ASIC has called on companies to focus on giving information for users of financial reports that is useful and meaningful, and to address the impact of major new accounting requirements.
Announcing its focus areas for year-ending 31 December 2017 financial reports of listed entities and other entities of public interest with many stakeholders, the regulator has highlighted a number of key areas to address.
Commissioner John Price said, “As with previous reporting periods, directors and auditors should focus on values of assets and accounting policy choices. ASIC continues to see companies use unrealistic assumptions in testing the value of assets or applying inappropriate approaches in areas such as revenue recognition.
“New requirements for revenue recognition and financial instrument valuation apply from the year that starts from 31 December 2017. So far, surprisingly few companies have made disclosures of the impact of these standards. This may indicate that some companies need to give urgent attention to the immediate impact of the standards on systems, processes and their businesses.”
As part of ASIC’s Financial Reporting Surveillance Program, financial reports are selected for review, based on risk-based criteria and at random, to determine compliance with the Corporations Act and accounting standards. Brokers should pay attention to holding funds from clients appropriately.
ASIC has advised that AFS licensees should ensure that client monies are appropriately held in separate, designated trust bank accounts, and that monies are applied in accordance with client instructions and the requirements of the Corporations Act. Auditors are reminded of the importance of audit testing to obtain assurance that assets and liabilities are not materially misstated, that monies are dealt with appropriately and that breaches are reported to ASIC in accordance with that Act and Regulatory Guide 34 Auditors’ obligations: Reporting to ASIC (RG 34).
There are other major changes coming up as well and brokers should consult with their tax accountants to know how these may affect them and their businesses.
ASIC continues to review the financial reports of proprietary companies and unlisted public companies, based on complaints and other intelligence. ASIC also recently wrote to more than 1,000 proprietary companies that appeared to be large with no reporting exemption and had not lodged financial reports.
The role of directors and management
Directors are primarily responsible for the quality of the financial report. This includes ensuring that management produces quality financial information. Companies must have appropriate processes and records to support information in the financial report rather than simply relying on the independent auditor.
New accounting standards
The introduction of some major new accounting standards will have the greatest impact on financial reporting since the adoption of International Financial Reporting Standards in 2005.
It is important that directors and management ensure that entities are prepared for these new standards and inform investors and other financial report users of the impact on reported results. There can be real business impacts and a need to implement new systems and processes. There is also a requirement to disclose the impact of the standards in notes to current financial reports ahead of the operative dates for the new standards.
Listed companies should continue to disclose information on risks and other matters that may have a material impact on the future financial position or performance of the entity. This could include, for example, matters relating to digital disruption, new technologies, climate change, Brexit or cyber-security.
Enhanced audit reports
Auditors of listed entities are required to issue enhanced audit reports. These audit reports outline key audit matters – those matters that required significant auditor attention in performing the audit. Preparers and directors should be mindful that these matters may relate to accounting estimates and significant accounting policy choices that also require specific disclosures in financial reports, as well as matters relating to the business that should be covered in the OFR.
Auditors should describe key audit matters and their work in those areas in a clear and understandable manner, having regard to the broad audience of investors and other users of financial reports. The description of key audit matters and the work performed should be specific to the circumstances of the company and the audit.
ASIC’s surveillance will continue to focus on material disclosures of information useful to investors and others using financial reports, such as assumptions supporting accounting estimates and significant accounting policy choices.