ASIC announces key focus areas for its 30 June 2024 financial reporting surveillance

The Australian Securities and Investments Commission (ASIC) conducts surveillance on the full-year financial reports of Australian entities as part of its financial reporting surveillance program. The surveillance program covers listed entities, other public interest entities, previously ‘grandfathered’ large proprietary limited companies, and superannuation funds. As a result of these risk-based reviews, ASIC conducts inquiries on matters of concern, and depending on the outcome, entities may be ‘named and shamed’ in media releases if they restate financial reports as a result.

In its recent Media Release, ASIC outlined its focus areas for its surveillance of 30 June 2024 financial reports and its expanded program to support financial reporting and audit quality. Directors, preparers, and auditors should collectively pay particular attention to these focus areas to improve financial reporting and audit quality. Focus areas of other regulators are consistent with ASIC.

Four enduring focus areas

ASIC’s focus areas can now be found on its Financial reporting and audit focus areas page. It highlights the following four enduring focus areas that ASIC will focus on when it conducts its reviews:

Each focus area is discussed in more detail at the end of this article. ASIC has not identified any other new focus areas for the 30 June 2024 reporting period on its Financial reporting and audit focus areas page.

Additional items highlighted in the media release 

In addition to the enduring focus areas, ASIC highlights the following financial reporting matters:

  • Previously ‘grandfathered’ large proprietary companies

    This is the second financial year previously ‘grandfathered’ large proprietary companies must lodge audited financial statements. ASIC will include these companies in its 30 June 2024 surveillance program because many of them operate significant businesses that are of interest to many stakeholders. It has announced that it will follow up on areas of non-compliance and non-lodgement. Our article illustrates ASIC’s recent enforcement activity in this area.
  • Lodgement with ASIC - audited financial statements of registrable superannuation entities

    This is the first year that superannuation trustees will be required to lodge the audited financial statements of registrable superannuation entities with ASIC. The financial statements need to be lodged within three months of the year-end. As a result of this change, ASIC has announced that it will review a selection of superannuation entities as part of its financial reporting surveillance program. You can find more information about the financial reporting obligations of registrable superannuation entities on ASIC’s registrable superannuation entity page, and specifically, our article contains guidance on remuneration reports, which are required for the first time this year.
  • Climate-related risks

    The Australian Government has introduced legislation to Parliament that, when passed, will mandate climate reporting for all entities required to prepare financial statements in accordance with Chapter 2M of the Corporations Act 2001. ASIC Commissioner Ms O’Rourke announced:

‘Directors need to be aware of the impending developments in climate reporting. The first tier of companies is proposed to report for financial years commencing from 1 January 2025. Directors and entities should start preparing and putting into place the necessary governance arrangements. They should consider what capabilities and data requirements may be needed.’

Before mandatory climate reporting, ASIC encourages companies with material climate-related risks to provide voluntary climate disclosures in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and ensure that these disclosures are not misleading.

ASIC will continue monitoring climate-related disclosures to inform future compliance programs and guidance.

  • Requirement for the consolidated entity disclosure statement

    For reporting periods beginning on or after 1 July 2023, all listed and unlisted public companies must include a new consolidated entity disclosure statement in their financial reports. The details of all consolidated entities at the end of the financial year must be included in the statement, including the following specific information for each entity:
    • Name
    • Ownership interest
    • Place of incorporation
    • Tax residence.
Our article contains more information about the contents required in the consolidated entity disclosure statement.

Asset values

ASIC’s focus on asset values relates to the following areas:

Financial statement area

Focus areas

Impairment of non-financial assets
  • Must conduct an annual impairment test for goodwill, indefinite-life intangible assets, and intangible assets not yet available for use.
  • Ensure impairment tests are conducted for other non-financial assets if there are new or continuing indicators of impairment.
  • Ensure key assumptions used to determine recoverable amounts are appropriate.
  • Ensure the valuation method used to test impairment is appropriate, reasonable and supportable assumptions are used, and calculations should be cross-checked for reliability against other methods.
  • Market capitalisation is not considered an appropriate method of determining fair value. However, it may be an appropriate indicator of impairment or used in a valuation cross-check.
  • When performing a valuation cross-check, an entity may compare its ratio of market capitalisation to revenue to that of other entities.
  • Estimation uncertainties must be disclosed, along with any changed key assumptions. A sensitivity analysis or information about probability-weighted scenarios must also be provided.

Values of property assets
  • Factors that could adversely affect values of commercial and residential properties should be considered, including:
    • Changes in the office space needs of tenants
    • Online shopping trends
    • Future economic or industry impacts on tenants
    • Financial condition of tenants.
  • Complex lease accounting requirements, including impairment of lessees’ right-of-use assets.

Note: Our Lease Accounting web page provides more information about the complexities of lease accounting, including software solutions, training materials, and publications.

Expected credit losses (ECL) on loans and receivables
  • Appropriateness of key assumptions used to determine ECL, which should be reasonable and supportable.
  • The need for more up-to-date information about borrowers’ and debtors’ circumstances.
  • Short-term liquidity issues for some borrowers and debtors, as well as their financial condition and earnings capacity.
  • Receivables ageing must be accurate.
  • Assumptions must be forward looking and the entity cannot simply assume that recent debts are collectible.
  • Past models and experience may not be representative of current expectations, and probability-weighted scenarios may be needed.
  • Disclosure of estimation uncertainty and key assumptions.
  • Companies in the financial services sector should have particular regard to the impact of current economic and market conditions and uncertainties on ECLs. Need to consider:
    • Whether there has been a significant increase in credit risk for particular groups of lenders
    • Adequacy of data, modelling, controls, and governance in determining ECLs
    • Disclosing uncertainties and assumptions.

Financial asset classification
  • Financial assets must be appropriately classified and subsequently measured at:
    • Amortised cost
    • Fair value through other comprehensive income, or
    • Fair value through profit or loss.
  • A financial asset can only be measured at amortised cost if (IFRS 9.4.1.2):
    • The assets are held in a business model whose objective is to hold financial assets in order to collect contractual cash flows, and
    • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Value of other assets
  • Value of inventories, including whether all estimated costs of completion and costs necessary to make the sale were considered when determining net realisable value.
  • Whether it is probable that deferred tax assets will be realised.
  • The value of investments in unlisted entities.

Provisions

Entities should consider the need for, and adequacy of, provisions for onerous contracts, leased property make-good, mine site restoration, financial guarantees given, and restructuring.

Subsequent events

Entities should review events occurring after the end of the reporting period to determine whether these are ‘adjusting’ or ‘non-adjusting’ post-balance date events.

Disclosures in the financial report and operating and financial review (OFR)

Entities should focus on ensuring adequate disclosures as outlined in the table below.

Consider

Focus areas

General considerations
  • Put yourselves in the shoes of investors and consider what information investors would want to know.
  • Disclosures should be specific to the entity (i.e. not boilerplate).
  • Consider changes from the previous period and disclose accordingly.

Disclosures in financial report
  • Disclose uncertainties, changing key assumptions and sensitivities.
  • Explain where uncertainties have changed since the previous full-year or half-year financial report.
  • Consider appropriate current versus non-current classification of assets and liabilities in the balance sheet having regard to maturity dates, payment terms, and compliance with debt covenants.

Disclosures in OFR
  • The OFR should complement the financial report and tell the story of how economic and market conditions have impacted the business’s results and prospects.
  • The overall picture should be clear, understandable, and supported by information that will enable investors to understand the significant factors affecting the entity, its businesses, and the value of its assets.
  • Explain the underlying drivers of results, financial position, risks, management strategies, and future prospects.
  • All significant factors should be included and given appropriate prominence.
  • The most significant business risks at the whole-of-entity level that could affect the achievement of the disclosed financial performance or outcomes should be disclosed. The OFR should discuss environmental, social and governance (ESG) risks. Disclosing an exhaustive list of generic risks that might affect many entities is not helpful, and these risks should be described in context. For example, it could include a discussion about:
    • Why the risk is important or significant
    • Potential impact of the risk
    • Where relevant, factors that are within management’s control.
  • Climate change risk could have a material impact on future prospects and these risks need to be disclosed.
  • Cyber security risks could have a material impact and require disclosure. For example, loss of personal data or denial of service attacks could impact revenue.

Non-IFRS financial information
  • A company should not present any non-IFRS measures in a misleading manner (refer to Regulatory Guide 230 for more information) in the OFR or within any market announcements.

Disclosure in half-year financial reports
  • May need to include disclosure about significant developments and changes in circumstances since the 31 December 2023 half-year financial reports.

Need assistance?

Please contact our IFRS & Corporate Reporting team if you need support with any financial reporting matters for your 30 June 2024 financial reports.