ASIC puts companies on notice over COVID-19 as reporting season looms

Companies have been warned they need to be clear, upfront and realistic about the impact of COVID-19 in the coming reporting season.

ASIC chairman James Shipton. Picture: Hollie Adams

The securities regulator has put corporate Australia on notice it will be scrutinising how the COVID-19 pandemic will be treated in their accounts during the upcoming reporting season, demanding the hit from the virus to be explained clearly to investors.

The Australian Securities and Investments Commission wants companies to provide clear and meaningful disclosures on both negative and positive impacts stemming from the pandemic on asset values, supply chains, and provisions, while also giving an update on solvency.

“In the current environment, the quality of financial reports and related disclosures is more important than ever for investors and to maintain confident and informed markets,” said ASIC chairman James Shipton.

“Entities with businesses adversely affected by the COVID-19 pandemic should focus on the reporting of asset values and financial position. Investors will expect clear disclosure about the impacts on an entity’s businesses, any risks and uncertainties, key assumptions, management strategies and future prospects.”

ASIC said it would review the full-year financial reports of about 200 larger listed entities and other public-interest entities as at June 30. The reviews will focus on entities and industries “adversely affected” by the COVID-19 conditions, although they will also look at the “adequacy of disclosure” by some entities that have been positively affected.

ASIC said the operating and financial reviews by companies should “tell the story” of how the entity’s businesses are impacted by the pandemic.

“The underlying drivers of the results and financial position should be explained, as well as risks, management strategies and future prospects.”

A second wave of COVID-19 infections, predominantly in Victoria, has heightened fears of a prolonged recession in Australia. The Victorian border with NSW was among those closed on Tuesday in an attempt to keep the coronavirus contained.

ASIC’s warning comes as ASX companies prepare to present their accounts to investors during the August reporting season, and market pundits continue to debate the eventual shape of an economic recovery. On Tuesday afternoon, Victorian Premier Daniel Andrews announced much of Melbourne was going back into lockdown.

The regulator is taking a strong interest in asset values ­during reporting season. It wants factors adversely affecting the values of commercial and residential properties to be considered, even in the absence of market transactions.

ASIC also cautioned companies to use “reasonable and supportable” assumptions in financial accounts and outlook statements.

“Entities may face some uncertainties about future economic and market conditions, and the future impact on their businesses. Assumptions underlying estimates and assessments for financial reporting purposes should be reasonable and supportable,” the regulator said.

“Assumptions should be realistic, and not overly optimistic or pessimistic.

“Useful and meaningful disclosures about the business impacts and potential uncertainties will be vital. Uncertainties may lead to a wider range of valid judgments on asset values and other estimates. Disclosures in the financial report about uncertainties, key assumptions and sensitivity analysis will be important.”

MST Marquee senior analyst Hasan Tevfik said ASX companies needed to give a clear outline on how they would navigate a COVID-19 environment over the next 12 months, particularly in terms of costs because for many, estimating revenue would be a “wild guess”.

“What are companies doing to make themselves more efficient in a world that is struggling to grow?”

Mr Tevfik also said he expected about $10bn of restructuring charges as many companies used the crisis to clean-up their operations and rid themselves of under-performing divisions.

“It’s going to be the mother of all kitchen-sinking opportunities,” he said.

ASIC’s announcement said it wanted entities to “appropriately account” for any assistance from government, lenders and landlords.

Ethical Partners Funds Management investment director Nathan Parkin said he would be looking for companies “to be explicit” about the benefits of lower rental payments and any government assistance.

“A number of companies have already reported better-than-expected revenue and profits through COVID-19 but have not been specific about the impact of one-off reduced expenses. This is important to establish a normal run rate for profit in financial 2021,” he said.

The regulator also urged directors to increase their questioning of management around processes and controls, including around remote working.

“Any assumptions, estimates, assessments and forward-looking information should have a reasonable basis, and the market should be updated,” ASIC said.