SIC advise for FY17

The accounting and auditing standard setting bodies, the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB), have published an important FAQ on the financial effects of COVID-19.

The FAQ is designed to assist preparers of financial reports and auditors deal with COVID-19, especially on reporting and disclosure. However, the matters contained within the FAQ should also act as a useful guidance to all directors, irrespective of the size of the entity and its disclosure requirements.

Some of the matters raised within the FAQ cover issues that directors should be discussing around the Board table and asking for clear recommendations from management teams. The framework set out in the FAQ should also assist Boards approaching their role in risk management and strategic decision-making as well as reporting and disclosure.

The FAQ also provides information for auditors and will be a useful resource for directors engaging with their external auditor over some of the judgments and assessments that may need to be made around the impact of COVID-19.

Assessing materiality of COVID-19 impact

The guidance asks directors to consider whether COVID-19 will have a significant effect on the entity. For a listed or reporting entity Boards should consider whether it is material (p. 6 of FAQ) to the entity, 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”. Part of that consideration might be the likely size of the effect of COVID-19, however the nature of the virus is relevant: if users reasonably expect that COVID-19 and its consequences will impact your entity it could be material even if the financial impact is negligible.

Material financial impact (p. 7 of FAQ) should be measured by looking at the effects on a range of operations, including:

  • reduced demand for products or services;
  • increased costs;
  • workforce shortages affecting production of goods or services;
  • changes to indirect costs because of effects on customers, suppliers or financiers leading to issues with supply chains or reduced revenues;
  • asset impairment and changes in fair value of assets or value of inventory or stock;
  • ability to service debt;
  • impairment of financial assets.

These impacts are likely to evolve as the full effect of COVID-19 and the social and economic disruption it causes are realised. Boards and management teams are going to need to constantly revisit and reassess the material financial impacts.

Going concern risk

Boards will also be determining whether their entity is a going concern (p.11 of FAQ), which includes the period over the next twelve months. This will be a difficult judgment given the considerable uncertainties over that period and the unknown effects of the virus on economic conditions, supply chains and the financial system. Directors might wish to reacquaint themselves with ASIC’s guidelines on directors duties to prevent insolvent trading if they are concerned about this as an issue. The AICD has also published some high-level guidance on insolvent trading and safe harbours that can be accessed here. As always, directors will need to assure themselves of these matters prior to signing off on financial accounts.

Directors should carefully consider the matters contained within the FAQ in light of any additional reporting and disclosure duties. The AICD provides tools to directors to assist with their continuous disclosure responsibilities that can be accessed here. Directors might also consider this article recently published by the AICD on market disclosure and COVID-19.