The regulator is looking for an improvement in financial reporting, writes John Price.

    Companies should continue to focus on providing useful and meaningful information for users of financial reports. This includes focusing on asset values and revenue recognition.

    Directors are primarily responsible for the quality of the financial report and for ensuring the production of quality financial information. Companies must have appropriate processes and records to support information in the financial report.

    Companies should apply appropriate experience and expertise, particularly in more difficult and complex areas such as accounting estimates (including asset impairment), accounting policies (such as revenue recognition) and taxation.

    While directors need not be accounting experts, they should seek explanation and advice and, where appropriate, challenge accounting estimates and treatments. They should particularly seek advice where a treatment does not reflect their understanding of the substance of an arrangement.

    Information should be produced on a timely basis and be supported by appropriate analysis and documentation.

    ASIC is presently gearing up to review financial reports with a 30 June 2017 year end. Specific focus areas are:

    1. Impairment testing and asset values

      In testing the recoverability of assets such as goodwill, other intangibles and property, plant and equipment:

      1. Cash flows and assumptions should be reasonable.
      2. Discounted cash flows should not used to determine fair value less costs of disposal where forecasts and assumptions are not reliable.
      3. Value in use should be based on reliable cash flow estimates that meet constraints on growth rates and enhanced asset performance.
      4. Cash flows should be matched to all assets that generate those cash flows.
    2. Particular regard may need to be given to assets in the extractive industries and mining support services, and assets that might be affected by risks of digital disruption.

    3. Revenue recognition

      Revenue should be recognised in accordance with the substance of the underlying transactions. This includes ensuring that:

      1. Services have been performed.
      2. Control of goods has passed to the buyer.
      3. Where revenue relates to both services and goods, revenue is allocated to each part and recognised accordingly.
    4. Expense deferral

      Expenses should only be deferred where:

      1. There is an asset as defined in the accounting standards.
      2. It is probable that future economic benefits will arise.
      3. The intangibles accounting requirements are met, including expensing start-up, training, relocation and research costs.
    5. Off-balance sheet arrangements

      The treatment of off-balance sheet arrangements and joint arrangements should be carefully reviewed.

    6. Tax accounting

      Tax accounting can be complex and:

      1. There should be a proper understanding of tax and accounting treatments, and how differences between the two affect tax assets, liabilities and expenses.
      2. The impact of any recent changes in legislation should be considered.
      3. The recoverability of any deferred tax asset should be considered.
    7. Estimates and accounting policy judgements

      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.

    8. New accounting standards

      The notes to the financial statements should disclose the impact on future financial position and results of new accounting standards that apply to future financial reports. These standards may significantly affect how and when revenue can be recognised, the values of financial instruments (including loan provisioning and hedge accounting), and assets and liabilities relating to leases. A new international accounting standard for insurance companies has also been issued.

    9. Enhanced audit reports

      Auditors of listed entities are required to issue enhanced audit reports. These reports outline key audit matters – those matters that required significant auditor attention in performing the audit.

    10. Client monies

      Australian financial services licensees should ensure that client monies are appropriately held in separate, designated trust bank accounts, and are applied in accordance with client instructions and the Corporations Act.

    11. Proprietary companies

      ASIC proactively identifies and follows up proprietary companies that have not met any obligation to lodge financial reports.

    Visit ASIC’s website to find out more on financial reporting and audit, including Information Sheet 183: Directors and financial reporting and Information Sheet 203: Impairment of non-financial assets: Materials for directors.

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