Avoid common disclosure mistakes in your financial reports

Our pre-release reviews of listed entity financial reports for the 30 June 2024 reporting season have identified some common disclosure mistakes worth avoiding when preparing your next annual financial report. While some findings are specific to listed entities, others apply across the board.

Read on to learn from these mistakes and ensure your financial reports are accurate and compliant.

Why focus on disclosures?

The Australian Securities and Investments Commission (ASIC) focuses on disclosures, including the financial report and Operating and Financial Review, and non-IFRS financial information. It is therefore important for entities to be mindful of avoiding common disclosure mistakes, and ensuring their financial reports are internally consistent.

Common disclosure mistakes

Common disclosure mistakes that apply to all entities:

Those that only apply to listed entities, include:

Consolidated entity disclosure statement (CEDS)

Public companies (both listed and unlisted) prepared their first consolidated entity disclosure statement in their 30 June 2024 annual financial reports. With legislation only receiving Royal Assent on 8 April 2024, teething problems were not unexpected. Common disclosure mistakes included:

  • Not including the parent entity in the list of entities in the CEDS
  • Not including immaterial unconsolidated subsidiaries (for example, employee share trusts)
  • Not preparing a CEDS where the public company has no subsidiaries
  • Not disclosing the basis of preparation (how tax residency of subsidiaries was determined).

Entities should also note that determining the tax residency of subsidiaries may not be straight-forward. For example, the tax residency of a foreign operation may not be where it is located.

Companies limited by guarantee are public companies and must prepare a consolidated entity disclosure statement. However, it is not required if the entity is also registered as a charity with the Australian Charities and Not-for-profits Commission.

Directors’ report

Many entities use a ‘boilerplate’ format and content, resulting in content in the directors’ report that may not necessarily reflect the entity’s circumstances. Examples of common disclosure mistakes include incorrectly using standard disclosures without tailoring. For example:

  • The directors’ report says there are no significant events when the review of operations refers to a major capital raising during the period
  • The prejudicial exemption for not disclosing likely developments is used, despite the OFR or review of operations containing such disclosures.

We also noted entities rounding their narrative disclosures in the directors’ report to ‘millions’ of dollars when such rounding factor is not permitted by ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191 (Legislative Instrument 2016/191) because total assets do not exceed $10 billion.

Rounding

Common errors noted regarding rounding include:

  • Entities not disclosing their choice to apply Legislative Instrument 2016/191 in both the directors’ report and the financial statements
  • Applying the incorrect rounding factor based on outdated asset numbers (this must be based on the current period assets)
  • Not including a rounding note when merely rounding to the nearest dollar (for example, this applies to most entities with assets of less than $10 million). Financial statements should show amounts, including cents, if the entity chooses not to apply Legislative Instrument 2016/191.

Entities must use the same rounding factor in the financial statements and in the directors’ report unless another rounding factor is prescribed in the legislative instrument. The tables below illustrate the rounding rules for various items in the financial statements and directors’ report.

Total assets in (consolidated) balance sheet Rounding for most items Rounding for specific items
More than
(minimum)		 But not more than
(maximum)		 Earnings per share Director's report:
300(10)(g), 300(8), 300(9), 300(11B), 300(11C), 300(13)(a), 300A(1)(c), 300A(1)(e)
  $10,000,000 $1 1/10th of 1 cent $1
$10,000,000 $1,000,000,000 $1,000 1/10th of 1 cent $1
$1,000,000,000 $10,000,000,000 $100,000 1/10th of 1 cent $1,000
$10,000,000,000   $1,000,000 1/10th of 1 cent $1,000
Total assets in (consolidated) balance sheet Rounding for specific items
More than
(minimum)		 But not more than
(maximum)		 Share-based payment
Expense & Liabilities Other information
AASB 2.44 & 46, AASB 1060.164, 300(6)(c), 300(7)(d) 300(7)(e)
  $10,000,000 $1 1 cent
$10,000,000 $1,000,000,000 $1 1 cent
$1,000,000,000 $10,000,000,000 $1,000 1 cent
$10,000,000,000   $1,000 1 cent
Total assets in (consolidated) balance sheet Rounding for specific items
More than
(minimum)		 But not more than
(maximum)		 Remuneration of auditors Compensation of KMPs Transactions between related parties
  $10,000,000 $1 $1 $1
$10,000,000 $1,000,000,000 $1 $1 $1
$1,000,000,000 $10,000,000,000 $1,000 $1,000 $1,000
$10,000,000,000   $1,000 $1,000 $1,000

Entities that prepare financial statements that are not in accordance with the Corporations Act 2001 can still round amounts in their financial statements. However, they are not bound by the rules in Legislative Instrument 2016/191. IAS 1.53 requires that the entity discloses the level of rounding used in the financial statements and does not omit material information.

Primary statements

We identified a variety of common disclosure mistakes in the four primary financial statements: the statement of profit or loss and other comprehensive income, the balance sheet, the statement of cash flows and the statement of changes in equity. These are discussed in more detail below.

Statement of profit or loss and other comprehensive income

Common disclosure mistakes included:

  • Incorrectly identifying income as revenue. Revenue is income arising in the course of an entity’s ordinary activities, e.g. if an entity earns interest that is not within its ordinary activities, it is income, not revenue. Income incorporates revenue, not the other way around.
  • Share-based payment expense not identified as being an employee expense (where applicable)
  • Aggregation of income/expense items without any further detail provided in the notes, particularly where aggregated amounts are material
  • Not showing the split of profit and other comprehensive income between members and non-controlling interests.

Balance sheet

Instead of presenting assets and liabilities in the balance sheet as current or non-current, entities can use the liquidity basis if this provides information that is reliable and more relevant. However, all assets and liabilities must be presented in order of liquidity. We noted instances where this was not followed.

Statement of cash flows

Common disclosure mistakes related to:

  • Inappropriately showing items as cash equivalents. Cash equivalents comprise amounts only if they are used for cash management purposes - long-term term deposits and certain restricted cash items are not cash equivalents
  • Not identifying non-cash financing and investing activities as required by IAS 7.43
  • Not separately identifying foreign exchange movements on cash held in foreign currencies.

Statement of changes in equity

Common disclosure mistakes related to adjustments, reserves disclosure and treasury shares.

Adjustments to prior year balances of retained earnings and reserves resulting from changes in accounting policies or restatements of errors must be shown in the statement of changes in equity as follows:

  • Balance as reported in prior financial statements
  • Details of the adjustment
  • The adjusted balance.

Whether the restated balance is reported as the opening balance at the beginning of the comparative period, or the beginning of the current period, will depend on the reason for the restatement. Full retrospective restatement is required for prior period errors, so restatements occur at the beginning of the comparative period. However, when changing accounting policies, full restatement is required unless the new or amended standard permits a modified retrospective approach.

We also noted instances where entities group all reserves together in the statement of changes in equity but then fail to provide further details in the notes of movements in reserves balances, as required by IAS 1.106(d) and 106A.

Lastly, we noted incorrect accounting for treasury shares, which should be shown as a deduction from the carrying amount of share capital. 

Discontinued operations

Being able to identify an operation as a discontinued operation is a privilege because it enables entities to separate out the results of the discontinued operation in the statement of profit or loss and other comprehensive income. In many cases, this separation makes the results of continuing operations look better, so it is imperative that:

  • Operations meet the definition of a discontinued operation
  • Discontinued operations are not identified too early or too late
  • Operations are not identified as discontinued if they are to be abandoned (the results and cash flows of the disposal group can only be separately presented as discontinued operations at the date on which it ceases to be used).

Deeds of cross guarantee

If there is a deed of cross guarantee in place, ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (Legislative Instrument 2016/785) provides relief to certain wholly-owned subsidiaries from having to prepare and lodge financial statements and directors’ reports under Part 2M of the Corporations Act 2001. However, to obtain the relief, the wholly-owned subsidiaries must be included in consolidated financial statements lodged with ASIC.

The legislative instrument refers to the concept of a ’closed group’. The closed group consists of the parent entity and all wholly-owned entities that are party to the deed of cross guarantee. In cases where the consolidated entity and the closed group are the same, no further consolidation information is required.

However, if the consolidated entity and the closed group are not the same, consolidation information for the closed group must be provided in the notes to the financial statements. This will be a subset of the results and financial position of the consolidated group. A common mistake noted is entities failing to provide additional consolidation information where the closed group is not the same as the consolidated group.

Material accounting policy information

For years ending 30 June 2024, only material accounting policy information should be disclosed. However, we noted many instances where immaterial accounting policies have been retained, adding unnecessary volume to the financial statements and more information is not always useful to readers of the accounts. Common mistakes included keeping accounting policies where:

  • The accounting is described in the standards, and no judgement is required to develop an accounting policy applying the hierarchy in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (i.e. wording copied straight out of the relevant standards)
  • Significant judgements or assumptions were made in applying the accounting policy, but these had already been disclosed as required by IAS 1.122-125, thereby duplicating policy information
  • The accounting is not complex
  • The accounting policy is not relevant to the entity as they either do not have the asset/liability or their holding is immaterial.

Entities that have not undertaken a culling exercise should prioritise efforts as it takes some time to decide which accounting policies are material and which are not. Our article provides guidance to assist you.

Significant estimates and judgements

ASIC continues to focus its financial reporting surveillance efforts on the disclosure of significant estimates and judgements, including assumptions used and sensitivities. It is common to see boilerplate disclosures here, covering a broad range of topics that require estimates and judgements, many of which are not material (for example, the method of calculating long service leave provisions).

Entities should remove immaterial disclosures and focus on ensuring that sufficient information is provided regarding significant judgements and assumptions affecting estimates (including quantifying key assumptions).

Tax disclosures

Common disclosure deficiencies identified in the tax note relate to:

  • The reconciliation from operating profit to the tax expense recognised in profit or loss:
    • Material reconciling items are not adequately explained or do not make sense
    • An incorrect tax rate is used
  • The tax expense in profit or loss does not equal the sum of the current income tax expense, the movements in deferred tax assets and liabilities recognised in profit or loss, and over/under provisions from prior periods
  • Deferred tax liabilities not recognised in cases where the ‘initial recognition exception’ criteria and the exception for investments in subsidiaries, branches, associates and interests in joint arrangements did not apply
  • Unrecognised deferred tax assets not separately quantified and disclosed for temporary differences and tax losses
  • Lack of disclosure about:
    • The basis on which unrecognised deferred tax assets can be realised (for example, the entity will generate sufficient taxable profits in future)
    • The aggregate amount of unrecognised temporary differences for investments in subsidiaries, branches, associates and interests in joint arrangements
    • Why deferred tax assets were recognised, including the nature of evidence supporting recognition, when the entity has suffered a loss in either the current or prior year in the tax jurisdiction to which the deferred tax asset relates
  • Offsetting deferred tax assets and liabilities or current tax assets and liabilities relating to different tax jurisdictions, or if not allowed by the tax authority.

Listed entities

The directors’ report and OFR

We noted the following common errors in directors’ reports and OFRs of listed entities:

  • Details regarding options granted to the five most highly remunerated officers (section 300(1)(d)), options outstanding (section 300(1)(e)), and options exercised (section 300(1)(f)) apply equally to performance rights, which are effectively options with zero exercise prices
  • Appointment details for other Australian listed entity directorships within the last three years were not disclosed, including the period for which each directorship has been held (section 300(11)(e))
  • Special responsibilities of directors were not always disclosed, such as which board committees they are a part of (section 300(10(a))
  • The OFR does not consider the potential environmental impacts on an entity - the ASX Corporate Governance Principles and Recommendations and the Corporations Act 2001 both recommend following the Task Force on Climate-related Financial Disclosures (TCFD).

Remuneration Report (Audited)

The Remuneration Report requires a discussion of the board’s policy for determining the nature and amount (or value, as appropriate) of remuneration of key management personnel (KMPs). Many entities use boilerplate disclosures, without adaption, to reflect what the entity is actually doing in practice. Some common disclosure deficiencies in the Remuneration Report are shown in the diagram below.

s300A(1)(a) s300A(1)(ba) s300A(1)(g) s300A(1)(h)
Stating entity has a remuneration committee when it does not Failing to explain why a performance condition was selected, and how and when it will be measured If 25% of members voted against a remuneration report in previous year, the entity must disclose its actions or inactions in response Referencing the use of remuneration consultants when none are employed by the entity
s300A(1)(h) Regulation 2M.3.03(1) Items 3-5 Regulation 2M.3.03(1) Items 6 & 8 Regulation 2M.3.03(1) Item 11
Referencing actions (e.g. benchmarking) that should require the use of a consultant (but none were identified) Not including (or inconsistent inclusion) details for former KMPs when still required in current period or the comparatives Not including the annual leave or long service leave allocation or expense in the remuneration disclosures Generic disclosures for share-based payments not specific to what the entity is actually doing

Segment information

Segment disclosures should be ‘through the eyes of management’. Information provided or considered by the chief operating decision maker (CODM), therefore, drives how segments are identified, as well as the information disclosed.

ASIC looks at the OFR to see how the entity analyses its results and financial position, and compares this to the segment reporting note. If there are discrepancies between the ‘segments’ referred to in the OFR and the segment note, this is a red flag. Also, if non-IFRS measures are used in OFR, this is likely because they are provided to the CODM, so we expect to see similar non-IFRS measures shown in the segment note.

A common mistake in segment reporting is referring to the corporate head office as a segment. It is rare that ‘corporate’ is a separate segment. Rather, this column merely represents the reconciliation between the aggregate of all segments, and amounts shown in the statutory financial statements. Presenting reconciling items in one column makes it difficult to show material reconciling items separately, and additional footnotes may be needed to highlight these items.

Another one is failing to disclose the judgements made by management in applying the criteria in paragraph 12 to aggregate several operating segments into one reporting segment. This includes a brief description of the operating segments that have been aggregated in this way, and the economic indicators that have been assessed in determining that the aggregated operating segments share similar economic characteristics.

Lastly, entities often fail to include entity-wide disclosures about products and services, geographic areas and major customers. This often occurs when the entity notes it only has one segment.

It is important to note that proper segment identification is relevant, even if the entity is not listed. This is because impairment testing of goodwill requires allocating goodwill to cash-generating units no larger than an operating segment.

Earnings per share (EPS)

Common disclosure mistakes relating to earnings per share include:

  • Profitable entities not identifying potential ordinary shares for calculating diluted EPS. Profitable entities MUST identify potential ordinary shares and determine if each of those potential ordinary shares is dilutive.
  • Using the total number of options as potential dilutive ordinary shares rather than adjusting for the exercise price of the option. Potential ordinary shares are only dilutive if the average market price exceeds the exercise price (refer to IAS 33, Example 5 for further information)
  • Failing to reduce the number of shares outstanding for basic EPS for the number of treasury shares held. Treasury shares may be potential ordinary shares for diluted EPS (IAS 33.20 and 36)
  • If an entity is not profitable, basic EPS and diluted EPS must be the same because the potential ordinary shares are anti-dilutive. However, IAS 33.70(c) requires disclosure about ‘instruments (including contingently issuable shares) that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they are anti-dilutive for the period(s) presented’.

More information

Learn how to avoid common disclosure mistakes in your Operating and Financial Review. Watch our webinar which comprehensively examines the Operating and Financial Review, including ASIC’s Regulatory Guide 247 Effective disclosure in an operating and financial review.

We are here to help

Preparing disclosures for general purpose financial reports is no easy task, particularly for listed entities. Please contact our IFRS & Corporate Reporting team for help.