ASIC today announced its areas of focus for 30 June 2014 financial reports of listed entities and other entities of public interest with a large number of stakeholders.

ASIC Commissioner John Price said, ‘The quality of financial reporting is an important contributor to confident and informed markets. Financial reports should provide useful and meaningful information for investors and other users of those reports.’

Focus on impairment

We encourage preparers and auditors of financial reports to carefully consider the need to impair goodwill and other assets. We continue to find impairment calculations that use unrealistic cash flows and assumptions, including cases where entities have made unrealistic forecasts that have not been met over several reporting periods. We also continue to find material mismatches between the cash flows used and the assets being tested for impairment.

Focus on accounting policy choices

Preparers and auditors should also focus on the appropriateness of key accounting policy choices that can significantly affect reported results. These include revenue recognition, expensing of costs that should not be included in asset values, and the impact of new requirements for consolidations and joint arrangements.

The role of directors

Even though directors do not need to be accounting experts, they should challenge the accounting estimates and treatments applied in the financial report, seek explanations and seek appropriate professional advice supporting the accounting treatments chosen, particularly where a treatment doesn't reflect their understanding of the substance of an arrangement.

Although calculations supporting impairment or valuation of significant assets can be complex, directors should review the cash flows and assumptions used in the calculations prepared by management or experts, bearing in mind their knowledge of the business, its assets, and the future prospects of the business.

To ensure that financial reports are of high quality, and that useful and meaningful information is provided to users of financial reports, entities should:

• have a culture focused on quality financial reporting

• have adequate governance arrangements, and processes and controls

• ensure the financial literacy of directors is appropriate

• apply the accounting standards

• apply appropriate experience and expertise to financial reporting, and the underlying processes supporting the information in the financial report, including engaging external experts where appropriate, and

• consider accountability and internal incentives for company management that are focused on financial reporting quality.

Further information can be found in ASIC Information Sheet 183 Directors and financial reporting (INFO 183).

Financial reporting quality is supported by the quality of the independent audit, which is also important to confident and informed markets and investors. In this regard, directors should have regard to ASIC Information Sheet 196 Audit quality: the role of directors and audit committees (INFO 196). ASIC will release its next public audit firm inspection report in June or July 2014.

ASIC’s surveillance

ASIC’s surveillance of 30 June 2014 financial reports will particularly focus on listed entities and other entities of public interest with a large number and wide range of stakeholders considering factors like the nature and size of the business and the number of its employees.

ASIC’s surveillance continues to focus on material disclosures of information useful to investors and other users of financial reports, such as key assumptions supporting accounting estimates. ASIC does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.

More information about focuses for 30 June 2014 financial reports is provided in the attachment to this release.

ASIC’s findings from reviews of 31 December 2013 financial reports of public interest entities will be released in June 2014.