In reviewing over 300 annual reports from listed and other entities, ASIC has highlighted concerns with the following areas in annual financial reports:

1. Asset value impairment being concealed by non-current assets being included as current assets, the misallocation of cashflow between assets to prop up poorly performing assets and cashflow projections being based on unrealistic assessments;
2. The early recognition of revenue and deferral of expenses leading to a more profitable picture being painted for the entity.  ASIC considers that early revenue recognition should only be used if it is appropriate to the business and industry and expenses should only be deferred if a defined asset will produce future economic benefits;
3. Intangible assets being included in reports where the development costs for those assets are unclear and the deferral criteria for the expenses is not satisfied;
4. Taxation accounting including the low reporting of tax expense compared to reported profit, movements in temporary accounts and unusual reconciliation of accounting profits and the tax liability of the company resulting in significant tax benefits for the company;
5. Off-balance sheet arrangements where ownership of non-consolidated entities is near to 100% but the direction of the relevant activities of the investee is said to be delegated to a separate decision-making body within the investee;
6. A mismatch of amortisation of intangible assets, which should not exceed the period of the matching contractual or legal right; and
7. An absence of proper disclosure by directors for the key assumptions in the annual report, the reasons for judgments, alternative treatments considered in reaching figures in the report and an appropriate quantification of matters set out in the report.

ASIC is investigating a number of entities in relation to these issues appearing in those entities annual reports.  Attempts by an entity to conceal impairment of assets, overstate future cashflow, defer expenses and bring profits forward may assist in projecting a picture of financial good health in the short term, but could foreshadow a future insolvency crisis for that entity.

For more information concerning this, please contact Daren Anderson.