The Australian Securities and Investments Commission (ASIC) has released its wish list for financial reporting improvements for the upcoming reporting season. The corporate regulator yesterday issued Media Release 18-364MR, outlining the nine areas it will be focusing on when it reviews at least 85 annual reports, and selected half year reports, for periods ending 31 December 2018 as part of its financial reporting surveillance program.
Impact of new accounting standards
The impact of new accounting standards has again made it to the top of the list. While focus areas are not ranked in order of importance, it is noteworthy that more than a page of the three-page release was dedicated to this one area.
AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers would have been in play for a full year for companies with 31 December year ends. Directors and preparers must ensure they make meaningful disclosures around how the adoption of these two standards has affected their companies’ reported assets, liabilities and profits. This includes detailing any consequential changes to their accounting policies for revenue and financial instruments. The expanded disclosure requirements of these standards will also have to be met in the 2018 annual reports. Boilerplate type disclosures will no longer cut it, especially for revenue.
AASB 16 Leases officially kicks in next year and applies to periods commencing on or after 1 January 2019. The notes to the 31 December 2018 annual financial statements should disclose the impact of this standard on reported results. ASIC’s media release emphasises that the market will expect entities to be able to quantify the impact of this far-reaching standard before it becomes effective.
Impairment testing and asset values
This focus area has been on ASIC’s list for a number of years, suggesting directors, preparers and auditors alike are just not getting it right. The various judgements and assumptions required in assessing the recoverability of assets such as goodwill, other intangible assets and property, plant and equipment are becoming increasingly difficult to make because of current world trends such as digital disruption, climate change, fast-paced technological change and even events like Brexit.
Management needs to ensure they are spending the necessary amount of time and resources on impairment testing. Assumptions and judgements underlying the asset values need to be realistic, supportable and documented. Those charged with governance should understand the models as well as the underlying assumptions being used by management, and challenge management when these seem inappropriate, incorrect or too aggressive. Auditors need to apply professional scepticism when reviewing management’s impairment models for reasonableness, making sure they get sufficient comfort over management’s ability to prepare forecasts and budgets, suitability of the impairment model used, and judgemental inputs such as discount rates and growth rates. Stress testing management’s impairment model is important to understand how sensitive it is to a reasonably possible adverse change in any of the key assumptions.
ASIC included two additional focus areas as compared to those for the 30 June 2018 reporting period, both related to key disclosures. ASIC has now explicitly included the “Operating and Financial Review” (OFR) as a focus area as opposed to just referring to it, as has been done previously. ASIC reminds directors of listed entities to provide useful and meaningful information in the OFR about underlying drivers of the entity’s results, business strategies and prospects for the entity. Furthermore, ASIC has indicated that risks such as digital disruption, climate change, cyber security and Brexit should be disclosed where they are estimated to have a material impact on the future financial position or performance of the entity.
ASIC will also be focussing on non-IFRS financial information presented in the OFR or other documents outside the financial report. Directors must ensure such information is not misleading and is presented in line with ASIC’s Regulatory Guide RG230: Disclosing non-IFRS financial information.
Other focus areas
The five other focus areas noted in the media release are:
- Revenue recognition policies
- Expense deferral
- Off-balance sheet arrangements
- Tax accounting
- Estimates and accounting policy judgements
Revenue recognition policies and accounting policy judgements listed above are both repeat offenders but will be of renewed interest to ASIC considering the new revenue standard is now effective and requires extensive use of judgement in applying it correctly.
Should you have any questions or wish to learn more, contact your HLB Mann Judd audit representative.