Despite a change in the way ASIC now approaches its surveillance program and announces focus areas, the key areas requiring attention in 31 December 2023 financial reports remain unchanged from previous reporting periods.
What is new?
For the 12-month cycle ended 30 June 2023, ASIC applied an integrated approach to conducting financial report reviews and audit surveillances. Under this new combined approach, ASIC now routinely selects audit files for inspection where a change has been made to the financial report in response to an ASIC review, or where ASIC has concerns that a financial report has an increased risk of material misstatement. This is because there is strong link between problems in a financial report and problems with the quality of work undertaken on that financial report.
Consistent with the new integrated approach above, ASIC’s focus areas now address both financial reporting and audit issues, highlighting those common areas preparers struggle with the most and that lead to significant non-compliance with the accounting standards.
In terms of announcing its focus areas, for 31 December 2023, ASIC issued a brief media announcement with further detail provided via a link to a new ‘Financial reporting and audit’ section on its website which will probably be refreshed every six months for the relevant reporting period.
What is not new?
The areas ASIC will focus on for purposes of its financial report and audit surveillance for the December 2023 reporting period are the same as those announced for June 2023, namely:
- Asset values (which covers impairment)
- Subsequent events
- The impact of the new insurance standard, AASB 17 Insurance Contracts
Again, much of ASIC’s 31 December 2023 guidance centres around disclosures.
ASIC reminds preparers that it is important to consider disclosures from the user’s perspective and what the user would want to know to be able to make informed decisions.
Furthermore, vanilla disclosures do not cut it, especially against a backdrop of continued uncertainty. Instead, disclosures should be tailored to the entity’s specific circumstances, particularly when it comes to asset values and estimates that involve judgement. Key assumptions (including changes therein) as well as sensitivities to changes in these key assumptions should be robustly disclosed.
Significant changes from the previous period are also of interest to users so these should be considered, and appropriate disclosures made where necessary.
The Operating and Financial Review (OFR), which only listed entities are required to prepare, has been a specific topic of interest for ASIC for the last few reporting seasons. The largest number of financial reporting surveillance findings stemming from ASIC’s latest surveillance program related to inadequate OFR disclosures, particularly missing or inadequate material business risks. ASIC expects a balanced narrative in this regard. That is, directors should talk about both future prospects and opportunities as well as the hurdles (risks) that could prevent the entity from achieving its objectives.
ASIC explicitly calls on directors to consider climate change when preparing their OFRs as this could have a material impact on the prospects of many entities. Starting to think about the impact of climate change now will also serve to better position these entities for the mandatory climate-related financial disclosures that are in the process of being legislated.
Where listed entities require guidance on preparing an OFR, they should refer to RG 247 Effective Disclosure in an Operating and Financial Review. Listed entities that are newly listed, have significant and complex transactions, regularly raise funds, or have unique or complicated business models should be particularly mindful of their OFR as ASIC considers such entities higher risk.
This update was first published in Issue 18 of The Bottom Line.