13-297MR Focuses for 31 December 2013 financial reports
Wednesday 30 October 2013
ASIC today announced its areas of focus for 31 December 2013 financial reports of listed entities and other significant economic entities.
ASIC Commissioner John Price said: ‘Preparers and auditors of financial reports should ensure that those reports provide useful and meaningful information.
‘This includes addressing the impact of new requirements for consolidations, joint arrangements and unconsolidated structured entities, as well as providing better quality analysis and information in the operating and financial review.’
ASIC’s reviews will include some half-year reports with particular emphasis on the impact of new accounting standards.
Particularly in challenging economic circumstances, directors and auditors should also focus on:
revenue recognition and expense deferral policies;
asset values; and
going concern assessments.
ASIC’s surveillance continues to focus on material disclosures of information useful to investors and other users of financial reports. ASIC does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.
ASIC’s surveillance of 31 December 2013 financial reports will particularly focus on public interest entities such as listed entities, disclosing entities, financial institutions and other entities of public interest with a large number and wide range of stakeholders considering factors like the nature and size of the business and the number of its employees.
The quality of financial reporting is an important contributor to confident and informed markets. The focus on these entities in our surveillance reflects the greater impact of these entities on markets, investors and other users of financial reports.
ASIC notes that the majority of proprietary companies have 30 June financial years, and we will review a selection of 30 June 2013 financial reports of proprietary companies in the first half of 2014.
More information about focuses for 31 December 2013 financial reports is provided in tthe Attachment to this release (below).
ASIC’s findings from reviews of 30 June 2013 financial reports of public interest entities will be released in early 2014.
Attachment to 13-293MR: Focuses for 31 December 2013 financial reports
1. Disclosure in the operating and financial review (OFR)
Directors of listed entities should consider ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review (RG 247) when preparing the OFR. RG 247 was released in March 2013 to assist directors of listed entities in providing useful and meaningful analysis and information in the OFR. ASIC’s guidance about the law is not intended to add unnecessary length to annual reports.
The OFR forms part of the annual report and complements the financial report by providing information on the entity’s operations, financial position and business strategies and prospects for future financial years.
The OFR should provide underlying drivers of the financial performance and position of entities, including relevant analysis at a segment level. The OFR should also explain the business model and strategies of the entity, and how business strategies are expected to impact on future financial performance.
While we do not expect numerical forecasts, we understand the caution of directors with meeting the legislative requirement to include forward looking information in the OFR. Any possible risk of being found liable for a misleading or deceptive forward looking statement can be dealt with by ensuring statements are framed as being based on the information available at the time and have a reasonable basis. Continuous disclosure obligations should be met when events or results overtake forward looking statements in the OFR.
2. Off-balance sheet arrangements and new standards
Accounting standards AASB 10 Consolidated Financial Statements,AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities and AASB 13 Fair Value Measurement apply for reporting periods beginning on or after 1 January 2013 (ie half-years and full years ending 31 December 2013).
As AASB 10 can significantly change the identification of controlled entities, directors and auditors should carefully review the treatment of off-balance sheet arrangements under the new standards. AASB 11 can change the accounting for joint arrangements, AASB 12 includes disclosures on unconsolidated structured entities, and AASB 13 affects aspects of the determination of fair values of financial instruments and other assets.
3. Revenue recognition and expense deferral
Directors and auditors should review an entity’s revenue recognition policies to ensure that revenue is recognised in accordance with the substance of the underlying transactions. This includes ensuring that:
(a) Services to which the revenue relates have been performed;
(b) Control of relevant goods has passed to the buyer;
(c) Where revenue relates to both the sale of goods and the provision of related services, revenue is appropriately allocated to the components and recognised accordingly;
(d) Assets are properly classified as financial or non-financial assets; and
(e) Revenue is recognised on financial instruments on the basis appropriate for the class of instrument.
Directors and auditors should ensure that expenses are only deferred where:
(a) There is an asset as defined in the accounting standards;
(b) It is probable that future economic benefits will arise; and
(c) The requirements of the intangibles accounting standard are met, including expensing start-up, training, relocation and research costs, as well as ensuring that any amounts deferred meet the requirements concerning reliable measurement.
To assist users of financial reports to understand the results of an entity, items of income and expense must be appropriately allocated between profit and other comprehensive income.
4. Asset values and impairment testing
Directors and auditors should continue to focus on the recoverability of the carrying values of assets, including goodwill, other intangibles and property, plant and equipment.
Directors and auditors should exercise professional scepticism and challenge the appropriateness of asset values and assumptions underlying impairment calculations, particularly in the context of current economic conditions and where prior period financial forecasts have not been met.
It is important to ensure:
(a) Cash flows used are matched to carrying values of all assets that generate those cash flows, including inventories, receivables and tax balances;
(b) Cash flows and assumptions are reasonable having regard to matters such as historical cash flows, how an entity is funded, and market conditions. Significant variances between prior period cash flow projections and actual results may raise doubt whether assumptions are reasonable and supportable;
(c) Cash generating units (CGUs) are not identified at too high a level, including where cash inflows for individual assets are not largely independent. CGUs must not be at a higher level than the operating segments; and
(d) Disclosure of key assumptions and sensitivity analysis, which enable users of the financial report to make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations.
ASIC will continue to focus on entities with substantial assets held in emerging economies. Entities should also take into account any impact of the carbon tax when performing impairment testing of non-current assets.
Directors and auditors should also review the amortisation periods and methods applied for intangible assets, including amortising of intangible assets available for use even if they have not yet generated revenue.
5. Going concern
Directors need to be realistic with their assumptions about an entity’s future prospects, particularly in the current environment or where the entity has continuing losses. Where an entity is assessed to be a going concern, but significant uncertainty exists, the financial report must adequately disclose the uncertainty and why the directors consider the entity to be a going concern. Directors should continue to review their entity’s ability to refinance maturing debt and ongoing compliance with loan covenants.
6. Financial instrument values
Directors and auditors should focus on the valuation of financial instruments, particularly where the value relies on assumptions that are not based on quoted prices or observable market data. As noted earlier, regard should also be given to the new AASB 13.
Disclosure of the methods and significant assumptions used to value financial instruments is important to investors. Directors should also focus on the classification of assets and liabilities between current and non-current.
7. Tax accounting
Tax effect accounting can be complex and preparers of financial reports should ensure that:
(a) There is a proper understanding of both the tax and accounting treatments, and how differences between the two affect tax assets, liabilities and expenses;
(b) The impact of any recent changes in legislation are considered; and
(c) The recoverability of any deferred tax asset is appropriately reviewed.
8. Estimates and accounting policy judgements
Disclosures regarding sources of estimation uncertainty and significant judgements in applying accounting policies are important to allow users of the financial report to assess the reported financial position and performance of an entity. Directors and auditors should ensure disclosures are made and are specific to the assets, liabilities, income and expenses of the entity.
9. Non-IFRS financial information
Directors should continue to review their use of non-IFRS financial information against the guidance in Regulatory Guide RG 230 Disclosing non-IFRS financial information.
Non-IFRS financial information should not appear in the financial statements, except that the management basis of accounting is used in segment disclosures.
To ensure non-IFRS financial information in other documents (eg market announcements, investor and analyst presentations, and related media releases) is not potentially misleading, it should not be given more prominence than corresponding IFRS measures. It should be presented on a consistent basis between reporting periods, and items of expense should not be described as ‘one-off’ or ‘non-recurring’ where they are inherent to the entity’s business or can be reasonably expected to recur.
10. Related party disclosures
Directors and auditors should ensure that related party disclosures are made in accordance with accounting standards. This information can assist investors in understanding the impact of related party transactions on the entity’s financial performance and financial position, as well as the accountability of directors and management. This includes disclosing any relevant information on whether the transactions are on an arm’s length basis, and any terms and conditions.