ASIC today announced the results from a review of the 31 December 2017 financial reports of 90 listed and other public interest entities.

Arising from that review, ASIC has made enquiries of 17 entities on 20 matters, seeking explanations of accounting treatments.

ASIC Commissioner John Price said, ‘The number of companies that quantified the impact of coming new requirements for reporting revenue and financial instruments was disappointing.  Directors and preparers should ensure that they understand the impact of new accounting standards and have systems and processes in place to support reporting under these new standards.’

Our risk-based surveillance of the financial reports of public interest entities for reporting periods ended 30 June 2010 to 30 June 2017 has led to material changes to four per cent of the financial reports of public interest entities reviewed by ASIC. The main changes related to impairment of assets, revenue recognition and expense deferral.

Enquiries made by ASIC from reviews of the 31 December 2017 financial reports relate to the following matters:

Enquiries of individual entities will not necessarily lead to material restatements. Matters involving three of the entities have been concluded without any changes to their financial reporting.

ASIC generally does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.

Announcements of material changes

ASIC publicly announces when a company makes material changes to information previously provided to the market following enquiries by ASIC. In addition to improving the level of market transparency, these announcements are intended to make directors and auditors of other companies more aware of ASIC’s concerns so that they might avoid similar issues.

Since the last release on findings in December last year, ASIC has issued media releases in relation to changes by Genworth Mortgage Insurance Australia Limited, Medusa Mining Limited, Intrepid Mines Limited, Sequoia Financial Group Limited, Pacific Current Group Limited, Myer Holdings Limited, and Orica Limited. The total adjustments to profit for these changes exceeds $750 million.

Enhanced audit reports

Auditors are required to issue enhanced audit reports for listed entity audits that describe key audit matters requiring the most attention in the audit. We continued to find that some key audit matters were described in general terms rather than being specific to the circumstances of the entity.  In some cases, the audit procedures performed were not clearly described.

Further information

More information about the findings from ASIC’s recent reviews of the financial reports of listed entities and of unlisted entities with larger numbers of users is provided in the attachment to this release.

ASIC’s focus areas for 30 June 2018 financial reports can be found in ASIC media release 18-159MR Major changes affecting reported net assets and profit, and other focuses for 30 June 2018 reporting.

Attachment 1 to 18-203MR Findings from 31 December 2017 financial reports

1.         New accounting standards

Our reviews indicated that most entities that were likely to show material changes to revenue recognition and financial instrument valuation for the financial year commencing 1 January 2018 had not quantified the impact of these standards in the notes to their 31 December 2017 financial statements.  This appears to indicate a lack of preparedness for reporting under the new standards.  Directors and preparers of financial reports also need to focus on the impact of upcoming new requirements for lease accounting and accounting for insurance activities, and a new conceptual framework.

Further information on the impact of new standards can be found in ASIC media releases 18-159MR and 16-442MR Companies need to respond to major new accounting standards.

2.         Revenue recognition

ASIC is following up seven matters concerning the recognition of revenue, including fee income recognition by a fund manager, and cases where revenue appears to have been recognised before the provision of the relevant goods or services.    

3.         Asset values and impairment testing

ASIC continues to identify concerns regarding assessments of the recoverability of the carrying values of assets, including goodwill, exploration and evaluation expenditure, and property, plant and equipment.

Findings include:

(a)        Determining the carrying amount of cash generating units: There are cases where entities appear to have identified cash generating units (CGUs) at too high a level despite cash inflows being largely independent, resulting in cash flows from one asset or part of the business being incorrectly used to support the carrying values of other assets.

(b)        Reasonableness of cash flows and assumptions: There continue to be cases where the cash flows and assumptions used by entities in determining recoverable amounts are not reasonable or supportable having regard to matters such as historical cash flows, economic and market conditions, and funding costs. We found cases where the entity’s forecast cash flows had exceeded actual cash flows for a number of reporting periods.

(c)        Use of fair value: We still see entities using discounted cash flow techniques to estimate fair value where the calculations are dependent on a large number of management inputs.  Where it is not possible to reliably estimate the value that would be received to sell an asset in an orderly transaction between market participants, the entity may need to use the asset’s value in use as its recoverable amount.

 (d)       Impairment indicators: Some entities are not having sufficient regard to impairment indicators, such as significant adverse changes in market conditions, reported net assets exceeding market capitalisation, or discontinuing exploration or mining activities.

(e)        Disclosures: We still find that there a number of entities not making necessary disclosure of key assumptions and, for fair values, the valuation techniques and inputs used.

Information Sheet 203 Impairment of non-financial assets: Materials for directors (INFO 203) may assist directors and audit committees in considering whether the value of non-financial assets shown in a company’s financial report continues to be supportable.

This item includes matters arising from the finalisation of impairment matters identified in our reviews of 30 June 2017 financial reports.

4.         Tax accounting

We have made enquiries of two entities on tax accounting, including the correct application of the tax legislation, the timing of entering into certain commercial arrangements, and recoverability of a deferred tax asset.  We have also recently made enquiries of two entities concerning the possible lack of disclosure of disputes with the Australian Taxation Office for 30 June 2017 year ends.

5.         Amortisation of intangibles

We are making enquiries of two entities concerning the amortisation of intangibles. This includes one entity that amortises assets over an estimated useful life that is significantly longer than the period of contractual rights and renewal options.

6.         Classification of liabilities as non-current

We have made enquiries of two entities concerning the classification of liabilities as non-current where it appears that the liabilities may have been payable in less than 12 months from year end.

7.         Business combinations

We have made enquiries of two entities on accounting for business combinations, including the determination of amount consideration given.

8.         Estimates and accounting policy judgements

We continue to observe instances where entities needed to improve the quality and completeness of disclosures in relation to estimation uncertainties, and significant judgments in applying accounting policies. The disclosure should include all information necessary for investors and others to understand the judgements made and their effect. This may include key assumptions, reasons for judgements, alternative treatments, and appropriate quantification.