On 31 May, ASIC released guidance to regarding the quality of financial report information that would be expected of companies in the lead up to the 2017 financial reporting season. In the release, ASIC continued to highlight the need for companies to include useful and meaningful financial information, and urged companies to avoid the implementation of unrealistic assumptions in calculating the value of assets or inappropriate approaches in areas such as revenue recognition.
A full version of ASIC’s release can be found here: ASIC calls on preparers to focus on the quality of financial report information.
The role of directors and management
Directors have a critical role, as they are primarily responsible for the quality of the financial report, and ensuring that management produces accurate financial information. It is essential that companies employ appropriate processes and maintain sufficient records to support the information provided in the financial report, rather than simply relying on verification by independent auditors.
ASIC emphasised that while they do not expect directors to be accounting experts, they should continually seek advice surrounding the accounting treatments chosen and if appropriate, challenge the accounting estimates produced in the financial report – particularly if such treatments and estimates vary from their understanding of the arrangement.
This process of the directors taking an active role in ensuring that the information is supported by appropriate analysis and documentation will enhance the quality of financial information, as it will allow auditors to focus on providing independent financial assurance on the financial report.
New accounting standards
Subject to transitional arrangements, new accounting standards on revenue and financial instrument valuation will come into force on 30 June 2017. It is essential that directors and management plan for these new standards, and inform investors of the potential impact of the new standards on reported results. Disclosure of this impact can take many forms, but ASIC suggested in their release that this could take place in the notes to the financial report.
Enhanced audit reports
The auditors of listed entities are required to issue enhanced audit reports, which are specific to the circumstances of the company. The reports must outline the key matters that required significant attention in performing the audit. It is important that auditors describe these matters in a clear and understandable way, in order to cater for the broad audience of investors, some of whom would not have a significant understanding of general financial and auditing principles.
ASIC warned that their surveillance continues to focus on material disclosures of information useful to investors, such as significant accounting policy choices and assumptions supporting accounting estimates.
AFSL holders have a responsibility to ensure that client monies are maintained in separate, designated trust bank accounts and are utilised in accordance with both client instructions and the Corporations Act. ASIC reminded auditors that any breaches in the handling of client monies must be reported to ASIC.
Operating and financial review of listed companies
Listed companies should disclose information on any matters that may have a material impact on the future financial position of the entity. ASIC cited the possible impact from climate change and cyber security considerations.
If you require further information about ASIC’s recommendations and how they may affect your business, please contact Anand Sundaraj.