ASIC warns directors and auditors

ASIC puts corporate Australia on notice over disclosure obligations.

ASIC says it will closely watch how companies disclose the impact of COVID-19 on their business when it pores over December-half reports.

The Australian Securities and Investments Commission has put corporate Australia on notice over disclosure obligations, warning directors and auditors that it will be keeping a close watch on estimates for asset values, provisions and solvency assumptions when it pores over financial reports for the December half.

Just two weeks out from the end of the calendar year, the corporate watchdog also reminded companies that they must provide “useful and meaningful” disclosures about the impact of COVID-19 on their business, as well as any potential uncertainties that may lie ahead.

“Useful and meaningful disclosures about the business impacts and potential uncertainties will continue to be vital,” ASIC said on Tuesday.

“Uncertainties may lead to a wider range of valid judgments on asset values and other estimates.”

Disclosures in financial reports about uncertainties, key assumptions and sensitivity analysis will be important to investors, the regulator warned.

Assumptions underlying estimates and assessments for financial reporting purposes should be “reasonable and supportable”, ASIC said.

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

ASIC’s move to highlight the key areas of focus in financial reports comes as the Reserve Bank warned that the banking system faces a new solvency test in the pandemic crisis.

“We’ve had the largest contraction in global output since the Great Depression,” RBA head of stability Jonathan Kearns said in a speech on Tuesday.

“And as that impairs some households’ and businesses’ ability to repay their loans, the liquidity phase of the crisis is giving way to a solvency phase.”

Hours later, ASIC Commissioner Cathie Armour said investors would expect “clear disclosure” about the impact the pandemic had on business.

“In the current environment, the quality of financial reports and related disclosures is more important than ever for keeping investors informed,” she said.

“Entities with businesses adversely affected by the COVID-19 pandemic should continue to 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.”

Asset values, assumptions and disclosures may be “significantly affected by developments or ongoing conditions” since the last reporting period for the June half, she added.

For the December half reports, ASIC said it would pay particular attention to asset values, provisions, solvency and going concern assessments, events occurring after year end and before completing the financial report, and disclosures in the financial report and operating and financial review.

The operating and financial review should complement the financial report and tell the story of how the entity’s businesses are impacted by the COVID-19 pandemic, ASIC said.

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