Article:

Questions directors of Natural Resources Companies should ask about 30 June 2020 Financial Statements - COVID-19 impacts and new accounting standards

10 June 2020

COVID-19 has had a devastating effect on the Australian economy and the impacts are being felt across natural resources companies, which will have a flow-on effect to 30 June 2020 financial statements. Audit committees need to weigh the practical challenges of accounting, reporting and disclosing the impacts of COVID-19 along with new Accounting Standards for 30 June 2020.

The following questions are designed to assist audit committees of natural resources entities in the execution of their oversight roles and responsibilities to ensure the performance of high-quality audits and transparent and reliable financial reporting.

Impact of COVID-19 on Natural Resources entities

Have there been impacts on the business that will have follow on impacts on Financial Reporting?

  • Are the net assets of the company higher than its market capitalisation? If yes, why is management satisfied that no impairment write-down of assets is required?
  • Has the entity’s production been impacted?
  • Has the commodity spot price fallen?
  • Has the forecast commodity price fallen over the life of the project?
  • Is COVID-19 impacting the entity’s liquidity?
  • Could COVID-19 impact the entity’s ability to continue as a going concern?
  • Has the entity sufficient funds to continue its exploration program?
  • Has the entity sufficient funds to bring its operation into production?
  • Has the entity sufficient funds to see out a prolonged reduced level of production?
  • Has the entity breached any of its loan covenants?
  • Will the entity have to raise funds in the next 12 months
  • Has the entity sufficient funds to be able to satisfy cash calls on joint venture/farm in projects?
  • Have joint venture partners sufficient funds to be able to satisfy cash calls on joint venture/farm in projects?
  • Is the entity able to satisfy its offtake obligations? or is it net settling these contracts?
  • Is the entity at risk of losing tenure over exploration rights?
  • Are Farm-in/farm-out arrangements impacted?

Preparation of the Financial Report - Going Concern

  • Is the entity a going concern?
  • Are there material uncertainties as to the entities ability to continue as a going concern?
  • If material uncertainties exist as to the entity’s ability to continue as a going concern are they appropriately disclosed?
  • Can the entity pay its debts as and when due?
  • Will the entity have to raise finance in the next 12 months to continue its operations (exploration/development)

Preparation of the Financial Report - Liquidity

  • Have share-based payments being issued to conserve cash?
  • Have loans been renegotiated?
  • Have convertible notes been renegotiated?
  • Will lack of cash give rise to loss of tenure?
  • Will lack of cash give rise to losing joint control?
  • Will lack of cash cause Joint venture partners to not be able to meet cash calls?
  • Will farm-in/farm-out arrangements be met?

Preparation of the Financial Report - Impairment

  • Is E&E impaired?
  • Are producing assets impaired?
  • Are development assets impaired?
  • Is inventory impaired?
  • Are loans to JV’s and associates impaired?
  • Are investments in JV’s and associates impaired?
  • Are deferred tax assets impaired?

Preparation of the Financial Report - Impact of disruption to exploration/ development / production

  • Impacts on streaming arrangements?
  • Impacts on hedge accounting?
  • Impacts on the own use exemption to offtake arrangements?
  • Impacts on impairment?
  • Impacts to inventory costing models?
  • Are there onerous contracts?
  • Results in claims and litigation?

Preparation of the Financial Report - Disclosure

  • If it is concluded that there are not material uncertainties as to the entities ability to continue as a going concern, was that a significant judgement? Or was it a close call?
  • Are the uncertainties as to the entity's ability to continue as a  going concern adequately disclosed?
  • Are the judgements as to the potential impact of COVID-19 appropriately disclosed?
  • Are the judgments as to impairment appropriately disclosed?
  • Are judgments as to the valuation of unlisted investments appropriately disclosed?
  • Are the judgements as to which entities are controlled or jointly controlled appropriately disclosed?
  • Are judgements as to the accounting for renegotiated loans/convertible notes appropriately disclosed?
  • Are judgements as to the valuation of share-based payments appropriately disclosed?
  • Are judgements as to the valuation of loans to Joint Ventures and associates appropriately disclosed?
  • Are judgements as to how to account for government support appropriately disclosed?
  • Are judgements as to the application of hedge accounting appropriately disclosed?
  • Are judgements as to the use of the “own use exemption “appropriately disclosed?
  • Are judgments as to the carrying value of inventory appropriately disclosed?

Audit Specific Questions

  • What unintended consequences of COVID-19 may increase incentives or pressures on management that may result in management override of controls?
  • Are there changes in controls over financial reporting that need to be evaluated to ensure management certifications are adequate?
  • Are we able to ensure continued proper segregation of duties and monitoring controls given changing physical work situations?
  • Have any significant risks or material weaknesses been identified as a result of impacts from COVID-19?
  • What changes in risk assessments have auditors determined need to be made and how will that impact the audit strategy?
  • Are there known impediments – either by management or by the auditors - that may delay the timely filing of financial statements? (e.g., lack of access or ability to obtain audit evidence or other information)
  • What additional resources or expertise may be needed by management to properly account for judgments or estimates or changes related to circumstances brought on by COVID-19?
  • What additional efforts may be required by the auditor to ensure the performance of a high-quality audit?
  • Does my audit firm have the depth of or access to adequate resources to address complex accounting and auditing questions, including industry-specific matters, as they arise?
  • Do my management teams, as well as my auditors, have the ability to properly supervise and direct the work of their staff and teams?
  • Are there additional challenges in performing auditing procedures due to multi-geographical considerations?
  • Has COVID-19 impacted circumstances that may call into question the company’s ability to continue as a going concern? What are management’s plans to address? How do these impact the auditor’s going concern evaluation?
  • Are there any auditor independence issues that have arisen with respect to COVID-19?

Corporate Governance Specific Questions

  • As an audit committee, how are we maintaining our education with respect to COVID-19 considerations, relief efforts and related risks and opportunities?
  • Are we appropriately engaging with internal and external stakeholders and providing transparent and consistent communications about significant impacts on our business?
  • Are we allocating enough time and making ourselves available to discuss critical issues as they arise with management, the auditors and the board?
  • Are we keeping the full board appropriately updated as to significant challenges with respect to financial accounting and reporting?
  • Are we considering responses to anticipated questions from shareholders during upcoming annual meetings?
  • Is management actively and effectively engaging with lenders, customers and other stakeholders in a timely and productive manner and are the results of those engagements reflected in the financial accounting and reporting?
  • Are we, as a board committee, appropriately considering additional risks that have arisen related to other stated committee responsibilities as described in our Audit Committee Charter e.g. COVID-19, cybersecurity and data privacy risks?

Questions on the new accounting standards

Overall

  • How could these new accounting standards impact shareholder value? How can we mitigate the potential negative impact of these accounting standards on shareholder value?
  • Would the organisation be able to continue to declare dividends? Would these dividend declarations be aligned to our current dividend policy?
  • How do these accounting standards impact the profit of the organisation in the year of implementation and thereafter?
  • How do these accounting standards impact the balance sheet position (assets, liabilities & equity) of the organisation in the year of implementation and thereafter?
  • How have we updated and incorporated these new accounting standards into our budgets and forecasts?
  • Would the organisation be able to continue to meet its current bank covenants?
  • Should the organisation renegotiate its bank covenants to minimise the potential impact of the new accounting standards on their current bank covenants?
  • What is the impact of the new accounting standards on current remuneration structures and incentives to key management personnel and other employees?
  • Does the organisation need to adjust performance hurdles and KPIs of key management personnel and other employees, to reflect the impact of the new accounting standards?
  • How are we going to communicate the immediate and future impact of the new accounting standards to our shareholders and other users of our financial statements?
  • Has the organisation performed and documented an impact and/or risk assessment of the implementation of the new accounting standards?
  • Does the organisation have documented position papers to support and justify the appropriate accounting treatment of existing transactions under the new accounting standards?
  • Has the organisation updated its accounting policy manual to reflect the requirements of the new accounting standards?
  • Has the organisation obtained independent accounting advice in relation to the implementation of the new accounting standards?
  • Have the auditors of the organisation been involved in the discussions and impact assessment of the new accounting standards on the organisation?
  • What research has been done on the potential impact of the new accounting standards on the organisation’s industry?
  • Has the organisation considered their technology needs and required changes to their existing systems and processes to deal with the new accounting standards?
  • How can the directors access further information on the requirements and potential implications of the new accounting standards?

AASB 16 Leases

  • Has the organisation decided on an appropriate transitional approach?
  • What process did the organisation follow to decide on the appropriate transitional approach in relation to AASB 16?
  • What is the impact of each of the three possible transitional approaches on the organisation’s:
    • Retained earnings at the date of initial application
    • Lease liabilities and right-of-use assets at the date of initial application
    • Profit before tax (i.e. depreciation and interest expenses).
  • Does the organisation have a register of all leases?
  • Does the organisation have a copy of all lease agreements?
  • What process did the organisation follow to identify all leases, including embedded leases?
  • How did the organisation decide whether it is reasonably certain to exercise lease extension options, termination options and purchase options included in lease agreements?
  • Does the organisation have a technology solution to manage leases on an ongoing basis, i.e. after the date of initial application?

Interpretation 23 Uncertainty over Income Tax Treatments

  • Has the organisation performed and documented an impact and/or risk assessment of the transfer pricing arrangements and other uncertain tax positions, particularly if the entity had any of the following occur in the previous 5 years:
    • Material international related party dealings
    • Material research and development concession claims
    • Material incurrence and/or utilisation of tax losses
    • Material business restructuring or transactions, including but not limited to:
      • Internal (transfer of functions, assets, or risks offshore)
      • External (acquisition or divestiture of a business component)
    • Any ATO investigation or audit activity
    • Material (greater than 10%) difference between accounting profit and taxable income?
       

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