Disclosing the impact of new accounting standards is top of ASIC’s focus areas for its 30 June 2018 financial reporting surveillance program
On 31 May 2018, the Australian Securities and Investments Commission (ASIC) issued Media Release MR18-159 which outlines its focus areas for its 30 June 2018 financial reporting surveillance program, and also calls on directors and preparers to pay more serious attention to disclosing the impact of new standards in June 2018 financial reports.
While the seven focus areas are essentially the same, and almost identically worded in its December 2017 media release of focus areas (MR17-423), discussion on the impact of new standards has been bumped up from the bottom of the list in 2017 (at number seven) to the top of the list in 2018 (number one!). While the media release does not rank the focus areas in order of importance, it is nevertheless interesting to note that the previous one paragraph discussion in 2017 has been considerably expanded to almost a page and a half, highlighting the priority ASIC is likely to assign to these disclosures when conducting their surveillance on June 2018 annual reports.
Impacts of new standards
Most entities will be impacted in some way by the new revenue standard, AASB 15 Revenue from Contracts with Customers, the new financial instruments standard, AASB 9 Financial Instruments and the new leases standard, AASB 16 Leases. However, ASIC will also be looking to see disclosure of impacts for:
- Companies to which the new insurance standard will apply (AASB 17 Insurance Contracts)
- Accounting policies formulated using the conceptual framework that may change because definitions and recognition criteria in the revised Conceptual Framework for Financial Reporting (applicable from 1 January 2020) have changed.
Key messages stressed in the media release include: - There is a requirement to disclose the impact of new standards in the notes to the financial statements ahead of the operative date for the standards.
- Companies that have not already done so should determine the extent of the impacts (i.e. be able to quantify the impact) as these could have a flow on effect to financial covenants, tax liabilities, dividend policy and remuneration schemes, and may require new systems and processes.
- It is reasonable for the market to expect that companies will be able to quantity the impact of the new standards, particularly for revenue, financial instruments and leases.
- Particularly for revenue and financial instruments, June 2018 results will be finalised part way through the first ‘live’ year for these standards, and any forecasts disclosed to the market for 2019 should be consistent with the accounting basis required by the new standards. The same principle would apply if the new leases standard will be adopted using the full retrospective method to restate comparatives for the 2018 year.
- Directors and preparers should be mindful of their legal obligations, including the requirement to keep financial records that correctly record and explain their transactions and financial position and performance, and that would enable true and fair financial statements to be prepared and audited.
- Investor and market confidence in an entity improves if the entity implements the new standards in a timely manner and discloses the impacts publicly.
- Directors and preparers should consider any continuous disclosure obligations and the need to keep the market informed, as well as the impact on any fundraising and other transaction documents.
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Other focus areas
The six other focus areas noted in MR18-159 are:
- Impairment testing and asset values (many media releases ‘naming and shaming’ still relate to impairment write-downs)
- Revenue recognition policies
- Expense deferral
- Off-balance sheet arrangements
- Tax accounting
- Disclosure of key estimates and accounting policy judgements.
At noted earlier in this article, these are virtually identical to the December 2017 media release, with the only additional comment of substance relating to impairment testing and not using royalty relief or an earnings multiple model unless they are sufficiently reliable, and market-based assumptions are available that are specific to the company’s assets and circumstances.
Please refer to MR18-159 for a detailed discussion on these focus areas.