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21RU-001 ASIC focus areas: 31 December 2020

21RU-001 ASIC focus areas: 31 December 2020

ASIC has released its areas of focus for 31 December 2020 reporting which are consistent with those communicated for 30 June 2020. It has also announced the results of its review of financial reports for 30 June 2020. All preparers (listed and unlisted) should ensure all relevant aspects are addressed.

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Continuing impact of COVID-19 conditions

Consistent with expectations, in announcing its focus areas for 31 December 2020, ASIC emphasised the continuing impact of COVID-19 and the numerous considerations that this has brought. ASIC continues to highlight the importance of communicating the impacts of COVID-19 conditions to the market.

Infographic showing which areas are being impacted by COVID-19

ASIC’s Frequently asked questions (FAQs) on the impact of COVID-19 on financial reports and audits provide further guidance on considering the impacts of the pandemic. These ASIC FAQs are updated, as needed, in response to emerging issues and changing circumstances. The first of the FAQs addresses ASIC’s focus areas for companies, directors and auditors for financial reporting given the impact of the COVID-19 pandemic. The release of ASIC’s focus areas for 31 December 2020 reporting are consistent with those areas listed in the FAQ.

ASIC has advised its surveillance of financial reports for the 31 December 2020 reporting season will focus on entities and industries adversely affected by the current conditions, although the adequacy of disclosure by some entities whose businesses have been positively affected will also be targeted. The reviews will be of financial reports of selected larger listed entities and other public interest entities.

Surveillance results from review of 30 June 2020 financial reports

ASIC also announced the results from its review of 30 June 2020 financial reports in late December 2020. While it was noted that many companies made useful and meaningful disclosures on the impact of COVID-19 conditions, there were some notable exceptions.
ASIC made 58 inquiries of 27 entities relating to the following matters.

Matter Number of inquiries
Impairment and other assets 19
Operating and Financial Review 8
Revenue recognition 7
Tax accounting 4
Provisions 4
Non-IFRS profit measures 4
Operating segments 3
Classification of debt 2
Other matters 7

Once again impairment and other asset values were a key focus, particularly given the extended impacts of COVID-19.

The focus on the quality of an entity’s Operating and Financial Review (OFR) and extent to which it complemented the financial report and told the story of how COVID-19 impacted the entity’s business is borne out by the number of inquiries made relating to the OFR. ASIC compared the presentation of the OFR to its regulatory guide on the topic, RG 247 Effective disclosure in an operating and financial review. ASIC reminded listed entities and their directors to refocus on the principles set out in RG 247 for the upcoming 31 December 2020 reporting season.

With ASIC’s warnings on not presenting financial performance in a potentially misleading manner, non-IFRS profit measures came in for heightened scrutiny. ASIC’s main concerns related to the prominence of these measures over statutory information.

“It is important for entities to ensure that the OFR complements the information disclosed in the financial report. The challenge is for the OFR to communicate a clear and understandable overview of the significant factors affecting the entity, its businesses and the value of its assets. ASIC has reinforced this in announcing its areas of focus. 

In addition, the OFR should explain the underlying drivers of the results, as well as risks, management strategies and future prospects. This will include the impacts of COVID-19 and may include other factors not attributable to COVID-19 if significant.” 

Michael Voogt
Director


 

Quality of disclosures is crucial

Fresh off the back of ASIC’s 30 June 2020 financial report surveillance, it has emphasised how critical the quality of financial reports and related disclosures are for keeping investors informed.

For a December year end, disclosing the continuing impact of COVID-19 so that users of financial statements can clearly understand what occurred during the first three-to-four months of the financial year, what followed when COVID-19 hit, the management strategies employed and the future prospects will require careful explanation by entities.

Entities preparing half-year reports will equally face the disclosure challenges. The continuing impacts of COVID-19 conditions will likely require more disclosure in the half-year financial reports compared to prior half-years to adequately communicate the changing uncertainties from the last annual report at 30 June.

Focus areas for 31 December 2020

The areas of focus identified by ASIC are broad, with the five major themes being:

  • asset values
  • provisions
  • solvency and going concern assessments
  • events occurring after the reporting date
  • disclosures (in the financial report and the OFR).

Further discussion on each of these areas can be found in the PDF version of the Reporting Update and on our website.

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