The Good and the Bad of ASIC’s Revised RG 228

07 November 2016

Sherif Andrawes , Global Head of Natural Resources
Partner, Corporate Finance

Preparing the financial information for inclusion in a prospectus in 2016 has been challenging. After many months of operating under Consultation Paper 257 – Improving disclosure of historical financial information in prospectuses: Update to RG 228 (CP257) as the de-facto rules of the game, ASIC finally released the real revised rules on 3 November 2016 in the form of a revised regulatory guide RG 228: Prospectuses: Effective disclosure for retail investors.

As a general comment we welcome most of the changes that the new regulatory guide has brought.  However, there are some elements that we find troublesome, which were not adequately addressed in the consultation process. It is these elements which may prove to be onerous for companies to comply with.  

Let’s look at the good news first:

The Good

Significant v Material

In CP 257 ASIC had contemplated that all material businesses that will form part of the group need to be audited.  What is material can be subjective and the view taken by practitioners is that it was safest to err on the side of caution and for virtually every business in the group to be subject to audit.

The revised RG 228 clarifies and reduces this requirement. Previously audited historical financial information was required where any acquisition was ‘material’ which is a relatively low threshold.  Now ASIC has set a new and higher threshold labelled ‘Significant’.  What is significant is consistent with ASX Guidance Note 12 Significant changes to activities to be anything that represents 25% or more of certain revenue, profitability or asset benchmarks.

The effect of this is best seen in the application to roll up listings where many immaterial businesses without audited financial statements are to be acquired.  Here ASIC states that it may be reasonable to expect that a minimum of 75% of historical information is audited for no less than one year.

Audit v Review

ASIC has listened to industry feedback and has reduced the current practice under CP257 for all historical financial information, for companies that are not currently listed, to be audited.  An operating business still needs to include either three years or two and a half years financial information, but now ASIC will allow half year financial information to be reviewed rather than audited.  This ensures consistency with the requirement for listed companies and is a very welcome change.

Acceptable audit report modifications

It is important that the financial information presented in a prospectus is reliable.  Under CP257 ASIC was concerned that any modifications to an audit report on the financial information to be included in a prospectus would be of such significance that the information could not be used.  The only exception to this was where the modification related to going concern which could be addressed through a successful capital raising which was the subject of the prospectus in any case.

This created an insurmountable issue where financial information had not previously been audited for the required three years and ‘back audits’ needed to be performed.  The requirement for the auditor to inspect inventory at the balance date is something that cannot be met retrospectively and if material could result in an audit qualification.  ASIC now recognises this, and that there may be other similar circumstances that do not affect the reliability of the financial information presented in the prospectus.

A Business or not a Business?

The requirement to disclose three years, or two and half years, financial information arises when the prospectus includes the acquisition of a business.  What represents a business as opposed to simply the acquisition of a collection of assets is a complex area and ASIC relies on the guidance in Accounting Standard AASB 3 Business Combinations and related interpretations to determine whether you have acquired a business.  We agree with this approach. 

ASIC clarifies that if you are acquiring assets rather than a business that this acquisition needs only be included in the pro-forma balance sheet. One interesting new requirement that is included in RG228.98 is the requirement to explain the basis for the acquisition price, which as ASIC explains can be “such as by providing property valuations, including market-based metrics for passive real estate investment trusts, or geological expert reports for mining tenements”.

Currently it is common to include an Independent Geologist’s Report (IGR) in a prospectus for an exploration company, but the IGR’s scope is usually limited to geological matters. It will not include an opinion on value.  The term that ASIC uses of ‘geological expert reports for mining tenements’ is unfortunately not clear and may be subject to differing interpretation.  It could be interpreted as a continuation of the current practice of being an IGR with directors making a statement that the purchase price was based on the geological characteristics set out in the IGR.  This had not been contemplated in the consultation on CP 257.

Our reading is that this is not the intention of RG 228.98.  The only form of geological expert report that can provide information on value in a public document is a valuation report prepared in accordance with the VALMIN Code 2015.  As such our interpretation is that when you are acquiring an asset that takes the form of mining tenements that a Valuation Report prepared by an independent expert in accordance with the VALMIN Code 2015 will need to be included.  

The Bad


We have a significant concern with the new requirement to include prior year comparatives for half year figures.  In Report 502 (responses to submissions on CP 257) ASIC explains “.. we would generally expect to see disclosures of comparative periods where half-years are presented: see RG228.89.  This is to ensure that where half-year financial information is presented, it is accompanied by the reviewed half-year information from the prior period for comparability purposes.”

For a company that has been audited in the past having its most recent half year financial statements reviewed is reasonable and provides a good level of assurance and information to investors.  Our view is that ASIC’s introduction of a requirement to have a new set of comparative half yearly financial information (which will be up to 21 months old) to be created and for a retrospective review to be performed is onerous and does not add a significant level of information for investors.

This had not been contemplated in CP 257 and had industry been consulted the response would have been negative and the practical consequences would have been identified.

We understand that ASIC considers the inclusion of half year comparatives to be a requirement of Accounting Standards and as such they have no choice but to require their inclusion.  This however is inconsistent both with existing market practice (and hence investor expectations) but also with RG 228.95 which is consistent with market practice and states “We expect, at a minimum, that all measurement and recognition standards are followed in any special purpose financial statements”.  Not all disclosure requirements of Accounting Standards must be met under RG 228 and what must be disclosed is set out in RG 228.87.

If ASIC’s argument is that the requirement for reviewed half year comparatives to be disclosed derives from accounting standards we have a concern that as this was not raised in the consultation process that full consideration of the many other disclose requirements in accounting standards has not been undertaken.  We also have doubts  whether the inclusion of reviewed comparative half year financial information will actually be of such benefit to investors to justify the extra time and expense imposed on companies.

Refreshing Time Periods

The best way to present our concerns about ASIC’s new requirements here is by way of an example.

If a company has a June year end and is considering a listing in say the June to September period, the currency of its financial information is of concern.  It is not unusual for the listing process to be delayed.  Our practical advice to clients has been to avoid issues if there is a delay, by presenting more current interim financial information (for say 31 March) so that the ASX requirement for accounts to be no more than eight months old is met. This also has the added benefit of providing investors with more up to date information than would otherwise have been available to them.

In Report 502 ASIC notes BDO’s consultation response on this, but adds the requirement that if 31 March financial information is included it will not change the requirement to include 30 June numbers if the prospectus is dated more than three months after the financial year end and further introduces a requirement to include reviewed comparatives for the previous 31 March balance date.

This statement effectively ends the practice of including more current financial information at an interim date, with the effect of reducing the currency of the financial information presented to investors and adds further  complexity to the logistics and timing of planning a prospectus.