ASIC today announced the results from a review of the 31 December 2013 financial reports of 135 listed and other public interest entities.

The review saw ASIC contact 23 companies about their reports. Matters ASIC looked at included inadequate impairment of assets and inappropriate accounting treatments.

Inquiries of a company will not necessarily lead to material restatements. Matters involving six of the entities ended without any changes to their financial reporting.

While the results from our review of 31 December are incomplete, our risk-based surveillance led to material changes to 4% of the financial reports previously reviewed for reporting periods ended 30 June 2010 to 30 June 2013.

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

As part of our surveillance of financial reporting from July 1 2014, ASIC will publicly announce when, following contact from ASIC, a company makes material changes to information previously provided to the market.

‘As a result, directors and auditors of other companies will be more aware of ASIC’s concerns and hopefully can avoid similar issues,’ Mr Price said.

ASIC’s reviews of 31 December 2013 financial reports 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:

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 1 to this release.

Findings from ASIC’s review of the 30 June 2013 financial reports of 100 proprietary companies – private companies - are provided in Attachment 2.

Attachment 1 to 14-141MR: Findings from 31 December 2013 financial reports

1. 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, 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:

• 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

• 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

• incorrectly included the benefit of tax losses in determining the recoverable amount of a CGU, and

• 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:

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

• assumptions derived from external sources were not assessed for consistency and relevance, and

• 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 under AASB 13: In their fair value assessment we still see entities using discounted cash flow techniques that are dependent on a large number of management inputs, without considering recoverable amounts for comparable transactions, where available. Where it is not possible to determine fair value because there is no basis for making a reliable estimate of the price that would be received to sell an asset in an orderly transaction between market participants, 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:

• 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

• key assumptions including discount rates and growth rates, and

• 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.

This item includes matters arising from the finalisation of impairment matters identified in our reviews of 30 June 2013 financial reports.

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 full 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 fourth can affect aspects of the determination of fair values of financial instruments or other assets.

ASIC is making enquiries on the non-consolidation of some entities, including some majority-owned entities and of one entity regarding the appropriateness of accounting for a joint arrangement.

3. Tax accounting

ASIC is making inquiries of four entities concerning their accounting for income tax and, in particular, the substantiation of their tax expense positions. This includes where:

• there is no apparent reason why the tax expense is low having regard to reported profit, and necessary disclosures have not been made

• where temporary differences and deferred tax balances appear to have arisen from non-ongoing transactions, and

• there are unusual reconciling items between accounting profit and tax expense/benefit that result in significant tax benefits.

We are also making inquiries of three entities as to whether it is probable that future taxable income will be sufficient to enable the recovery of deferred tax assets relating to tax losses.

4. Amortisation of intangible assets

ASIC is making inquiries of four 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, which may differ from the periods over which revenue is expected to be generated by the asset. 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.

5. Expense deferral

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 two entities in relation to the deferral of expenditure to the balance sheet. Particular concerns include recognition of intangible assets arising from the development phase where the strict criteria for deferral do not appear to be met.

6. Revenue recognition

ASIC is following up one matter concerning the recognition of revenue. We continue to see instances where the disclosure of revenue recognition policies by some 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, particularly where business models are more complex and there are multiple sources of revenues.

7. Estimates and accounting policy judgements

We observed instances where entities needed 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. 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. We have continued to see significant improvements in the quality of OFRs as a result of our reviews.

We have continued to see a substantial reduction in instances where 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.

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

9. Segment reporting

We are still finding some entities that do not appear to have met the core principle in 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. We are making enquiries of three entities in relation to their operating segment disclosures.

10. Non-IFRS financial information

Our reviews continue to show that entities are following the guidance in ASIC Regulatory Guide 230 Disclosing non-IFRS financial information (RG 230).

11. Other areas

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

• The classification of instruments as equity rather than liabilities;

• The appropriateness of applying the going concern assumption; and

• Possible under recorded provisions.

Attachment 2 to 14-141MR: Findings for financial reports of proprietary companies

ASIC reviewed the financial reports of 100 proprietary companies required to lodge financial reports for years ended 30 June 2013. The review focused on large proprietary companies. The reviews resulted in changes to financial reporting in relation to the following matters:

• Companies with substantial manufacturing and trading operations for which it is reasonable to expect significant numbers of users dependent on general purpose financial reports that had prepared special purpose financial reports that omitted significant disclosures.

• Two companies had failed to make a provision against materially impaired assets.

• Two companies had misclassified financial instruments as equity rather than debt.

• One company inappropriately deferred costs as a asset.

• One company misclassified gains on available for sale financial instruments in the income statement.

• Companies had purported to rely on ASIC relief from auditing requirements, even though they did not meet the financial or other conditions for use of that relief.