Regina Fikkers outlines the key financial reporting issues directors will face in 2015 and the implications this may have for organisations.
It has never been more important for directors to have a deep understanding of financial reporting and the implications for their company. As representatives of shareholders, directors must be confident the report reflects their own picture of the company, and question management where it may not. With the half- yearly financial reporting season around the corner, it is worth taking the time to think about some of the key issues for 2015.
The Australian Securities and Investments Commission (ASIC) continues to emphasise the importance of reports providing useful and meaningful information to investors. Its focus on impairment will continue, as they hone in on understanding cash flows and assumptions supporting the impairment calculation. It will challenge forecast assumptions where budgets have not been met in prior periods.
Another area of attention will be the relationship between the asset being tested for impairment and the supporting cash flow models. In the past ASIC has found mismatches between the two.
Judgements and critical estimates
It is normal for boards to be discussing critical issues throughout the year. Board members need to assess whether these issues are adequately reflected in the financial report. Some important questions to ask include: Is the issue clearly articulated in plain English? Does its positioning (upfront or relegated to the back) reflect its importance to the reader? Is the value sensitive to movements in critical assumptions? If so, does the reader have enough information to understand the value could change? You should also consider if the period of profit impact (for example, amortisation timing) makes sense.
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Tax effect accounting can be complex. You should feel confident that management has considered unusual transactions during the year, to make sure any tax issues are addressed. Questions to ask may be: is there a good connection between the finance, tax and any acquisition/divestment teams? Has the tax team updated the finance team on tax developments during the year?
A regular ASIC focus has been the recoverability of deferred tax assets. The assumptions supporting the assets, while not exactly the same as for impairment, should have consistent forecast revenue expectations for example.
Revenue: old issues and new rules
ASIC will continue to concentrate on the appropriateness of accounting policy choices that affect the timing of profits in relation to both the deferral of expenses and the recognition of revenue. Boards should reflect on the substance of transactions, when services are performed or goods delivered, and whether revenue needs to be split into components.
Revenue accounting policies can appear “boilerplate” if they are written in accounting jargon. Make sure your disclosures plainly articulate what the company earns revenue from, when it is recognised and how it is measured.
The new revenue accounting standard does not apply until 2017, however it does contain helpful guidance that might assist companies, particularly those with contracts spanning many years.
Companies with complex or multiple element revenue contracts will need to understand if the new standard impacts how they recognise revenue. They also might need to think about whether system changes are needed to capture the data required for new disclosures.
The Australian dollar has weakened so it is important to look at the impact of currency movements in the financial report. Companies with US dollar (USD) revenue streams will be better off than those with USD costs, who may need to think about impairment issues.
Some companies will see the impact directly in profits, others through the foreign currency revaluation reserve if they have foreign subsidiaries. Boards may have been considering risk management strategies such as hedging. It is also important to think through the flow-on accounting impacts. Has the movement highlighted any instances of over or under hedging and hedge ineffectiveness impacting profits?
Companies taking the lead in improving reporting are putting their readers first and making their financial reports more useful, informative and streamlined. One recent example is Wesfarmers which moved away from the traditional report to one that is completely different in its structure, design, language and length. It is written in clear plain English rather than accounting jargon, and is almost half the length of last year’s report. It is worth taking a step back and asking if your report is really telling the story of your company’s performance in a meaningful way for investors.
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