How will COVID-19 impact financial reporting obligations?

The COVID-19 crisis will complicate many organisations’ ability to meet financial reporting obligations.

The AICD has been heavily engaged in policy discussions with government and have put forward balanced solutions that recognise the need to provide Boards, and their management teams, with time and space to grapple with the challenges confronting them, while providing users with the necessary reporting to make informed decisions.

For further guidance on navigating financial reporting during COVID-19, see the AICD’s analysis here.

Has ASIC extended reporting deadlines?

ASIC has announced a one month extension to financial reporting deadlines for both listed and unlisted entities with balance dates up to and including 7 July 2020. The ASX has also announced a class waiver to align with ASIC’s announcement. ASX listed entities are still required to undertaken certain steps including lodging unaudited/reviewed accounts AND the information required by Appendix 4D or 4E, by the usual lodgement deadline. Listed entities should see here for further information.

ASIC has advised that, where possible, entities should continue to lodge within the statutory deadlines having regard to the information needs of shareholders, creditors and other users of their financial reports, or to meet borrowing covenants or other obligations.

What about ACNC Annual information statements?

The ACNC has now advised that entities with an AIS due date between 12 March 2020 and 30 August 2020, will now have an extension until 31 August 2020.

Do directors need to disclose the effect of COVID-19 on their business in their audited financial report?

Directors of reporting entities should disclose the effects of COVID-19 if it will have a significant effect on the entity and if it is “material”, that is “if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements”. The AICD together with CA ANZ and CPA Australia has released a substantial guidance on this topic which directors should read. It is available here: https://aicd.companydirectors.com.au/resources/covid-19/impacts-of-covid-19-on-annual-report-disclosures

What about solvency resolutions and assessment of going concern given future uncertainty?

Boards are required to pass solvency resolutions when publishing their directors and financial reports as well as assess whether their entity is a going concern. This means that directors must state they have reasonable grounds to believe the company can pay its debts as and when they become due and payable and can continue in operation for the next 12 months without any intention or necessity to liquidate or otherwise wind up its operations.

Both determinations are currently perhaps more difficult than they have been in the past. In particular, going concern may be a difficult assessment. For example, the combination of government support and the shut-down of large parts of the economy has effectively put companies in many industries into “hibernation”. Others are faced by so much uncertainty, particularly around inward cash flows, that any assessment of going concern must be heavily qualified.

Boards are able to issue a qualified solvency resolution, ASIC has said previously that such qualified statements are permissible, and their Regulatory Guide 22 - Directors’ statement as to Solvency, explicitly deals with the issue. A qualified statement as to solvency may give boards some flexibility when they are trying to turn a difficult situation around in COVID-19 circumstances. The nature of that qualification could then be the subject of discussion with the auditor, particularly if circumstances have changed between when the board made the declaration and when the director’s report is being audited. Auditors also have the option of issuing an unqualified opinion with an “emphasis of matter” paragraph pointing to the qualifications in the solvency declaration.

In practice of course, directors may be very reluctant to qualify their solvency declaration given the practical, commercial and legal implications that could follow. For example, a qualified solvency declaration may lead to a qualified audit opinion, which in turn leads to a breach of debt covenants.

Directors may also be able to deal with the going concern assessment by making a going concern statement with a material uncertainty around COVID-19 related issues. This will require disclosure by directors of some details of how COVID-19 has created a material uncertainty in a similar manner to that discussed earlier in this FAQ Again, the AICD is of the view that directors and auditors would benefit from specific guidance on disclosures in this area.

Directors should consult the AICD’s guide which also refers to ASIC and AASB/AUASB publications: https://aicd.companydirectors.com.au/resources/covid-19/impacts-of-covid-19-on-annual-report-disclosures