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The Australian Securities and Investments Commission (ASIC) provides guidance twice a year to financial statement preparers and auditors, outlining key focus areas for financial statement and audit surveillance for periods ending 30 June and 31 December. These focus areas address the most significant and recurring non-compliance issues with Australian Accounting Standards, audit deficiencies, and emerging challenges.
This article outlines the key focus areas for financial statement preparers and auditors, as detailed in ASIC’s latest guidelines for the reporting period ending 31 December 2024.
ASIC's Focus Areas for 31 December 2024 Reporting:
Assets Value
Impairment of Non-Financial Assets
Entities are reminded of the responsibility to conduct an annual impairment test for goodwill, indefinite useful life intangible assets, and intangible assets not yet available for use. In the current economic climate, entities facing adverse impacts are urged to assess new or continuing indicators of impairment that require impairment testing for other non-financial assets. ASIC underscores the significance of evaluating key assumptions supporting the recoverable amount of non-financial assets. The valuation method used for impairment testing should be not only appropriate but also founded on reasonable and supportable assumptions, cross-checked for reliability.
Market capitalisation is cautioned as an inappropriate fair value estimate for a business. It may serve as an impairment indicator or in a cross-check. Share prices may reflect small portfolio transactions, and business sales in illiquid markets may occur. Applying market capitalisation-to-revenue ratios for cross-checks is advised, but data limitations and comparable business considerations are crucial. Disclosure of estimation uncertainties, changing key assumptions, and sensitivity analysis or information on probability-weighted scenarios is emphasised.
Values of Property Assets
Property asset valuation is evolving beyond traditional metrics. Preparers are advised to consider factors such as changes in tenant office space requirements, online shopping trends, and the financial conditions of tenants. Lease accounting requirements and the impairment of lessee right-of-use assets are highlighted as areas of special attention.
Expected Credit Losses (ECLs) on Loans and Receivables
Entities are urged to focus on Expected Credit Losses (ECLs). This involves assessing the reasonableness and supportability of key assumptions, ensuring access to reliable and up-to-date information about borrowers and debtors, and considering short-term liquidity issues, financial conditions, and earning capacity. Forward-looking assumptions, accurate aging of receivables, and disclosure of estimation uncertainties and key assumptions are essential.
Financial Asset Classification
Ensuring proper measurement at amortised cost, fair value through other comprehensive income, or fair value through profit and loss is paramount. The criteria for using amortised cost, such as assets are held in a business model whose objective is to hold the assets to collect contractual cash flows and contractual terms give rise on specific dates to cash flows that are solely payments of principal and interest on the principal outstanding, should be rigorously adhered to.
Value of Other Assets
In addition to the core focus areas, entities are reminded to assess the net realisable value of inventories, the realisation of deferred tax assets, and the valuation of investments in unlisted entities.
Provisions
Consideration of provisions for onerous contracts, leased property makes good, mine site restoration, financial guarantees given, and restructuring is highlighted as a critical aspect.
Subsequent Events
Reviewing events occurring after year-end becomes crucial, focusing on their potential impact on assets, liabilities, income, or expenses.
Disclosures
Directors and preparers are advised to adopt an investor-centric approach when disclosing information in financial reports and Operating and Financial Review (OFR). Disclosures should be specific, considering changes from the previous period, and the appropriateness of asset and liability classifications should be emphasised.
The OFR should provide a comprehensive overview of the impact of economic and market conditions on the entity’s businesses, results, and prospects. Risks, management strategies, and future prospects should be transparently explained, with specific attention to climate change and cybersecurity risks. For non-IFRS financial information, any presentation of non-IFRS profit measures in the OFR or market announcements should adhere to a standard of transparency, avoiding potentially misleading information.
Other Matters
‘Grandfathered’ Large Proprietary Companies
ASIC has identified instances where some formerly grandfathered large proprietary companies have not been lodging financial reports, despite being required to do so since financial years ending 31 December 2022 or 30 June 2023. To address this, ASIC will be reaching out to a number of these entities and, in certain cases, may take action against companies that fail to meet their reporting obligations.
Registrable Superannuation Entities (RSEs)
Superannuation trustees must lodge audited financial reports for most RSEs with ASIC. Reports must be lodged within three months of the fund's year-end. ASIC emphasises the importance of timely lodgment and adherence to relevant accounting standards. RSEs will also be included in ASIC’s financial reporting and audit surveillance program.
Consolidated Entity Disclosure Statement
This will be the first financial year for December year-end reporters of Australian public companies (listed and unlisted) to prepare and lodge a consolidated entity disclosure statement. ASIC will be monitoring for compliance with this requirement.
New Sustainability and Climate Reporting
Starting from financial years beginning on or after 1 January 2025, certain entities will need to comply with new sustainability and climate reporting requirements. The first cohort of reporters will consist of the largest entities covered under Chapter 2M of the Corporations Act 2001. However, all entities subject to the sustainability reporting requirements should ensure they understand how the new regulations apply to them.
Conclusion
ASIC's guidelines provide essential direction for financial statement preparers and auditors, helping ensure compliance with Australian Accounting Standards and effectively tackling emerging challenges.