ASIC's Focus Areas for June 2017

IFRS news

Ahead of this year’s financial reporting season, ASIC has issued its focus areas for preparers of financial statements, and has reminded directors of the need to focus on providing high-quality, relevant financial information to readers. 

ASIC’s financial reporting surveillance process involves the review of over 300 sets of financial statements per year, and, where issues are noted, can lead to a “please explain” letter to directors. 

In a small number of cases, companies can be required to restate their financial statements. Here are the key areas to consider in order to ensure that doesn’t happen to you:

1. Disclosure of the impact of new accounting standards

The next few years will see the adoption of three significant new accounting standards on revenue, leases, and financial instruments, which will impact virtually all entities. ASIC expects to see financial statements include a genuine assessment of the effect of these new standards, not simply a boilerplate disclosure that the effect has not yet been assessed.

ASIC noted that...

“this may well mean quantification of the impacts for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report.”

 In other words, their expectation is quantitative disclosures on the impact of the revenue and financial instruments standards in the current year.

2. Removing unnecessary clutter from financial statements

ASIC have noted that they will focus only on material disclosures, and that they will not pursue immaterial disclosures that may add unnecessary clutter to financial reports.ASIC's Focus Area

This is timely, as amendments to AASB 101 Presentation of Financial Statements which come into force this year re-confirm that materiality can be applied when drafting disclosures, and that if the information from a disclosure is not relevant to users, it need not be presented.

We encourage preparers to take advantage of this opportunity by adopting the “three R’s” principle to preparing their financial statements:

  • Re-order the notes to the accounts.  The most important information should be presented first, with compliance-based disclosure towards the end. There’s no requirement to have accounting policies all together in Note 1 – they are often better presented under the relevant note.
  • Remove immaterial disclosures.  This can be both for balances that are small in size, or where a note on a particular item provides no useful information to readers.
  • Re-word the narrative disclosures in the notes to make greater use of “plain English” and avoid technical jargon.  In particular, accounting policies should be specifically tailored, not just a copy of the relevant accounting standard.

3. Focus on whether asset values are supported, and whether the assumptions used are supportable and appropriately disclosed

ASIC’s most common area of focus remains on impairment testing and asset values, and on ensuring that:

  • Future cash flow forecasts and other assumptions included within valuation models are reasonable and reflect current market conditions
  • Appropriate disclosure is made of the key assumptions used within impairment models, including sensitivity analysis on those assumptions
  • Directors should seek independent valuations or accounting advice where necessary

All of the recent media releases issued by ASIC relate to this area, so directors should ensure that they understand the judgments taken, the reasons for them, and that they challenge management’s position where appropriate.  Directors should evaluate whether the financial statements are consistent with their own understanding of the business, and should avoid over-reliance on the external auditors. 

For further information about ASIC financial reporting surveillance, please contact Ralph Martin, or your local RSM adviser.

Learn about the new approach to lease accounting

<< New approach to lease accounting