The Australia Securities and Investment Commission (ASIC) has recently issued guidelines for companies who are preparing 31 December 2009 financial reports. The guidance report outlines ASIC’s key areas of focus for the current reporting season and is designed to ensure directors and senior officers are aware of specific issues around financial reporting.

ASIC’s key areas of concern are outlined below.

Going concern

The ASIC report reminds directors that they need to make sure that the assumption that the company is a “going concern” is appropriate in the current market conditions, and to consider the particular circumstances of the company. Companies should continue to consider issues of liquidity, debt restructuring and future compliance with debt covenants when making any assumption regarding the company as a “going concern”.

Impairment of assets

In the wake of the global financial crisis and despite optimistic forecasts of economic recovery, ASIC anticipates that writedowns against assets will remain widespread in the forthcoming financial reporting period.

There are a number of key areas that should be addressed when considering writedowns:

• Applying appropriate discount and growth rates used in the value in use calculations. Discounts and growth rates should reflect the risks and uncertainties associated with the assets being tested.
• Explaining the use of forecast periods of greater than five years.
• Undertaking sensitivity analysis for changes in key assumptions.
• Using appropriate levels of cash generating units, used when testing goodwill impairment. ASIC recommends using these units at low levels (as prescribed by accounting standards) so that cash flows from assets in one unit do not support cost values in another unit.
• Disclosing carrying amounts allocated to each cash generating unit.

Determining fair value

ASIC also provides some general comments to be considered when determining the fair value of the following types of assets:

Investment properties

ASIC’s view is that valuations should reflect current market conditions and appropriately disclose the methods and significant assumptions that have been applied when determining the fair values.

Financial assets

These should be valued by reference to quoted prices in active markets, but where there is an inactive market, fair value should be determined with reference to market input and disclosure of key assumptions.

Intangible assets

Careful consideration should be given to the fair value assigned to intangible assets. ASIC has indicated that it will question whether it is appropriate, under the circumstances, to assign a fair value to intangible assets. ASIC advises that it has recently been inclined to request companies to revert to using amortised costs rather than fair values for their intangible assets.

Off-balance sheet arrangements

ASIC have been reminding companies that where arrangements remain off-balance sheet, the nature and scale of the arrangements should be disclosed, together with the reasons why they are not on-balance sheet.

While the majority of directors should be well versed in the reasons for not recognising assets and liabilities as on-balance sheet, they should still be mindful of their obligations when determining what remains on or off balance sheet.

Financial instrument disclosure

Companies need to ensure that they provide full disclosure on the significance of financial instruments, the associated risks and how the entity manages or intends to manage those risks.

In particular, ASIC is concerned that there is:

• sufficient disclosure to enable investors and potential investors to evaluate the nature and extent of risks associated with a financial instrument;
• appropriate disclosure of sensitivity analysis to market risk;
• sufficient ageing analysis of financial assets that may be past due, but not impaired, together with analysis of impaired financial assets; and
• appropriate disclosure about material gains and losses arising from a group of similar transactions as required by AASB101 - presentation of financial statements.

Current market conditions

In addition to specific reporting requirements, ASIC stresses that companies should ensure that their financial reports include:

• disclosure about significant judgments used when applying accounting policies;
• the use of key assumptions and sources of estimation of uncertainty;
• appropriate classification as debt, particularly for its classification where it should be current or non-current; and
• ensuring that balance sheets include a separate note on the disclosure of the current and non-current split of assets and liabilities which may have been used when presenting assets and liabilities on a liquidity basis.

Revised accounting standards

ASIC has also noted that its review of 31 December 2009 financial reports will include a focus on compliance with revised accounting standards, particularly those concerning:

• segment reporting;
• business combinations;
• consolidated financial statements; and
• the presentation of financial statements.

Conclusion

Directors should be mindful of ASIC’s key areas of focus when preparing their half-year financial reports for 31 December 2009. Directors should ensure that their company’s half-year financial reports are lodged in the prescribed legislative timeframe. 

For unlisted public companies and listed mining exploration companies it is 75 days after the end of the half-year, being no later than 16 March 2010.  For listed companies that are non mining exploration companies the timeframe is 2 months after the end of the half-year being 26 February 2010.

For more information on ASIC’s financial reporting requirements, please contact HopgoodGanim’s Corporate Advisory and Governance practice.

Nicole Radice, Partner
Liz Cameron, Associate