ASIC today announced the results from a review of the 31 December 2015 financial reports of 100 listed and other public interest entities.

Following our review, ASIC has made enquiries of 18 entities on 24 matters seeking explanations of accounting treatments.

ASIC Commissioner John Price said: ‘The largest number of our findings continue to relate to impairment of non-financial assets and inappropriate accounting treatments. Directors and auditors should continue to focus on values of assets and accounting policy choices in preparing their 30 June 2016 financial reports.’

ASIC issued Information Sheet 203 Impairment of non-financial assets: Materials for directors in June 2015 to assist directors and audit committees in considering whether the value of non-financial assets shown in a company’s financial report continues to be supportable.

Our risk-based surveillance of the financial reports of public interest entities for reporting periods ended 30 June 2010 to 30 June 2015 has led to material changes to 4% of the financial reports of public interest entities reviewed by ASIC. The main changes over this period related to impairment of assets, revenue recognition and expense deferral.

Enquiries made by ASIC from reviews of the 31 December 2015 financial reports relate to the following matters:

Enquiries of individual entities will not necessarily lead to material restatements. Matters involving four of the entities have been concluded without any changes to their financial reporting.

In keeping with its overall goal of reducing unnecessary redtape and regulatory intervention, ASIC does not pursue immaterial disclosures that it considers may add unnecessary clutter to financial reports.

Public announcements of material changes

From 1 July 2014, ASIC has publicly announced when a company makes material changes to information previously provided to the market following enquiries by ASIC. In addition to improving the level of market transparency, these announcements are intended to make directors and auditors of other companies more aware of ASIC’s concerns so that they can avoid similar issues.

In the period since our last surveillance results were released in December 2015, ASIC has issued media releases in relation to changes by Slater & Gordon, Panoramic Resources Limited, Ashley Services Group Limited, Spring FG Limited, and Cardno Limited. The total adjustments to profit for these entities were $1.2 billion.

Further information

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

ASIC’s focus areas for 30 June 2016 financial reports can be found in ASIC media release 16-174 ASIC calls on directors to apply realism and clarity to financial reports.

Attachment to 16-205MR: Findings from 31 December 2015 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, exploration and evaluation expenditure, and property, plant and equipment. The largest number of ASIC’s enquiries at 31 December 2015 relate to assets in the extractive industries.

Findings include:

1. Determining the carrying amount of cash generating units: There are cases where entities:
   1. appear to have identified cash generating units (CGUs) at too high a level despite cash inflows being 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;
   2. did not include all assets that generate the cash inflows in the carrying amount of a CGU, such as inventories and trade receivables and tax balances; and
   3. incorrectly deducted liabilities from the carrying amount of a CGU.
2. 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, economic and market conditions, and funding costs. In particular, we found cases where:
   1. assumptions derived from external sources were not assessed for consistency and relevance;
   2. the entity’s forecast cash flows did not appear reasonable and had exceeded actual cash flows for a number of reporting periods; and
   3. corporate costs and assets are not allocated to CGUs on an appropriate basis where it is reasonable to allocate them.
3. Fair value assessments of recoverable amounts: We still see entities using discounted cash flow techniques to estimate fair value where the calculations are dependent on a large number of management inputs. Where reliance is placed solely on management inputs, entities need to consider other fair value methods with a view to ‘cross checking’ their estimate. Where it is not possible to reliably estimate the value that would be received to sell an asset in an orderly transaction between market participants, the entity may need to use the asset’s value in use as its recoverable amount.
4. Value in use assessments using cash flows that aren’t probable: We have seen extractive industry entities apply the value in use method for impairment testing before technical feasibility and commercial viability have been demonstrated. Value in use can only be used where cash flows are probable.
5. Impairment indicators: Some entities are not having sufficient regard to impairment indicators, such as significant adverse changes in market conditions, and reported net assets exceeding market capitalisation.
6. Disclosures: We still find that there a number of entities not making necessary disclosure of:
1. sensitivity analysis where there is limited excess of an asset’s recoverable amount over the carrying amount and where a reasonably possible change in one or more assumptions could lead to impairment;
2. key assumptions, including discount rates and growth rates;  and
3. for fair values, the valuation techniques and inputs used.

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 2015 financial reports.

2. Revenue recognition

ASIC followed up three matters concerning the recognition of revenue, including the recognition of commissions on property development contracts and the timing of bringing the revenue to account.

3. Tax accounting

ASIC is making enquiries of three entities concerning their accounting for income tax, and in particular where it appears that future taxable income may not be sufficient to recover deferred tax assets.

4. Estimates and accounting policy judgements

We observed instances where entities needed to improve the quality and completeness of disclosures in relation to estimation uncertainties, and significant judgments in applying accounting policies. The disclosure requirements are principle-based and should include all information necessary for investors and others to understand the judgements made and their effect. This may include key assumptions, reasons for judgements, alternative treatments, and appropriate quantification.

These disclosures are important to allow users of the financial report to assess the reported financial position and performance of an entity.

Auditors will be required to disclose information on key audit matters in audit reports from December 2016. Directors should ensure that relevant information is already disclosed in the financial report and in the Operating and Financial Review.