ASIC Financial and Audit Reports for the half year ending 31 December 2008
The Australian Securities and Investments Commission has recently issued guidance for companies preparing 31 December 2008 financial and audit reports. The guidance stems from ASIC's review of a cross-section of 30 June 2007 financial reports and aims to ensure that company directors and financial officers are aware of specific issues concerning financial reporting and of ASIC's key areas of focus.
Companies and directors are reminded to focus on disclosures that are relevant to all stakeholders and not just shareholders. The disclosure made by entities should enable the reader to acquire a proper understanding of the business and the risks faced in the current, and future economic and market conditions.
The key areas of concern are:
Going Concern
Directors should be mindful of the 'going concern' assumption and whether or not this assumption is appropriate in the current circumstances of the company. Issues of liquidity, debt restructuring, and the ability of a company to raise new funds should be considered in making this assumption. Further consideration should be given to future compliance with debt covenants.
Impairment of Assets
As financial markets have further deteriorated since 30 June 2008, there is an expectation that writedowns against assets will continue to rise. In particular, directors should focus their attention on write-downs against intangible assets and those other assets not reported at fair-value. ASIC is looking for a company's assets impairment review process to be robust and transparent ensuring investors can be confident in the reported value of assets.
Key areas that should be addressed are:
- discount rates and growth rates used in the value in use calculations;
- explanations for using forecast periods of greater than five years; and
- sensitivity analysis in relation to changes in key assumptions.
Determining Fair Value
ASIC noted that many of the valuations conducted to 30 June 2008 were done so using director's valuations rather than independent valuations. Whilst this is not problematic, ASIC's view is that valuation methods and assumptions (eg financial models), should be fully disclosed including whether the fair value reckoning is supported by market evidence.
Off-Balance Sheet Arrangements
ASIC have indicated that whilst financial reports and public disclosures imply off-balance sheet arrangements are being used by companies, these arrangements are not being adequately disclosed in financial reports. Companies are being asked to disclose the nature and extent of the arrangements and the reasons why assets and liabilities are not on-balance sheet.
The risks and benefits of off-balance sheet arrangements should be well understood by directors as should the circumstances that give rise to assets and liabilities not being recognised on-balance sheet. Directors should also be mindful of the longer term risks in deciding whether an off-balance sheet financial arrangement should, in fact, be on-balance sheet.
New Financial Instruments Disclosure
ASIC is looking for companies to more fully disclose the extent of financial instrument usage in line with AASB 7, that is, the full disclosure of:
- debt security provided;
- debt maturity profiles;
- risks associated with financial instruments; and
- hedging arrangements.
Conclusion
It is recommended that companies and directors take considerable care in signing off on financial reports for the half-year ending 31 December 2008. It is important to ensure that the completed financial reports are lodged with ASIC and ASX (if appropriate) within the legislative time frames, that is, within 75 days of expiry of the period: s 320(1) Corporations Act 2001 and ASX Listing Rule 4.2A.
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