ASIC releases guidance on COVID-19 financial reporting

On 28 April, ASIC released guidelines on financial reporting and audit matters that are a must-read for all directors.

The guidance talks about the disclosures that need to be made in the financial report (and for reporting entities, the operating and financial review) covering topics such as

• What disclosures should be made in the financial report and the OFR
• Appropriate factors to consider for assets, liabilities and going concern assessments
• Solvency resolutions and issues of trading while insolvent
• Reporting deadlines
• Audit matters

The guidance refers to the passing of insolvency resolutions by Boards, a topic discussed in an earlier AICD article. A solvency resolution, which is a resolution by the directors of a company as to whether or not, in their opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable, is required to be passed by Boards when filing financial statements. It has largely operated as a pro forma requirement to date, with directors satisfying it by filing a return with ASIC. The Government’s decision to temporarily suspend the duty of directors to prevent insolvent trading, combined with the uncertainty generated by COVID-19, has now raised questions regarding compliance with this requirement.

The ASIC guidance confirms that solvency and going concern obligations remain for directors, notwithstanding the temporary safe harbor, and goes on to provide advice on how to assess solvency. Qualified declarations of solvency are also available for entities and some advice on how that might be applied is provided. ASIC notes that, because of the suspension of the duty and many businesses effectively going into “hibernation”, it may be possible for an entity to be insolvent and yet still a going concern. This is an entirely novel prospect that preparers of financial statements, directors, auditors, and users will need to adjust to.

The AICD understands that further guidance, particularly on assessing going concern during COVID-19, will shortly be forthcoming from regulatory and standard setting agencies. The AICD will assess those publications once they are released to see if we need to release our own guidance to assist directors. In the interim, members are encouraged to consider the guide to going concern issues published by the AICD and the Auditing and Assurance Standards Board (available here).

The ASIC guidance also refers to some of the reporting relief that ASIC has provided as well as the “no action” position ASIC has taken around the holding of AGMs. Finally, the guidance provides some very important information for auditors. This includes on how they should deal with disclosure of emphasis of matter, delays in reporting and negotiations around audit fees. Again, the AICD expects further clarification from the standard setting bodies on how auditors should approach these matters in early May.