ASIC Releases Financial Reporting and Audit Focus Areas for December 2023
ASIC has released the Financial Reporting and Audit Areas where it will focus its surveillance programs for the 31 December 2023 reporting period. Most of the areas raised have been carried over from previous focus areas.
The Reporting Process
ASIC notes that Directors are primarily responsible for the quality of financial reports, and expects that companies produce quality and timely financial information. Companies must have appropriate processes, records and analysis to support the financial report. The Operating and Financial Review (OFR) should complement the financial report and tell the story of how the business is performing. The underlying drivers of the results and financial position should be explained, as well as risks, strategies and future prospects. Forward-looking information should have a reasonable basis.
LNP Comment
Management need to engage with auditors early in the audit process to ensure that any issues are identified and resolved in a timely manner and not delay the finalisation of the audit opinion. While auditors do not form an opinion on the OFR, they are required to read the OFR for material misstatements of fact and material inconsistencies with the financial report. It is important that drafts of the OFR be provided to your auditors as soon as possible so that any issues on content can be resolved.
Asset Values
Reported value of assets continue to be a specific focus area.
Impairment of Non-Financial Assets
Goodwill, indefinite useful life intangible assets and intangible assets not yet available for use must be tested for impairment annually. Entities adversely impacted in the current environment may have new or continuing indicators of impairment that require assessment.
Companies should consider the appropriateness of assumptions supporting recoverable amounts. Methods used for assessment should be appropriate, use reasonable and supportable assumptions, and be cross checked for reliability using other relevant information.
Values and potential impairment of Property and Right of Use Assets
Factors that could adversely affect property values should be considered including changes in space requirements of tenants, on-line shopping and work trends, future economic industry and financial condition of tenants.
Expected Credit Losses (ECLs) on loans and receivables
ECLs should be a focus in the financial and other sectors. Financial institutions should have particular regard to the impact of current economic and market conditions and uncertainties on ECLs. This includes assessing whether there are significant increases in credit risk for particular groups of debtors; adequacy of data, modelling, controls and governance in determining ECLs; and disclosing uncertainties and assumptions.
Financial Asset Classification
Financial assets may be measured at amortised cost, fair value through other comprehensive income or fair value through profit and loss. Management need to ensure that the classification applied meets the appropriate criteria set out in accounting standards.
Values of Other Assets
The values applied to other assets need to be considered, in particular the net realisable value of inventories, whether it is probable that deferred tax assets will be realised, and values of unlisted investments.
LNP Comment
Valuation and Impairment of assets involves significant judgements that can be quite subjective. Robust working papers that support judgements and assumptions made in arriving at valuations should be produced. Estimation uncertainties, changing key assumptions, and sensitivity analysis or information on probability-weighted scenarios should be fully documented and considered and approved by management and the Board, and made available to your auditors.
Provisions
ASIC continue to be concerned about 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
Provisions can involve critical judgements and subjective assessment, the bases of estimation should be reasonable and supportable and the assessment should be fully documented and reviewed and approved.
Subsequent Events
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
It is easy to overlook events after balance date but sometimes they can have a significant impact on the overall picture presented by the financial statements. Examples could be significant new contracts (or the failure to secure a contract), market value changes, acquisition or destruction of a major asset, material share issues or settlement of a legal case. All significant events that have occurred between balance date and the date of signing of the accounts need to be assessed, and disclosed.
Disclosures
When considering 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.
ASIC also particularly noted the following matter.
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.
Cyber security risks could have a material impact for particular entities and require disclosure. Considerations include the impacts of a loss of personal data or a denial of service attack, such as the extent and nature of personal data held and possible impacts on revenue.
LNP Comment
There is an increasing focus by ASIC on climate change and cyber security risks. Management and Directors need to have an increased understanding of how these risks may affect their organisations and how they will be managed.