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10-147MR ASIC focuses attention on 2010 financial reports
Monday 5 July 2010 (per ASIC website)
1. Going concern
While there has been some reduction in the number of audit reports containing emphasis of matter paragraphs, drawing attention to uncertainties concerning the ability of entities to continue as a going concern, the appropriateness of the going concern assumption in the preparation of financial reports continues to be an important area of focus.
Uncertainty remains over the future economic climate in which many Australian entities operate. There are indications that credit may still be tight for some entities, and entities should continue to focus on the ability to refinance debt within the next 12 months and beyond. Entities should also review compliance with lending covenants.
2. Asset impairment
Based on the financial reports reviewed, ASIC found that writedowns were 5 per cent of the total value of indefinite life intangible assets and goodwill for the 12 months to 31 December 2009. For the 12 months to 30 June 2009, the writedowns were 11 per cent. Directors should continue to focus on asset values at 30 June 2010.
ASIC’s experience is that impairment testing is one of the most difficult areas of financial report preparation for entities. A number of issues of compliance with AASB 136 ‘Impairment of Assets’ identified in previous reviews continued to be prevalent at 31 December 2009. The most common of these were that:
Monday 5 July 2010 (per ASIC website)
1. Going concern
While there has been some reduction in the number of audit reports containing emphasis of matter paragraphs, drawing attention to uncertainties concerning the ability of entities to continue as a going concern, the appropriateness of the going concern assumption in the preparation of financial reports continues to be an important area of focus.
Uncertainty remains over the future economic climate in which many Australian entities operate. There are indications that credit may still be tight for some entities, and entities should continue to focus on the ability to refinance debt within the next 12 months and beyond. Entities should also review compliance with lending covenants.
2. Asset impairment
Based on the financial reports reviewed, ASIC found that writedowns were 5 per cent of the total value of indefinite life intangible assets and goodwill for the 12 months to 31 December 2009. For the 12 months to 30 June 2009, the writedowns were 11 per cent. Directors should continue to focus on asset values at 30 June 2010.
ASIC’s experience is that impairment testing is one of the most difficult areas of financial report preparation for entities. A number of issues of compliance with AASB 136 ‘Impairment of Assets’ identified in previous reviews continued to be prevalent at 31 December 2009. The most common of these were that:
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unrealistically optimistic discount and growth rates were used
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cash flows were projected for more than five years in “value in use” calculations without any explanation justifying the longer period
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cash-generating units (CGUs) used for testing goodwill impairment were not broken down sufficiently to allow accurate testing. For example, some CGUs were larger than the segments disclosed in the entity’s segment reporting note
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no sensitivity analysis disclosed for changes in key assumptions
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a lack of disclosure of assumptions used in DCF calculations, particularly growth rates and discount rates.
Directors and audit committees have a key role in reviewing the appropriateness of cash flow projections, growth and discount rates, and other key assumptions.
ASIC continues to liaise with a number of entities in relation to impairment testing. Given the complexity of this area, it is very important that directors employ an appropriate level of internal or external expertise.
3. Fair value of assets
Investment properties
ASIC’s review of financial reports for full years ended 31 December 2009 found that writedowns of investment properties accounted for eight per cent of the carrying value of the properties, compared to 12 per cent for 30 June 2009 full years.
Entities should ensure that values reflect current market conditions and are properly supported.
At 31 December 2009, a number of entities carrying investment properties at fair value failed to appropriately disclose the methods and significant assumptions applied in determining the fair values. ASIC has contacted a number of these entities to ensure the disclosures are improved.
Financial assets
Financial assets at fair value should be based on the best available market information. Where quoted prices in active markets are genuinely not available, fair values should be determined with the maximum use of market inputs and key assumptions should be disclosed.
AASB 7 ‘Financial Instruments: Disclosures’ requires entities to ensure that fair value measurements of financial assets are classified using a three level 'fair value hierarchy', reflecting the extent to which quoted prices or observable and non-observable market data are used in the measurement.
Intangible assets
AASB 138 allows identifiable intangible assets (other than brandnames, mastheads, etc) to be revalued upwards to fair value where there is an “active market” for the intangible asset. The criteria for an “active market” in accounting standards are strict, and ASIC has not yet seen intangible assets in Australia that would meet those criteria. In a number of cases, ASIC has asked companies to revert to using amortised cost rather than fair values for their intangible assets. Examples of intangibles where the measurement basis has been challenged by ASIC are water rights, bed licences and liquor and gaming licenses.
4. Off balance sheet exposures
ASIC continues to identify a small number of cases where entities should have consolidated other entities or should have included assets and liabilities that had been left off their balance sheets. Directors and audit committees should carefully review any off-balance sheet arrangements to ensure that they are correctly treated.
5. Financial instruments
Entities should ensure that there is sufficient disclosure to enable users of financial reports to evaluate the nature and extent of risks arising from financial instruments.
Reviews of full year 31 December 2009 financial reports found a number of entities not disclosing debt maturities for liabilities subject to floating interest rates, as required by AASB 7. Such disclosure is important for users of financial reports to assess an entity's exposure to interest rate risk.
AASB 9 'Financial Instruments', released late last year, represents the first phase of a three phase project to revise AASB 139 and covers classification and measurement of financial assets. Although it is not mandatory until 2013, it is available for early adoption. Where 30 June 2010 financial reports have early adopted AASB 9, entities should ensure:
ASIC continues to liaise with a number of entities in relation to impairment testing. Given the complexity of this area, it is very important that directors employ an appropriate level of internal or external expertise.
3. Fair value of assets
Investment properties
ASIC’s review of financial reports for full years ended 31 December 2009 found that writedowns of investment properties accounted for eight per cent of the carrying value of the properties, compared to 12 per cent for 30 June 2009 full years.
Entities should ensure that values reflect current market conditions and are properly supported.
At 31 December 2009, a number of entities carrying investment properties at fair value failed to appropriately disclose the methods and significant assumptions applied in determining the fair values. ASIC has contacted a number of these entities to ensure the disclosures are improved.
Financial assets
Financial assets at fair value should be based on the best available market information. Where quoted prices in active markets are genuinely not available, fair values should be determined with the maximum use of market inputs and key assumptions should be disclosed.
AASB 7 ‘Financial Instruments: Disclosures’ requires entities to ensure that fair value measurements of financial assets are classified using a three level 'fair value hierarchy', reflecting the extent to which quoted prices or observable and non-observable market data are used in the measurement.
Intangible assets
AASB 138 allows identifiable intangible assets (other than brandnames, mastheads, etc) to be revalued upwards to fair value where there is an “active market” for the intangible asset. The criteria for an “active market” in accounting standards are strict, and ASIC has not yet seen intangible assets in Australia that would meet those criteria. In a number of cases, ASIC has asked companies to revert to using amortised cost rather than fair values for their intangible assets. Examples of intangibles where the measurement basis has been challenged by ASIC are water rights, bed licences and liquor and gaming licenses.
4. Off balance sheet exposures
ASIC continues to identify a small number of cases where entities should have consolidated other entities or should have included assets and liabilities that had been left off their balance sheets. Directors and audit committees should carefully review any off-balance sheet arrangements to ensure that they are correctly treated.
5. Financial instruments
Entities should ensure that there is sufficient disclosure to enable users of financial reports to evaluate the nature and extent of risks arising from financial instruments.
Reviews of full year 31 December 2009 financial reports found a number of entities not disclosing debt maturities for liabilities subject to floating interest rates, as required by AASB 7. Such disclosure is important for users of financial reports to assess an entity's exposure to interest rate risk.
AASB 9 'Financial Instruments', released late last year, represents the first phase of a three phase project to revise AASB 139 and covers classification and measurement of financial assets. Although it is not mandatory until 2013, it is available for early adoption. Where 30 June 2010 financial reports have early adopted AASB 9, entities should ensure:
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they have correctly applied the transition provisions in the standard;
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where financial assets are measured at amortised cost, the classification is appropriate; and
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gains and losses on financial assets carried at fair value are correctly classified between income and expenses included in profit and loss and in “other comprehensive income”.
6. Current vs non-current classifications
The correct classification of liabilities and assets between current and non-current is important to an understanding of the financial position of an entity. Directors and audit committees should ensure that there are appropriate processes to ensure the correct classification and should review the classification having regard to their knowledge of the business and its funding.
7. Other issues related to current market conditions
Other focus areas include:
The correct classification of liabilities and assets between current and non-current is important to an understanding of the financial position of an entity. Directors and audit committees should ensure that there are appropriate processes to ensure the correct classification and should review the classification having regard to their knowledge of the business and its funding.
7. Other issues related to current market conditions
Other focus areas include:
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adequate disclosure of significant judgements in applying accounting policies, and key assumptions and sources of estimation uncertainty;
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appropriate revenue recognition, expense recognition; and
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disclosure of subsequent events.
8. Non-statutory profits
ASIC reviewed 50 profit announcements of listed entities and found that 78% disclosed an alternative profit measure, with 11% of listed entities including alternative profit measures in the financial report.
The financial report should not include alternative profit measures. Disclosure of alternative profit measures in profit announcements should not be misleading and should not be given undue prominence compared to the statutory profit. There should be a reconciliation of any alternative profit to the statutory profit, with explanations of adjustments. Both positive and negative adjustments should be included and should be consistent from period to period.
9. Operating and financial review
The “operating and financial review” in annual reports enables the directors to explain to users of financial reports the performance and financial position of the entity in a meaningful way. At 30 June 2010 we encourage directors to focus on the quality of the operating and financial review. The Corporations Act 2001 requires listed public company to provide information that members of the company would reasonably require to make an informed assessment of the operations and financial position, as well as business strategies and its prospects for future financial years (unless disclosure would cause unreasonable prejudice).
10. Segment reporting
The new segment reporting accounting standard that applies from periods commencing 1 January 2009 will result in changes to the segments reported by some entities. Entities should ensure that the segments reported reflect the segments reported internally to the chief operating decision maker. ASIC continues to liaise with some entities in relation to their segment reporting at 31 December 2009.
11. Financial statement disclosure
ASIC will be reviewing financial reports to ensure compliance with the revised AASB 101 ‘Presentation of Financial Statements’, including the correct classification of items between profit and loss and other comprehensive income.
12. Business combinations
With a recent increase in the number of acquisitions, and new business combination and consolidation accounting standards, directors and auditors should focus on the accounting for these transactions, including appropriate treatments of reverse acquisitions and common control transactions.
13. Employee share plan loans
At 31 December 2009 some entities accounted for non-recourse loans provided to employees to buy shares in the entity as financial assets. Although the accounting for these loans will depend on the individual circumstances, the loans may represent options in substance and, where this is the case, the accounting should reflect this.
ASIC reviewed 50 profit announcements of listed entities and found that 78% disclosed an alternative profit measure, with 11% of listed entities including alternative profit measures in the financial report.
The financial report should not include alternative profit measures. Disclosure of alternative profit measures in profit announcements should not be misleading and should not be given undue prominence compared to the statutory profit. There should be a reconciliation of any alternative profit to the statutory profit, with explanations of adjustments. Both positive and negative adjustments should be included and should be consistent from period to period.
9. Operating and financial review
The “operating and financial review” in annual reports enables the directors to explain to users of financial reports the performance and financial position of the entity in a meaningful way. At 30 June 2010 we encourage directors to focus on the quality of the operating and financial review. The Corporations Act 2001 requires listed public company to provide information that members of the company would reasonably require to make an informed assessment of the operations and financial position, as well as business strategies and its prospects for future financial years (unless disclosure would cause unreasonable prejudice).
10. Segment reporting
The new segment reporting accounting standard that applies from periods commencing 1 January 2009 will result in changes to the segments reported by some entities. Entities should ensure that the segments reported reflect the segments reported internally to the chief operating decision maker. ASIC continues to liaise with some entities in relation to their segment reporting at 31 December 2009.
11. Financial statement disclosure
ASIC will be reviewing financial reports to ensure compliance with the revised AASB 101 ‘Presentation of Financial Statements’, including the correct classification of items between profit and loss and other comprehensive income.
12. Business combinations
With a recent increase in the number of acquisitions, and new business combination and consolidation accounting standards, directors and auditors should focus on the accounting for these transactions, including appropriate treatments of reverse acquisitions and common control transactions.
13. Employee share plan loans
At 31 December 2009 some entities accounted for non-recourse loans provided to employees to buy shares in the entity as financial assets. Although the accounting for these loans will depend on the individual circumstances, the loans may represent options in substance and, where this is the case, the accounting should reflect this.