ASIC sounds warning to directors on financial reporting responsibilities

ASIC has sent out a warning to companies to be careful with their asset valuations in their next set of accounts or risk incurring the wrath of the corporate regulator.

The Australian Securities and Investments Commission (ASIC) has sounded a warning to directors of their financial responsibilities ahead of the FY16 reporting season.

The regulator highlighted in a press release in June that it would apply close scrutiny to asset valuations and accounting policy choices.

“Directors and auditors should continue to focus on values of assets and accounting policy choices. We continue to see companies use unrealistic assumptions in testing the value of assets or that have applied inappropriate approaches in areas such as revenue recognition,” ASIC Commissioner John Price said.

The warning comes following the 1H16 review period in which 46 percent of the enquiries that ASIC made of company accounts were to do with asset impairments.

Research confirms the regulator’s observation that many companies are not properly impairing their assets in a timely manner. A paper by University of Technology Sydney accounting academics found that most Australian companies showing signs of impairment were not recognising that impairment. “There is little evidence of firms complying with the regulatory requirement for asset impairments,” the researchers wrote.

In the wake of the collapse in commodity prices, ASIC has particularly called on companies in extractive industries and mining support services, as well as those affected by digital disruption, to be careful when assessing asset values. Mining companies accounted for 62 per cent of non-current asset impairments of ASX50 companies for 1H15, according to a survey by KPMG. In total there were $41 billion in impairments over that period across the ASX50, the highest since KPMG started the survey in 2008.

The regulator also urged auditors and directors to consider how accounting policies, such as off-balance sheet arrangements, revenue recognition, tax accounting and inventory pricing, might affect reported results.

“Even though directors do not need to be accounting experts, they should seek explanation and advice supporting the accounting treatments chosen and, where appropriate, challenge the accounting estimates and treatments applied in the financial report,” ASIC advised.

ASIC identifies unreasonable cash flow assumptions, using inappropriate discount rates and not cross-checking with different valuation methods as some of the common issues the watchdog encounters with asset impairments.