ASIC today announced the results from a review of 30 June 2013 financial reports that covered 280 listed and other public interest entities.

ASIC Commissioner John Price said: ‘Preparers of financial reports should ensure that they provide high standard, useful and meaningful information.

‘While the quality of financial reporting in Australia is comparable with other major jurisdictions, we continue to identify matters such as inadequate impairment of assets and inappropriate recognition of revenue in some cases.’

The June 2013 annual reports are the first since ASIC released guidance on the operating and financial review (OFR) in March 2013 (ref: 13-064MR).

Since then there have been significant improvements in the quality of disclosures in the OFR, however some entities need to improve the description of the entity’s business and the underlying drivers of reported results.

To date, ASIC has made inquiries of 70 entities on 100 matters. Of these:

• eight have made material restatements of reported net assets and profits;

• three have agreed to provide additional material disclosures; and

• twelve have been concluded without changes to their financial reporting.

Inquiries of other entities are being finalised in areas such as impairment, revenue recognition, consolidation of other entities, amortisation of intangibles, segment reporting and OFR disclosures. Inquiries of individual entities will not necessarily lead to material restatements.

ASIC’s reviews are now almost complete although a small number of additional queries may be made.

Inquiries made by ASIC to date relate to the following matters:

Matter	Number of inquiries to date
Operating and financial review	3
Consolidation of other entities	9
Joint arrangements	1
Impairment and other asset values	34
Going concern	1
Revenue recognition	14
Control of assets	3
Financial instruments	4
Non-IFRS financial information	5
Related party disclosures	2
Amortisation of intangibles	6
Segment reporting	6
Current classification of assets	3
Business combination accounting	2
Other matters	7
Total	100

ASIC does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.

Further information

More information about the findings of ASIC’s reviews of the financial reports of listed entities and of unlisted entities with larger numbers of users are provided in the Attachment to this release.

Attachment to 13-341MR: Findings from 30 June 2013 financial reports

1. Disclosure in the operating and financial review (OFR)

ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review (RG 247) was released in March 2013 to assist directors of listed entities in providing useful and meaningful analysis and information in the OFR as required by law.

Our reviews have revealed significant improvements in the quality of OFRs.

Previous ASIC reviews found that half of listed entities sought to rely on an exemption for information that could cause unreasonable prejudice and did not disclose any information on business strategies and prospects for future financial years. This included cases where relevant information was already publicly available. In the OFRs reviewed at 30 June 2013, there was a substantial reduction in the use of the exemption.

We have written to, or will be writing to, a number of entities regarding omitted or inadequate disclosures of:

(a) the entity's business model(s);

(b) business strategies which are relevant to the entity’s future financial position and performance;

(c) material business risks that could adversely affect the achievement of the future financial performance or financial outcomes of the entity;

(d) underlying drivers of financial performance; and

(e) explanation of significant changes in balances.

We encourage entities to refer to RG 247 and review how to best articulate their business model, strategies, and underlying drivers of financial performance.

Some entities make relevant disclosures in investor presentations and analyst briefings rather than in the OFR. However, these disclosures are often in the form of slide presentations, lack supporting explanation and are not in a readily understandable narrative form.

Our objective is not to increase the length of the OFR but rather the quality of the information provided in it.

2. Off-balance sheet arrangements and new standards

Accounting standards AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities and AASB 13 Fair Value Measurement applied to half -year financial reports for the first time. The first two standards can significantly change the identification of controlled entities and accounting for joint arrangements. The third can affect aspects of the determination of fair values of financial instruments or other assets.

ASIC is making inquiries on the non-consolidation of some entities, including some majority owned entities. We are also inquiring of one entity on the appropriateness of accounting for a joint arrangement.

A number of entities affected by the new accounting standards did not make the necessary disclosures of the impact of those standards.

3. Asset values and impairment testing

ASIC continues to identify concerns regarding assessments of the recoverability of the carrying values of assets, including goodwill, other intangibles, investment properties and property, plant and equipment.

As a result of ASIC inquiries, a number of entities have made significant impairment write-downs and will improve their disclosures on matters such as key assumptions

Findings include:

(a) Determining the carrying amount of cash generating units

There are cases where entities:

(i) appear to have identified CGUs at too high a level or used single CGUs where cash flows for individual assets are largely independent, resulting in cash flows from one asset or part of the business being incorrectly used to support the carrying values of other assets;

(ii) did not include all assets that generate the cash inflows in the carrying amount of a cash generating unit (CGU), such as inventories and trade receivables;

(iii) incorrectly included the benefit of tax losses in determining the recoverable amount of a CGU; and

(iv) incorrectly deducted liabilities from the carrying amount of a CGU.

(b) Reasonableness of cash flows and assumptions

There continue to be cases where the cash flows and assumptions used by entities in determining recoverable amounts are not reasonable or supportable having regard to matters such as historical cash flows, the manner in which an entity is funded and market conditions.

In particular, we found cases where:

(i) cash flows for value in use calculations included estimated future cash inflows or outflows expected to arise from future restructuring or development plans;

(ii) assumptions derived from external sources were not assessed for consistency and relevance; and

(iii) forecasts extended beyond five years for value in use calculations even though the entity had a poor history of making forecasts.

(c) Fair value assessments of recoverable amounts

In their fair value assessment some entities are using to discounted cash flow techniques that are dependent on a large number of management inputs without considering recoverable amounts for comparable transactions. Where it is not possible to determine fair value because there is no basis for making a reliable estimate of the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties, the entity may need to attribute the asset’s value in use as its recoverable amount.

(d) Impairment indicators

Some entities are not attaching appropriate weight to impairment indicators, such as obsolescence and market capitalisation relative to reported net assets.

(e) Disclosures

A number of entities are not making necessary disclosure of:

(i) sensitivity analysis where there is limited excess of an asset’s recoverable amount over the carrying amount and where a reasonably possible change in an assumption(s) could lead to impairment;

(ii) key assumptions including discount rates and growth rates; and

(iii) periods covered by forecasts.

These disclosures are important to investors and other users of financial reports given the subjectivity of these calculations/assessments. They enable users to make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations.

4. Going concern

ASIC is currently making inquiries of one entity concerning the appropriateness of applying the going concern assumption.

5. Revenue recognition and expense deferral

ASIC has made inquiries with entities to clarify the recognition of revenue in relation to sales of goods, provision of services, investments, consignment stock, cash received in advance and other contractual arrangements. Material adjustments have been made by some entities that had prematurely recognised revenue.

Concerns include recognition of revenue prior to:

(a) the performance of services to which the revenue relates;

(b) control of relevant goods passing to the buyer; and

(c) services being provided under contracts that involve both the sale of goods and the provision of related services. Revenue should be appropriately allocated to the components and recognised accordingly.

ASIC also found that the disclosure of revenue recognition policies by many entities was not sufficiently specific to the entity, its business and sources of revenue. Boilerplate accounting policies do not assist users of a financial report to understand the basis of revenue recognition.

Expenses should only be deferred where there is an asset as defined in the accounting standards and it is probable that future economic benefits will arise. We are making inquiries of 3 entities in relation to the control of assets.

6. Financial instrument values

We have made inquiries of some entities in relation to the valuation of financial instruments not traded in an active market, including the adequacy of provisions against loans made by entities.

A number of entities should improve disclosures to enable users to assess the significance of and the nature and extent of risks under financial instruments. In particular we noted:

(a) some entities did not provide information of the assumptions and technique/ methodology applied when valuing financial instruments;

(b) inconsistent information in the financial report; and

(c) a number of entities that had disclosed that they had pledged assets as security for liabilities did not provide explicit information on the items pledged.

7. Estimates and accounting policy judgements

We observed opportunities for entities to improve the quality and completeness of disclosures in relation to judgements, key assumptions, estimation uncertainties, and significant judgments in applying accounting policies.

Disclosures in this area are important to allow users of the financial report to assess the reported financial position and performance of an entity with all relevant information.

8. Non-IFRS financial information

ASIC reviewed financial reports, market announcements, investor and analyst presentations, and related media releases of selected listed entities having regard to the use of non-IFRS financial information.

While the vast majority of entities reviewed by ASIC had followed the guidance in Regulatory Guide RG 230 Disclosing non-IFRS financial information (RG 230), we continue to find some entities who:

(a) inappropriately disclose non-IFRS information in the financial report;

(b) describe items of expense as ‘one-off’ or ‘non-recurring’, even though they are inherent to the entity’s business and occur every year or can be reasonably expected to recur;

(c) give greater prominence to non-IFRS financial information in market announcements, investor and analyst presentations, and/or related media releases;

(d) do not provide a reconciliation between non-IFRS and IFRS financial information in all relevant documents; and/or

(e) do not disclose whether the non-IFRS financial information had been subject to audit or review.

We have contacted a number of companies in relation to their use of non-IFRS financial information.

9. Related party disclosures

A number of entities did not disclose the terms and conditions of related party transactions or appear to have incorrectly described transactions as being on arm’s length terms and conditions. ASIC has also made inquiries with entities regarding the adequacy of related party disclosures and compliance with Part 2E of the Act in relation to the approval of certain transactions.

10. Amortisation of intangible assets

ASIC is making inquiries of entities concerning the appropriateness of their assessment of indefinite useful life and/or the amortisation periods attributed to intangibles.

Amortisation should take place as the benefits of an intangible asset are consumed by the entity. Where the useful life of an intangible asset arises from contractual or legal rights the amortisation period must not exceed the period of the contractual or legal rights. Useful life extends to the contract term, including renewal periods where renewal is expected to occur and renewal costs are not significant.

11. Segment reporting

A number of entities do not appear to have met the core principle in the AASB 8 Operating segments and disclosed segment information that may be important to investors. This includes some entities that provide select segment information in market announcements and other documents but don’t disclose segment information in their financial reports.

12. Other material disclosures

Some entities did not disclose:

(a) Significant post balance date events that were known prior to the signing of the financial report; or

(b) The nature of non-audit services provided by their auditors.

13. Other areas

ASIC is also making inquiries of entities in relation to the following matters:

(a) The appropriateness of business combination accounting, including recognition of amounts as goodwill rather than a prepayment for services;

(b) Recognition of deferred tax assets where it may not be probable that future taxable income will be sufficient to enable its recovery;

(c) The classification of financial instruments as equity rather than liabilities;

(d) Treatment of mine stripping costs;

(e) The grossing up of assets and liabilities; and

(f) Recognition of employee provisions.

A company that had not corrected material errors in its 30 June 2013 financial report in relation to revenue, expenditure and asset recognition has addressed those issues following ASIC inquiries. The auditor had issued a qualified audit report.