New accounting standards and the operating and financial
review join some old favourites on ASIC's watchlist for 2013
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
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
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
Revenue recognition and expense deferral: ASIC
reiterates that entity revenue recognition and expense deferral
must correspond to the substance of the underlying event or
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
Amortisation of intangible assets: Amortisation
policies should be reviewed to ensure that amortisation methods and
periods match the consumption of benefits from the intangible
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.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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