The assumptions underlying estimates and assessments for financial reporting purposes should be reasonable, supportable, realistic, and not overly optimistic or pessimistic.
ASIC (Australian Securities and Investments Commission) has issued an update warning company directors and their auditors to tighten up their disclosures, assumptions and estimates in view of financial uncertainties surrounding Covid-19.
In the update, ASIC has highlighted key focus areas for financial reporting by companies for the reporting periods ending 30 June 2021 under Covid-19 conditions.
Specifically, directors, preparers of financial reports and auditors are expected to pay attention to:
- asset values
- solvency and going concern assessments
- events occurring after year end and before completing the financial report
- disclosures in the financial report and Operating and Financial Review (OFR).
“As Covid-19 conditions continue to evolve, the quality of financial reports and related disclosures remain more important than ever for keeping investors informed,” said ASIC Commissioner Cathie Armour.
The circumstances of companies and the environment in which they operate can change significantly from one reporting period to the next, which can significantly affect assessments of asset values and financial position, Armour explains.
As such, disclosing key assumptions, risks, the drivers of results, management strategies and future prospects will be important for investors and other users of financial reports.
In addition, amid uncertainties about future economic and market conditions, and the future impact on businesses, the assumptions underlying estimates and assessments for financial reporting purposes should be reasonable, supportable, realistic, and not overly optimistic or pessimistic.
ASIC says the OFR should complement the financial report and tell the story of how the entity’s businesses are impacted by the Covid-19 pandemic, where the underlying drivers of the results and financial position should be explained, along with the risks, management strategies and future prospects.
Appropriate experience and expertise should be applied in the reporting and audit processes, particularly in more difficult and complex areas, such as asset values and other estimates.
In addition, directors and auditors should be given sufficient time to consider reporting issues; challenge assumptions, estimates and assessments; and make appropriate enquiries of management to ensure that key processes and internal controls have operated effectively during periods of remote work.
Auditors should be given access to perform procedures on-site rather than remotely, including stock counts and system walk-throughs.
ASIC says it has extended the deadline for listed and unlisted entities to lodge financial reports by one month for balance dates from 23 June 2021 to 7 July 2021 (inclusive), to assist with any pressures on resources for the audits of smaller entities and provide adequate time for the completion of the audit process.
The regulator said it will conduct its regular review of the full-year financial reports of selected larger listed entities and other public interest entities as at 30 June 2021, focusing on entities and industries more affected by the current conditions.