COVID-19 implications for financial reporting and audit: Frequently asked questions (FAQs)
The FAQs refer to financial reporting and audit requirements of Chapter 2M of the Corporations Act 2001 (Corporations Act) unless otherwise stated.
The FAQs relate to:
- What are ASIC’s focus areas for companies, directors and auditors for financial reporting given the impact of the COVID-19 pandemic?
- What are some of the factors to consider for assets, liabilities and going concern assessments?
- What disclosures should be made in the financial report?
- What disclosures should be made in the OFR?
- Can I use alternative profit measures that remove the impact of the COVID-19 pandemic?
- What are the reporting considerations where there is increased revenue or reduced expenditure?
- What disclosure is required in half-year financial reports and what work should the auditor perform?
- What are some of the considerations for management and preparers of financial reports?
- How do directors minimise possible liability in connection with accounting estimates and forward-looking information?
- Does the temporary relief for directors where a company trades while insolvent affect requirements for financial reports, directors’ declarations and directors’ reports?
- Can directors give a qualified solvency statement?
- Is an auditor required to report suspected insolvent trading to ASIC?
- Are extended reporting deadlines available for listed and unlisted entities?
- Can entities seek more than one additional month to complete their financial reporting obligations?
- Has the period for holding an AGM been extended and can I hold the AGM electronically?
- Is an auditor required to report to ASIC where a company uses the ‘no action’ position on its AGM?
- Will ASIC consider additional time for listed and unlisted entities to report and hold AGMs for periods ending after 7 July 2020?
- What is the impact on the audit report and should all audit reports contain a general emphasis of matter paragraph on uncertainties relating to the COVID-19 pandemic?
- Should an auditor delay their opinion until a limitation or uncertainty is resolved?
- Should audit fees be reduced when reviewing other cost saving initiatives?
1. What are ASIC’s focus areas for companies, directors and auditors for financial reporting given the impact of the COVID-19 pandemic?
Given the impact on businesses of the COVID-19 pandemic and associated measures (e.g. travel restrictions, remote work and social distancing), key focus areas for financial reports for years ended 31 March 2020 to 30 June 2020 include:
- Recognition and measurement
- values of assets (including intangibles, property, inventories, receivables/loans, investments, other financial assets, contract assets and deferred tax assets)
- liabilities (including provisions for onerous contracts, financial guarantees and restructuring)
- sources of estimation uncertainty
- key assumptions and sensitivity analysis
- operating and financial review (OFR) – underlying drivers of results, business strategies, risks and future prospects
- going concern assessments and solvency
- subsequent events.
Other matters to consider may include hedge effectiveness, sales returns, off-balance sheet exposures, and credit and liquidity risks associated with financial instruments.
Companies, directors and auditors should also be mindful of the new lease accounting requirements.
Factors to consider in relation to asset values, liabilities and assessments on solvency and going concern may include:
- business and economic factors
- industry specific factors
- impact on customers, borrowers and lessees
- impact on supply chains
- exposures to overseas operations, transactions and currencies
- short-term versus long-term conditions
- duration of containment measures and business closures
- government initiatives, assistance and support
- impact on short-term operating cash flows
- debt refinancing, borrowing covenants, lender forbearances and liquidity support
- modifications of debt and lease contracts
- capital raising
- management plans and response to the crisis.
This list is not intended to be exhaustive and there may be other factors to consider in the circumstances of individual entities.
There are different approaches to uncertainties for different assets and liabilities. For example, impairment of non-financial assets is based on best estimates of fair value and value in use. The best estimate should have regard to risk factors (e.g. through the discount rate used in a present value approach). For loan loss provisioning, a probability weighting of possible scenarios may apply.
Assumptions should be realistic and should not be overly optimistic or pessimistic. However, disclosure on uncertainties, key assumptions and sensitivity analysis will be important for users of financial reports, as well as information and explanations presented in the OFR.
Focus should also be given to the appropriate classification of assets and liabilities between current and non-current categories on the statement of financial position.
See Information Sheet 203 Impairment of non-financial assets: Materials for directors (INFO 203).
In some cases, uncertainties may lead to a relatively broad range of reasonable and valid assumptions as to future performance and cash flows for an entity’s businesses or assets. This could affect the assessment of asset values or liabilities/provisions, or the assessment as to whether an entity is a going concern.
Directors should have a reasonable basis for each significant estimate in the financial report and any assessment on whether the entity is a going concern. Key assumptions should be appropriately challenged by directors and auditors.
Useful and meaningful disclosure on sources of estimation uncertainty and key assumptions will enable users to understand the basis for the estimates and judgements made. Information should be sufficiently specific to the circumstances affecting the entity and the impact on particular assets, liabilities, revenues and expenses.
Disclosing the impact under different possible scenarios as part of an entity’s sensitivity analysis on assets and liabilities may also be considered.
Transparency is important to market and investor confidence in financial reports.
Communication should be clear, concise and effective. Key information should not be lost in unnecessary detail.
For listed entities, the OFR should explain the business impacts and underlying drivers of the results and financial position, as well as strategies, risks and future prospects. This is particularly important for entities whose results and financial position have been adversely affected as a result of the COVID-19 pandemic.
The information and explanations in the OFR should tell the story and be specific to the circumstances of the entity and provide all information that members of the listed entity would reasonably require to make an informed assessment of:
- the operations of the entity, including underlying drivers of results that relate to the impact of the COVID-19 pandemic and other factors that are not related to the pandemic
- the financial position of the entity, including how the entity’s financial condition has been affected by the impact of the COVID-19 pandemic
- the business strategies of the entity, including the strategies to address impacts and risks from the COVID-19 pandemic, and prospects for future financial years.
Entities should address the relevant factors outlined in the response to Question 2 above.
Similar disclosures may be required in the directors’ reports of unlisted entities. These reports are required to include a review of operations, as well as details of significant changes in the state of affairs and in the nature of the entity’s principal activities.
The OFR should properly identify all significant causes of adverse performance, including those factors not attributable to the impact of the COVID-19 pandemic.
See Regulatory Guide 247 Effective disclosure in an operating and financial review (RG 247).
Non-IFRS profit measures that purport to show the result had the impact of the COVID-19 pandemic not occurred are likely to be misleading. They will be hypothetical and may not show the actual performance of an entity. It may also not be possible to reliably identify and separately quantify the impact of the COVID-19 pandemic. Any non-IFRS profit measures should be unbiased and not used to avoid presenting ‘bad news’ to the market. Directors should refer to the relevant ASIC guidance (listed below) in presenting non-IFRS financial information.
Presenting a split of profit or loss between pre-COVID-19 and post-COVID-19 periods is problematic and can be potentially misleading because:
- the cut-off point cannot generally be clearly identified
- the pre-COVID-19 period may not be representative of future performance
- the impact of the COVID-19 pandemic is unlikely to be the only factor contributing to changes between pre-COVID-19 and post-COVID-19 results
- the effects of the COVID-19 pandemic are unlikely to be constant or uniform in the post-COVID-19 period.
It is important that the underlying drivers of the result are discussed in the OFR or review of operations. This includes providing an understanding of the impact of the pandemic and all other significant drivers of the result. Any analysis of the result should not be presented in a manner that is potentially misleading.
The result should not be split between pre-COVID-19 and post-COVID-19 periods on the face of the income statement or in the notes to the financial statements. Segment results should cover the entire reporting period. Segment results should not exclude the result for all or part of the post-COVID-19 period.
In some cases, it may be possible to quantify and disclose in the notes to the financial statements specific types of transactions as significant items included in the result that arose solely due to the impact of the COVID-19 pandemic (e.g. government support). It is not appropriate to treat all ongoing operating costs as a significant item during a period of reduced revenue.
An explanation should be given as to why an item is described as solely COVID-19 related. Where an item is not solely COVID-19 related, other contributing factors should also be clearly described. It may be misleading to describe a COVID-19 related expense as being non-recurring, particularly where the effects of the COVID-19 pandemic cross over a balance date. It should be clearly disclosed that any significant items attributed in whole or part to the COVID-19 pandemic are not the only affected items. For example, other items of revenue and expense are also likely to be affected.
It may not be possible to attribute some items such as impairment losses or changes in sales revenue solely to the impact of the COVID-19 pandemic and to separately quantify the amounts attributable to different causes.
See Regulatory Guide 230 Disclosing non-IFRS financial information (RG 230).
The underlying reasons for improved performance or improved elements of performance related to the impact of the COVID-19 pandemic should be described in the OFR (or directors’ report), as well as strategies, risks and future prospects.
For example, an entity that had increased sales to parties who stockpiled the items sold should disclose the cause of the increased sales, and also disclose the possibility of reduced sales if customer stockpiles are reduced in the future.
Some entities may have obligations that give rise to liabilities at balance date in the specific circumstances. For example, the suspension of non-urgent or non-essential elective surgery for a period may result in a backlog of surgical procedures that has not been fully cleared by balance date. Private health insurers should recognise a liability where an insured person who knows that they have a condition is likely to continue their cover until the surgical procedure has been performed. Community rating and waiting periods may be relevant to the decision by an insured person with a pre-existing condition to retain their cover. The liability estimate should typically have regard to the pattern of claims in prior periods compared to the pattern of claims in the current year. A liability would not be required to the extent that there has been a reduction in the number of injuries in motor vehicle accidents.
See Regulatory Guide 247 Effective disclosure in an operating and financial review (RG 247).
7. What disclosure is required in half-year financial reports and what work should the auditor perform?
While half-year reports of listed entities and other disclosing entities typically have reduced disclosures compared with full-year financial reports, an entity’s half-year report may be the first financial report where asset values, liabilities and results are significantly affected by the impact of the COVID-19 pandemic.
Half-year reports must explain events and transactions that are significant to an understanding of the changes in financial position and performance since the end of the financial year.
Half-year financial reports and directors’ reports should also provide comprehensive disclosure on relevant matters such as:
- in the financial report – estimation uncertainties, key assumptions and liquidity risk disclosures
- in the OFR – business impacts, underlying drivers of performance, strategies, risks and future prospects.
There is the potential for significant changes in the circumstances of companies and difficult judgements on asset values, liabilities/provisions and assessments of going concern. While auditors may conduct reviews rather than audits, it is likely that matters will come to the auditor’s attention that will require additional inquiries or other procedures in order to conclude in the review report.
Companies must have appropriate processes and records to support the information in their financial reports. Management should apply appropriate experience and expertise to produce quality financial information and financial reports, particularly in more difficult and complex areas, such as accounting estimates (including asset values). Papers should be prepared for the directors on significant judgements, and should include all relevant facts and the basis for the conclusions reached.
Information should be produced on a timely basis and be supported by appropriate analysis and documentation. This will support the quality of financial information in the market and the audit process.
Early planning of the reporting process will help to reduce any deadline pressures. This should include the work of external management experts such as asset valuers.
9. How do directors minimise possible liability in connection with accounting estimates and forward-looking information?
In our view, the risk of being found liable for misleading or deceptive accounting estimates or forward-looking information is minimal, provided:
- any statements are properly framed as, for example, being based on the information available at this time
- any estimates, assumptions or statements have a reasonable and supportable basis and have been appropriately challenged, which involves good governance at board level for signing off on that information
- there is ongoing compliance with any continuous disclosure obligations when events or results overtake estimates, assumptions or statements.
Both directors and auditors should ensure that the circumstances in which judgements on accounting estimates and forward-looking information have been made, and the basis for those judgements, are properly documented at the time and disclosed as appropriate. This will minimise the risk that hindsight is applied when estimates, information and judgements are reviewed by others at a later time.
See Regulatory Guide 247 Effective disclosure in an operating and financial review (RG 247).
10. Does the temporary relief for directors where a company trades while insolvent affect requirements for financial reports, directors’ declarations and directors’ reports?
The requirements to provide a solvency statement in the directors’ declaration and assess whether an entity is a going concern remain in place. Transparency on the financial condition of entities and on solvency and going concern are important to the confidence of users of financial reports and their ability to make informed decisions. Speculation in the absence of full disclosure can also be more damaging to an entity than having full and frank disclosure.
Recent reforms provide temporary relief for directors in connection with insolvent trading by a company. This safe harbour may assist a company with short-term financial issues to survive the COVID-19 pandemic.
The Coronavirus Economic Response Package Omnibus Act 2020 relieves directors from personal liability under section 588G(2) of the Corporations Act for six months from 25 March 2020 where a company trades while insolvent and a debt is incurred:
- in the ordinary course of the company’s business
- before any appointment of an administrator or liquidator.
The relief does not apply to section 588G(3), under which it is an offence if a director suspects a company incurs a debt when insolvent, or would be insolvent by incurring the debt, and their failure to prevent the company incurring the debt was dishonest.
The temporary relief does not extend to relief from statutory and common law director’s duties. These include the duty to act in the best interests of the company as a whole (which can involve directors taking into account the interests of stakeholders beyond shareholders including creditors when the company is in financial distress). These duties also involve the duty to act with care, diligence and good faith and not to use a director’s position or information obtained as a director to gain an advantage or cause detriment to the company.
Directors are encouraged to seek advice early from a suitably qualified and independent adviser about the company’s financial affairs and the options available to manage the disruption caused by the COVID-19 pandemic.
See ‘Directors duties in the context of COVID-19’, article by Commissioner John Price, 16 April 2020.
The uncertainty created by the COVID-19 pandemic may make it more difficult to make assessments on solvency and going concern. Assessments of solvency and going concern are distinct tests that have regard to their own specific criteria:
- any entity is solvent if it will be able to pay its debts as and when they become due and payable
- an entity is a going concern unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
It is possible for an entity to be solvent but not a going concern. There is also temporary relief in certain circumstances from parts of the provisions that make insolvent trading an offence, and there may be cases where some entities are insolvent but a going concern. For example, an entity may be facing short-term liquidity issues due to the impact of the COVID-19 pandemic on short-term cash inflows and may be unable to pay suppliers within normal credit terms. The business may be fundamentally sound, has forbearance from its lenders, and is expected to meet its debts in coming months. However, directors should exercise caution in relying on the temporary relief, be mindful of its limitations, and may need to seek appropriate professional legal and financial advice.
The solvency statement in the directors’ declaration concerns the company’s capacity to pay debts which it has incurred as at the time of that declaration. Directors should also take into account debts which will be incurred in the foreseeable future. In making the statement, directors should take reasonable steps to obtain all information relevant to forming an opinion in respect of this statement.
Depending upon the circumstances of each company, the statement may be that:
- the directors have reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable
- there is a material uncertainty as to whether the company will be able to pay its debts as and when they become due and payable – for example, the ability to renegotiate loans due for repayment, or
- the directors do not have reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.
The doubt over whether the company can pay its debts as and when they become due and payable may become so great that it is not appropriate for directors to give a positive solvency statement or one stating there is material uncertainty. In these situations, the directors should make a negative statement stating that the directors do not have reasonable grounds to believe that the company is able to pay its debts as and when they fall due.
A statement that refers to material uncertainty or that is a negative statement must be clearly worded and in sufficient detail for the reader to comprehend the statement fully. The statement should identify the item which is the subject of qualification and disclose monetary details where practicable.
In addition to the financial report, the directors’ declaration and solvency statement are within the scope of the auditor’s report. In that context, auditors should perform appropriate audit work in relation to the solvency statement.
While the solvency statement is made at a point in time, the requirements (as amended) concerning solvent trading apply at all times. Directors should review solvency as frequently as is necessitated by the circumstances of a company.
See Regulatory Guide 22 Directors’ statement as to solvency (RG 22).
Temporary relief is available for six months from director personal liability for incurring debts where a company is or will be insolvent in certain circumstances (see Question 10 above). An auditor of a company who suspects that the insolvent trading provisions (as amended by the Coronavirus Economic Response Package Omnibus Act 2020) or other duties of directors and officers under the Corporations Act have been contravened should report the matter to ASIC under section 311 of the Corporations Act. Given the amendments a company continuing to trade while insolvent may not always be a contravention. However, an auditor should report if, for example, the failure of a director to prevent the company incurring a debt may have been dishonest or if debts have been incurred outside the ordinary course of the company’s business.
See Regulatory Guide 34 Auditor’s obligations: Reporting to ASIC (RG 34).
ASIC is extending the deadline for both listed and unlisted entities to lodge financial reports under Chapters 2M and 7 of the Corporations Act by one month for certain balance dates up to and including 7 July 2020 balance dates.
The extended deadlines for lodgement by unlisted entities will assist those entities whose reporting processes take additional time due to current remote work arrangements, travel restrictions and other impacts of the COVID-19 pandemic.
Where possible, entities should continue to lodge within the normal 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.
Unlisted entities will be able to take one additional month to lodge financial reports for year ends from 31 December 2019 to 7 July 2020. Listed entities will be able to take one additional month to lodge full-year and half-year financial reports for 21 February 2020 to 7 July 2020 balance dates.
Listed entities will be required to inform the market when they rely on the extended period for lodgement. These entities may also find it desirable to explain the reasons for relying on the extended deadlines.
Similar extended deadlines will be available for sending reports to members, but some of those deadlines also operate by reference to the date of the next AGM.
We understand that ASX listed entities will need to lodge their Appendix 4E under ASX Listing Rules 4.3A and 4.3B by the due date (i.e. 31 August 2020 for 30 June 2020 year ends). If the entity does not have audited accounts by that date to append to its Appendix 4E, it will need to lodge unaudited accounts with its Appendix 4E.
See Media Release 20-084MR ASIC to provide additional time for unlisted entity financial reports (9 April 2020), Media Release 20-113MR ASIC to further extend financial reporting deadlines for listed and unlisted entities and amends ‘no action’ position for AGMs (13 May 2020), ASIC Corporations (Extended Reporting and Lodgment Deadlines – Unlisted Entities) Instrument 2020/395, ASIC Corporations (Amendment) Instrument 2020/396, ASIC Corporations (Extended Reporting and Lodgment Deadlines – Listed Entities) Instrument 2020/451 and ASIC Corporations (Amendment) Instrument 2020/452.
14. Can entities seek more than one additional month to complete their financial reporting obligation?
Timely reporting by entities is important and we envisage that the additional one month to lodge reports will be sufficient for the vast majority of those entities that may require more time. However, ASIC will consider applications to extend the reporting deadline for individual entities in appropriate circumstances. Where possible, any applications should be made at least 14 days before the normal reporting deadline. Applications can be sent to firstname.lastname@example.org and should include sufficient information for ASIC to assess the impact of market conditions and COVID-19 developments.
See Regulatory Guide 43 Financial reports and audit relief (RG 43).
ASIC has adopted a ‘no action’ position for AGMs of public companies with 31 December 2019 to 7 July 2020 year ends. ASIC will not take action if an AGM is held up to seven months after year end. For public companies with 1 June 2020 to 7 July 2020 year ends, the ‘no action’ position also applies where holding an AGM in January or February 2021 results in the requirement to hold an AGM in the 2020 calendar year not being met.
The Treasurer has issued a determination amending the Corporations Act for six months from 6 May 2020 which facilitates meetings, including AGMs, being held using one or more technologies (virtual technology) that give all persons entitled to attend a reasonable opportunity to participate without being physically present in the same place: see the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020.
To assist companies and responsible entities, ASIC has issued guidance setting out its views on the appropriate approach to calling and holding meetings using virtual technology and the requirements of the determination.
See Media Release 20-068MR Guidelines for meeting upcoming AGM and financial reporting requirements (20 March 2020) and Media Release 20-113MR ASIC to further extend financial reporting deadlines for listed and unlisted entities and amends ‘no action’ position for AGMs (13 May 2020).
16. Is an auditor required to report to ASIC where a company uses the ‘no action’ position on its AGM?
Where a public company with a year end from 31 December 2019 to 7 July 2020 holds its AGM between five and seven months after year end, the auditor is not required to report a contravention to ASIC under section 311 of the Corporations Act. Given that ASIC has adopted a ‘no action’ position, the contravention is unlikely to be considered significant for the purposes of section 311 provided the directors hold the AGM within the seven months.
See Regulatory Guide 34 Auditor’s obligations: Reporting to ASIC (RG 34).
17. Will ASIC consider additional time for listed and unlisted entities to report and hold AGMs for periods ending after 7 July 2020?
ASIC will continue to monitor how market conditions and COVID-19 developments are affecting financial reporting and AGM obligations for entities with balance dates after 7 July 2020. We may make further announcements depending on market developments.
18. What is the impact on the audit report and should all audit reports contain a general emphasis of matter paragraph on uncertainties relating to the COVID-19 pandemic?
There may need to be increased numbers of emphasis of matter paragraphs (EOMs) in audit reports, material uncertainty related to going concern (MURGC) paragraphs, and modified audit opinions (qualified, adverse and disclaimers of opinion).
Auditors should also be mindful that any inappropriate overuse of EOMs may diminish the value of EOMs and the ability of users to focus on the required EOMs.
EOMs draw attention to information in a financial report fundamental to users’ understanding of the financial report. Whether an auditor should include an EOM in their audit report referring to information in the financial report about any uncertainties associated with the impact of the COVID-19 pandemic, should be assessed on a case-by-case basis having regard to the specific circumstances of each entity.
Any EOM should refer to the entity’s disclosures about specific uncertainties relating to the circumstances of the audited entity and the matter giving rise to the uncertainty. For example, this may include referring to specific matters affecting estimates for the value of particular assets.
See also the examples of factors that may affect assets, liabilities and going concern assessments in the answer to Question 2 above.
Where a matter is covered in a key audit matter or a MURGC paragraph, it is not also covered in an EOM. If there is a MURGC and it is adequately disclosed in the financial report, the audit report should include a MURGC paragraph. An EOM is not a substitute where a modified audit opinion is required.
A modified audit opinion is required if, for example, the auditor has been unable to obtain sufficient appropriate audit evidence about the impacts of the COVID-19 pandemic on the values of particular assets, or concludes that the impact of COVID-19 has not been appropriately reflected in the financial report and therefore it is not free from material misstatement.
An auditor must complete all necessary audit work that it is possible to undertake to support their opinion before issuing the audit report, even if reporting deadlines (including extended reporting deadlines) will not be met.
However, an auditor should not delay their audit report where information needed for the financial report or supporting the audit opinion will not be available to the auditor for a period and the matter is outside the control of both the auditor and the audited entity, particularly where the period is prolonged or uncertain. The auditor should issue a qualified opinion or disclaimer of opinion in respect of any significant limitation on the scope of the audit.
Finalisation of the financial report, directors’ report and the audit report should not be delayed beyond the reporting deadline pending the resolution of matters such as the audited entity’s funding situation or the impact of the COVID-19 pandemic on the business becomes clearer.
The auditor should also consider the need to report a contravention to ASIC if the financial report is not completed within the applicable reporting deadline.
See Regulatory Guide 34 Auditor’s obligations: Reporting to ASIC (RG 34).
A company is required to pay the auditor’s reasonable fees and expenses (section 331 of the Corporations Act). The setting of audit fees is a commercial decision by companies and their auditors. The overall audit fee setting process should be managed by the directors and the audit committee to ensure that fees are not set at a level that could lead to audit quality being compromised.
When companies are under financial pressure, audit fees can be affected in the pursuit of general cost reductions. However, audit fees are usually a small proportion of costs, and reducing them might not have a significant impact on a company’s profit and cash flows.
The impact of the COVID-19 pandemic may significantly increase audit time and the expertise required. Auditors may be faced with some more challenging judgements in areas such as assessing asset values and whether a company is a going concern.
Remote work arrangements of companies and auditors may affect audit effort and time. For example, the company’s internal control environment and processes may change, stocktakes may need to be observed remotely, and remote work may create communication or other inefficiencies in the audit process.
See Information Sheet 196 Audit quality – The role of directors and audit committees (INFO 196).
21. How are ASIC’s regulatory activities in relation to financial reporting and audit changing in response to the COVID-19 pandemic?
ASIC’s financial reporting surveillance and audit inspection activities are continuing given their importance to confident and informed markets and investors through quality financial reports supported by quality audits.
Consultation on possible routine reporting of audit inspection findings to audit committees and some parts of our reviews on culture and talent at the largest audit firms have been deferred.
See Changes to regulatory work and priorities in response to COVID-19 for updates on financial reporting and audit activities.