ASIC has published the results of its review of 2016 financial reports of 90 entities. The report makes interesting reading especially in preparation for the 30 June 2017 financial reports.
One of the important findings noted that more than a third of 28 enquiries from 23 entities related to impairment and other asset values. This involves ensuring that the value of assets in an entity’s balance sheet (that is, the ‘carrying amount’) continues to be supportable, or whether they should be reduced. In June 2015, ASIC issued Information Sheet 203 - Impairment of Non-Financial Assets: Materials for Directors which provides additional guidance.
ASIC undertook a risk based surveillance of certain disclosing entities for the period 30 June 2010 to 30 June 2015, which has led to material changes across 4% of the financial reports reviewed. The principal changes involved issues relating to impairment of assets, revenue recognition and expense deferral.
It has been ASIC policy over the past three (3) years to provide full details of instances where a company has made material changes to its previously disclosed financial report. The reasons are twofold - firstly to improve the level of market transparency, and secondly to make other entities aware of ASIC’s concerns to avoid any similar issues.
Some of ASIC’s findings are outlined below:
Asset Values and Impairment Testing
ASIC had concerns in regard to the assessments of the recoverability of the carrying values of assets - for example, goodwill, exploration and evaluation expenditure as well as property, plant and equipment.
Consolidation Accounting
ASIC noted instances whereby entities did not properly consolidate financial statements due to incorrect accounting assumptions.
Amortisation of Intangible Assets
ASIC queried three (3) entities over the correct accounting treatment of amortising intangible assets.
Revenue Recognition
ASIC noted an inconsistency in the treatment of revenue recognition in regard to contracts that involved the provision of services in the future.
Tax Accounting
ASIC made additional queries of two (2) entities in regard to their accounting for income tax. It was noted that future taxable income may not be at a level great enough to recoup deferred tax assets.
Estimates and Accounting Policy Judgements
ASIC noted instances whereby financial reports lacked the quality and completeness of disclosures in regard to not just estimation uncertainties, but also to the judgements in applying these accounting policies. The requirements and obligations regarding disclosure are principle-based and must include all relevant information which is necessary for investors and other stakeholders understand the judgements made and their subsequent effect. Relevant disclosure may involve key assumptions, reasons for judgements, alternative treatments and any appropriate quantification.
ASIC has reiterated that such disclosures are essential for users of the financial report (whether they be investors, clients, employees or other stakeholders) to assess the reported financial position and performance of an entity.
Should you have any queries about ASIC or other issues involving compliance, licensing, or corporate governance, please contact Jeremy Danon, director of Ariel & Associates Pty Ltd on (02) 8223 3355 or at jeremy@ariel.associates.