ASIC Areas of Focus for December 2021

By Paul Pearman, Paul Pearman
Partner
15 February 2022

On 9th December 2021, ASIC released their revised focus areas for 31 December 2021 financial reports under COVID-19 conditions.

ASIC Commissioner Sean Hughes said, ‘COVID-19 conditions have continued through 2021 and companies will be affected differently depending on their industry, where they operate, how their suppliers and customers are affected, and a range of other factors.’.

ASIC has highlighted a number of areas for attention, in particular:

  • 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)

We note that the current list represents no material change from prior cycles areas of focus, however the recent ASIC commentary suggests that these areas persist as the most common challenges in the accuracy and completeness of the financial reporting process.

The results of ASIC’s review of the 31 December 2020 Financial Reports reviews highlighted that the largest numbers of queries raised by ASIC in this period related to impairment of non-financial assets, asset values and disclosure in the operating and financial review.

The focus on impairment centred on the following:

  • Reasonableness of cash flows and assumptions, having regard to historical trading results, current and forecast commodity prices, or impact of uncertainties due to COVID-19 conditions
  • Insufficient disclosures regarding:
    • Key assumptions used (discount rates and growth rates) –including for probability-weighted scenarios
    • For fair values – valuation techniques and inputs used

Given the subjectivity of these types of calculations, transparency and quality disclosure should enable users to make their own judgement about the carrying values of these assets and the risks involved.

We also note that quality and completeness of the OFR disclosures is gaining increased attention from ASIC.  Regulatory Guide 247 – Effective disclosure in an Operating and Financial Review should be considered by management and directors in their presentation of their OFR, and there is a clear expectation that the entity discloses its material risks and potential secondary COVID related risks, and if not disclosed then why not.

  • 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, 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.

What else should Directors be considering and expecting?

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.

Please get in touch with your local PKF audit & assurance team to learn more.