Data#3 restates full year 2023 financial reports in response to ASIC review

About Data #3 Ltd

Data#3 Limited (Data#3, the Group, ASX: DTL) is Australia’s leading IT services and technology solutions provider that was formed in 1984 and has been listed on the ASX since 1997. The Group employs 1,400 people and services 5000 customers from facilities across 12 locations in Australia and Fiji. The name Data#3 reflects the company’s culture of innovation and a willingness to break new ground in that the ’#3’ was chosen from the new IBM Personal Computer keyboard, which was the first to show the ‘#’ and the ‘3’ on the same key. ‘Data’ represents the history of the company, which was formed following the merger of a software developer and an IBM typewriter dealer with experience in providing quality office equipment and supplies.

Restatement of full year 2023 and half year 2022 financial reports

Data#3 has announced the restatement of its full year 2023 and half year 2022 financial reports following a review initiated as part of ASIC’s new financial reporting and audit surveillance program.

The restatement resulted in Data#3 reducing the amount attributable to revenue from contracts with customers for the year to 30 June 2023 from $2.56 million to $0.88 million, a reduction of $1.68 million.

ASIC initially raised concerns with Data#3 regarding its revenue recognition accounting policy in November 2023. ASIC’s primary concern was when an entity acts as an agent and recognises all the revenue in relation to a product or service it on-sells, it can create a misleading impression to shareholders about the size of a business. Data#3 subsequently changed its accounting policy to recognise revenue from contracts for the sale of some software products as an agent rather than a principal (under Australian Accounting Standard AASB 15 Revenue from Contracts with Customers).

In acting as agent for the software supplier when making a sale, Data#3 should have only recognised the net amount received from the end-user minus the cost of the sale as revenue, because the end-user is not Data#3’s customer. The supplier is Data#3’s customer and Data#3 is acting as the supplier’s agent. Data#3, as agent acting for the supplier should have only reported the net amount of revenue received, which includes a deduction for the cost of the sale owing to the supplier. This means that Data#3 should not have reported the gross amount received from the end-user as revenue. Revenue that should have been reported is the net amount received which includes a deduction for the cost of sale owed to the supplier. Previously Data#3 recognised product sales as principal and reported revenue as the gross amount of consideration received from the end user.

The accounting policy change had no impact on reported profit before tax because the offsetting cost of sales expense is also eliminated when the revenue is no longer recognised.

Improved quality of reporting

ASIC’s financial reporting surveillance program aims to improve the quality of financial reporting to shareholders and other financial statement users.

Under its new financial reporting and audit surveillance program, ASIC targets financial reports for review using risk-based criteria. These include where ASIC identifies potential issues in revenue recognition or asset valuation.

In Data#3’s case ASIC was cognisant that not correctly identifying whether revenue (performance obligations) should be recognised as a principal or as an agent can create a misleading impression about the size of a business and a misleading impression about the profitability of the business.

Shareholders of public companies can be confident that the quality of financial reporting enables informed judgements to be made about the historical financial performance of the shares which they own. In instances when financial reporting may mislead shareholders, ASIC will require financial statements to be restated to accurately reflect the intention of the relevant Accounting Standard. This was the case with Data#3 in relation to its revenue recognition policy when acting as agent rather than as principal when providing a service to end-users.