ASIC calls on preparers to focus on useful and meaningful financial reports

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ASIC has called on  companies to provide information for users of financial reports that is  useful and meaningful ahead of the preparation of reports for the period ended 31 December 2016.

In particular, companies should adopt realistic valuations for asset values, appropriate accounting policies and provide more effective communication of that information.

Announcing its focus areas for 31 December 2016 financial reports of listed entities and other entities of public interest with many stakeholders, ASIC highlighted key problem areas to  address.

ASIC Commissioner John Price said, ‘As in previous reporting periods, directors and auditors should focus on values of assets and accounting policy choices. ASIC continues to see companies use unrealistic assumptions in testing the value of assets or that have applied inappropriate approaches in areas such as revenue recognition’.

As part of ASIC’s Financial Reporting Surveillance Program, we will select financial reports for review, both based on risk-based criteria and at random to determine compliance with the Corporations Act and accounting standards.

ASIC also continues to review the financial reports of proprietary companies and unlisted public companies, based on complaints and other intelligence. We proactively identify and follow up where such companies have not met their obligation to lodge financial reports with ASIC. It is their responsibility to do so and ASIC will take all necessary steps to see this done.

Asset values

ASIC encourages preparers of financial reports and their auditors to carefully consider the need to impair goodwill, inventories and other assets. ASIC continues to find impairment calculations based on unrealistic cash flows and assumptions, as well as material mismatches between the cash flows used and the assets being tested for impairment.

Fair values attributed to financial assets should also be based on appropriate models, assumptions and inputs.

There should be particular focus on assets of companies in extractive industries and mining support services, as well as asset values that may be affected by digital disruption.

Accounting policy choices

Directors and auditors should consider how the choice of accounting policy can affect reported results. These include the treatment of off-balance sheet arrangements, revenue recognition, expensing of costs that should not be included in asset values, tax accounting, and inventory pricing and rebates.

Material disclosures

ASIC’s surveillance continues to focus on material disclosures of information useful to investors and others using financial reports, such as assumptions supporting accounting estimates, significant accounting policy choices, and the impact of new reporting requirements.

We will not pursue immaterial disclosures that may add unnecessary clutter to financial reports. We encourage efforts to communicate information more clearly in financial reports.

The role of directors

While ASIC does not expect directors to be accounting experts, they should seek explanation and advice supporting the accounting treatments chosen 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.

Further information can be found in ASIC Information Sheet 183 Directors and financial reporting (INFO 183) and ASIC Information Sheet 203 Impairment of non-financial assets: Materials for directors(INFO 203).

Enhanced audit reports

Auditors of listed entities will be required to issue enhanced audit reports from financial years ending on or after 15 December 2016. These enhanced audit reports will outline key audit matters, being those matters that required significant auditor attention in performing the audit.  Preparers and directors should be mindful that these matters may relate to accounting estimates and significant accounting policy choices that also require specific disclosures in financial reports, as well as matters relating to the business that should be covered in the Operating and Financial Review.

Client monies

Australian financial services licensees should ensure that client monies are appropriately held in separate, designated trust bank accounts, and that monies are applied in accordance with client instructions and the requirements of the Corporations Act. We remind auditors of the importance of audit testing to obtain assurance that assets and liabilities are not materially misstated, that monies are dealt with appropriately, and that breaches are reported to ASIC in accordance with that Act and ASIC Regulatory Guide 34 Auditors Obligations: Reporting to ASIC (RG 34).

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