Five minutes of your time is all it should take to get a message contained within a series of recent ASIC media releases. If you are a preparer, auditor or person responsible for approving financial statements, you can benefit from understanding the common themes that emerge. They tell a story about the reasons for, and consequences of, financial statement errors.
A change in policy last year means ASIC now publicises situations where entities change their financial statements as a result of ASIC challenges. In the current financial year, 9 such releases have been made to date.
Most of the situations come to ASIC’s attention through its ongoing financial statement surveillance program. For some time, ASIC has issued a twice-yearly summary of the major issues identified from its surveillance and subsequent enquiries of entities. It also issues an alert on the areas of focus of this program for the next financial reporting period.
The most common issue on which entities have agreed with ASIC’s view on the need for restating accounts is writing down asset values. The revised financial statements show impairment expenses, in most cases where there was previously none.
- Write-downs of assets associated with extractive industries activities, where declines in commodity prices have not been recognised appropriately as an impairment trigger or factored into impairment calculations;
- Impairment losses recognised when forecast cash flows based on most recent actuals were used, as opposed to the original use of a fair value model that ASIC considered had insufficient evidence to support it;
- Write-downs of assets needed once values were calculated in accordance with assumptions and inputs disclosed elsewhere by an entity; and
- Reclassification of impairment losses on an investment in an unlisted entity. The restatement recognised the expense in profit and loss, where it was originally allocated against a reserve account in equity, despite being a “significant or prolonged” decline as identified in AASB 139
ASIC’s queries show that it is interested in the accounting for acquisitions, and that they are finding cases where amounts are allocated to goodwill when they either should not be capitalised at all, or should be named as separable identifiable intangible assets. Some of these will have limited lives, possibly quite short when connected with the term of a contract, and should be expensed over that life.
There are also changes in the period of recognition of revenue, and in the calculation of current and deferred taxation balances.
In some instances, ASIC has accepted the entities addressing errors by restatement of comparatives in the next published financial report. Some companies have issued amended financial reports for the same period.
Restatement can be a costly process, both in financial terms and in stakeholder confidence. Outcomes in the examples ASIC has highlighted include issuing additional audited financial statements and a supplementary prospectus. Correction of material sometimes requires the use of a third balance sheet, and always additional explanatory note disclosure. It also draws attention to the adequacy of internal controls over financial reporting, and is likely to add to the cost of compliance in future periods as risk assessments change.
Prevention is a much better approach, and involves responses such as ensuring there is adequate knowledge of accounting standards applied in the process and sufficient time to identify and address the issues.
The accounting issues and guidance on appropriate steps to avoid becoming an entity forced to restate errors are covered in Thomson Reuter’s Financial Accounts Workshops.
Links to the ASIC releases may be found here.