ASIC focus areas for 30 June 2023 financial reports

ASIC focus areas for 30 June 2023 financial reports

The Australian Securities and Investments Commission (ASIC) conducts surveillance on the full year financial reports of Australian entities (mainly listed entities) as part of its financial reporting surveillance program. As a result of these risk-based reviews, ASIC conducts inquiries on matters of concern, and depending on the outcome, entities may be ‘named and shamed’ in media releases if they restate financial reports as a result.

In its recent Media Release, ASIC outlined its focus areas for its surveillance of 30 June 2023 financial reports. Directors, preparers, and auditors should take note of these to ensure financial reports provide useful and meaningful information for investors and other users. Focus areas of other regulators are consistent with ASIC.

Six focus areas

ASIC’s focus areas media release highlights six areas that it will focus on when it conducts these reviews:

These are discussed further below. In addition, ASIC highlights that:

  • Entities need to consider whether off-balance sheet exposures should be recognised on-balance sheet (for example, interests in non-consolidated entities)
  • Groups that have operations in countries that have enacted the Pillar II tax reforms and also have operations in low-tax jurisdictions need to include information in their financial report about the impact of the Pillar II reforms
  • The financial statements of registered schemes, where individual scheme members have pooled interest in the assets and returns of the registered scheme with some or all other members, must recognise the following:
    • Assets and liabilities in the balance sheets, and
    • Income and expenses in the income statements.
  • Previously ‘grandfathered’ large proprietary companies with year-ends after 10 August 2022 are now required to lodge financial statements with ASIC.

Uncertainties and risks

Entities continue to face changes in circumstances and uncertainties about future economic and market conditions that may impact their business strategies and future financial performance. These uncertainties should be factored into the assumptions used for financial reporting purposes and should be reasonable and supportable. Examples of changes in circumstances, uncertainties, and risks to be considered when preparing the 30 June 2023 financial reports include those listed in the diagram below. This list is not exhaustive.

ASIC uncertainties and risks

Asset values

ASIC’s focus on asset values relates to the following areas:

Financial statement area

Focus areas

Impairment of non-financial assets
  • Must conduct an annual impairment test for goodwill, indefinite-life intangible assets, and intangible assets not yet available for use.
  • Ensure impairment tests are conducted for other non-financial assets if there are new or continuing indicators of impairment.
  • Ensure key assumptions used to determine recoverable amounts are appropriate.
  • Ensure valuation method used to test impairment is appropriate, reasonable assumptions are used, and calculation should be cross checked against other methods.
  • Market capitalisation is not considered to be an appropriate method to determine fair value. However, it may be an appropriate indicator of impairment or appropriate cross check.
  • Entity may compare its ratio of market capitalisation to revenue to that of other entities when performing a valuation cross check.
  • Estimation uncertainties must be disclosed, together with sensitivity analyses on probability-weighted scenarios when key assumptions are changed. Key assumptions may include those related to factors identified in the media release.

Values of property assets
  • Factors that could adversely affect values of commercial and residential properties should be considered, including:
    • Changes in the office space needs of tenants
    • Online shopping trends
    • Future economic or industry impacts on tenants
    • Financial condition of tenants
    • Restructured lease agreements.
  • Complex lease accounting requirements, treatment of rent concessions by lessors and lessees, and impairment of lessees’ right-of-use assets.

Note: Refer to our Lease Accounting web page for more information about the complexities of lease accounting, including software solutions, training materials, and publications.

Expected credit losses (ECL) on loans and receivables
  • Appropriateness of key assumptions used to determine ECL, which should be reasonable and supportable.
  • The need for more up-to-date information about borrowers’ and debtors’ circumstances.
  • Short-term liquidity issues for some borrowers and debtors, as well as their financial condition and earnings capacity.
  • Ageing receivables must be accurate.
  • Assumptions used must be forward looking and the entity cannot simply assume that recent debts are collectible.
  • Past models and experience may not be representative of current expectations and probability-weighted scenarios may be needed.
  • Disclosure of estimation uncertainty and key assumptions.
  • Financial institutions should have particular regard to impact of current economic and market conditions and uncertainties on ECLs. Need to consider:
    • Whether there has been a significant increase in credit risk for particular groups of lenders
    • Adequacy of data, modelling, controls, and governance in determining ECLs
    • Disclosing uncertainties and assumptions.

Financial asset classification
  • Financial assets must be appropriately classified and subsequently measured at:
    • Amortised cost
    • Fair value through other comprehensive income, or
    • Fair value through profit or loss.
  • A financial asset can only be measured at amortised cost if (IFRS 9.4.1.2):
    • The assets are held in a business model whose objective is to hold financial assets in order to collect contractual cash flows, and
    • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Value of other assets
  • Value of inventories, including whether all estimated costs of completion and costs necessary to make the sale were considered when determining net realisable value.
  • Whether it is probable that deferred tax assets will be realised.
  • The value of investments in unlisted entities.

Provisions

Entities should consider the need for, and adequacy of, provisions for onerous contracts, leased property make good, mine site restoration, financial guarantees given, and restructuring.

Subsequent events

Entities should review events occurring after the end of the reporting period to determine whether these are ‘adjusting’ or ‘non-adjusting’ post-balance date events.

Disclosures in the financial report and operating and financial review (OFR)

Lastly, entities should focus on ensuring adequate disclosures as outlined in the table below.

Consider

Focus areas

General considerations
  • Put yourselves in the shoes of investors and consider what information investors would want to know.
  • Disclosures should be specific to the entity (i.e. not boilerplate).
  • Consider changes from the previous period and disclose accordingly.

Disclosures in financial report
  • Disclose uncertainties and sensitivity analysis for key assumptions.
  • Explain where uncertainties have changed since the previous full-year or half-year financial report.
  • Consider appropriate current versus non-current classification of assets and liabilities in the balance sheet having regard to maturity dates, payment terms, and compliance with debt covenants.

Disclosures in OFR
  • The OFR should complement the financial report and ‘tell the story’ of how economic and market conditions have impacted the business, the COVID-19 pandemic and changing circumstances.
  • The overall picture should be clear, understandable, and supported by information that will enable investors to understand the significant factors affecting the entity, its businesses, and the value of its assets.
  • Explain the underlying drivers of results, financial position, risks, management strategies, and future prospects.
  • All significant factors should be included and given appropriate prominence.
  • The most significant business risks at the whole-of-entity level that could affect the achievement of the disclosed financial performance or outcomes should be disclosed. Refer to the note below for more information.
  • Climate change risk could have a material impact on future prospects. Directors should consider disclosing information under recommendations of the Task Force on Climate-Related Financial Disclosures.
  • Cyber security risks could have a material impact and require disclosure. For example, loss of personal data or denial of service attacks could impact revenue.

Note: The media release notes that the OFR should discuss environmental, social and governance (ESG) risks. Disclosing an exhaustive list of generic risks that might affect many entities is not helpful, and these risks should be described in context. For example, it could include a discussion about:

  • Why the risk is important or significant
  • Potential impact of the risk
  • Where relevant, factors that are within management’s control.

Also, refer to ASIC’s separate Media Releases MR 23-018 and MR-23-058 that call for greater focus on material business risk disclosure in annual reports, and BDO’s article.

Non-IFRS financial information
  • Should not be presented in a misleading manner (refer to Regulatory Guide 230 for more information).
  • If asset impairment losses were excluded from a non-IFRS profit measure in a previous year, then reversals of impairment should also be excluded from the non-IFRS profit measure in subsequent years.

Disclosure in half-year financial reports
  • May need to include disclosure about significant developments and changes in circumstances since the 31 December 2022 half-year financial reports.

Impact of new accounting standards for insurers

Insurers must continue to disclose the impact of the new insurance accounting standard, IFRS 17 Insurance Contracts, in the notes to the 30 June 2023 financial report. Given that the new standard applies for periods beginning on or after 1 January 2023 (i.e. to 30 June 2024 year-ends), it is reasonable to expect insurers should be able to quantify the new standard’s impact in their 30 June 2023 financial reports. Non-insurers affected by IFRS 17 for certain transactions should include similar note disclosures.

Insurers that have a 30 June 2023 half-year need to:

  • Follow all recognition and measurement requirements in IFRS 17 in their half-year financial report, and
  • Disclose the changes in accounting policies from adopting IFRS 17 in their 30 June 2023 half-year financial report.

Private health insurers should consider the impacts on their deferred claims liability for changes in the backlog of deferred procedures. A liability may be required for a commitment to return premiums to existing policyholders for savings during the pandemic.

Private health insurers with a 30 June 2023 half-year need to:

  • Ensure that the deferred claims liability has been calculated in accordance with IFRS 17
  • Disclose the impact of the change in accounting policy, particularly if there has been a significant impact on the deferred claims liability
  • Disclose any significant impact on profit from the change in the accounting policy in its OFR.

Need assistance?

Please contact our IFRS Advisory team if you need support with any financial reporting matters for your 30 June 2023 financial reports.