1. Asset values and impairment testing

ASIC continues to identify concerns regarding assessments of the recoverability of the carrying values of assets, including goodwill, other intangibles, exploration and evaluation expenditure, and property, plant and equipment. The largest number of ASIC's enquiries at 30 June 2014 relate to assets in the mining and renewable energy industries.

Findings include:

(a) Determining the carrying amount of cash generating units: There are cases where entities:

(i) appear to have identified cash generating units (CGUs) at too high a level despite cash inflows being largely independent, resulting in cash flows from one asset or part of the business being incorrectly used to support the carrying values of other assets;

(ii) did not include all assets that generate the cash inflows in the carrying amount of a CGU, such as inventories and trade receivables and tax balances;  and

(iii) incorrectly deducted liabilities from the carrying amount of a CGU.

(b) Reasonableness of cash flows and assumptions: There continue to be cases where the cash flows and assumptions used by entities in determining recoverable amounts are not reasonable or supportable having regard to matters such as historical cash flows, economic and market conditions, and funding costs.

In particular, we found cases where:

(i) cash flows for value in use calculations incorrectly included estimated future cash inflows or outflows expected to arise from future restructuring or development plans;

(ii) assumptions derived from external sources were not assessed for consistency and relevance; and

(iii) the entity's forecast cash flows did not appear reasonable and had exceeded actual cash flows for a number of reporting periods.

(c) Fair value assessments of recoverable amounts: We still see entities using discounted cash flow techniques to determine fair value where the calculations are dependent on a large number of management inputs.  Where it is not possible to reliably estimate the value that would be received to sell an asset in an orderly transaction between market participants, the entity may need to use the asset’s value in use as its recoverable amount.

(d) Impairment indicators: Some entities are not having sufficient regard to impairment indicators, such as significant adverse changes in market conditions, and reported net assets exceeding market capitalisation. 

(e) Disclosures: A number of entities are not making necessary disclosure of:

(i) sensitivity analysis where there is limited excess of an asset’s recoverable amount over the carrying amount and where a reasonably possible change in one or more assumptions could lead to impairment;

(ii) key assumptions, including discount rates and growth rates;  and

(iii) for fair values, the valuation techniques and inputs used.

These disclosures are important to investors and other users of financial reports given the subjectivity of these calculations/assessments. They enable users to make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations.

This item includes matters arising from the finalisation of impairment matters identified in our reviews of 30 June 2014 financial reports.

2. Off-balance sheet arrangements and business combinations

ASIC is making enquiries of three entities on the non-consolidation of entities and of two entities on the accounting for joint arrangements.

We have also made enquiries of three entities with respect to their accounting for business combinations.  These enquiries relate to matters such as reverse acquisition accounting, and the recognition of goodwill rather than identifiable intangible assets.

3. Revenue recognition

ASIC is following up five matters concerning the recognition of revenue, including the treatment of deferred income and the timing of bringing the revenue to account. 

This item includes comments regarding matters arising from revenue recognition matters identified in our reviews of 30 June 2014 financial reports.

4. Tax accounting

ASIC made enquiries of two entities concerning their accounting for income tax, and in particular, the substantiation of their tax expense positions.  This included where there appeared to be unusual reconciling items between accounting profit and tax expense/benefit that resulted in either significant tax benefits or tax expenses.

We are also making enquiries of three entities as to whether it is probable that future taxable income will be sufficient to enable the recovery of deferred tax assets relating to tax losses.

5. Non-IFRS financial information

While generally our reviews show that entities are continuing to follow the guidance in ASIC Regulatory Guide 230 Disclosing non-IFRS financial information, we made enquiries of four entities regarding their use of non-IFRS financial information.  In particular, entities should:

(a) Not disclose income or expense items as extraordinary items, including where the presentation is intended to achieve that result but the term ‘extraordinary items’ is not used; and

(b) Apply the guidelines in RG 230 in presenting non-IFRS information outside the financial report to help reduce the risk of that information being misleading.

6. Treatment of expenses

We are making enquiries of three entities in relation to the treatment of expenses. These enquiries relate to the treatment of stripping costs in the extractive industries, the pattern of amortisation of deferred acquisition costs in the insurance industry, and certain expenses taken to equity.  

This item includes comments regarding matters arising from matters identified in our reviews of 30 June 2014 financial reports.

7. Estimates and accounting policy judgements

We observed instances where entities needed to improve the quality and completeness of disclosures in relation to estimation uncertainties, and significant judgments in applying accounting policies.  The disclosure requirements are principle-based and should include all information necessary for investors and others to understand the judgements made and their impact.  This may include key assumptions, reasons for judgements, alternative treatments, and appropriate quantification.

These disclosures are important to allow users of the financial report to assess the reported financial position and performance of an entity.

Following the approval of a new international auditing standard, auditors will be required to disclose information on key audit matters in future audit reports.  Directors should ensure that relevant information is already disclosed in the financial report and in the Operating and Financial Review.