As we progress through the 30 June 2023 financial reporting season, the Australian Securities and Investments Commission (ASIC) has placed a strong focus on the current economic climate in which entities are operating and how this may affect their business, especially considering factors such as increasing interest rates and rising inflation.
ASIC has urged entities to assess the impact of these uncertain market and economic conditions, consider the impact on their operations, and adequately reflect this in their financial report.
As per the June 2023 media release, ASIC has highlighted key areas of attention as outlined below.
Draft CPS 230 | ASIC’s focus | What you can do |
| Asset values | Judgements and assumptions utilised to calculate asset values must be reasonable and supportable.
ASIC’s focus will be to ensure assets such as goodwill and other intangible assets, property, inventories, deferred tax assets, and loans and receivables, are not overstated. | - Ensure that impairment testing is performed where necessary applying the requirements of the relevant accounting standard
- Ensure that valuation inputs are supported by observable data as far as possible
- Ensure current and future expected economic conditions are appropriately factored into asset valuations
- Stress test impairment assessments and valuations to understand how sensitive they are to possible changes in key assumptions
|
| Provisions | The impact of changing circumstances, uncertainties, and risks, and how these may impact an entity’s provisions.
ASIC’s focus will be on whether provisions are adequate based on an entity’s circumstances. Key provisions for entities to consider include provisions for onerous contracts, leased property make-good and mine site restoration obligations, financial guarantees given, and restructurings committed to before reporting date. | - Review all new and existing contracts for any potential provisions or contingencies
- Ensure that estimated provisions take into consideration all likely outflows
- Update provision estimates from prior periods to reflect current economic conditions
|
| Solvency and going concern | Changing circumstances and increased uncertainty make forecasting more challenging for entities. ASIC will be paying attention to the reasonableness of solvency and going concern assessments undertaken by directors. | - Consider the impact of both internal and external factors when preparing a going concern assessment
- Consider key assumptions used in these assessments and whether they are appropriate in the current economic environment and can be supported.
|
| Subsequent events | ASIC reminds entities to identify those events that occur after reporting date but before signing of the financial report and, where applicable, ensure these are appropriately reflected in the financial report. | - Review subsequent events to identify those that affect the numbers at reporting date and those that require only disclosure
- Refer to AASB 110 Events after the Reporting Date for guidance
|
| Disclosures in the financial report and Operating Financial Review | ASIC will be paying attention to disclosures in the financial report and the OFR considering current economic and market conditions. Directors should be forthcoming about uncertainties, key assumptions, sensitivity analyses, and risks where these are material to the business.
ASIC has reiterated that the OFR should complement the financial report and appropriately discuss an entity’s results, strategies, future prospects and business risks, taking into account the economic climate and changing circumstances. | - Ensure that disclosures made in the financial report and OFR are consistent with other publicly available information
- Ensure disclosures are specific to the entity and contain information that investors would want to know
- Consider disclosures regarding climate change risks and cyber security risks given recent developments in both areas
- Refer to RG 247 Effective Disclosure in an
Operating and Financial Review for guidance.
|
| New insurance standards (AASB 17) | ASIC reminds entities to apply the new accounting standard AASB 17 Insurance Contracts where applicable. The new standard is effective from 1 January 2023 and may significantly affect the financial results of an entity. | - Seek assistance if you need to clarify or further understand whether AASB 17 applies to your business, noting that the new standard could apply to non-insurers in certain circumstances
|
For any clarification or further insight, please do not hesitate to contact your local PKF Audit representative.
