John Price explains how companies can provide more meaningful and higher quality information to stakeholders.
The Australian Securities and Investments Commission (ASIC) has announced its focus for 31 December 2014 financial reports of listed and public interest entities, as well as findings from its reviews of 30 June 2014 reports.
ASIC’s surveillances led to material changes to 4 per cent of the financial reports reviewed for the three years to 30 June 2013. From 1 July 2014, ASIC has publicly announced when, following contact from ASIC, a company makes material changes to information previously provided to the market. Directors of other companies will be more aware of ASIC’s concerns and hopefully can avoid similar issues. ASIC has issued media releases on changes made by iProperty Group, Terramin, and GoConnect. ASIC’s financial reporting focus areas for directors include:
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 and in some cases, there have been material mismatches between cash flows used and assets tested. Fair value less costs to sell should not be used on the basis of 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 renewal right, renewal is expected to occur and renewal costs are not significant. Time-based intangibles should be amortised even if they have not yet generated revenue.
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 proper understanding of tax and accounting treatments and how differences between the two affect tax assets, liabilities and expenses. Recent changes in tax law should be considered, as well as the recoverability of deferred tax assets.
Disclosures – Disclosures of sources of estimation uncertainty and significant accounting policy judgments 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. Although not yet operative, financial reports must disclose the impact of a new accounting standard on revenue under contracts.
The role of directors – Directors are ultimately responsible for a company’s financial report and are required to give an opinion as to whether it complies with the accounting standards and gives a true and fair view. Even though directors do not need to be accounting experts, they should seek explanation and professional advice supporting the accounting treatments chosen if needed and, where appropriate, challenge the accounting estimates and treatments applied in the financial report. They should particularly seek advice where a treatment does not reflect their understanding of the substance of an arrangement. Entities should have a culture and incentives focused on quality reporting, and adequate governance, processes and controls. Directors should have knowledge of financial reporting, and ensure experience and expertise is applied to financial reporting.
Financial reporting quiz – Together with the Australian Institute of Company Directors and the three largest accounting bodies in Australia, ASIC has prepared a quiz to help directors get to grips with their knowledge of financial reporting requirements. Go to www.asic.gov.au/financial-reporting-quiz.
Improving communication – Companies can better communicate information in financial reports by, for example, grouping related financial statement notes together, using clear language, removing unnecessary information and digital financial reporting using XBRL (eXtensible business reporting language).See ASIC media releases 14-294 and 14-332 at
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