ASIC has issued two important releases on preparing financial statements and on upcoming changes to accounting standards. AICD Senior Policy Adviser Kerry Hicks explains what directors need to know.
The Australian Securities and Investments Commission (ASIC) recently issued two media releases, one reminding directors of what to watch out for when preparing financial reports (16-428MR ASIC calls on preparers to focus on useful and meaningful financial reports) and another flagging new accounting standards (16-442MR Companies need to respond to major new accounting standards).
ASIC focus areas
In the first release, ASIC reminded directors about their role in reviewing and approving the financial report. The regulator indicated it does not expect directors to be accounting experts, but at the same time it emphasised they should seek explanation and advice supporting accounting treatments chosen. They also need to challenge the accounting estimates and treatments applied.
“As in previous reporting periods, directors and auditors should focus on values of assets and accounting policy choices,” Commissioner John Price said. ASIC’s review program primarily focuses on listed companies, but they continue to review proprietary companies and unlisted public companies based on complaints and other intelligence.
The detailed attachment to the media release provides the following detailed areas of focus for ASIC:
- Impairment testing and asset values (for more on this topic, see the feature by Tony Featherstone in the December issue of the AICD’s Company Director Magazine)
- Off-balance sheet arrangements
- Revenue recognition
- Expense deferral
- Tax accounting
- Estimates and accounting policy judgements
- Impact of new revenue and financial instrument standards
Preparing for new accounting standards – Revenue, Leases and Financial Instruments
ASIC’s second media release stressed the huge impact three new accounting standards coming into force over the next two years are expected to have. The impact on financial reporting will be as great if not greater than when International Financial Reporting Standards first came into operation in Australia in 2005, according to the regulator.
“We remind directors and management of the importance of planning for the new standards and informing investors and other financial report users of the impact on reported results,” Price said.
Companies are required to disclose in the financial report the possible impact of the new standards ahead of their implementation. Further, continuous disclosure obligations will require listed companies to keep the market informed of the possible impacts in a timely manner.
ASIC believes it is reasonable for the market to expect that quantitative information will be available at least 12 months before the application date of the new standards, if not before. For some companies this will be the 2017 financial report for revenue and financial instruments impacts, and the 2018 financial report for the impact of the leases standard. To determine these impacts, companies should be gathering data immediately.
Other securities regulators around the world, including the International Organisation of Securities Commissions and the European Securities Markets Authority have both released similar statements.
The AICD regularly runs courses for directors, aspiring directors and executives, covering governance and business practice including understanding financial statements and accounting. Click here to see our upcoming courses in Western Australia.