As COVID-19 begins to lose its place in the public consciousness, the uncertainty felt during the pandemic has been replaced by the economic challenges presented by high inflation, an increase in energy costs and higher interest rates. ASIC has reminded directors and preparers of financial statements for the year ended 30 June 2022 to review and be aware of the impact of these uncertainties.
For the 30 June 2022 reporting period, ASIC will be focusing on areas of concern. One of these is uncertainties and risks which may affect asset values, liabilities, and assessments of solvency and going concern. This includes factors such as COVID-19 conditions and restrictions during the period, the discontinuation of financial and other support from governments/parent companies/lenders etc., and the impact of rising interest rates on future cash flows and on discount rates used in valuing assets and liabilities.
Other considerations also include the increased likelihood of ongoing geopolitical risks, such as the Ukraine/Russia conflict and the flow-on effects for the broader Australian economy and the industry the business is in. This is compounded by the difficulty in obtaining sufficiently skilled staff and expertise due to the slow ramping up of migration activity after COVID-19.
It is perhaps no surprise then that ASIC considers industries that may be particularly affected this year to include the construction industry, owners of commercial properties and large carbon emitters.
Flowing on from these uncertainties, one of the other important areas that ASIC will be focusing on will be asset values, which encompasses the following:
- impairment of non-financial assets – including goodwill, indefinite useful life intangible assets and intangible assets not yet available for use. The appropriateness of key assumptions and disclosure of estimation of uncertainties will need to be reviewed and justified.
- value of property assets – factors that could adversely affect commercial and residential property values should be considered, including levels of migration, changes in shopping habits and future economic or industry impacts on tenants.
- expected credit losses on loans and receivables – key assumptions used in determining expected credit losses should be reasonable and supportable.
- value of other assets – including the value of investments in unlisted entities, whether deferred tax assets will be realised, and the net realisable value of inventories.
According to ASIC, financial report preparers and directors should also pay close attention to disclosures. It notes that when considering what information should be provided in the financial report, those responsible should consider what their backers and potential investors would want to know. Salient changes from the prior year should also be disclosed.
Given the challenging economic conditions, the adequacy of provisions for such things as onerous contracts, leased property make good, financial guarantees and restructuring need to be carefully considered. In addition, subsequent events after the reporting period which may affect assets, liabilities, income, expenses or disclosures also need to be reviewed and disclosed.
While companies may experience differences depending on their industry, where they operate and how their suppliers and customers are affected, what remains consistent is that all companies will face some level of uncertainty about future economic and market conditions. ASIC encourages companies to ensure that impacts on the business are appropriately disclosed, and that underlying estimates and assessments for financial reporting purposes be reasonable and supportable.
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