The corporate regulator said on the ASIC website that although directors do not need to be accounting experts, they should be challenging the accounting estimates and treatments used in financial reports.
ASIC said directors should seek explanations and appropriate advice about why particular accounting treatments have been used in the report, “particularly where a treatment doesn’t reflect their understanding of the substance of an arrangement”.
While the calculations used to provide a valuation of assets or for identifying impairment can be complex, ASIC said directors need to review cash flows and assumptions used by management or experts in calculating the report.
To ensure a financial report is of high quality and contains useful and meaningful information, ASIC believes entities need to establish a “culture focused on quality financial reporting”, implement adequate “governance arrangements, processes and controls”, and ensure the “financial literacy of the directors is appropriate”.
It also argued that reports should be produced by someone with the necessary experience and expertise and use appropriate accounting standards.
ASIC said directors might also want to consider introducing accountability and internal incentives aimed at improving financial reporting quality.
According to the ASIC website, the corporate regulator’s surveillance of 30 June 2014 financial reports will target listed entities and other entities of public interest with a large number and wide range of stakeholders.
ASIC said it will consider factors like the “nature and size of the business and the number of its employees”.
“ASIC’s surveillance continues to focus on material disclosures of information useful to investors and other users of financial reports, such as key assumptions supporting accounting estimates,” said the corporate regulator.
“ASIC does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.”
