ASIC focus areas for 31 December 2022 financial reports

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.
• 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 above.

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 due to more flexible work arrangements
  • 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 webpage 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.
• 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.

Value of other assets

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

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 analyses 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 the business has been impacted by economic and market conditions, 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 and financial position, as well as the 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 include a discussion on environmental, social and governance (ESG) risks. Disclosing an exhaustive list of generic risks that might potentially affect a large number of entities is not helpful, and these risks should be described in context. For example, it could include 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 Release MR 22-332 that calls for greater focus on material business risk disclosure in annual reports, as well as BDO’s recent article on this subject.

Assistance and support from others

• Appropriately account for each type of support and assistance from government, lenders, landlords and others.
• Prominently disclose in the financial report and OFR:
  • Material amounts
  • Duration of support
  • Impact of its discontinuance.

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 30 June 2022 half-year financial reports.