ASIC Commissioner John Price says companies should focus on new requirements that can materially affect their assets, liabilities and profits for FY 18 financial reports.
Major new accounting standards are imminent, which will have the greatest impact on financial reporting since the adoption of International Financial Reporting Standards (IFRS) in 2005. The standards can significantly affect reported results, systems and processes. They can also affect debt covenants and other financial condition requirements, tax liabilities, dividend paying capacity and remuneration schemes.
The new standards cover: revenue recognition, financial instrument valuation (including hedge accounting and loan loss provisioning), lease accounting, accounting by insurers, and criteria for recognising assets, liabilities, income and expenses.
Full-year financial reports at 30 June 2018 must disclose the future impact of these standards. Half-year reports at 30 June 2018 must comply with the new requirements for revenue recognition and financial instrument valuation. Directors and preparers should also consider any continuous disclosure obligations and the impact on any fundraising or other transaction documents. ASIC will review more than 200 full-year financial reports at 30 June 2018, plus selected half-year reports.
Directors are primarily responsible for ensuring management produces quality financial information.
Directors are primarily responsible for both the financial report and ensuring that management produces quality financial information. Companies must have appropriate processes, records and analysis to support information in the financial report. Companies should apply appropriate experience and expertise, particularly in more difficult and complex areas such as asset impairment, revenue recognition and taxation.
Operating and financial review
Listed companies should disclose information on risks and other matters that may have a material impact on the future financial position or performance of the entity. This could include digital disruption, new technologies, climate change, Brexit or cybersecurity.
Directors may also consider whether to disclose additional information that would be relevant under integrated reporting, sustainability reporting or the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) where that information is not already required for the operating and financial review (OFR).
Other focuses for 30 June 2018 reports are:
- Asset values
- Revenue recognition
- Expense deferral
- Off-balance sheet arrangements
- Tax accounting
- Estimates/accounting policy judgements
- Proprietary companies
Cash flows and assumptions used in testing the recoverability of non-financial assets such as goodwill and tangible assets should be reasonable and reliable. Cash flows should be matched to all assets that generate those cash flows. The impact of any market changes, digital disruption, technological change, climate change or Brexit should be considered.
Revenue should be recognised in accordance with the substance of underlying transactions. This includes ensuring services have been performed or control of goods passed to buyer.
Expenses should only be deferred where the definition of an asset is met and it is probable that future economic benefits will arise. Specific requirements include expensing of start-up, training, relocation and research costs.
The treatment of off-balance sheet arrangements and joint arrangements should be carefully reviewed. Client monies held may also give rise to on-balance sheet assets and liabilities.
There should be a proper understanding of tax and accounting treatments, and how differences between the two affect tax assets, liabilities and expenses. The impact of any recent changes in legislation and the recoverability of any deferred tax asset should also be considered.
Disclosures on sources of estimation uncertainty and significant judgements in applying accounting policies should be specific to the assets, liabilities, income and expenses of the entity.
ASIC proactively identifies proprietary companies that have not met an obligation to lodge financial reports. Later this year, we will contact several hundred proprietary companies that have not lodged, but appear to be large and with no reporting exemption.
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