Financial reporting and audit focus areas

ASIC provides guidance to financial statement preparers and auditors on its enduring and period-specific focus areas for its financial reporting and audit surveillance programs. Commencing with years ending 30 June and 31 December 2025 the focus areas will be updated on an annual basis. The focus areas highlight elements of financial reports and audits where ASIC has identified:

significant and/or common instances of non-compliance with Australian Accounting Standards, and/or
emerging significant challenges for financial report preparers, and/or
issues in past reviews of audit files.

Financial reporting process

Directors and superannuation trustees are primarily responsible for the quality of their financial report in accordance with the Corporations Act 2001 (the Act) and applicable Australian accounting and sustainability standards. This includes ensuring that management produces high quality and timely financial information, supported by robust position papers with appropriate analysis and conclusions.

Appropriate experience and expertise should be applied in the reporting process, particularly in more difficult and complex areas, such as asset values, provisions, revenue arising from contracts with customers, capitalisation of expenditure, expected credit losses and other estimates, the impact of post balance date events and disclosure.

The basis and circumstances related to management’s judgements on accounting estimates and forward-looking information, should be documented at the time and disclosed in the financial report.

ASIC reviews the full-year financial reports of selected listed entities and other public interest entities for each reporting period. This includes a sample of financial reports from registrable superannuation entities (RSE) and large proprietary companies that were formerly exempt from lodging audited financial statements with ASIC (grandfathered companies).

Audit

High-quality financial reports supported by robust auditing are essential for market integrity and investor confidence.

Auditors have an essential role in the production of high-quality financial reports and are reminded to focus their attention and use their professional scepticism on the elements of the financial report that require the greatest amount of professional judgement and estimation. The financial reporting focus areas outlined here are also important focus areas for auditors.

As part of our program we will review a random selection of audit files in addition to reviewing a sample of audit files where financial statements are identified as being at higher risk of material misstatement as part of our financial reporting surveillance program.

Enduring focus areas for financial report reviews

1. Asset values

Examples of matters that may require the focus of directors, RSE trustees, preparers and auditors in relation to asset values include:

Impairment of non-financial assets

Goodwill, indefinite useful life intangible assets and intangible assets not yet available for use must be tested for impairment annually. Entities adversely impacted by the prevailing economic conditions may have new or continuing indicators of impairment that require impairment testing for other non-financial assets.
The valuation method used for impairment testing should be appropriate, use reasonable and supportable assumptions, and be cross-checked for reliability using other relevant methods.
An entity’s market capitalisation will generally not represent an appropriate fair value estimate for its underlying business, although may be useful as an impairment indicator or valuation cross-check. Share prices may reflect transactions of relatively small proportionate interests as part of an investor’s strategy for a share portfolio. Businesses may be sold in illiquid markets with few potential participants. A business acquirer may seek synergistic benefits or make significant changes to a business.
Values from applying the ratio of market capitalisation to revenue for other entities to the entity’s own revenue will generally only be appropriate for use in valuation cross-checks and even then, in limited circumstances. Information may be dated and the limitations in using an entity’s own market capitalisation may apply. Further, the other entities must have closely comparable businesses, products, markets, cost structures, funding, etc.
Disclosure of estimation uncertainties, changing key assumptions, and sensitivity analysis or information on probability-weighted scenarios must be sufficiently detailed for users to understand the judgements applied.

Values of property assets

Factors that could adversely affect commercial and retail property values should be considered such as changes in office space requirements of tenants i.e. impact of work from home, on-line shopping trends, future economic or industry impacts on tenants, and the financial condition of tenants.
The lease accounting requirements and the impairment of lessee right-of-use assets.

Expected credit losses (ECLs) on loans and receivables

Whether key assumptions used in determining expected credit losses are reasonable and supportable.
Any need for more reliable and up-to-date information about the circumstances of borrowers and debtors.
Short-term liquidity issues, financial condition and earning capacity of borrowers and debtors.
Ensuring the accuracy of ageing of receivables.
Using forward looking assumptions and not assuming recent debts will all be collectible.
The extent to which a history of credit losses remains relevant in assessing ECLs.
Whether possible future losses have been adequately factored in, using probability weighted scenarios as necessary.
Disclosure of estimation uncertainties and key assumptions.
ECLs should be a focus for companies in the financial sector. Financial institutions should have regard to the impact of current economic and market conditions and uncertainties on ECLs. This includes assessing whether there are significant increases in credit risk for groups of lenders; adequacy of data, modelling, controls and governance in determining ECLs; and disclosing uncertainties and assumptions.

Financial asset classification

Financial assets are appropriately measured at amortised cost, fair value through other comprehensive income or fair value through profit and loss. Criteria for using amortised cost include whether both:
- assets are held in a business model whose objective is to hold the assets to collect contractual cash flows
- contractual terms give rise on specific dates to cash flows that are solely payments of principal and interest on the principal outstanding.

Value of other assets

The net realisable value of inventories, including whether all estimated costs of completion that are necessary to make the sale have been considered in determining net realisable value.
Whether it is probable that deferred tax assets will be realised.
The valuation of investments in unlisted entities.

2. Revenue

Directors, RSE trustees and auditors should review an entity’s revenue recognition policies to ensure that:

revenue and deferred revenue are recognised in accordance with the substance of the underlying transactions and the satisfaction of performance obligations.
judgements and assumptions used in revenue models are appropriate and reasonable.
disclosure of revenue policies is not boilerplate and is appropriate for each material revenue stream.

3. Provisions

Consideration should be given to the need for and adequacy of provisions for matters such as onerous contracts, leased property make good, mine site restoration, financial guarantees given and restructuring.

4. Subsequent events

Events occurring after year-end and before completing the financial report should be reviewed as to whether they affect assets, liabilities, income or expenses at year-end or relate to new conditions requiring disclosure only.

5. Disclosures

Considerations on disclosure include:

General considerations

When considering the information that should be disclosed in the financial report and OFR, directors, RSE trustees and preparers should put themselves in the shoes of investors and consider what information investors would want to know.
Disclosures should be specific to the circumstances of the entity and its businesses, assets, financial position and performance.
Changes from the previous period should be considered and disclosed.

Disclosures in the financial report

Uncertainties may lead to a wider range of valid judgements on asset values and estimates. The financial report should disclose uncertainties, changing key assumptions and sensitivities. This will assist investors in understanding the approach taken, understanding potential future impacts and making comparisons between entities. Entities should also explain where uncertainties have changed since the previous full-year and half-year financial reports.
The appropriate classification of assets and liabilities between current and non-current categories on the statement of financial position should be considered. That may have regard to matters such as maturity dates, payment terms and compliance with debt covenants.

Disclosures in the OFR

The OFR should complement the financial report and tell the story of how the entity’s businesses, results and prospects are impacted by economic and market conditions, and changing circumstances. The overall picture should be clear, understandable, and be supported by information that will enable investors to understand the significant factors affecting the entity, its businesses and the value of its assets.
The OFR should explain the underlying drivers of the results and financial position, as well as risks, management strategies and prospects.
All significant factors should be included and given appropriate prominence.
The most significant business risks at whole-of-entity level that could affect the achievement of the disclosed financial performance or outcomes should be provided
The risks will vary depending upon the nature and businesses of the entity and its business strategies. An exhaustive list of generic risks that might potentially affect many entities would not be helpful. Risks should be described in context – for example, why the risk is important or significant and its potential impact and, where relevant, mitigation factors within the control of management
A listed entity must disclose sustainability-related financial information, including climate-related financial information, in the OFR, if this is information that members reasonably require to make an informed assessment of the entity’s operations, financial position, business strategies and prospects for future financial years. For further information about disclosing sustainability-related financial information in the OFR, please refer to paragraphs 119 to 129 of ASIC Regulatory Guide 280: Sustainability reporting.
ASIC’s Regulatory Guide 247 Effective disclosure in an operating and financial review (RG 247) provides further guidance on OFR disclosure.

Non-IFRS financial information

Any non-IFRS profit measures (i.e. measures not in accordance with all relevant accounting standards) in the OFR or market announcements should not be presented in a potentially misleading manner (see Regulatory Guide 230 Disclosing non-IFRS financial information (RG 230)).

Focus areas for the relevant reporting period

In addition to enduring areas of focus, ASIC may identify areas for focus in the relevant period. In recent years ASIC’s focus has expanded to cover its increased mandate which now includes RSE and previously grandfathered entities. ASIC is also responsible for administering the sustainability reporting requirements under Chapter 2M of the Act.

Focus areas for FY 2025-26

‘Grandfathered’ large proprietary companies

Large proprietary companies that were previously ‘grandfathered’ are required to lodge financial reports for years ending on or after 10 August 2022.

These entities are now included in ASIC’s financial reporting and audit surveillance program.

Auditors should be informing ASIC of grandfathered large proprietary companies not complying with their lodgement obligations.

Registrable Superannuation Entities

Since 2023-2024 RSE trustees are required to lodge audited financial reports for most RSE with ASIC. Trustees will need to lodge within three months of the end of the fund’s financial year.

RSEs will be included in ASIC’s financial reporting and audit surveillance programs.

From 1 July 2023, RSE auditors must comply with the audit obligations under Chapter 2M of the Act. More information can be found on ASIC’s Registrable superannuation entity financial reporting and audit page.

Sustainability reporting

Entities that are required to prepare an annual financial report under Chapter 2M of the Corporations Act and meet one of the sustainability reporting thresholds under s292A for a financial year must prepare a sustainability report containing climate-related financial information required under the Act and AASB S2: Climate-related Disclosures. The sustainability reporting requirements are being phased in over three years across three groups of reporting entities, with the first reporting cohort required to prepare sustainability reports for financial years commencing on or after 1 January 2025.

We will review 31 December 2025 sustainability reports as part of our 2025-26 program and will share our observations with the market to assist preparers. We will take a proportionate and pragmatic approach to supervision and enforcement as the sustainability requirements are being phased in.

Preparers of sustainability reports should refer to Regulatory Guide 280 Sustainability reporting (RG 280) for more information.