ASIC Releases Key Focus Areas For The June 2023 Reporting Season
As is usual, ASIC has just released the areas it will focus on for the June 2023 reporting season. ASIC is urging directors, preparers of financial reports and auditors to assess the impact of uncertain economic and market conditions on financial reporting.
There are a number of uncertainties and risks that may affect asset values, liabilities and assessments of solvency and going concern, and ASIC mentions that it will consider matters including:
Asset Values
Impairment testing for non-financial assets, particularly for goodwill and indefinite useful life intangible assets is a focus. The valuation methodology used for impairment testing should be appropriate, use reasonable and supportable assumptions, and be cross checked for reliability to other relevant information.
Values of commercial properties could be adversely affected by changes in space requirements of tenants, on-line shopping trends, future economic or industry impacts on tenants, the financial condition of tenants and restructured lease agreements.
Assumptions used in determining expected credit losses over all receivables need to be reasonable and supportable.
Other asset values to consider include the net realisable value of inventories, deferred tax assets and the values and methodologies applied to unlisted investments.
LNP comment
Impairment assessments and valuations of assets can be complex and are usually subject to significant judgements. Prepare the valuations and impairment assessments well in advance, and ensure you have support for key assumptions including discount rates, comparables etc. Allow plenty of time to complete the process and discuss them with directors and auditors early in the year end process.
Provisions
Consideration should be given to the need for and adequacy of provisions for matters such as onerous contracts, leased property make good, mine site restoration, financial guarantees given and restructuring.
LNP Comment
Preparers need to be aware of all the potential areas where a provision may be required.
The basis for estimation and assessment of the provision needs to be reasonable and supportable, including key assumptions, historic experiences and future expectations. This is another area that can be worked on in advance of the year end and we recommend it is considered early.
Solvency and going concern assessments
Solvency and going concern assessments are crucial to the reporting process and underpin the whole financial report.
Preparers should ensure that going concern assessments include:
Cash flow forecasts that cover the period of 12 months from the date of signing of the financial report. To ensure this period is covered, the cash flow forecast should cover 18 months from the balance date.
The assumptions underlying the cash flow forecast are reasonable and supportable. Bases for assumptions need to be fully documented for review by advisors and auditors.
The forecast should be stress tested to allow for uncertainties and risks that may be beyond the control of the organisation.
LNP comment
LNP considers going concern is a key issue on every audit because it is a fundamental assumption underlying the preparation of every financial report. A rigorous ongoing assessment of going concern is vital. This should be considered on an ongoing basis by directors and management as part of good governance in any case, and the year-end assessment and underlying assumptions should be considered in advance of the year end.
Events occurring after year end and before completing the financial report
Events occurring after year-end and before completing the financial report should be reviewed as to whether they affect assets, liabilities, income or expenses at year-end or relate to new conditions requiring disclosure.
LNP Comment
Preparers and directors need to keep subsequent events in mind. Events occurring up until the date of signing of the financial report need to be considered.
Items which can affect financial reporting include events which happen after the year end which do not affect conditions at the year-end (including significant new contracts, market value changes and the like), but which may need disclosure in the financial statements or which affect the going concern situation, or circumstances which change the outcome of assets and liabilities or contingencies that existed at the period end. An example of this could be the settlement of an existing legal case prior to signing the accounts.
Disclosures in the financial report and Operating and Financial Review (OFR)
ASIC have set out the following general considerations:
When considering the information that should be disclosed in the financial report and OFR, directors and preparers should put themselves in the shoes of investors and consider what information investors would want to know.
Disclosures should be specific to the circumstances of the entity and its businesses, assets, financial position and performance.
Changes from the previous period should be considered and disclosed.
LNP Comment
The disclosures in the financial report and OFR are important to flesh out the story of the financial year and the organisation’s current position. In particular, where there are uncertainties, key judgments and sensitivities, full details should be provided to allow users to make their own assessments.
Other Matters
ASIC has also briefly noted the following matters
Consideration of whether off-balance sheet exposures should be recognised on-balance sheet, such as interests in non-consolidated entities.
Ensuring the recognition of assets, liabilities, income and expenses in registered scheme balance sheets and income statements where individual scheme members have pooled interests in assets and returns with some or all other members in substance.
Large proprietary companies that were previously ‘grandfathered’ are required to lodge financial reports for years ending on or after 10 August 2022.
A full copy of the ASIC release can be found here.
If you need any assistance with any of these matters we can help.
Our senior team has a comprehensive understanding of the issues and ASIC’s expectations for the June reporting season. Contact one of our Directors or email us at info@lnpaudit.com.