18 Jul 2013
ASIC's annual report hit list: familiar and new faces
by Geoff Hoffman
New accounting standards and the operating and financial review join some old favourites on ASIC's watchlist for 2013 annual reports
ASIC's determination to sit in on analyst briefings may have grabbed the headlines this reporting season, but the regulator's gaze is still firmly fixed on corporate annual reports.
Last week, ASIC released a list of key areas that directors and auditors should consider when preparing FY2013/14 annual reports. The 2013 list raises both familiar and new points:
Disclosure in operating and financial review: Directors must provide meaningful information and analysis on the underlying drivers of financial performance, and consult the recently released Regulatory Guide 247 (Effective disclosure in an operating and financial review) when preparing an operating and financial review. Directors are advised to provide forward-looking statements of the entity's business strategies, but these should be with reasonable basis and on the information available at the time; they need not be numerical or highly comprehensive.
Off-balance sheet arrangements and new standards: Directors must continue to disclose the arrangements and exposures of off-balance sheet items, and reasons for their omission from the balance sheet. ASIC notes that in financial statements ended 30 June 2013 entities should have complied with, or disclosed the quantitative impact of, the new accounting standards (AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements and AASB 12 Disclosure of Interests in Other Entities).
Asset values and impairment testing: ASIC is concerned that entities performing impairment testing are attempting to conceal impairment losses by not considering the carrying value of assets related to the recoverable amount of the cash generating unit. Cash flows used in impairment testing should be grounded in reasonable assumptions, the entity's historical funding, and market conditions. Directors must disclose assumptions and not misallocate cash flows from one asset to support the carrying value of another asset.
Going concern: Consistent with previous years, ASIC calls upon directors to use realistic assumptions in the going concern assessment, and to adequately disclose why an entity should be regarded as a going concern where significant uncertainty exists.
Revenue recognition and expense deferral: ASIC reiterates that entity revenue recognition and expense deferral must correspond to the substance of the underlying event or transaction.
Financial instrument values: Financial instruments not traded in an active market should be valued on reasonable assumptions, with regard to the nature of that instrument and prevailing market conditions.
Estimates and accounting policy judgments: Directors should make material disclosures of estimation uncertainties and the significant judgment involved in applying accounting policies specific to the company's assets, liabilities, income and expenses.
Non-IFRS financial information: Some entities have improperly mischaracterised expenses as one-off events, or given greater prominence to non-IFRS financial information without disclosing whether that information has been subject to an audit or review. Directors should continue to use non-IFRS financial information in accordance with Regulatory Guide 230 (Disclosing non-IFRS financial information).
Related party disclosures: Directors and auditors should ensure that related party disclosures comply with accounting standards. This includes disclose of relevant terms and conditions, and whether the transaction is on an arm's-length basis.
Amortisation of intangible assets: Amortisation policies should be reviewed to ensure that amortisation methods and periods match the consumption of benefits from the intangible asset.
Special purpose financial reports: ASIC's concerns also extend to proprietary companies. It says that proprietary companies should apply "professional scepticism" in considering whether actual or potential users will depend on the financial report and, if so, cannot rely on the special purpose report to provide all information reasonably demanded. They should be mindful of complying with recognition and measurement requirements of accounting standards, whether or not they are reporting entities.