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ASIC is urging directors, preparers of annual and half-year reports and auditors to assess whether companies’ financial reports provide useful and meaningful information for investors and other users, as it highlights key focus areas for reporting by companies for full and half-years ending 31 December 2022.

ASIC Commissioner Sean Hughes said, ‘Directors should ensure that company financial reports provide investors with useful and meaningful information on the impact on current and future performance of changing and uncertain economic and market conditions. Directors and preparers should assess the impact on asset values and provisions, and disclose uncertainties, key assumptions, business strategies and risks.’

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).

Companies will be affected differently by changing and uncertain economic and market conditions depending on their industry, where they operate, how their suppliers and customers are affected, and a range of other factors.

‘Companies may continue to face some uncertainties about future economic and market conditions, and the impact on their businesses. Assumptions underlying estimates and assessments for financial reporting purposes should be reasonable and supportable’, said Mr Hughes.

Directors and management should assess how the current and future performance of a company, the value of its assets and provisions, and business strategies, may be affected by changing circumstances, uncertainties and risks such as:

• the availability of skilled staff and expertise, which can impact on revenue and costs;
• the impact of rising interest rates on future cash flows and on discount rates used in valuing assets and liabilities;
• inflationary impacts that may differ between costs and income;
• increases in energy and oil prices;
• geopolitical risks, including the Ukraine/Russia conflict;
• impacts of climate change and climate related events;
• commitments and policies on climate and carbon emissions by governments;
• technological changes and innovation;
• COVID-19 conditions and restrictions during the reporting period;
• changes in customer preferences and online purchasing trends;
• use of virtual meetings and more flexible working arrangements;
• the discontinuation of financial and other support from governments, lenders and lessors, including any possible increases in the level of insolvencies;
• legislative and regulatory changes; and
• other economic and market developments.

This list is not intended to be exhaustive and there may be other factors to consider in the circumstances of individual entities. These factors may also be relevant in assessing the ability of an entity’s borrowers, debtors and lessees to meet their obligations to the entity, and the ability of key suppliers to continue to provide goods and services to the entity.

Industries that may be affected by the above factors include the construction industry, owners of commercial property, large carbon emitters and the agriculture industry.

Uncertainties may lead to a wider range of valid judgements on asset values and other estimates. These uncertainties may change from period to period. Disclosures in the financial report about uncertainties, key assumptions and sensitivity analysis are important to investors.

The Operating and Financial Review (OFR) should complement the financial report and tell the story of how the entity’s businesses are impacted by both COVID-19 and non-COVID-19 factors. The underlying drivers of the results and financial position should be explained, as well as risks, management strategies and future prospects. Forward-looking information should have a reasonable basis and the market should be updated through continuous disclosure if circumstances change. Further guidance can be found in ASIC’s Effective disclosure in an operating and financial review.

More detail about ASIC’s focus areas for 31 December 2022 reporting is outlined in the attachment to this media release.

The reporting process

Appropriate experience and expertise should be applied in the reporting and audit processes, particularly in more difficult and complex areas, such as asset values and other estimates.

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.

The circumstances in which judgements on accounting estimates and forward-looking information have been made, and the basis for those judgements, should be properly documented at the time and disclosed as appropriate.

As in previous reporting periods, ASIC will review the full-year financial reports of selected listed entities and other public interest entities as at 31 December 2022.

Discontinuation of extensions of time

From early 2020, ASIC extended the deadlines for June and December reporting by unlisted entities (and initially also for listed entities) by one month at June and December each year. At first, these extensions recognised the challenges of moving to remote work arrangements and assessing the impact of COVID-19 conditions on financial reports. More recent extensions of time recognised the impact of travel restrictions and staff turnover on audit firm resources.

ASIC will not be giving a general extension of unlisted entity’s December 2022 reporting deadlines given that:

• the impacts on audit firm resources have reduced;
• extensions of deadlines can interfere with preparations for the following period audits; and
• there is a lower workload for audit firms for the December reporting season.

Audit focus areas

The financial reporting focus areas outlined in this media release are also important focus areas for auditors.

Auditors should also bring the knowledge of a business, risks and strategies obtained in the process of auditing the financial report in reviewing the OFR. 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. Auditors should document their consideration of disclosures on matters such as the underlying drivers of results, material risks, strategies and future prospects. The auditor may need to report a suspected contravention of the Corporations Act 2001 to ASIC where, for example, disclosures are materially inadequate or misleading, including where there is possible ‘greenwashing’.

Auditors should also be prepared for major new auditing standards that apply from 15 December 2022 on firm quality management, engagement quality reviews, and quality control for financial report audits. Auditors should also ensure that they meet requirements of a new standard on risk assessment that applies from periods commencing 15 December 2021. Auditing standards can be found on the .

Attachment to 22-XXXMR ASIC highlights focus areas for 31 December 2022 reports

1. Uncertainties and risks

A number of uncertainties and risk that may affect asset values, liabilities and assessments of solvency and going concern are shown in the bullet point list in the main body of this release.

2. Asset values

Examples of matters that may require the focus of directors, preparers and auditors in relation to asset values in the current environment include:

3. 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.

4. 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.

5. Disclosures

Considerations on disclosure include:

6. Other matters

• Insurers must continue to disclose the impact of the new insurance accounting standard in the notes to financial statements. Given that the new standard applies for periods commencing 1 January 2023, it is reasonable to expect that insurers will be in a position to quantify the impact of the new standard in the notes to their 31 December 2022 financial reports. Insurers should refer to ASIC media release Insurers urged to respond to new accounting standard (17 November 2020) for more information.
• Consideration of whether off-balance sheet exposures should be recognised on-balance sheet, such as interests in non-consolidated entities.
• Aged care providers should review of the treatment of bed licenses following the announcement in May 2021 that the licences will be discontinued on 1 July 2024 and subsequent information from the Department of Health.
• Private health insurers should consider the impacts on the deferred claims liability for changes in the backlog of delayed procedures. A liability may be required for a commitment to return premiums to existing policyholders for savings during the pandemic.
• Disclosure of material penalties for non-compliance with sanctions imposed in Australia or elsewhere in relation to Russia.
• 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.