While the areas that the Australian Securities and Investments Commission (ASIC) will focus on for 30 June 2023 are consistent in many respects with those announced in June and December last year, economic and market conditions are not so similar meaning there may be much for management and directors to think about as they navigate a reporting season set against a backdrop of uncertainty.
Inflation, rising interest rates, labour shortages, changing customer preferences and behaviours, supply chain disruptions, the climate emergency and the changes this necessitates looming on the horizon.
This is the landscape businesses find themselves traversing at the moment. It is, therefore, no surprise that ASIC has put an emphasis on the current uncertainty and changing market conditions in its latest focus areas.
Uncertainties and shifting market conditions affect all entities in some way, shape or form. For many entities, both listed and unlisted, these will impact several areas in their financial reports, including those highlighted by ASIC as areas of focus (see bellow). Directors and management should consider how changing circumstances, uncertainties and risks impact the entity, from its performance, to the values of its assets and liabilities, to its business strategies.
Uncertainties tend to widen the range of valid judgements that underly asset values and other accounting estimates. Directors and management should ensure that these judgements are adequately considered and documented, especially where these will be subject to auditor (and possibly regulator) scrutiny. Uncertainties, key assumptions, and sensitivity analyses (where relevant), as well as how these have changed from the last reporting period, must be appropriately disclosed in the financial statements.
‘Usual’ focus areas for 30 June 2023
The areas ASIC has highlighted for this reporting season that are unchanged from those announced last year in June and December are the following:
- Asset values
- Adequacy of provisions
- Solvency and going concern assessments
- Post-balance date events
- Disclosures, both in the financial report and the Operating and Financial Review (OFR)
ASIC reminds listed entities of the importance of the OFR as a complement to the financial report, encouraging directors to use this space to communicate what significant events and conditions impacted the business during the year, and why the numbers are what they are. ASIC also urges directors to be better at disclosing the business risks that could most impede the entity from reaching its financial objectives and business strategies.
To this end, it should be noted that in ASIC’s latest surveillance program for 30 June 2022, more than a third of ASIC’s queries to directors related to the OFR, specifically inadequate disclosure of material business risks. To avoid any ‘please explain’ letters from ASIC on this front, directors of listed entities should ensure greater attention is given to this part of the OFR.
Risks to consider include cyber security and climate as these are risks likely to impact many entities. For guidance on preparing an effective OFR, directors can refer to RG 247 Effective disclosure in an operating and financial review.
Impairment of assets should continue to be high on the list of priorities for directors. Goodwill and other indefinite-lived intangible assets are required to be tested annually for impairment, however impairment tests for other non-financial assets (such as intangible assets with finite useful lives and property) are only necessitated by impairment indicators. As economic conditions deteriorate, the likelihood of events or circumstances that trigger the need for a detailed impairment assessment increase.
Directors should not assume that the assumptions applied in prior period impairment evaluations remain appropriate now. ASIC continues to find that key assumptions underlying impairment calculations are not reasonable and supportable. To ensure a smooth audit process, make sure the assumptions and inputs are documented and can be substantiated.
It is also important to note ASIC’s view that a company’s market capitalisation cannot be used as a proxy for its fair value when it comes to impairment testing. Where a detailed impairment assessment is required, the higher of value in use and fair value less costs of disposal must be determined applying the requirements of AASB 136 Impairment of Assets.
New insurance standard
In terms of new accounting standards, ASIC will be paying attention to the application and related disclosures by entities impacted by AASB 17 Insurance Contracts. This new standard applies for the first time to annual reporting periods beginning on or after 1 January 2023. It is ASIC’s expectation that insurers with June year ends quantify and disclose the impact of the new standard in their 30 June 2023 full year reports.
Insurers with half-years ending 30 June 2023 will need to apply the recognition and measurement requirements of the new standard and disclose the changes in accounting policies on adoption of that standard.
This article was first published in The Bottom Line – Issue 16.