ASIC has highlighted key focus areas for financial reporting by companies for reporting periods ending 30 June 2021 under COVID-19 conditions.
ASIC expects directors, preparers of financial reports and auditors to pay attention to:
- asset values
- provisions
- 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).
ASIC Commissioner Cathie Armour said, 'As COVID-19 conditions continue to evolve, the quality of financial reports and related disclosures remain more important than ever for keeping investors informed.
'The circumstances of companies and the environment in which they operate can change significantly from one reporting period to the next. This could significantly affect assessments of asset values and financial position.
'Disclosing key assumptions, risks, the drivers of results, management strategies and future prospects will be important for investors and other users of financial reports. This includes both full-year and half-year reports.'
Entities may continue to face some uncertainties about future economic and market conditions, and the future impact on their businesses. Assumptions underlying estimates and assessments for financial reporting purposes should be reasonable and supportable. Assumptions should be realistic, and not overly optimistic or pessimistic.
Useful and meaningful disclosures about business impacts and potential uncertainties will continue to be vital. Uncertainties may lead to a wider range of valid judgements 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 will be important to investors.
The OFR should complement the financial report and tell the story of how the entity's businesses are impacted by the COVID-19 pandemic. The underlying drivers of the results and financial position should be explained, as well as risks, management strategies and future prospects.
More details about each focus area 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 enquiries of management to ensure that key processes and internal controls have operated effectively during periods of remote work. Where possible, auditors should be given access to perform procedures on-site rather than remotely, including stock counts and system walk-throughs.
Relief on reporting deadlines
ASIC has extended the deadline for both listed and unlisted entities to lodge financial reports under Chapters 2M and 7 of the Corporations Act 2001 by one month for balance dates from 23 June 2021 to 7 July 2021 inclusive.
The extended deadlines will assist with any pressures on resources for the audits of smaller entities and provide adequate time for the completion of the audit process given challenges presented by COVID-19 conditions.
When deciding whether to depart from the normal statutory deadlines, directors should consider the information needs of shareholders, creditors and other users of their financial reports, as well as meeting borrowing covenants or other obligations.
Frequently asked questions
ASIC's on the impact of COVID-19 on financial reports and audits provide additional information on matters such as:
- focus areas and factors to consider
- disclosures in the financial report and OFR
- the use of non-IFRS financial information
- half-year report disclosures
- director liability
- loan and receivable provisioning
- lessor and lessee accounting for rent concessions
- non-COVID-19 focus areas
- the solvency statement by directors
- the extensions of time for financial reporting
- the 'no action' position on the timing of AGMs
- virtual meetings
- reporting by auditors.
ASIC surveillances
ASIC will conduct its regular review of the full-year financial reports of selected larger listed entities and other public interest entities as at 30 June 2021. Our reviews will focus on entities and industries more affected by the current conditions.
Attachment to 21-129MR ASIC highlights focus areas for 30 June 2021 financial reports under COVID-19 conditions
1. Factors affecting asset values, provisions and assessments of solvency and going concern
Factors to consider in relation to asset values, liabilities and assessments on solvency and going concern continue to include:
- business and domestic/international economic factors
- industry-specific factors
- impact on customers, borrowers and lessees
- impact on supply chains
- exposures to overseas operations, transactions and currencies
- short-term versus long-term conditions
- the availability, distribution and take up of COVID-19 vaccines
- duration of containment measures and business closures
- extent and duration of assistance and support by governments and others
- impact on short-term operating cash flows
- debt refinancing, borrowing covenants, lender forbearances and liquidity support
- modifications of debt and lease contracts
- capital raising
- management plans and response to the pandemic impacts.
These factors may also be relevant in assessing the ability of an entity's borrowers and debtors to meet their obligations to the entity, and the ability of key suppliers to continue to provide good and services to the entity.
This list is not intended to be exhaustive and there may be other factors to consider in the circumstances of individual entities. ASIC's FAQs also discuss matters that directors and auditors may consider in assessing the solvency of an entity.
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
- Impairment testing 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.
- Given uncertainties, it may be necessary to use probability-weighted scenarios in making estimates of both fair value and value in use. In those cases, modelling risk may still need to be factored into the discount rate used in a discounted cash flow model.
- 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 at the start of this attachment.
Values of property assets
- Factors adversely affecting the values of commercial and residential properties should be considered, despite any absence of market transactions. These may include:
- expected changes in office work practices affecting future space requirements of tenants;
- possible changes in consumer preferences between 'bricks and mortar' retail and on-line shopping;
- economic or industry impacts on future tenancy;
- changes in the financial condition of existing tenants; and
- new or ongoing impacts of restructuring of agreements with tenants.
- 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 on loans and receivables
- The appropriateness of key assumptions used in determining expected credit losses. Assumptions should be reasonable and supportable.
- Any need for more reliable and up-to-date information about the circumstances of borrowers and debtors.
- Short-term liquidity issues for some borrowers and debtors, as well as the financial condition and earning capacity of borrowers and debtors.
- In determining expected credit losses for loans or for receivables, past models and experience may not be representative of current expectations. A probability weighting of possible scenarios may be needed.
- Whether the rebuttable presumptions in the relevant accounting standard for loans in arrears for 30 days or 90 days being moved into higher categories for assessing credit losses can continue to be rebutted under current loan repayment deferral arrangements for some borrowers who may had short-term liquidity issues.
- Disclosure of estimation uncertainties and key assumptions.
Values of other assets
- The value of inventories, including where demand decreases and inventory levels increase.
- Whether it is probable that deferred tax assets will be realised.
- The impact of the COVID-19 pandemic on the value of investments in unlisted entities.
3. Provisions
Consideration should be given to the need for provisions for matters such as onerous contracts, financial guarantees 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.
5. Disclosures
Considerations on disclosure include:
General considerations
- 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, its businesses, its assets and its 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 judgements 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 narrowed or 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 are impacted by the COVID-19 pandemic and changing circumstances. The overall picture should be clear and understandable, and be 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.
- Significant factors not attributable to the COVID-19 pandemic should be included and given appropriate prominence, such as changes in consumer preferences or new competitors.
- 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.
Assistance and support by governments and others
- Entities should appropriately account for each type of support and assistance from government, lenders, landlords and others. Both the financial report and OFR should prominently disclose material amounts, as well as the commencement date and either the end date or expected duration of support or assistance. Examples include JobKeeper, land tax relief, loan deferrals and restructuring, and rent deferrals and waivers. Entities should also disclose the amount of any material voluntary returns of JobKeeper or other support or assistance.
Non-IFRS financial information
- Any non-IFRS profit measures in the OFR or market announcements should not be presented in a potentially misleading manner.
- 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.
- Where a net tangible asset figure is presented by a lessee, there should be a prominent footnote on the same page explaining whether some, all or no lease right-of-use assets have been included.
Disclosure in half-year reports
- Disclosure will also be key for half-year financial reports and directors' reports as at 30 June 2021. These half-year reports may need to include significant disclosure about developments and continuing impacts since 31 December 2020 of COVID-19 conditions and other significant factors.
ASIC's FAQs provide more information on disclosures in the financial report, disclosures in the OFR, and the use of non-IFRS financial information.
6. Reporting processes
The circumstances in which judgements on accounting estimates and forward-looking information have been made, and the basis for those judgements, should be properly documented at the time and disclosed as appropriate. This will minimise the risk that hindsight is applied when information, estimates and judgements are reviewed by others at a later time.
Any assumptions, estimates, assessments and forward-looking information should have a reasonable basis, and the market should be updated through continuous disclosure if circumstances change.
7. Cloud computing and other matters
The IFRS Interpretations Committee issued an agenda decision Configuration or Customisation Costs in a Cloud Computing Arrangement in March 2021. The decision confirms that a cloud computing customer should expense the costs of configuring or customising the supplier's application software in a Software as a Service arrangement.
There should be sufficient time to identify past amounts capitalised that should be expensed before 30 June 2021 financial reports are completed. Adjustments are treated as a change in accounting policy.
If past amounts to be expensed may be material but cannot be identified for 30 June 2021 reporting, this should be prominently disclosed. Adjustments should be made in the next financial report.
Other matters to consider may include off-balance sheet exposures and the impact of recent developments concerning leave entitlements of casual employees.
