ASIC tells directors to focus on accounting policy choices

Announcing the results of its review of the 30 June 2019 full-year financial reports of 200 entities, ASIC said it has made inquiries of 47 entities on 80 matters, the largest number of which relate to the impairment of non-financial assets and inappropriate accounting treatments.

In total, asset values and impairment testing contributed 25 out of 80 inquiries, with ASIC identifying concerns regarding assessments of the recoverability of the carrying values of assets, including goodwill, exploration and evaluation expenditure, and property, plant and equipment.

“Directors and auditors need to focus on impairment of non-financial assets in financial reports to ensure that the market is properly informed about asset values and the expected future performance implied by those values,” ASIC said.

“We continue to find instances where companies have made unrealistic and unsupportable assumptions about future cash flows.”

Revenue recognition followed with 23 inquiries, with ASIC taking a close look at contracts that involve multiple performance obligations (e.g. sale of goods and provision of services) where one or more obligation is still to be met.

ASIC also made a total of nine inquiries concerning their accounting for income tax, including the adequacy of tax expense and whether it is probable that future taxable income will be sufficient to enable the recovery of deferred tax assets relating to tax losses.

The regulator urged directors and auditors to focus on the impact of the newer accounting standards on revenue, financial instruments and leases, which can materially affect reported financial position and results.

ASIC’s risk-based surveillance of the financial reports of public interest entities for reporting periods ended 30 June 2010 to 31 December 2018 has led to material changes to 4 to 5 per cent of the financial reports of public interest entities reviewed by ASIC.

The main changes related to impairment of assets, revenue recognition and expense deferral.