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15-331MR Focus for 31 December 2015 financial reports
ASIC today announced its focus for 31 December 2015 financial reports of listed entities and other entities of public interest.
'Directors and auditors should continue to focus on values of assets and accounting policy choices. We continue to see companies using unrealistic assumptions in testing the value of assets or applying inappropriate approaches in areas such as revenue recognition,' ASIC Commissioner John Price said.
We will review financial reports looking at risk-based criteria and through a random selection.
ASIC encourages people preparing financial reports and their auditors to consider carefully the need to impair goodwill and other assets. ASIC continues to find impairment calculations using 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
There should also be a focus on appropriateness of accounting policy choices that can affect reported results. These include off-balance sheet arrangements, revenue recognition, expensing of costs that should not be included in asset values, and tax accounting.
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. ASIC does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.
The role of directors
Even though directors do not need 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 an agreement's substance.
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).
ASIC will continue to review the financial reports of proprietary companies and unlisted public companies based on complaints and other intelligence. We proactively identify and follow up companies that are required to lodge financial reports with ASIC but have not done so.