1. Segment reporting

The core principle of accounting standard AASB 8 'Operating Segments' requires each listed entity to disclose segment information to enable users to evaluate the nature and financial effects of its business activities and the economic environments in which it operates.

There are also requirements for identifying segments that have regard to components whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM). It is important to correctly identify the CODM, which is a function rather than an individual with a specific title. The CODM may be a group of executive directors or others.

A number of entities only provided short narrative descriptions of operating segments, but should have provided the quantitative and other disclosures required by accounting standards, including reconciliations.

Segments should be presented on a consistent basis from period to period. Where there is a change in continuing segments, the reasons for the change and comparable prior period information should be presented to assist investors and other users of the information.

2. Control and significant influence

Our reviews continued to identify cases where reporting entities have not consolidated their controlled entities even though the ownership interest has been as high as 90%. Although one aspect of decision making may be shared with other parties, directors should have regard to the overall substance of such arrangements in determining whether there is control.

The overall substance of relationships should also be considered in determining whether there is significance influence over an investee and equity accounting is required. There is a presumption that significant influence exists where 20% or more of the voting power is held.

3. Going concern

Of the 31 December 2010 reviews undertaken by ASIC, 13% of audit reports contained an emphasis of matter paragraph drawing attention to uncertainty surrounding the entity's ability to continue as a going concern. This compares to 10% of the reports reviewed for years ended 30 June 2010.

The appropriateness of applying the going concern assumption remains an important issue. Where material uncertainties exist that may cast significant doubt upon an entity’s ability to continue as a going concern, those uncertainties must be disclosed. Entities should continue to focus on their ability to refinance debt due for repayment and any foreseeable increases in the cost of borrowing.

4. Asset impairment

For the financial reports reviewed, ASIC found that write-downs were less than one per cent of the total value of indefinite life intangible assets (including goodwill) for the 12 months to 31 December 2010. For the 12 months to 30 June 2010, the write-downs were 6%.

We continue to identify issues with impairment testing, including the identification of cash generating units, the allocation of goodwill to cash generating units and the use of unrealistic assumptions to calculate recoverable amounts (including discount rates and expected growth rates).

Cash generating units should be determined in accordance with AASB 136 'Impairment of Assets' and should normally be consistent from year to year. Goodwill must be allocated to the units expected to benefit from the goodwill at the time of acquisition.

A number of entities omitted material disclosures concerning their impairment testing, including key assumptions, goodwill allocated to each cash generating unit, and sensitivity analysis for changes in key assumptions.

5. Fair value of financial assets

A number of financial reports reviewed did not contain the required disclosure of fair value measurements of financial assets and liabilities using a three level ‘fair value hierarchy’ that reflects the extent to which quoted prices or observable and non-observable market data are used in the measurement.

A number of entities also failed to disclose the methods and assumptions they used to determine fair values of financial assets. Some entities failed to disclose an ageing analysis of financial assets that are past due but not impaired, or an analysis of financial assets that are individually determined to be impaired.

6. Financial instrument disclosures

A number of entities did not make adequate disclosures to enable users of financial reports to understand and evaluate the nature and extent of the specific market, credit and liquidity risks associated with their use of financial instruments. Disclosures should be meaningful to users, and specific disclosures should be made rather than boilerplate disclosures.

7. Disclosures of estimates and accounting policy judgements

Some entities did not make material disclosures of significant judgements in applying accounting policies and sources of estimation uncertainty. These disclosures should be specific to the entity and its assets, liabilities, equity, income and expenses.

8. Business combinations

With a continued increase in the number of acquisitions, directors and auditors should focus on the accounting for these transactions, including appropriate treatments of reverse acquisitions, common control transactions and transaction costs, as well as the appropriateness of purchase price allocations.

9. Related party disclosures

Understanding the impact on financial position and performance of related parties and transactions and balances with such parties is important to investors and other users of financial reports. Directors should ensure compliance with the disclosure requirements for the financial report under accounting standards and for the directors’ report under the Corporations Act 2001 (the Corporations Act).

10. Operating and financial review

ASIC reviewed the quality of the Operating and Financial Reviews (OFRs) in the annual reports of 130 listed entities. Directors of listed companies need to focus on the quality of the OFR (also known as ‘management commentary’ or ‘management discussion and analysis’). The Corporations Act requires the OFR to present information that members of the company would reasonably require to make an informed assessment of:

(a) the operations of the entity;

(b) the financial position of the entity; and

(c) the entity’s business strategies and its prospects for future years (unless disclosure is likely to result in unreasonable prejudice to the company or a controlled entity and that fact is disclosed).

ASIC will focus on the quality of the OFR again for financial years ended 30 June 2011.

11. Alternative profits

Directors should be mindful of the limitations on the use of alternative profit measures in financial reports. These measures should not be presented in a misleading manner in documents associated with financial reports, such as the directors’ report, market announcements, briefings to analysts and presentations to investors.

11–139MR ASIC focuses attention on 30 June 2011 financial reports