As 30th June approaches it is always a good time for businesses to review their Board/Committee (“Board”) responsibilities and their impact on the direction of the year-end financial reporting process.
“The quality of financial information from a vigorous financial reporting process is not only important to the Board and other internal users of information, but also to the stakeholders, regulators and the public in general” says Peter Hill, Director of Perks Audit.
Even though Board members do not need to be accounting experts, they should challenge the accounting estimates and methods used in the financial reports. They should also seek explanations and appropriate professional advice, particularly in areas that don’t reflect their understanding of an arrangement.
“Having a Board that questions the financial information presented to them ensures that financial reports are of high quality and that useful and meaningful information is provided to users” says Peter Hill.
Given the current economic climate we have identified a number of areas of key importance and focus for Boards when heading into their 30 June 2014 year end reporting:
- Going concern
The fundamental concept underlying the preparation of financial statements is that of going concern. This is the ability of the entity to continue to pay its debts as and when they fall due.
In the good times this is usually an easy assessment but, if circumstances change, a formal assessment should be made by the Board, prior to any sign off on the year-end financial statements.
If there are circumstances that need to be explained to support the underlying assumption of going concern, it is important that the Board discloses them!
“If there are any doubts, the Board should consider getting independent advice to ensure that their duties are fulfilled under any statutory obligations and to also have assistance in working through the issues” says Peter Hill.
- Accounting policy choices
Accounting policy choices can have a big effect on an entity’s financial results, so care should always be taken by a Board when selecting and disclosing accounting policies. The following are two of the more common and easily manipulated policies;
a) Revenue recognition
Policies for revenue recognition should detail the substance of the underlying transactions. For example, revenue in relation to services is usually recognised when the service has been performed and for goods sold when title has passed to the buyer.
b) Expense deferral
Expenses should only be deferred and classed as an asset, where benefits are going to arise in future periods from the use of those assets.
Estimates by their very nature can be of concern for financial reporting, given their element of estimation, uncertainty and significant judgement.
“Boards should give careful thought to estimates, the most common being those relating to doubtful debt provisions and impairment, as an inappropriate policy may lead to vastly different results” says Peter Hill.
For example, underestimating an assets useful life will result in it being written off to the profit at loss, through a depreciation expense. This will lead to reduced operating results of those years and having an asset written down to a value of nil, but still being used by the entity.
In summary, the time is right for Boards to challenge the financial information that is put before them and ensure that the financial reports they prepare, and sign off, are of a high quality and provide relevant financial information to the users of the reports.
If you would like more information on how Perks can assist you with your financial reporting call us today on (08) 8273 9300.
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