Announcing its focus areas for 30 June 2017 financial reports of listed entities and other entities of public interest with many stakeholders, ASIC highlighted key areas to address.

ASIC Commissioner John Price said, ‘As with 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 apply inappropriate approaches in areas such as revenue recognition.’

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

The role of directors and management

Directors are primarily responsible for the quality of the financial report. This includes ensuring that management produces quality financial information. Companies must have appropriate processes and records to support information in the financial report rather than simply relying on the independent auditor.

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

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.

Information should be produced on a timely basis and be supported by appropriate analysis and documentation for the independent audit.

This will support the quality of financial information in the market and enable auditors to focus on their role in providing independent assurance on the financial report.

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).

New accounting standards

The introduction of some major new accounting standards will have the greatest impact on financial reporting since the adoption of International Financial Reporting Standards in 2005.

It is important that directors and management plan for these new standards and inform investors and other financial report users of the impact on reported results.  This includes making required disclosures on the impact of the standards in notes to the financial report.  This may well mean quantification of the impacts for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report.  Subject to transitional arrangements, that is 30 June 2017 for new standards on revenue and financial instrument valuation.

Further information can be found in ASIC media release Companies need to respond to major new accounting standards (refer: 16-442MR) 

Enhanced audit reports

Auditors of listed entities are required to issue enhanced audit reports. These audit reports will outline key audit matters – 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.

Auditors should describe key audit matters and their work in those areas in a clear and understandable manner, having regard to the broad audience of investors and other users of financial reports.  The description of key audit matters and the work performed should be specific to the circumstances of the company and the audit. 

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 and significant accounting policy choices.

ASIC will not pursue immaterial disclosures that may add unnecessary clutter to financial reports; efforts should be made to communicate information more clearly in financial reports. 

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. Auditors are reminded 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 Regulatory Guide 34 Auditors’ obligations: Reporting to ASIC (RG 34)

Operating and financial review

Listed companies should continue to disclose information on matters that may have a material impact on the future financial position of the entity. This could include, for example, matters relating to climate change or cyber-security. 

Proprietary companies

ASIC 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.

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