Economic uncertainty to impact 30 June reporting, mid-tier firm warns
Management and directors must navigate this reporting season carefully with financial reports likely to be impacted by economic uncertainty, HLB Mann Judd cautions.
While ASIC’s focus areas for 30 June are largely consistent with the ones it announced in June and December last year, economic uncertainties and shifting market conditions can impact several areas of financial reports, the mid-tier firm warns.
HLB Mann Judd said that businesses are currently grappling with inflation, rising interest rates, labour shortages, changing customer preferences and behaviours, supply chain disruptions and the climate emergency.
“It is, therefore, no surprise that ASIC has put an emphasis on the current uncertainty and changing market conditions in its latest focus areas,” the advisory firm said in a recent article.
“Uncertainties and shifting market conditions affect all entities in some way, shape or form. For many entities, both listed and unlisted, these will impact several areas in their financial reports.”
Directors and management will need to consider how changing circumstances, uncertainties and risks impact their entity from its performance to the values of its assets and liabilities, to its business strategies.
“Uncertainties tend to widen the range of valid judgements that underly asset values and other accounting estimates,” the article said.
“Directors and management should ensure that these judgements are adequately considered and documented, especially where these will be subject to auditor and possibly regulator scrutiny. Uncertainties, key assumptions, and sensitivity analyses where relevant, as well as how these have changed from the last reporting period, must be appropriately disclosed in the financial statements.”
In its areas of focus for the 30 June 2023 reporting season, ASIC highlighted a range of areas it had previously flagged from last year.
This includes areas such as asset values, adequacy of provisions, solvency and going concern assessments, post-balance date events and disclosures both in the financial report and the Operating and Financial Review.
ASIC reminded listed entities of the importance of the OFR as a complement to the financial report, encouraging directors to use this space to communicate what significant events and conditions impacted the business during the year, and why the numbers are what they are.
The Corporate Regulator also urged directors to be better at disclosing the business risks that could most impede the entity from reaching its financial objectives and business strategies.
“To this end, it should be noted that in ASIC’s latest surveillance program for 30 June 2022, more than a third of ASIC’s queries to directors related to the OFR, specifically inadequate disclosure of material business risks,” said HLB Mann Judd.
“To avoid any ‘please explain’ letters from ASIC on this front, directors of listed entities should ensure greater attention is given to this part of the OFR.”
Cyber security and climate are some of the risks businesses should consider these are risks likely to impact many entities, said HLB Mann Judd.
Impairment of assets should also continue to be high on the list of priorities for directors, the firm said.
“Goodwill and other indefinite-lived intangible assets are required to be tested annually for impairment, however impairment tests for other non-financial assets such as intangible assets with finite useful lives and property are only necessitated by impairment indicators,” it said.
“As economic conditions deteriorate, the likelihood of events or circumstances that trigger the need for a detailed impairment assessment increase.”
Directors should also not assume that the assumptions applied in prior period impairment evaluations remain appropriate now.
“ASIC continues to find that key assumptions underlying impairment calculations are not reasonable and supportable. To ensure a smooth audit process, make sure the assumptions and inputs are documented and can be substantiated,” the advisory firm said.
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