Number one priority for this reporting season?
With the reporting season now upon us and the recent media release by ASIC (Australian Securities and Investments Commission) calling for a continued focus on quality by the preparers of financial reports, it is important that directors do not relax their efforts and that they continue to strive to raise the quality of financial reports.
The areas of focus raised by ASIC have remained consistent with previous reporting periods, therefore it is advantageous for companies to actually assess where the shortfalls have occurred in recent times based on ASIC’s reviews and media releases.
It can be seen that the majority of restatements in the last year, appear to relate overwhelmingly to impairment of non-financial assets. Non-financial assets are often significant assets of a company and the value attributed to these assets may affect not only the company’s reported financial position, but also its reported performance.
Most of the exceptions raised by ASIC from their review of financial reports, related to companies carrying assets where the values were not supportable and should have been reduced. Examples of the restatements included:
- Spotless - $99m write down of goodwill
- Pacific Star Network - $4.5m impairment charge of intangible assets
- Nine Entertainment - $260m write down off goodwill
- Seven West Media - $75m write down of investment
- Shine Corporation - $5m write down off goodwill
- MMA Resources - $254m write down of property, plant and equipment
Responsibility of Directors
Directors and members of audit committees should question the need for, and adequacy of, asset impairment and the adequacy of related disclosures. They should also critically assess whether management and staff have adequate skills to deal with impairment issues.
Directors should always insist on the use of external independent experts, especially when; the assets are material, if there are any reservations about the expertise of management and staff, and the current company performance and operating environment is adverse. The use of external experts will provide the strongest possible defense mechanism for directors should there be any issues later down the track.
From our experience of providing, and reviewing, expert evidence and valuation reports, PKF recommend that directors should consider and ensure the following for any the external expert that they utilise:
- Do they have sufficient qualifications, experience and expertise?
- Have appropriate instructions been given as to the scope of their work?
- Are their calculations in accordance with the methodologies outlined in the accounting standards?
- Do they have a good understanding of the company’s businesses, its assets and the environment in which it operates?
- Do they have appropriate internal review processes?
- Have they adequately supported and tested key assumptions?
In addition directors need to confirm that management have adequately considered and addressed any issues raised in the valuation reports, and ensured that the cash flows, assumptions and results are reasonable and appropriate – essentially have they still performed a sanity check of the valuation.
Directors should not rest on their laurels – a lack of changes around the accounting standards should provide the opportunity for companies to dedicate more time and resources to raising the quality of their financial report, and in particular provide additional focus on the value of their assets, and raising the quality of any impairment testing performed.