ASIC review of 31 December 2020 financial reports

ASIC today announced the results from its review of the financial reports of 85 listed entities for the year ended 31 December 2020. The review was conducted as part of ASIC’s ongoing risk-based reviews of financial reports.

ASIC has made inquiries of 15 entities on 22 matters. The largest numbers of matters relate to impairment of non-financial assets, asset values and disclosure in the operating and financial review.

Asset values and disclosures under COVID-19 conditions

Many companies have continued to make useful and meaningful disclosures on the impact of COVID-19 conditions. However, we still identify some entities with businesses adversely affected by the pandemic that did not appear to give sufficient attention to the reporting of asset values and financial position.

We recognise COVID-19 conditions may create uncertainties which necessitate the use of probability weighted scenarios. Disclosure of assumptions is key in this context. We continue to make inquiries where companies appear to have made unrealistic and unsupportable assumptions about future cash flows, and where disclosures did not clearly identify the impacts of COVID-19 conditions on the business.

Our findings emphasise that directors and auditors need to focus on impairment of non-financial assets, particularly as businesses navigate through the continuing impacts of the COVID-19 pandemic.

For information on focus areas for 30 June 2021 financial reports, refer to 21-129MR Financial reporting focuses for 30 June 2021.

ASIC’s inquiries

Following the 31 December 2020 reviews, ASIC made inquiries about the following matters:

Matter

Number of inquiries

Impairment and other asset values

10

Operating and Financial Review

3

Consolidation accounting

2

Lease accounting

2

Off-balance sheet arrangements

1

Revenue recognition

1

Provisions

1

Other matters

2

Total

22

Making inquiries of individual entities does not necessarily lead to material restatements in every case. Matters involving two of the entities have been concluded without any changes to their financial reporting. Inquiries of the remaining 13 entities are continuing.

Material changes

When a company makes material changes to information previously provided to the market following inquiries made by ASIC, ASIC makes a public announcement. In addition to improving the level of market transparency, these announcements are intended to make directors and auditors of other companies aware of ASIC’s concerns so they can avoid similar issues.

Since the last release of ASIC findings on 17 December 2020, we have made public announcements about:

The total negative adjustments to profit was $53.5 million for LawFinance Limited and $32.4 million for Ainsworth Game Technology Limited.

More information about the findings from ASIC’s recent reviews is provided in the attachment to this media release.

Attachment to 21-135MR ASIC review of 31 December 2020 financial reports

1. Impairment

ASIC’s inquiries on assessments of the recoverability of the carrying values of assets, including goodwill, mining assets, and property, plant and equipment include:

  1. Reasonableness of cash flows and assumptions: There continue to be cases where the cash flows and assumptions used by entities in determining recoverable amounts are not reasonable or supportable having regard to matters such as historical trading results, current and forecast commodity prices, or the impact of and uncertainties due to COVID-19 conditions.
  2. Disclosures: ASIC still finds some entities that are not making the necessary disclosure of:
    • key assumptions, including discount rates and growth rates; and
    • for fair values, the valuation techniques and inputs used.

These disclosures are important to investors and other users of financial reports given the subjectivity of these calculations/assessments. They enable users to make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations.

This item includes matters arising from the finalisation of impairment matters identified in our reviews of 30 June 2020 financial reports.

2. Expected credit losses on trade receivables

ASIC has made two inquiries in relation to expected credit losses on trade receivables. In one instance, the entity did not disclose its basis for determining expected credit losses despite indications of increased credit risk.

ASIC also found that estimated loss rates did not adequately reflect the credit risk related to long outstanding receivables, by using sufficient forward-looking information. This item relates to issues arising from the finalisation of matters identified in our reviews of 30 June 2020 financial reports.

3. Operating and Financial Review (OFR)

ASIC has raised three inquiries about the quality of the entity’s OFR, and the extent to which it complemented the financial report and told the story of how the entity’s business is impacted by the COVID-19 pandemic.

In one instance, no information had been provided about business strategies and prospects and the impacts of COVID-19 on key assumptions, and in another instance, the entity continued to indicate that the impacts of COVID-19 on its business cannot be determined.

4. Consolidation accounting

ASIC has followed up two matters concerning the accounting for controlled entities and joint arrangements. In one of the matters, we are making inquiries about the accounting for the loss of control of a subsidiary and treatment of the remaining interest as a joint arrangement. The other matter concerns the accounting for a joint arrangement where continuing indicators exist that the entity may have control.

5. Lease accounting

ASIC has made inquiries with two entities about lease accounting under the standard that first applied for years commencing on or after 1 January 2019. In one instance, we are inquiring about the entity’s treatment of a sale and leaseback transaction that resulted in a material gain on sale. The other instance was resolved with no changes to the financial report following further information and explanations from the entity.

6. Off-balance sheet arrangements

ASIC has made an inquiry about the basis for an entity’s apparent derecognition of trade receivables under a debtor securitisation facility.

7. Revenue recognition

ASIC has followed up one matter concerning an entity’s contracts with significant customers, where revenue recognition is dependent on agreed milestones related to product development.

ASIC has also inquired with an entity is connection with its accounting policy for late fees, which relates to a matter arising from the reviews of 30 June 2020 financial reports.

8. Provisions

ASIC has made an inquiry with one entity about potential liabilities with respect to cyber breaches.

ASIC has also inquired with two entities on the adequacy of make good provisions in connection with leased properties. In both instances, the entity has not had regard to the obligations under its lease agreements. These inquiries relate to matters arising from the reviews of 30 June 2020 financial reports.

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