ASIC is urging directors, preparers of annual and half-year reports, and auditors to assess whether companies’ financial reports provide useful and meaningful information for investors and other users, as it highlights key focus areas for reporting by companies for full and half-years ending 31 December 2022.
ASIC Commissioner Sean Hughes said, ‘Directors should ensure that company financial reports provide investors with useful and meaningful information on the impact on current and future performance of changing and uncertain economic and market conditions. Directors and preparers should assess the impact on asset values and provisions, and disclose uncertainties, key assumptions, business strategies, and risks.’
ASIC has highlighted a number of areas for attention, in particular:
solvency and going concern assessments
events occurring after year end and before completing the financial report
disclosures in the financial report and Operating and Financial Review (OFR).
Companies will be affected differently by changing and uncertain economic and market conditions depending on their industry, where they operate, how their suppliers and customers are affected, and a range of other factors.
‘Companies may continue to face some uncertainties about future economic and market conditions and the impact on their businesses. Assumptions underlying estimates and assessments for financial reporting purposes should be reasonable and supportable’, said Mr. Hughes.
Directors and management should assess how the current and future performance of a company, the value of its assets and provisions, and business strategies, may be affected by changing circumstances, uncertainties, and risks such as:
the availability of skilled staff and expertise, which can impact revenue and costs;
the impact of rising interest rates on future cash flows and on discount rates used in valuing assets and liabilities;
inflationary impacts that may differ between costs and income;
increases in energy and oil prices;
geopolitical risks, including the Ukraine/Russia conflict;
impacts of climate change and climate-related events;
commitments and policies on climate and carbon emissions by governments;
technological changes and innovation;
COVID-19 conditions and restrictions during the reporting period;
changes in customer preferences and online purchasing trends;
use of virtual meetings and more flexible working arrangements;
the discontinuation of financial and other support from governments, lenders and lessors, including any possible increases in the level of insolvencies;
legislative and regulatory changes; and
other economic and market developments.
This list is not intended to be exhaustive and there may be other factors to consider in the circumstances of individual entities. These factors may also be relevant in assessing the ability of an entity’s borrowers, debtors, and lessees to meet their obligations to the entity, and the ability of key suppliers to continue to provide goods and services to the entity.
Industries that may be affected by the above factors include the construction industry, owners of commercial property, large carbon emitters, and the agriculture industry.
Uncertainties may lead to a wider range of valid judgments on asset values and other estimates. These uncertainties may change from period to period. Disclosures in the financial report about uncertainties, key assumptions, and sensitivity analysis are important to investors.
The Operating and Financial Review (OFR) should complement the financial report and tell the story of how the entity’s businesses are impacted by both COVID-19 and non-COVID-19 factors. The underlying drivers of the results and financial position should be explained, as well as risks, management strategies, and future prospects. Forward-looking information should have a reasonable basis and the market should be updated through continuous disclosure if circumstances change. Further guidance can be found in ASIC’s Regulatory Guide 247 Effective disclosure in an operating and financial review.
More detail about ASIC’s focus areas for 31 December 2022 reporting is outlined in the attachment to this media release.
The reporting process
Appropriate experience and expertise should be applied in the reporting and audit processes, particularly in more difficult and complex areas, such as asset values and other estimates.
Directors and auditors should be given sufficient time to consider reporting issues and to challenge assumptions, estimates, and assessments.
Directors should make appropriate inquiries of management to ensure that key processes and internal controls have operated effectively during periods of remote work.
The circumstances in which judgments on accounting estimates and forward-looking information have been made, and the basis for those judgments, should be properly documented at the time and disclosed as appropriate.
As in previous reporting periods, ASIC will review the full-year financial reports of selected listed entities and other public interest entities as at 31 December 2022.
Discontinuation of extensions of time
From early 2020, ASIC extended the deadlines for June and December reporting by unlisted entities (and initially also for listed entities) by one month at June and December each year. At first, these extensions recognized the challenges of moving to remote work arrangements and assessing the impact of COVID-19 conditions on financial reports. More recent extensions of time recognized the impact of travel restrictions and staff turnover on audit firm resources.
ASIC will not be giving a general extension of unlisted entity’s December 2022 reporting deadlines given that:
the impacts on audit firm resources have reduced;
extensions of deadlines can interfere with preparations for the following period of audits; and
there is a lower workload for audit firms for the December reporting season.
Audit focus areas
The financial reporting focus areas outlined in this media release are also important to focus areas for auditors.
Auditors should also bring the knowledge of a business, risks, and strategies obtained in the process of auditing the financial report in reviewing the OFR. While auditors do not form an opinion on the OFR, they are required to read the OFR for material misstatements of fact and material inconsistencies with the financial report. Auditors should document their consideration of disclosures on matters such as the underlying drivers of results, material risks, strategies, and future prospects. The auditor may need to report a suspected contravention of the Corporations Act 2001 to ASIC where, for example, disclosures are materially inadequate or misleading, including where it is possible ‘greenwashing’.
Auditors should also be prepared for major new auditing standards that apply from 15 December 2022 on firm quality management, engagement quality reviews, and quality control for financial report audits. Auditors should also ensure that they meet the requirements of a new standard on a risk assessment that applies from periods commencing 15 December 2021. Auditing standards can be found on the Auditing and Assurance Standards Board website.
Attachment to 22-333MR ASIC highlights focus areas for 31 December 2022 reports
1. Uncertainties and risks
A number of uncertainties and risks that may affect asset values, liabilities, and assessments of solvency and go concerned are shown in the bullet point list in the main body of this release.
2. Asset values
Examples of matters that may require the focus of directors, preparers, and auditors in relation to asset values in the current environment include:
Impairment of non-financial assets
Goodwill, indefinite useful life intangible assets, and intangible assets not yet available for use must be tested for impairment annually. Entities adversely impacted in the current environment may have new or continuing indicators of impairment that require impairment testing for other non-financial assets.
The appropriateness of key assumptions supporting the recoverable amount of non-financial assets.
Disclosure of estimation uncertainties, changing key assumptions, and sensitivity analysis or information on probability-weighted scenarios. Key assumptions may include assumptions relating to the factors listed in the covering release.
Values of property assets
Factors that could adversely affect commercial and residential property values should be considered such as changes in office space requirements of tenants, online shopping trends, future economic or industry impacts on tenants, the financial condition of tenants and restructured lease agreements.
The lease accounting requirements, the treatment of rental concessions by lessors and lessees, and the impairment of lessee right-of-use assets.
Expected credit losses (ECLs) on loans and receivables
Whether key assumptions used in determining expected credit losses are reasonable and supportable.
Any need for more reliable and up-to-date information about the circumstances of borrowers and debtors.
Short-term liquidity issues, financial condition, and earning capacity of borrowers and debtors.
The extent to which past history of credit losses remains relevant in assessing ECLs.
Disclosure of estimation uncertainties and key assumptions.
ECLs should be a focus for companies in the financial sector and other sectors. Financial institutions should have particular regard for the impact of current economic and market conditions and uncertainties on ECLs. This includes assessing whether there are significant increases in credit risk for particular groups of lenders; adequacy of data, modeling, controls, and governance in determining ECLs; and disclosing uncertainties and assumptions.
Value of other assets
The net realizable value of inventories, including whether all estimated costs of completion and necessary to make the sale have been taken into account in determining net realizable value.
Whether it is probable that deferred tax assets will be realized.
The value of investments in unlisted entities.
Consideration should be given to the need for and adequacy of provisions for matters such as onerous contracts, leased property make good, mine site restoration, financial guarantees are given, and restructuring.
4. Subsequent events
Events occurring after year-end and before completing the financial report should be reviewed as to whether they affect assets, liabilities, income or expenses at year-end or relate to new conditions requiring disclosure.
Considerations on disclosure include:
When considering the information that should be disclosed in the financial report and OFR, directors and preparers should put themselves in the shoes of investors and consider what information investors would want to know.
Disclosures should be specific to the circumstances of the entity and its businesses, assets, financial position and performance.
Changes from the previous period should be considered and disclosed.
Disclosures in the financial report
Uncertainties may lead to a wider range of valid judgments on asset values and estimates. The financial report should disclose uncertainties, changing key assumptions and sensitivities. This will assist investors in understanding the approach taken, understanding potential future impacts, and making comparisons between entities. Entities should also explain where uncertainties have changed since the previous full-year and half-year financial reports.
The appropriate classification of assets and liabilities between current and non-current categories on the statement of financial position should be considered. That may have regard to matters such as maturity dates, payment terms, and compliance with debt covenants.
Disclosures in the OFR
The OFR should complement the financial report and tell the story of how the entity’s businesses, results, and prospects are impacted by economic and market conditions, the COVID-19 pandemic, and changing circumstances. The overall picture should be clear, understandable, and supported by information that will enable investors to understand the significant factors affecting the entity, its businesses, and the value of its assets.
The OFR should explain the underlying drivers of the results and financial position, as well as risks, management strategies, and future prospects.
All significant factors should be included and given appropriate prominence.
The most significant business risks at the whole-of-entity level that could affect the achievement of the disclosed financial performance or outcomes should be provided, including a discussion of environmental, social, and governance risks. The risks will vary depending upon the nature and businesses of the entity and its business strategies. An exhaustive list of generic risks that might potentially affect a large number of entities would not be helpful. Risks should be described in context – for example, why the risk is important or significant and its potential impact and, where relevant, factors within the control of management.
Climate change risk could have a material impact on the future prospects of entities. Directors may also consider whether to disclose information that would be relevant under the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Given common reporting pillars, following the TCFD recommendations will help position companies for any future reporting under standards being developed by the International Sustainability Standards Board.
Cybersecurity risks could have a material impact on particular entities and require disclosure. Considerations include the impacts of a loss of personal data or a denial of service attacks, such as the extent and nature of personal data held and possible impacts on revenue.
Assistance and support from others
Entities should appropriately account for each type of support and assistance from the government, lenders, landlords, and others during the reporting period. Material amounts should be disclosed with the duration of the support or assistance, and any impact from its discontinuation.
Non-IFRS financial information (e.g. financial information that is presented other than in accordance with all relevant accounting standards)
Any non-IFRS profit measures in the OFR or market announcements should not be presented in a potentially misleading manner (see Regulatory Guide 230 Disclosing non-IFRS financial information). Where asset impairment losses were excluded from a non-IFRS profit measure in a prior period, any impairment reversal should also be excluded from that measure.
Disclosure in half-year reports
Disclosure will also be important for half-year financial reports and directors’ reports as of 31 December 2022. Half-year reports should disclose information on significant developments and changes in circumstances since 30 June 2022.
6. Other matters
Insurers must continue to disclose the impact of the new insurance accounting standard in the notes to financial statements. Given that the new standard applies for periods commencing 1 January 2023, it is reasonable to expect that insurers will be in a position to quantify the impact of the new standard in the notes to their 31 December 2022 financial reports. Insurers should refer to ASIC media release 20-286MR Insurers are urged to respond to the new accounting standard (17 November 2020) for more information.
Consideration of whether off-balance sheet exposures should be recognized on-balance sheet, such as interests in non-consolidated entities.
Aged care providers should review of the treatment of bed licenses following the announcement in May 2021 that the licenses will be discontinued on 1 July 2024 and subsequent information from the Department of Health.
Private health insurers should consider the impacts on the deferred claims liability for changes in the backlog of delayed procedures. A liability may be required for a commitment to return premiums to existing policyholders for savings during the pandemic.
Disclosure of material penalties for non-compliance with sanctions imposed in Australia or elsewhere in relation to Russia.
Ensuring the recognition of assets, liabilities, income, and expenses in registered scheme balance sheets and income statements where individual scheme members have pooled interests in assets and returns with some or all other members in substance.