Financial Reporting & Governance News

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1 Directors Responsibilities for Financial Reporting Lucio DiGiallonardo Partner Audit & Assurance Perth Chartered Accountants Australia and New Zealand ( CA ANZ ) and the Association of Chartered Certified Accountants ( ACCA ) have recently released a publication entitled Directors Responsibilities for Financial Reporting which is designed to assist directors in understanding and fulfilling their responsibilities in relation to financial reporting. The publication is useful for directors of all types of companies, be they listed companies, unlisted public companies, private companies or companies limited by guarantee. In fact, the concepts discussed in the publication are also very useful for board members of all types of not for profit entities. The publication refers generally to directors but these can also include anyone who is in a position of overseeing the strategic direction of an organisation (eg committee members, board of management members, trustees, etc). The publication addresses the following five questions: 1. Who is responsible for financial reporting? There are numerous participants in the financial reporting process that play a role in ensuring that relevant, useful, comparable and consistent financial information is presented, to enable users to make financial decisions. These include management, directors, external auditors, stakeholders and regulators. However, it is the directors who have ultimate responsibility for ensuring compliance with legislative requirements in relation to financial reporting. As a result, all directors are required to understand the financial information being presented and the processes behind the preparation of this information. 2. Why are directors responsible for financial reporting? Directors responsibility for financial reporting arises from the duty of care directors have to the organisation they are governing. This duty of care generally emanates from legislation and other regulatory requirements which the entity must adhere to. For example, in Australia this could be the Corporations Act 2001, various State-based Associations MARCH 2018 Financial Reporting & Governance News In this issue ASIC focus on 31 December financial reports ASIC seeks accounting explanations Enhancing whistleblower protections Four standards amended narrowly AASB offers materiality guidance ACNC update Comments sought on three recent standards Rationalising licence-fee treatments Former Hastie executives charged with conspiracy Draft regulations on crowd-sourced funding released Murray Goulburn entity fined $650,000 How to manage culture Treasury seems submissions on passport bill

2 Incorporation Acts, the Australian Charities and Not-for-profits Commission Act 2012, etc. 3. What are directors responsible for in relation to financial reporting? The Australian Securities and Investment Commission ( ASIC ) has stated in one of its media releases Directors do not need to be accounting experts. However, directors do need to have sufficient financial literacy to understand, monitor and direct the organisation. As a result, directors are expected to be able to read and understand the financial statements and to form a view on the accuracy, credibility and understandability of the information presented, as well as understanding the processes in place to review the financial statements. This was borne out clearly in the 2011 Centro case where the Federal Court ruled that directors are expected to take a diligent and intelligent interest in the information ASIC has called on companies to make financial reports useful and meaningful and to address the impact of major new accounting requirements. available to them, to understand that information, and apply an enquiring mind to the responsibilities placed upon them. 4. How do directors discharge their financial reporting responsibilities? Directors should challenge the information presented by management and should question the accounting treatments applied when the treatments do not reflect their understanding of the substance of the transaction. They should also apply professional scepticism when assessing management s views on areas that have required significant judgement and estimates. It is not appropriate for directors to place complete reliance on the expertise of others (including management, external auditors, etc), however it may be useful for them to consult with those with a financial background for guidance and advice to assist in understanding financial terms, processes and requirements. 5. When do directors discharge their financial reporting responsibilities? This generally occurs on an annual basis (or half-yearly for listed entities and some other entities), however it is important that directors provide continuous oversight over the financial position of the organisation eg reviewing financial reports prepared by management at each board meeting. This will help in supporting the directors review of the financial statements at the end of each statutory reporting period. The publication also contains a list of example questions that the directors can ask management and external auditors to assist them in understanding the financial information presented and to ensure that they have discharged their financial reporting responsibilities. The publication can be found at: charteredaccountantsanz.com ASIC focus on 31 December 2017 financial reports Announcing its focus for the year ending 31 December 2017, ASIC highlighted several key areas. Commissioner John Price said: As with previous reporting periods, directors and auditors should focus on values of assets and accounting policy choices. ASIC continues to see companies use unrealistic assumptions in testing the value of assets or applying inappropriate approaches in areas such as revenue recognition. New requirements for revenue recognition and financial-instrument valuation apply from the year that starts from 31 December So far, surprisingly few companies have made disclosures of the impact of these standards. This may indicate that some companies need to give urgent attention to the immediate impact of the standards on systems, processes and their businesses. ASIC has also stressed the importance of the roles of directors and management. Directors are primarily responsible for the quality of the financial report. This includes ensuring that management produces quality financial information. Companies must have appropriate processes and records to support information in the financial report rather than simply relying on the independent auditor, said Mr Price. Need to know Companies should apply appropriate experience and expertise, particularly in more difficult and complex areas such as accounting estimates (including impairment of non-financial assets), accounting policies (such as revenue recognition) and taxation. Information should be produced on a timely basis and be supported by appropriate analysis and documentation for the independent audit. The Commission reminded directors of the importance of its Information Sheet 183 Directors and financial reporting. The Appendix to this newsletter summarises ASIC s broad focus for 31 December 2017 financial reports.

3 Newsletter Heading Here ASIC seeks accounting explanations The Australian Securities and Investments Commission has queried 54 accounting treatments used by 50 entities following a review of the 30 June 2017 reports of 220 listed and other public-interest entities. As part of ASIC s surveillance program, financial reports are selected randomly or on risk-based criteria to determine compliance with the Corporations Act and accounting standards. ASIC Commissioner John Price said: The largest number of our findings continue to relate to impairment of non-financial assets and inappropriate accounting treatments. Directors and auditors should continue to focus on values of assets and accounting policy choices in preparing their [ ] reports. The survey led to material changes to 4 per cent of the reports of public interestentities for reporting periods 30 June 2010 to 31 December The main changes were to impairment of assets, revenue recognition and expense deferral. ASIC continues to identify concerns over assessments of the recoverability of the carrying values of assets, including goodwill, exploration and evaluation expenditure, and property, plant and equipment. Many of the Commission s inquiries at 30 June relate to assets in the energy and extractive industries. ASIC reminded directors and audit committees of the importance of Information Sheet 203 Impairment of non-financial assets: Materials for directors in considering whether the value of non-financial assets shown in a company s financial report continues to be supportable. The table below summarises the enquiries ASIC made. Inquiries of individual entities do not necessarily lead to material restatements. For example, matters involving 18 of the entities have been concluded without any changes to their financial reporting. Matter Number of inquiries Impairment and other asset values 20 Revenue recognition 8 Tax accounting 8 Expense deferral 4 Business combinations 3 Consolidation accounting 2 Operating segments 2 Other matters 7 Total 54 Enhancing whistleblower protections The federal government has introduced a bill signalling stronger protections for whistleblowers who expose corporate and tax misconduct. Minister for Revenue and Financial Services Kelly O Dwyer said the bill was a significant milestone because it created a single, enhanced whistleblowerprotection scheme to cover the corporate and financial sectors. The bill also features a new whistleblower-protection regime in the taxation law to protect those who expose tax misconduct, Ms O Dwyer said. The reforms mean whistleblowers will be able to come forward with the confidence that they will be protected under a comprehensive and robust legal framework. Breaking ranks and reporting wrongdoing can be a harrowing experience, so it is important people know that they will have access to redress if they are victimised as a result of blowing the whistle. The new protection regimes apply to whistleblower disclosures received from 1 July The disclosures can be about misconduct from before that date.

4 Four standards amended narrowly The International Accounting Standards Board has issued Annual Improvements to IFRS Standards Cycle, which makes narrowscope amendments to four IFRS Standards. Annual improvements are part of the board s process for maintaining standards and amendments made as part of the strategy either clarify the wording in a standard or correct relatively minor oversights and conflicts among standards. The amendments made during the cycle are listed in the below table. The amendments are effective from 1 January 2019, early application permitted. The AASB will shortly issue these amendments for Australian reporting purposes. Amended Standard IFRS 3 Business Combinations IFRS 11 Joint Arrangements IAS 12 Income Taxes IAS 23 Borrowing Costs The amendments clarify that: A company remeasures its previously held interest in a joint operation when it obtains control of the business. A company does not remeasure its previously held interest in a joint operation when it obtains joint control of the business. A company accounts for all income tax consequences of dividend payments in the same way. A company treats as part of general borrowings any borrowing originally made to develop an asset when the asset is ready for its intended use or sale. AASB offers materiality guidance Directors, trustees and others responsible for the preparation of financial statements make continuous judgements about materiality. ACNC update The Australian Charities and Not-forprofits Commission ( ACNC ) has: Published a new report Australians Trust Charities Revoked the charity status of two charities AAASB Practice Statement 2 Making Materiality Judgements provides practical guidance and examples that might help in discussions with auditors and regulators. Tabled its annual report Issued a statement on deductible-giftrecipient reforms Announced a review of the ACNC legislation The statement includes examples that are specific to not-for-profit private and public-sector entities. Released Australian Charities Report 2016 Commented on the AAT s Waubra Foundation decision, and Updated its review and appeal policy. Comments sought on three recent Standards AASB-issued exposure draft 284 Recent Standards Reduced Disclosure Requirements proposes to provide disclosure concessions for tier-2 entities for AASB 16 Leases, AASB 1058 Income of Not-for-Profit Entities and AASB Nice to know 1059 Service Concession Arrangements: Grantors. Comments are sought by 31 March 2018.

5 Newsletter Heading Here Rationalising licence-fee treatments Licence fees make up a big portion of public-sector revenue, but it appears as if their accounting treatment under AASB 15 Revenue from Contracts with Customers is unclear. An AASB-released Exposure Draft 283 Amendments to Australian Accounting Standards Australian Implementation Guidance for Not-for-Profit Public Sector Licensors aims to help reduce diversity in treatments. ED 283 provides amendments, guidance and illustrative examples based on AASB 15 that aim to assist public-sector licensors to: Distinguish licences from taxes Determine the nature of licences (for example, those that are leases or contain a lease, those that are not distinct from other goods or services, intellectual property or non-ip licences) and identify relevant accounting requirements, and Understand performance obligations relevant to public-sector licence arrangements. The draft also suggests practical expedients for short-term and low-value licences. Former Hastie executives charged with accounting conspiracy The former director and the former Chief Operating Officer of a subsidiary of the publicly listed company Hastie Group Pty Limited (in external administration) have each been charged with three counts of conspiracy to falsify accounts. Joseph Carmec Farrugia, former director of Hastie Services Pty Limited, and Ian Athol Thompson, former Chief Operating Officer of Hastie Services, were charged with two charges of conspiracy to falsify Hastie Services books and records and The Federal Government has released an exposure draft providing further detail on the extension of crowdsourced funding ( CSF ) to proprietary companies. Draft regulations also make refinements to the existing CSF regime for public companies, adding flexibility to the structure and contents of CSF offer documents. one charge of conspiracy to give false or misleading information to an auditor. ASIC alleges that Mr Farrugia and Mr Thompson conspired with two other Hastie Services senior staff members to make false entries into the company s books to reduce the gap between a forecast earnings before interest and tax and the actual. conspired with two Hastie senior staff members to make false entries into the books to conceal the true financial Relevant disclosures are outlined, and minor changes clarify the operation of the existing rules. The draft regulations provide that the exemption from takeover rules for CSF proprietary companies will be limited to those that are eligible to make a CSF offer, as it would be inappropriate for proprietary companies that out-grow CSF to continue to be exempt from takeover position of the company s Western Australian branch. The offences each carry a maximum penalty of two years imprisonment. conspired with two Hastie senior officers conspired to provide false information to Hastie Group Limited s auditors to conceal the above offenders. This offence carries a maximum penalty of five years imprisonment. Draft regulations on crowd-sourced funding released rules in perpetuity. The draft regulations also modify unsolicited-offer provisions in the Corporations Act, making them more flexible for proprietary companies with CSF shareholders.

6 Murray Goulburn entity fined $650,000 The Federal Court has fined MG Responsible Entity Limited ( MGRE ) $650,000 for contravening continuousdisclosure obligations. MG Unit Trust was officially admitted to the Australian Securities Exchange list on 3 July A special-purpose funding vehicle, the trust was set up by Murray Goulburn and issues units to external investors. MGRE is a wholly-owned subsidiary of MG and the responsible entity of the MG Unit Trust. The court found that MGRE contravened its disclosure obligations under the Corporations Act by failing to notify the ASX that circumstances had arisen making it unlikely that Murray Goulburn would achieve the average milk price and net profit after tax as previously announced. MGRE admitted the contravention in a statement of agreed facts and admissions and the parties filed joint submissions for a declaration and a civil penalty. In handing down her judgment, Justice Davies said: The penalty is towards the higher end of the statutory maximum but a penalty towards the higher end is warranted, reflecting the gravity of the contravention, the market impact and prejudice caused by the contravention, the involvement of the senior level of management in the contravention and failure of governance, and the inadequacy of MGRE s compliance policies at the time and the duration of the contravention. ASIC Commissioner Cathie Armour said: If an entity has previously given a profit forecast to the market and that subsequently changes causing its profit forecast to differ from that guidance by a material amount, it is crucial to inform the market immediately [so] that investors are apprised with up-to-date information. How to manage culture Regulators often warn that listed and non-listed companies lacking good corporate culture will fail investors and stakeholders. Key industry bodies have collaborated to produce a guide on managing culture. The Ethics Centre, CA ANZ, the Governance Institute of Australia and the Institute of Internal Auditors Australia have produced Managing Culture A good practice guide. Research has shown that organisations that have a good culture perform better than organisations that do not. The guide outlines how each group in an organisation can contribute to a good culture, the first step of which is to create an ethical framework that provides guidance on decisions and an appropriate tone from the top. Governance Institute of Australia CEO Steven Burrell said: While having an integrated governance and riskmanagement framework is important, unless an organisation establishes a culture that promotes risk awareness [in] everything it does, it is unlikely to achieve its objectives. Governance and risk management must be at the core of an organisation s culture. The publication argues that the role of boards is to determine the purpose, values and principles of a company. the CEO and senior management have the responsibility for implementing the desired culture, and personnel in human resources, ethics, compliance and risk functions all have a role in embedding values and ethics. Research has shown that organisations that have a good culture perform better than organisations that do not.

7 Appendix ASIC s broad focus for 31 December 2017 financial reports Focus area New accounting standards ASIC comments Directors and management ensure that entities are prepared for these new standards and inform investors and other financial report users of the impact on reported results. There can be real business impacts and a need to implement new systems and processes. There is also a requirement to disclose the impact of the standards in notes to current financial reports ahead of the operative dates for the new standards. This may mean quantification of the impacts for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report. Subject to transitional arrangements, that would mean 31 December 2016 for new standards on revenue and financial instrument valuation, and 31 December 2017 for the new Lease Standard. For the revenue and financial instrument standards 31 December 2016 marks the commencement of the new standards going live. Operating and financial review ( OFR ) listed entities Enhanced audit reports listed Material disclosures Client monies Proprietary companies Further information can be found in ASIC media release Companies need to respond to major new accounting standards (refer MR ). They should continue to disclose information on risks and other matters that may have a material impact on the future financial position or performance of the entity. This could include, for example, matters relating to digital disruption, new technologies, climate change, Brexit or cyber-security. For more information see ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review. Directors may also consider whether it would be worthwhile to disclose additional information that would be relevant under integrated reporting or sustainability reporting where that information is not already required for the OFR. Preparers and directors should be mindful that key audit matters may relate to accounting estimates and significant accounting policy choices that also require specific disclosures in financial reports, as well as matters relating to the business that should be covered in the OFR. Auditors should describe key audit matters and their work in those areas in a clear and understandable manner, having regard to the broad audience of investors and other users of financial reports. The description of key audit matters and the work performed should be specific to the circumstances of the company and the audit. ASIC s surveillance continues to focus on material disclosures of information useful to investors and others using financial reports, such as assumptions supporting accounting estimates and significant accounting policy choices. ASIC will not pursue immaterial disclosures that may add unnecessary clutter to financial reports. Efforts should be made to communicate information more clearly in financial reports. Australian financial services licensees should ensure that client monies are appropriately held in separate, designated trust bank accounts, and that monies are applied in accordance with client instructions and the requirements of the Corporations Act 2001 ( the Act ). Auditors are reminded of the importance of audit testing to obtain assurance that assets and liabilities are not materially misstated, that monies are dealt with appropriately and that breaches are reported to ASIC in accordance with the Act and Regulatory Guide 34 Auditors obligations: Reporting to ASIC. ASIC continues to review the financial reports of proprietary companies and unlisted public companies, based on complaints and other intelligence. ASIC also recently wrote to more than 1,000 proprietary companies that appeared to be large with no reporting exemption and had not lodged financial reports.

8 HLB FRG News MARCH 2018 Treasury seeks submissions on passport bill The Federal Government is seeking submissions on a draft Corporations Act (Asia Region Funds Passport) Bill and related explanatory materials. The passport is a common framework of coordinated regulatory supervision to facilitate cross-border issuing of managed-investment funds. Australia, Japan, Korea, New Zealand and Thailand are signatories to the passport s memorandum of cooperation, which took effect on 30 June Schedule 1 of the exposure draft is a revised chapter 8A (previously released for consultation in August) and includes minor revisions and new provisions to: Address the treatment of notified foreign passport funds Ban such funds from issuing debentures in Australia, and Require such funds to provide various reports to members in Australia. Schedule 2 would amend the Corporations Act 2001 to provide the disclosure, financial reporting, distribution and licensing of notified foreign passport funds, as well as other amendments. Queries For further information or assistance, please contact: Adelaide Corey McGowan Tel: Fax: cmcgowan@hlbsa.com.au Brisbane Adrian Narayanan Tel: Fax: anarayanan@hlbqld.com.au Melbourne Jude Lau Tel: Fax: jlau@hlbvic.com.au Perth Marcus Ohm Tel: Fax: mohm@hlbwa.com.au Sydney Darryl Swindells Tel: Fax: dks@hlbnsw.com.au Wollongong Ben Fock Tel: Fax: bfock@hlbw.com.au Liability limited by a scheme approved under Professional Standards Legislation All material contained in this newsletter is written by way of general comment. No material should be accepted as authoritative advice and any reader wishing to act upon the material should first contact our office for properly considered professional advice, which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein.