As we approach 30 June, directors need to know about their reporting obligations during the COVID-19 crisis. The panel for this important discussion includes ASIC’s Senior Executive Leader, Financial Reporting and Audit, Douglas Niven; company director Adjunct Professor Grant Murdoch FAICD; and KPMG Audit, Assurance & Risk Partner, Martin McGrath. The AICD’s Senior Policy Adviser, David McElrea, facilitated the discussion.
ASIC’s shifted priorities
Doug Niven, who leads ASIC’s work to review financial reports of public entities, outlined how ASIC’s focus areas had shifted and how their approach to surveilling reports differed to pre-COVID times with the key focus now on asset values, liabilities and assessments on solvency and going concern matters.
He emphasised that disclosure will be a focus in both the financial reports and directors’ report, and disclosures must be specific to the circumstances of the company. They must tell the whole story in a way that is clear and understandable.
While recognising there will be uncertainty, Niven said ASIC will pay close attention in the financial report to sources of estimation uncertainty, key assumptions, and sensitivity analysis; and in the directors’ report to the underlying drivers of the financial position and results, the strategies for moving forward, the risks and the future prospects of the company.
“Disclosure will be a very key area for directors to focus on and that’s because in the current environment we don’t know exactly where we’ll be, particularly leading into 30 June…but there will be some quite challenging judgements around assets values, going concern and the like”. With, he says, a broader range of potentially valid judgements on some of these matters.
He also clarified details of the reporting deadline relief for listed and unlisted entities, ASIC’s ‘no action’ position for AGMs of public companies, their guidance on virtual meetings, and touched on ACNC relief for NFP organisations.
A detailed set of FAQs addressing these and other COVID-19 implications for financial reporting and audit can be found on ASIC’s website.
Assessment of going concern and disclosures
The accounting standards require directors to assess whether their entity is a going concern, meaning it can continue to operate and meet debt obligations for the foreseeable future. This must also be assessed by the auditor.
Grant Murdoch FAICD, a non-executive director of ASX listed companies ALS, OFX and Lynas Ltd who chairs the audit committee of all three boards, emphasised that the considerations and disclosures you make around going concern are a key issue.
Murdoch talked through how his boards are approaching forecasting and the scenarios they are testing, to underpin the information provided in their forward-looking statements. He cautions against testing too many scenarios, recommending only a best, a base, and a worst-case scenario, and the panel listed several scenarios that may be appropriate for businesses right now as they assess going concern.
“You’ve also got to ask yourself, is the business model still appropriate; what will it be like on the other side?” The current circumstances, he says, mean that past results can’t be relied on for future modelling. Instead, his boards have been putting in place robust systems to stress test the questions they are asking and to challenge assumptions and ensure they are reasonable.
Another key issues, says Murdoch, is not wanting to put too much additional burden on an already exceptionally busy executive team.
Murdoch detailed the process his boards are undertaking around disclosure and says working out what to disclose is difficult, but in the case of his boards it will involve providing commentary around the market conditions, how the business is responding, and hopefully a positive focus on the opportunities arising.
Murdoch says he is undertaking extra due diligence and ensuring records are kept, much like he would for a capital raising. By going through an additional due diligence process “you want to be able to demonstrate, with hindsight, that all your assumptions and the challenges that you made were reasonable.”
What the auditor will look for
Like the board, the auditor’s role is to evaluate management’s assessment of the entity’s ability to continue as a going concern and to make a determination on whether they agree – and again, disclosures and assumptions are key.
KPMG audit partner, Martin McGrath, who has extensive experience working with boards of ASX 100 companies, says in assessing whether the going concern assumption is correct, auditors will look at whether the assumptions are reasonable and appropriate, are they optimistic or pessimistic, do they disclose the uncertainties, and, ultimately, is the information transparent, balanced and of fundamental value to users of the accounts. “That’s the key for us.”
If the auditor thinks there’s material uncertainty, they need to form a view as to whether the going concern assumption is appropriate and will report their determination in the audit opinion.
The panel also touched on what to disclose if a business is looking to raise further funding, when to disclose commercially sensitive information, and AICD’s David McElrea suggested directors refer to the financial reports on the ASX site and in particular how smaller mining entities – who often have a material uncertainty around going concern – disclose uncertainty, for guidance on how this is dealt with.
The solvency declaration
Directors must sign a solvency declaration each year as part of their financial statements to declare that the company is able to pay their debts as and when they fall due. A recent decision to temporarily suspend insolvent trading laws due to COVID-19, which allows insolvent companies to continue to trade without exposing directors to insolvent trading liability, means that in theory companies could be insolvent and a going concern. This is not something that has ever arisen before, says the AICD’s Senior Policy Adviser, David McElrea.
Niven explained that solvency is different from going concern and while the Corporations Act suspension has provided some relief, it is limited and is designed to deal with short term liquidity problems of otherwise sound businesses.
In terms of assessing solvency and disclosing negative solvency or uncertainty about solvency, Niven says disclosure is again key and must tell the story and provide detail that will be helpful to the market. He cautions that general directors’ duties still apply and if you are in a difficult situation, it is best to get professional financial and legal advice.
Further information about solvency statements can be found in the FAQs on ASIC’s website.
Effects of COVID-19 on the accounting measures
Murdoch discussed the considerations when calculating impairment of non-current assets and intangibles like goodwill and suggests carrying out the same processes and modelling as with assessing going concern, but with a longer-term focus. Importantly, he says, businesses must consider whether their business model is going to be as robust moving forward as it has been in the past.
When assessing impairment, McGrath says an auditor will look for an acceptance that the world has changed, possibly for both your business and your customers. They will look at how the business model and assumptions have been reassessed, the reasonableness of assumptions, the voracity of the model, that the impacts of COVID-19 have been properly considered including the assumptions around recovery and future state, and importantly they will look at the disclosures around uncertainties, key assumptions and sensitivity analysis.
In terms of fair value measurements, McGrath acknowledged these can be very difficult at the moment where markets have changed dramatically and previous performance indicators don’t apply. He says an auditor will look for evidence that the assumptions management have made reflect the changed world and the market the business is operating in.
McGrath also talked through what he would consider as he assessed the reporting of financial instruments, government stimulus packages, leases and lease modifications, and dealing with events occurring after the reporting period.
How the role of directors has changed
Murdoch said the critical nature of the ongoing COVID-19 situation has required a great deal more communication than normal, and notes he has spent more time talking with auditors, the audit committees, the board, management and the preparers of financial statements than in the past.
He recommends boards speak to their auditors early and often through this process.
To hear the full COVID-19: Reporting obligations webinar in full please please download the recording here.
The Australian Accounting Standards Board (AASB) and the Auditing and Assurance Board (AUASB) have published a joint guidance on assessing going concern and solvency declarations entitled “The Impact of COVID-19 on Going Concern and Related Assessments”. Read more here.
The AICD intends to shortly publish additional guidance, in conjunction with the professional accounting bodies, that will bring together all the information provided by regulatory bodies and standard setters on reporting and periodic disclosure during COVID-19 and provide a basic checklist for directors, preparers of financial statements and auditors. Watch the AICD website for further details.