Quality of disclosures a ‘critical focus area’ for ASIC this year, warns KPMG

ASIC’s latest guidance on financial reporting and audit has emphasised the importance of company financial reports providing investors with useful and meaningful information on the impact of changing economic and market conditions on a company’s financial position and performance.

KPMG said this means that companies need to ensure that investors and markets are properly informed through financial reports about underlying drivers of results as well as risks, strategies, and prospects.

“ASIC continues to highlight the important role the operating and financial report (OFR) plays in providing this information to users of financial reports and telling the story of how the entity’s businesses are performing,” KPMG said in its latest reporting update.

The KPMG report said that companies should have well-established and appropriate processes, records and analyses to support disclosures in the financial report.

It is important companies have access to appropriate experience and expertise in reporting processes, particularly in more difficult and complex areas, such as asset values, provisions, and other estimates, the report said.

“Given the level of uncertainty and evolving circumstances, documentation is key around judgements on accounting estimates and the basis for those judgements,” it said.

“Directors need to make appropriate enquiries of management to ensure that key processes and internal controls have operated effectively, including during periods of remote work.”

KPMG director, department of professional practice Julie Locke said uncertainties about future economic and market conditions and their impacts on businesses “amplify pressure on various reporting aspects, particularly judgements, estimates and assessments.

“Useful and meaningful disclosures in the financial report about uncertainties, key assumptions and sensitivity analysis therefore continue to be important to investors. Documenting the basis for judgements is a critical part of the governance process,” said Ms Locke.

“We encourage directors to take the time to consider the uncertainties and how these should be reflected in the financial report.”

In its guidance, ASIC advised directors that disclosures in their financial statements must be sufficient to allow investors and other users to understand the sources of estimation uncertainty and significant judgements made in applying accounting policies.

“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,” the corporate regulator said.

ASIC noted that 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 guidance said.

The appropriate classification of assets and liabilities between current and non-current categories on the statement of financial position should also be considered, ASIC said.

“That may have regard to matters such as maturity dates, payment terms and compliance with debt covenants,” it stated.

Concerning the OFR, ASIC said 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 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,” the regulator said.

ASIC said businesses should consider whether climate change risks or cyber security risks could have a material impact on their entity and require disclosure, for example.

KPMG said preparers of financial reports should think about whether the company has identified and given appropriate prominence to all significant factors affecting the entity.

The company should also consider whether the information in the OFR is consistent with the key judgements, estimates and assessments made in the financial statements.

Businesses should also consider whether it has identified the entity’s specific business risks and outlined why the risk is significant and assessed its potential impact, the KPMG report said.