ASIC calls on preparers to focus on useful and meaningful financial reports (Focus areas for 31 December 2016 financial reports)

On 8 December 2016 the Australian Securities and Investments Commission (ASIC) issued Media Release MR 16-428 which outlines its focus areas for 31 December 2016 financial reports of listed entities and other entities of public interest with many stakeholders. ASIC also reviews financial statements of proprietary companies and unlisted public companies based on complaints and other intelligence.

‘As in previous 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.’

ASIC Commissioner, John Price

Besides the focus areas, which are similar to the past few years, key points made in the Media Release include:

Role of directors - Directors do not need to be accounting experts but should seek explanation and professional advice supporting the accounting treatments chosen, and challenge accounting estimates and treatments applied in the financial report. They should also seek advice where an accounting treatment does not reflect their understanding of the substance of an arrangement.
Material disclosures - ASIC will continue to only focus its review on material disclosures that are useful to investors and other users of financial reports. In line with the ‘decluttering’ changes discussed above, ASIC will focus on information about assumptions supporting accounting estimates, significant accounting policy choices, and the impact of the forthcoming three new accounting standards (AASB 9, 15 and 16).
Enhanced audit reports for listed entities – Key audit matters (KAMs), i.e. those requiring significant auditor attention in performing the audit, will need to be included for the first time in December 2016 audit reports. Preparers and directors should be mindful that KAMs usually relate to accounting estimates and significant accounting policy choices that also require specific disclosure in the financial statements, as well as business matters covered in the Operating and Financial Review.
Client monies – Client monies held by Australian financial services licensees must be held in separate, designated trust bank accounts, and only applied in accordance with client instructions and the requirements of the Corporations Act.
Asset values – Particular attention is needed for entities in the extractives industry, mining support services and assets subject to digital disruption. Preparers and auditors need to carefully consider impairment of goodwill, inventories and other assets, ensuring cash flows and assumptions are realistic, and recoverable amounts are compared against all relevant assets in the cash-generating unit (CGU). Fair values need to be based on appropriate models, assumptions and inputs.
Accounting policy choices – Directors and auditors to consider how an accounting policy choice affects reported results.

Focus areas

ASIC still has the seven focus areas that directors, preparers and auditors of financial statements should be aware of. These are the same as for June 2016 and include:

Impairment testing and asset values
Off-balance sheet arrangements
Revenue recognition
Expense deferral
Tax accounting
Disclosure of key estimates and accounting policy judgements
Disclosure of the impact of new accounting standards.

Our June 2016 Accounting News includes details of ASIC’s comments on each of these focus areas. In this latest Media Release, ASIC have expanded comments on the above areas made at June 2016, and stress that:

When testing impairment, both corporate costs and corporate assets should be allocated to a CGU on an appropriate basis where it is reasonable to allocate them
Appropriate fair values must be used when testing exploration and evaluation assets during the exploration and evaluation phase, and
When considering asset values in the extractive industries, entities should focus on the adequacy of treatment of any liabilities required for mine restoration and closure costs.

Resources for directors

ASIC has compiled the following Information Sheets to assist directors:

With their general financial reporting obligations (Information Sheet 183 Directors and financial reporting)
When considering whether non-financial assets shown in the financial statements are impaired and reviewing impairment models and calculations (Information Sheet 203 Impairment of non-financial assets: The role of directors and audit committees).

Our article from June 2015 Accounting News provides a summary of ASIC Information Sheet 203 of the issues directors should be questioning when assessing management’s impairment models and calculations.