With days to go before auditors launch into the final stages of auditing your financial statements, we provide you in this article some key things to consider as you think about closing down your ledgers and preparing your financial report, assembling supporting documentation, including how ASIC's focus areas for 30 June 2021 financial reports under COVID-19 may apply to you.

Have you considered your asset values?

AASB 136 Impairment of Assets requires that an entity records its assets at no more than their recoverable amount.  An impairment review is carried out on the assets in scope of the standard, whenever any indicator of impairment is identified, or at each reporting date, for indefinite-life assets including goodwill.  Economic uncertainty and adverse market conditions triggered by the pandemic are ongoing at 30 June 2021, and may be an indicator of impairment for many assets.Are you ready to finalise your 30 June 2021 financial reports?

Carrying assets at more than their recoverable amount is an area which may result in misleading financial reports, so it is important that key estimates, judgements, and assumptions made are supportable. ASIC’s focus areas highlight some factors which may be relevant to any determination of recoverable amount, including the impact of the pandemic on customers, borrowers, lessees, supply chains; the timing of any resumption of international travel; and the availability, distribution, and take-up of COVID-19 vaccines; the impact on short term operating cashflows; and the ability to raise capital. In the uncertainty caused by the pandemic, it is likely that one set of assumptions will not be sufficient to justify asset values, and that the best estimate is likely to be a probability-weighted average of a variety of possible scenarios.

When assessing impairment, ask yourself:

  • Have you documented what your entity’s impairment indicators for each asset are?
  • Have you documented how you have you performed your impairment review, to confirm that your assets are carried at the lower of their carrying value and their recoverable amount? (Some advice can be found in our previous article!)
  • Are all your judgements, estimates, and assumptions supported by evidence?
  • Have you adjusted the discount rate applied to take account of current risk factors?
  • Are the disclosures in your financial report in relation to asset values understandable and complete?

Other assets, including inventories, deferred tax assets, and financial instruments, which are not in scope of AASB 136, may also be impacted by the current conditions. For example, inventory valuations may be misstated if demand has changed as a result of the pandemic. AASB 9 Financial Instruments’ forward-looking expected credit loss model for determining loss allowances on receivables and financial assets requires judgmental assumptions and estimates to be made. In many cases, these estimates are based on historical information, which may not be accurate in the current environment. Again, a probability-weighted average of a range of scenarios is more likely to better represent current circumstances.

Ask yourself:

  • Have you documented the assumptions made in modelling the expected credit losses on your receivables?
  • If they are based on historical rates of debt recovery, is any adjustment necessary?
  • Have you considered whether the presumption in AASB 9 that loans or receivables in arrears for 30 days or 90 days should be placed in higher risk categories?

Have you considered the need for any additional provisions?

The economic environment may have given rise to onerous contracts, financial guarantees being given, and restructuring; all of which will need considering under AASB 137 Provisions, Contingent Liabilities and Contingent Assets.

Onerous contracts are those under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. For any contract which is pending completion at the year end, and for which factors exist which cast doubt on your ability to complete it as planned, consider:

  • Are any penalties payable in the event of failing to fulfil the contract higher than the costs of fulfilling the contract?
  • Are the costs of fulfilling the contract higher than the economic benefits expected to be received under it?Are you ready to finalise your 30 June 2021 financial reports?

Restructuring provisions are recognized only when a constructive obligation to restructure has arisen. For any planned business reorganization or restructure, have you considered:

  • Is there a detailed formal plan for the restructure?
  • Has the plan raised a valid expectation in those affected by the restructure, that it will be carried out? That is, has it been announced to employees, and has the plan commenced?
  • If so, have you recognised a provision for the restructuring costs?
  • Have you documented your assumptions and estimates, and are the components of the provision supportable?

Since the Federal Court decision in WorkPac Pty Ltd v Rossato [2020] FCAFC 84, entities have had to consider additional employee entitlements should be provided for past and present so called “permanent-casual” workers. (That is, employees who, by virtue of being engaged to work on a regular and systematic basis, become seen as permanent employees rather than casual employees, notwithstanding any other contractual terms.) Effective 27 March 2021, the Fair Work Act 2009 has been amended to incorporate a definition of a casual employee (someone with no firm advance commitment to ongoing work), which may assist in determining the impact of the decision on employers.

If you believe any of your workforce may be impacted by these changes:

  • Have you sought legal advice to work through who in your organization may be impacted based on the decision, and used this information to determine whether any provision is required for previously unaccrued entitlements?

Have you considered the format of your financial statements and disclosures?

Operating and Financial Review: Are you telling the story?

In ASIC’s own words, the “OFR should complement the financial report and tell the story [of an entity].” It must be clearly articulated, it must be understandable, and must only contain supportable information that will help your users understand what has happened to your entity during the reporting period.

Audit article