By Jack Newton, Lawyer, MST Lawyers and Jason Rudaizky, Law Clerk MST Lawyers

 The Australian Securities and Investments Commission (ASIC) recently announced the focus for its reviews of financial reports to be lodged for the year ended 30 June 2017.

ASIC conducts a Financial Reporting Surveillance Program that randomly targets financial reports lodged by companies and reviews those reports in detail to assess compliance.

ASIC’s focus for 2017 financial reports is targeted at two items:

1. the reasonableness of assumptions used in testing asset valuation; and
2. the appropriateness of accounting policy choices.

Financial reporting obligations

Certain types and classes of companies are required by the Corporations Act 2001 (Cth) (the Act) to lodge financial reports. Part of ASIC’s role is to ensure that the quality of financial information in the market is not affected by non-compliance with any financial reporting obligation.

There has been a recent change to the accounting standards to be used (commencing either 1 January 2018 or 1 January 2019) which will significantly affect many companies’ financial reports. Directors should plan for future compliance with those standards, as well as disclose to users of the financial statement users the impact this may have on results in the notes to the financial report. See here for ASIC’s media release on the new accounting standards.

Reporting: The role of directors

 The role of directors was (and will always be) a central feature of ASIC reviews because they hold the primary responsibility for the quality of the reports. The Act requires directors to take steps comply with the financial reporting and audit requirements of the Act.

 Directors must read, understand and carefully consider the contents of their company’s reports. Directors must critically review the financial report, and ascertain whether the information presented coincides with company’s actual financial position and affairs.

Who will be subject to review?

ASIC’s investigations target listed companies and other entities of public interest with many stakeholders.

ASIC selects financial reports for review based on a combination of risk-based criteria, random choice and, for proprietary companies, complaints and other sources of information.

If your company is selected for review, you will not be informed unless there are issues which ASIC will raise with you.

What directors should be aware of?

For the 2017 year, ASIC’s focus is on accounting estimates and accounting policy choices. In addition to all of the other obligations and requirements of these reports, directors should take particular note of the following matters.

• Accounting Estimates: impairment testing and asset valuation. Directors should ensure that:
  • the assumptions and estimates underlying cash flows, discounted cash flows and the discount rates used for cash generating units are reliable and realistic; and
  • that asset values take into account the risk of digital disruption or commercial obsolescence.

• Accounting policy choices. Directors should also:
  • review the company’s revenue recognition policies, and ensure that the services to which the revenue relates have been performed, or that the control of the relevant goods has duly passed to the purchaser;
  • ensure that the deferment of expenses only occurs in the appropriate circumstances prescribed by the accounting standards;
  • review the company’s off-balance sheet arrangements, and the related disclosures made; and
  • ensure that relationship between tax and accounting treatments, and how each affects assets, liabilities and expenses, is properly understood.

Conclusion

Directors must always remember that they are responsible for the quality of their financial reports. Directors should read the financial report critically with a mind to ensuring the reasonableness, reliability and accuracy of accounting estimates policy choices used in financial reports.

For further information, you can:

• find ASIC’s media release here; or

• test your knowledge of the financial reporting requirements, using ASIC’s 10 question quiz available here.

If you are a director and are not sure if your financial reports are compliant or do not fully understand your financial reporting requirements, please contact our Corporate and Commercial team by email or call us on +61 3 8540 0200.