FY21 financial reports: what to prioritise to keep investors informed

The Australian Securities and Investments Commission has again provided guidance to entities on its key focus areas for financial reports in the COVID-19 environment. In light of the pandemic and resulting changes that have occurred for many entities that are required to prepare financial reports, ASIC expects particular attention to be paid to:

• asset values;
• provisions;
• solvency and going concern assessments;
• events occurring after year-end; and
• disclosures in the financial report and operating and financial review (as required for listed entities).

ASIC has also encouraged directors and auditors of reporting entities to challenge assumptions, and to make appropriate enquiries of management to ensure that the remote-working environment has not hindered the operation of key processes and controls.

The key areas closely align with ASIC’s focus in previous pandemic-impacted reporting periods, and the attention on asset values is consistent with ASIC’s:

• monitoring activity in relation to the valuation practices of entities during FY21 (which included the distribution of targeted valuation surveys); and
• findings in relation to December 2020 reporting that some listed entities impacted by the pandemic did not give sufficient weight to the reporting of asset values and their financial position.

While all asset values (and the other focus areas) should be considered when preparing accounts, ASIC has highlighted some specific asset classes that it expects to be impacted. In particular:

• Non-financial assets such as goodwill and other intangibles must be annually tested for impairment, and entities adversely impacted by the pandemic should consider testing other non-financial assets.
• Commercial and residential property values should be considered, particularly given the potential for changes in remote working practices, a shift towards online shopping and changes in the financial condition of, and existing agreements with, tenants.
• In light of the change in circumstances of many borrowers and debtors, entities should be making a reasonable assessment of any expected credit losses on loans and receivables, taking into account that historical experience in recovering these amounts may no longer be reflective of the current situation. Where there is estimation uncertainty or key assumptions underlying the assessment of the extent of these losses, these should be disclosed.

With the 2020-21 financial year being the first full reporting period for which many entities will need to take into account the impacts of the pandemic in their financial reporting, it is important that management and directors consider these key focus areas to ensure that they provide useful disclosures for their stakeholders.

For further information on financial reporting requirements, please contact our team.