TA 2025-1: ASIC focus areas for 31 December 2024 financial reports

INTRODUCTION

The purpose of this Alert is to draw attention to the Australian Securities and Investments Commission’s (ASIC) Media Release 24-275MR ASIC highlights focus areas for 31 December 2024 financial reports.

ASIC Commissioner Kate O’Rourke said, “We have highlighted matters that require the most judgement and use of estimates as these areas have previously shown the highest rates of non-compliance.”

Note that this document is heavily based on 24-275MR as issued by ASIC and accessed on 13 December 2024. Certain additions/amendments have been made for clarity and/or inclusion of additional guidance only.

OVERVIEW

The Media Release highlights ASIC’s expectation that directors, preparers, and auditors focus on the areas of:

1. impairment and asset values;
2. provisions;
3. events occurring after year-end and before completing the financial report; and
4. disclosures in the financial report and Operating and Financial Review (OFR).

These items are explored in more detail in the Appendix to this document.

This will also be the first financial year for December year-end reporters to prepare and lodge a consolidated entity disclosure statement. ASIC will be monitoring for compliance with this requirement. ASIC will also review the financial reports of registrable superannuation entities with December year ends.

For some entities, new sustainability and climate reporting requirements will commence for financial years beginning on or after 1 January 2025.

While the first cohort of reporters will be the very largest entities that report under Chapter 2M of the Corporations Act 2001, all entities subject to the sustainability reporting requirements should understand how the new requirements apply to them.

ASIC’s surveillance project focusing on auditors’ compliance with independence and conflicts of interest obligations will continue in early 2025. Auditors are encouraged to self-identify and self-report non-compliance with these obligations.

THE REPORTING PROCESS

Directors are primarily responsible for the quality of the financial report. This includes ensuring that management produces quality and timely financial information for audit, supported by robust position papers with appropriate analysis and conclusions referencing relevant accounting standards. Companies must have appropriate processes, records and analysis to support information in the financial report.

The Operating and Financial Review (OFR) should complement the financial report and tell the story of how the entity’s businesses are performing. The underlying drivers of the results and financial position should be explained, as well as risks, management strategies and future prospects. Forward-looking information should have a reasonable basis and the market should be updated through continuous disclosure if circumstances change. Further guidance can be found in ASIC’s Regulatory Guide 247 Effective disclosure in an operating and financial review.

ASIC will review the full-year financial reports of selected listed entities and other public interest entities for each reporting period. This includes a sample of financial reports from the group of large proprietary companies that were formerly exempt from lodging audited financial statements with ASIC (grandfathered companies) but are now required to lodge and registerable superannuation funds.

Audit fees should be reasonable and align with increased costs for auditors and any additional audit effort required in judgment areas.

ASIC SURVEILLANCE

ASIC plans to review the full-year financial reports of selected listed entities and other public interest entities as at 31 December 2024.

APPENDIX: FOCUS AREAS FOR 31 DECEMBER 2024 REPORTS

1. Asset values

Examples of matters that may require the focus of directors, preparers and auditors in relation to asset values in the current environment include:

Impairment of non-financial assets

• Goodwill, indefinite useful life intangible assets and intangible assets not yet available for use must be tested for impairment annually. Entities adversely impacted in the current environment may have new or continuing indicators of impairment that require impairment testing for other non-financial assets.
• The appropriateness of key assumptions supporting the recoverable amount of non-financial assets.
• The valuation method used for impairment testing should be appropriate, use reasonable and supportable assumptions, and be cross checked for reliability using other relevant methods.
• An entity’s market capitalisation will generally not represent an appropriate fair value estimate for its underlying business but may be useful as an impairment indicator or in a valuation cross-check. Share prices may reflect transactions of relatively small proportionate interests as part of an investor’s strategy for a share portfolio. Business may be sold in illiquid markets with few potential participants. A business acquirer may seek synergistic benefits or make significant changes to a business. 
• Values from applying the ratio of market capitalisation to revenue for other entities to the entity’s own revenue will generally be more appropriately used in valuation cross-checks. Information may be dated and the limitations in using an entity’s own market capitalisation may apply. Further, the other entities must have closely comparable businesses, products, markets, cost structures, funding etc.
• Disclosure of estimation uncertainties, changing key assumptions, and sensitivity analysis or information on probability-weighted scenarios. 

Values of property assets

• Factors that could adversely affect commercial and residential property values should be considered such as changes in office space requirements of tenants, on-line shopping trends, future economic or industry impacts on tenants and the financial condition of tenants.
• The lease accounting requirements and the impairment of lessee right-of-use assets.

Expected credit losses on loans and receivables

• Whether key assumptions used in determining expected credit losses are reasonable and supportable.
• Any need for more reliable and up-to-date information about the circumstances of borrowers and debtors.
• Short-term liquidity issues, financial condition and earning capacity of borrowers and debtors.
• Ensuring the accuracy of ageing of receivables.
• Using forward looking assumptions and not assuming recent debts will all be collectable.
• The extent to which past history of credit losses remains relevant in assessing expected credit losses.
• Whether possible future losses have been adequately factored in, using probability weighted scenarios as necessary.
• Disclosure of estimation uncertainties and key assumptions.
• Expected credit losses should be a focus for companies in the financial sector. Financial institutions should have particular regard to the impact of current economic and market conditions and uncertainties on expected credit losses. This includes assessing whether there are significant increases in credit risk for particular groups of lenders; adequacy of data, modelling, controls and governance in determining expected credit losses; and disclosing uncertainties and assumptions.

Financial asset classification

• Financial assets are appropriately measured at amortised cost, fair value through other comprehensive income or fair value through profit and loss. Criteria for using amortised cost include whether both:
  • 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.

Value of other assets

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

2. Provisions

Consideration should be given to the need for and adequacy of provisions for matters such as onerous contracts, leased property make good, mine site restoration, financial guarantees given and restructuring.

3. Subsequent events

Events occurring after year-end and before completing the financial report should be reviewed as to whether they affect assets, liabilities, income or expenses at year-end or relate to new conditions requiring disclosure.

4. Disclosures

Considerations on disclosure include:

General considerations

• When considering the information that should be disclosed in the financial report and OFR, directors and preparers should put themselves in the shoes of investors and consider what information investors would want to know.
• Disclosures should be specific to the circumstances of the entity and its businesses, assets, financial position and performance.
• Changes from the previous period should be considered and disclosed.

Disclosures in the financial report

• Uncertainties may lead to a wider range of valid judgements on asset values and estimates. The financial report should disclose uncertainties, changing key assumptions and sensitivities. This will assist investors in understanding the approach taken, understanding potential future impacts and making comparisons between entities. Entities should also explain where uncertainties have changed since the previous full-year and half-year financial reports.
• The appropriate classification of assets and liabilities between current and non-current categories on the statement of financial position should be considered. That may have regard to matters such as maturity dates, payment terms and compliance with debt covenants.

Disclosures in the OFR

• The OFR should complement the financial report and tell the story of how the entity’s businesses, results and prospects are impacted by economic and market conditions and changing circumstances. The overall picture should be clear, understandable, and be supported by information that will enable investors to understand the significant factors affecting the entity, its businesses and the value of its assets.
• The OFR should explain the underlying drivers of the results and financial position, as well as risks, management strategies and future prospects.
• All significant factors should be included and given appropriate prominence.
• The most significant business risks at whole-of-entity level that could affect the achievement of the disclosed financial performance or outcomes should be provided, including a discussion of environmental, social and governance risks.  The risks will vary depending upon the nature and businesses of the entity and its business strategies.  An exhaustive list of generic risks that might potentially affect a large number of entities would not be helpful.  Risks should be described in context – for example, why the risk is important or significant and its potential impact and, where relevant, factors within the control of management.
• Climate change risk could have a material impact on the future prospects of entities and should be disclosed. 
• Cyber security risks could have a material impact for many entities and require disclosure. 

Non-IFRS financial information

• Any non-IFRS profit measures (i.e. measures not in accordance with all relevant accounting standards) in the OFR or market announcements should not be presented in a potentially misleading manner (see Regulatory Guide 230 Disclosing non-IFRS financial information).

Disclosure in half-year reports

• Disclosure will also be important for half-year financial reports and directors’ reports as at 31 December 2024. Half-year reports should disclose information on significant developments and changes in circumstances since the last full year financial report.

FURTHER INFORMATION

If you wish to discuss any of the information included in this Technical Accounting Alert, please get in touch with your local Grant Thornton Australia contact or a member of the National Assurance Quality Team at national.assurance.quality@au.gt.com.