Results of ASIC’s 30 June 2020 financial reporting surveillance program

It is important for boards, finance teams and auditors to be aware of the results of ASIC’s previous financial reporting surveillance programs because they provide an indication of what ASIC will be looking for in its next surveillance round for 31 December 2020 reporting dates.

ASIC’s Media Release MR20-329 outlines the areas where it directed most of its enquiries on 30 June 2020 financial statements (although these would not necessarily all lead to restatements). These are summarised in the table below.

Matter

Number of enquiries

Enquiries cover…

Impairment and other asset values

19

  • Reasonableness of cash flows and assumptions
  • Determining the carrying amount of cash generating units (CGUs)
  • Treatment of leases by lessees
  • Fair value determined using discounted cash flows dependent on a large number of management inputs
  • Insufficient disclosures regarding:
    • Sensitivity analyses
    • Key assumptions used
    • For fair values – valuation techniques and inputs used

Operating and financial review (OFR)

8

  • No information provided on the entity’s business model
  • No information provided about business strategies and prospects (particularly in the context of COVID-19)
  • Over-reliance on ‘unreasonable prejudice’ exemption to avoid disclosure about strategies and future prospects, even though competitors did not use the exemption
  • Lack of discussion about risks that could impact the entity’s future performance (e.g. sustainability and climate risks)

Revenue recognition

7

  • Variation of franchise fee arrangements as a result of COVID-19
  • Commission-based revenue which relies on estimates about future sales levels (also impacted by COVID-19)

Tax accounting

4

  • Probability of recovery of deferred tax assets relating to tax losses

Provisions

4

  • Adequacy of provisions for possible onerous lease contracts and site rehabilitation
  • Adequacy of provision for possible obligations for casual employee entitlements

Non-IFRS profit measures

4

  • Use of non-IFRS profit measures and prominence of these over statutory information
  • Splitting profit or loss between pre-COVID-19 and post-COVID-19, with inappropriate prominence given to pre-COVID-19 numbers in the directors’ report

Operating segments

3

  • Disclosure of operating segments
  • Failing to allocate significant expense items to a reportable segment

Classification of debt

2

  • Current vs non-current liabilities

Other matters

7

  • Various

Total

58

 

Not surprisingly, given COVID-19, almost a third of enquiries related to impairment and asset values, and there was a big emphasis on the OFR and use of non-IFRS profit measures as many entities attempted to ‘window dress’ the effects of COVID using alternate profit measures. We expect ASIC to focus heavily on these aspects at 31 December 2020 too.

More information

Please refer to MR20-329  for more information.

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