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ASIC sounds warning on ‘unrealistic and unsupportable’ cash-flow assumptions

 Auditors and company directors have been urged to focus on values of assets and accounting policy choices as ASIC releases its latest financial review results.

Tax&Compliance Jotham Lian 09 February 2020
— 1 minute read

ASIC’s review of 30 June 2019 full-year financial reports of 200 entities has resulted in inquiries of 47 entities on 80 matters.

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The largest number of inquiries continue to relate to impairment of non-financial assets and inappropriate accounting treatments, carrying on from ASIC’s review of 31 December 2018 financial reports.

“We continue to find instances where companies have made unrealistic and unsupportable assumptions about future cash flows,” ASIC said.

“Directors and auditors need to focus on impairment of non-financial assets in financial reports to ensure that the market is properly informed about asset values and the expected future performance implied by those values.”

Asset values and impairment testing contributed to 25 out of 80 inquiries, with ASIC identifying concerns regarding assessments of the recoverability of the carrying values of assets, including goodwill, exploration and evaluation expenditure; and property, plant and equipment.

“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,” ASIC said.

Revenue recognition followed closely with 23 inquiries, particularly around instances where revenue was not disaggregated with regard to how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

ASIC also made inquiries about tax accounting, expressing concern with nine entities on the adequacy of tax expense and whether it is probable that future taxable income will be sufficient to enable the recovery of deferred tax assets relating to tax losses.

The corporate regulator has also called on directors and auditors to focus on the impact of the newer accounting standards on revenue, financial instruments and leases, which can materially affect reported financial position and results.

ASIC sounds warning on ‘unrealistic and unsupportable’ cash-flow assumptions
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Jotham Lian

Jotham Lian

Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.

Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.

You can email Jotham at: This email address is being protected from spambots. You need JavaScript enabled to view it. 

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