What’s on ASIC's radar for financial year end reports

Even though directors do not need to be accounting experts, they should challenge the accounting estimates and treatments used in their financial reports and should seek explanations and advice on these, particularly where they do not reflect their understanding of an arrangement.

That was the warning from the Australian Securities and Investments Commission (ASIC) when announcing its areas of focus for 30 June 2014 financial reports of listed entities and other entities of public interest with a large number of stakeholders.

ASIC added: “Although calculations supporting impairment or valuation of significant assets can be complex, directors should review the cash flows and assumptions used in the calculations prepared by management or experts, bearing in mind their knowledge of the business, its assets, and the future prospects of the business.”

To ensure that financial reports were of high quality and that useful and meaningful information was provided to users of financial reports, ASIC said entities should:

• Have a culture focused on quality financial reporting.

• Have adequate governance arrangements, processes and controls.

• Ensure the financial literacy of directors was appropriate.

• Apply the accounting standards.

• Apply appropriate experience and expertise to financial reporting, and the underlying processes supporting the information in the financial report, including engaging external experts where appropriate.

• Consider accountability and internal incentives for management that were focused on financial reporting quality.

ASIC added: “Financial reporting quality is supported by the quality of the independent audit, which is also important to confident and informed markets and investors. In this regard, directors should have regard to ASIC Information Sheet 196 Audit quality: the role of directors and audit committees (INFO 196).”

ASIC warned its focus this year would also be on impairment and accounting policy choices.

“We encourage preparers and auditors of financial reports to carefully consider the need to impair goodwill and other assets. We continue to find impairment calculations that use unrealistic cash flows and assumptions, including cases where entities have made unrealistic forecasts that have not been met over several reporting periods. We also continue to find material mismatches between the cash flows used and the assets being tested for impairment.”

It added that it was vital for preparers and auditors of financial reports to consider the appropriateness of key accounting policy choices that could significantly affect reported results. “These include revenue recognition, expensing of costs that should not be included in asset values,and the impact of new requirements for consolidations and joint arrangements.”

For more on ASIC's focuses for 30 June 2014 financial reports, click here.