to make their own assessments about the carrying values of the entity’s assets given the subjective nature of many asset valuations.
Entities impacted by the introduction of the carbon tax and mining resource rent tax (MRRT) will need to take this into account when performing their impairment testing of non-current assets. For the MRRT, affected entities will need to obtain asset valuations if they adopt the market approach to the starting base allowance and ensure they correctly account for any impact on deferred tax balances.
3. Off-balance sheet arrangements
Directors should carefully review the treatment of off-balance sheet arrangements, particularly where the entity has the right to obtain the majority of the benefits of any special purpose entity’s activities or any assets transferred to another entity, and is exposed to the majority of risks.
Where arrangements remain off balance sheet, the details of the arrangements and any exposures should be disclosed, together with the reasons why they are not on balance sheet.
4. Going concern
Directors need to be realistic in their assumptions about an entity’s future prospects. Where an entity is assessed to be a going concern, but significant uncertainty exists, the entity must ensure that its financial report adequately discloses the uncertainty and why the directors consider the entity to be a going concern. Directors should continue to review ability to refinance maturing debt and compliance with loan covenants.
