Financial reporting periods present myriad considerations and challenges for businesses. For the upcoming reporting season there are a variety of economic and regulatory factors that will impact on directors and financial statement preparers.
Continued uncertainty related to the Australian economy will have a significant bearing on financial statement preparation. Overall, there is a subdued growth outlook for the economy. The latest Reserve Bank of Australia data shows that over the course of 2013, growth has been slightly below trend at about 2.5 per cent.
Additionally preparers, directors and auditors of financial reports will need to ensure they are across key regulatory changes.
All businesses applying accounting standards will need to consider impairment on their non-current assets.
In light of modest growth in the economy, uncertainty posed by an upcoming election, slowing of the mining boom and rapidly declining exchange rates, close attention must be paid to the assumptions included in impairment models, such as revenue targets and cost estimates. Also, discount rates applied in models may need revising as interest rates have fallen this year, with predictions they will fall further by the end of the calendar year.
Further, given the carbon pricing regime has been in place for almost a year, businesses should now understand the effects it has had on their operations. These effects can be used to update assumptions on forecast cash flows used in impairment models.
Regulator focus areas
Regulatory focus areas should be front of mind for management and preparers of financial information as some amendments have been made since the previous reporting season.
Both the Australian Securities and Investments Commission and the Australian Taxation Office have compliance or surveillance operations on businesses. The ATO’s focus is currently on robust corporate governance and tax risk management strategies, as well as assessing claims under the research and development tax incentive. Management should review any potential exposure on these focus areas, and assess the financial statement impacts of any new taxes or any identified tax risks.
ASIC’s financial reporting surveillance program reviews a significant number of listed and unlisted companies each year, in order to ensure market confidence in the quality of financial reporting. Every six months ASIC releases its findings from the surveillance and it’s expected that ASIC’s focus will be similar to previous years. New areas are likely to include monitoring of compliance with new accounting standards - as well as those issued but not yet effective - increased scrutiny of special purpose financial reports, and a particular focus on new listed company requirements.
Listed company focus areas
In addition to those focus areas identified above, it is likely that ASIC will monitor compliance regarding disclosures in operating and financial reviews and in non-International Financial Reporting Standards information.
1) Operating and financial reviews: Listed entities should give increased attention to the disclosure of business strategies and prospects, following ASIC’s recent release of guidance in this area.
2) Guidance on disclosing non-IFRS information: ASIC also continues to monitor compliance in this area to minimise the risk of miscommunication on earnings numbers in financial reports. Its regulatory guide provides protocols around sufficient use of non-IFRS information disclosure. It has been suggested that more improvement is needed to ensure ‘non-IFRS measures’ are defined in any document where it is referred to.
The Institute of Chartered Accountants Australia compiles a report with the major issues that impact financial reporting periods, as well as the areas that require forthcoming attention. This is produced bi-annually to coincide with mid-year and year-end reporting seasons.
More information on the key areas this reporting season can be found in the report Essential guidance for the 2013 reporting season.
Kerry Hicks is head of reporting policy, Institute of Chartered Accountants Australia.