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The regulator says fuel prices, global politics and COVID must be factored into asset values and performance forecasts.
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Come clean on risks in annual reports, ASIC warns
03 June 2022
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The impact of COVID, labour shortages, global conflict, fuel prices and rising interest rates must be written into asset values in annual reports, ASIC warned directors this week as it highlighted areas of concern.
Companies were facing ongoing risks and uncertainties, the regulator said, and the assumptions underlying estimates and assessments had to be reasonable and supportable.
“Directors and preparers should assess the impact on current and future performance, asset values and provisions,” ASIC commissioner Sean Hughes said.
“They should also ensure that increasing demands for better information for investors on uncertainties, key assumptions, business strategies and risks are met as required under the existing reporting regime for both annual and half-year reports.”
ASIC said areas that would attract particular attention included 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.
It said uncertainties could lead to a wider range of valid judgements on asset values and other estimates, and financial report disclosures about key assumptions and sensitivity analysis would be important to investors.
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ASIC said companies would be affected differently depending on their industry, where they operated, how their suppliers and customers are affected, and a range of other factors.
Industries that might be particularly affected included the construction, commercial property and large carbon emitters.
Factors that could adversely affect commercial and residential property values should be considered such as changes in office space requirements, online shopping trends, future economic or industry impacts on tenants, the financial condition of tenants and restructured lease agreements.
Entities should appropriately account for each type of support and assistance from government, lenders, landlords and others during the reporting period. Material amounts should be disclosed with the duration of the support or assistance, and any impact from its discontinuation.
ASIC produced a checklist of risks and uncertainties that included:
- COVID conditions and restrictions during the reporting period
- Changes in customer preferences and online purchasing trends
- Use of virtual meetings and more flexible working arrangements
- The discontinuation of financial and other support from governments
- Lenders and lessors, including any possible increases in the level of insolvencies
- The availability of skilled staff and expertise
- Ongoing restrictions to deal with COVID in different jurisdictions
- The impact of rising interest rates on future cash flows and discount rates used in valuing assets and liabilities
- Increases in oil prices
- Geopolitical risks, including the Ukraine-Russia conflict
- Commitments and policies on climate and carbon emissions by governments
- Technological changes and innovation
- Legislative and regulatory changes
It said these and other factors might also be relevant when assessing the ability of an entity’s borrowers, debtors and lessees to meet their obligations, as well as the ability of key suppliers to continue to provide goods and services.
ASIC said the Operating and Financial Review should complement the financial report and relate how the businesses were impacted by both COVID and non-COVID factors.
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.
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