"The largest number of our inquiries and findings
continue to relate to inadequate asset impairment and inappropriate
accounting treatments. Preparers of financial reports should focus
on these areas and ensure that they provide high quality, useful
and meaningful information to investors and
Asset values and impairment testing
ASIC is concerned that entities performing impairment testing
are attempting to conceal impairment losses by:
misallocating cash flows from one asset to support the carrying
value of another asset;
not considering the carrying value of assets related to the
recoverable amount of the cash generating unit; and
incorrectly including tax benefits or deducting
The cash flows used in impairment testing should be grounded in
assumptions that are reasonable given the entity's historical
funding and market conditions.
Directors must also disclose key assumptions such as discount
rates and growth rates. If the recoverable amount of a cash
generating unit is calculated without a quoted price, then
directors should also disclose the valuation technique used,
management's approach to these assumptions, and whether these
assumptions reflect past experience or are consistent with external
Revenue recognition and expense deferral
ASIC reiterates that boilerplate accounting policies are not
helpful to users of financial reports. Entity revenue recognition
polices must be sufficiently specific to the entity, its business
and sources of revenue. Expense deferral should only occur where
there is a defined asset that will produce future economic
ASIC is also concerned about the recognition of intangible
assets arising from development where costs are unclear and the
deferral criteria is not satisfied.
ASIC has asked some entities about irregularities in their
accounting for income tax. These include:
low reported tax expense compared to reported profit;
movements in temporary differences being inconsistent with
movements in related accounting items; and
unusual reconciling of accounting profit and tax
Off-balance sheet arrangements and business combinations
ASIC has queried three entities on the non-consolidation of
entities, including where the ownership interest is near 100% but
the relevant activities of the investee are delegated to a separate
decision-making body within the investee. Inquiries were also made
of four entities about their accounting for business
Current classification of assets
ASIC is speaking to three entities about assets classified as
current that would appear to be non-current.
Amortisation of intangible assets
Consistent with previous years, ASIC advises that amortisation
periods must not exceed the period of the matching contractual or
Estimates and accounting policy adjustments
ASIC says that directors should disclose all information
necessary for investors and others to understand the formation and
impact of business judgments. Disclosure should include:
reasons for judgments;
alternative treatments; and
Auditors are required to disclose information on key audit
matters in future audit reports.
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.
Persons listed may not be admitted in all states and
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