The Australian Securities and Investment Commission
(ASIC) has announced the areas it will be focusing
on for 30 June 2014 financial reports.
ASIC have stated that their surveillance will focus on material
disclosures of information which is useful to investors and others
who rely on these financial reports, such as key assumptions
supporting accounting estimates.
In this Alert, Partner Michelle Eastwell and Trainee Solicitor
Kaitlyn Rafter outline the three main areas of ASIC's focus and
how your company can address them.
Focus on Impairment
ASIC will be looking closely at impairment calculations in
financial reports, so companies need to carefully consider the need
to impair goodwill and other assets and the basis for determining
impairment. This is as a result of ASIC's concerns that they
continue to find unrealistic cash flows, forecasts and assumptions
being used when companies are determining whether and to what
extent assets are impaired.
Companies should carefully crunch their numbers and err on the
side of caution when relying on assumptions or making forecasting
predictions regarding impairments.
For further information in relation to the matters that a
company must take into consideration in determining whether or not
an asset is impaired, please see our recent Alert on impairment of
Focus on Accounting Policy choices
Key accounting policy choices will also be reviewed by ASIC
closely. ASIC have identified that these include revenue
recognition, expensing of costs that should not be included in
asset values, tax effect accounting and the impact of new
requirements for consolidations and joint arrangements particularly
in respect of off-balance sheet arrangements. ASIC will also be
focusing on specific disclosures regarding the application of
accounting policies, including disclosures of key assumptions and
sensitivity analysis which enable readers to make their own
assessments about the carrying values of the entity's assets
and risk of impairment.
Companies should give careful consideration to the application
of key accounting policies and the disclosure of relevant
information as to the application of these policies, particularly
in areas where there are new requirements for the 2013/2014
The role of directors
Regardless of a director's accounting expertise, they are
still required to closely analyse and understand the contents of a
financial report and seek explanations and professional advice to
ensure that all accounting treatments chosen can be supported. This
falls within the duty of care and diligence that directors have
under both the general law and the Corporations Act 2001 (Cth).
Directors have a responsibility to ensure that reasonable steps are
taken for the company to comply with its financial reporting and
audit requirements under the Corporations Act.
Directors need to be financially literate and have sufficient
knowledge of accounting principles and practices, as well as an
appropriate understanding of the business and how it is reflected
in the financial reports. When reviewing financial reports,
directors need to, amongst other things:
ensure, as far as possible and reasonable, that the information
included is accurate, having regard to their understanding of the
business, assets and future prospects – including the cash
flows and assumptions used in the calculations;
consider and question the accounting treatments applied;
examine the adequacy of disclosures and whether the disclosure
of any additional matters should be made.
The global economic slowdown is having an adverse impact on many businesses, often resulting in lower cash flows.
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