As you prepare for the 30 June 2023 reporting season, it is important to keep in mind the position of the regulators and their areas of focus, as this helps to inform you of the higher risk areas that will require your attention in preparing your financial reports this year-end. Not only has ASIC released their focus areas media release for 30 June 2023 year-ends, but over the last 12 months, both ASIC and the ACNC have been active in their enforcement activities which require careful consideration.
Enforcement activities
FAILURE TO LODGE FINANCIAL STATEMENTS
In the last 12 months, ASIC appears to have stepped up their action against entities that failed to lodge financial statements. 16 companies have been prosecuted for failure to lodge financial statements and some also had other related failures such as not holding AGMs. This action was against both public and private companies, and the penalties ranged from good behavior bonds through to $50,000 fines. The penalties appeared to be directed at those companies who had failed to lodge for a number of years. Accordingly, if you have yet to lodge your 2022 or earlier financial statements, it is essential that you ensure these are lodged as soon as possible to mitigate the risk of ASIC taking action against you.
In addition, the ACNC has de-registered over 700 charities for failure to lodge their annual information statements, and financial statements (if applicable). Accordingly, having organisations meet their reporting obligations is an increased focus by all regulators.
ASIC SURVEILLANCE ACTIVITIES
ASIC continues to be active in their surveillance activities of financial reports of both public companies and other public interest entities. As a result of ASIC surveillance, a number of companies have either made changes to their accounting for items (typically in the next interim set issued, rather than reissuing financial statements) or have had to enhance their disclosures. The ASIC inspections typically relate to the ASIC focus areas (discussed below).
The changes that companies have made in response to the ASIC enquiries include:
ASIC raised concerns over the use of market capitalisation as a fair value estimate of a company’s underlying assets. The company subsequently revised its impairment testing methodology using a discounted cash flow model which resulted in its goodwill being impaired. (ASIC 23-066MR)
- Impairment of intellectual property
ASIC raised concerns that a company had not performed an impairment test of their intellectual property, although their market capitalisation was less than net assets, which is an indicator of impairment. The company subsequently undertook a detailed impairment test and impaired its intellectual property. (ASIC 23-080MR)
ASIC questioned the recoverability of specific trade receivables and whether the company had appropriately assessed the increase in credit risk. As a result, the company subsequently recognised an impairment provision against the related receivable. (ASIC 23-053MR)
ASIC raised concerns over the recognition of a trade receivable and related contract liability when no past event had occurred to give rise to the trade receivable. Accordingly, the Company made a prior period restatement in its subsequent financial report and derecognised the receivable and contract liability. (ASIC 23-097MR)
ASIC questioned whether a lender was inappropriately recognising loan establishment fees as revenue upfront rather than include them as part of the loan’s effective interest rate. As a result, the company made a prior period restatement in its subsequent financial report and deferred the fees into the effective interest rate on its lending activities. (ASIC 23-054MR)
DISCLOSURE OF BUSINESS RISKS IN THE OPERATING FINANCIAL REVIEW (OFR)
In recent years, a significant area of ASIC focus in their surveillance activities has been the disclosures made by listed companies in the Directors’ report and more specifically the business risks disclosed within the operating and financial review (OFR). ASIC has raised significant concerns that companies have focused on disclosing future opportunities in the OFR without providing a balanced view of the risks that the company faces as well. Companies should be particularly cognisant of risks that they have disclosed in other forums such as analyst packs and investor presentations, or even in the financial report itself and ensure that they are included in the Directors’ report.
In the current environment, common risks that may be impacting companies include cybersecurity threats and impacts of climate change. Any disclosures that the companies make should be entity specific and not generic in nature.
GREENWASHING
Although not an ASIC focus area for financial statements, ASIC has also been increasing their actions against organisations in relation to greenwashing. Greenwashing is where organisations are making environmental claims that are not accurate or supportable. Typical examples include ‘Our Company is 100% carbon neutral’ when the company is not, or ‘We aim to be a Net Zero (carbon) Company by 2050’ where the company has no roadmap in place to get there. This is likely to be particularly relevant in the annual reporting in Directors’ Report disclosures, and for organisations that offer sustainable or environmentally friendly investment options, to ensure that their claims are supportable.
ASIC focus areas
ASIC has just released their focus areas for 30 June 2023 financial reporting (ASIC 23-149MR). These focus areas reflect the areas that organisations should focus on this reporting season. The focus areas are broadly consistent with prior years, with the main changes being in relation to the new insurance standard AASB 17 Insurance Contracts and the impacts of the OECD Pillar II tax reforms, and the removal of the focus on assistance from other organisations as we have moved beyond COVID times.
The financial statement areas of focus include:
Current economic uncertainties and risk can have a significant impact on valuations, assumptions, and judgements in the financial report. It is essential that they are appropriately considered this reporting season. See our article Inflation & the slowing economy | What this means for you for further information on the impacts on financial reporting. These uncertainties and risks will have a pervasive effect across the financial report.
Asset valuations are always an area of concern for ASIC, in particular ensuring that assets are not over-valued. Companies are directed to consider their approaches to impairment of non-financial assets, valuation of property assets, calculation of expected credit losses on loans and receivables and the valuation of other assets such as the net realisable value of inventory or the recoverability of deferred tax assets. Finally, companies should ensure that financial instruments are appropriately classified as amortised cost or fair value through other comprehensive income or profit and loss.
Consideration should be given to the sufficiency of provisions and ensuring that they are both recognised when required and the amounts provided for are appropriate.
Events occurring after balance date but before the financial statements are finalised should be considered and disclosed if they have a material impact on the amounts recognised in the financial statements.
When considering what disclosures to include in the financial statements, organisations should consider what information investors and other users of the financial statements would want to know. The disclosures should be specific to the entity and not generic and where matters have changed from the prior period, these matters should be disclosed. Organisations are encouraged to consider the adequacy of disclosures in financial reports, the OFR and Directors’ report more broadly as well as in half-year reporting. Further, organisations should ensure that any non-IFRS information disclosed in Directors’ Reports is not misleading or given undue prominence. Non-IFRS information should not be disclosed in financial statements, except when permitted in the operating segment note.
ASIC has also noted that the impacts of first time application of AASB 17 Insurance Contracts will be significant for some companies, along with the deferred tax impacts of the OECD’s Pillar II tax reforms. Organisations should also consider whether off balance sheet exposures should actually be recognised on balance sheet.
In addition to the specific accounting focus areas, ASIC has noted that Directors are ultimately responsible for the quality of financial reporting, and it is important for Directors to ensure that sufficient time and resources are committed to the financial reporting process to develop quality financial reports, including ensuring that auditors are provided with sufficient time to complete their audit procedures.
Further Information
30 June is rapidly approaching, and it is essential that you think about how you need to approach your financial reporting this year. To ensure that you produce high quality reports and minimise the risk of regulatory enforcement activity, it is important to be cognisant of ASICs views and focus areas and adjust your approach to financial reporting accordingly.
If you require assistance in considering how the ASIC focus areas or enforcement activities might impact your organisation, please contact your local Moore advisor.