Under Chapter 2M of the Corporations Act 2001 (Cth), all public companies and large proprietary companies must prepare a financial report and a directors' report each financial year.
The Australian Securities and Investment Commission (ASIC) have released a list of Frequently Asked Questions (FAQs) to assist companies, directors and auditors understand ASIC's focus areas for financial reporting and audit matters given the impact of the COVID-19 pandemic.
This article summarises the key FAQs in respect of private companies and, in particular, outlines ASIC's position on how directors can minimise possible liability in connection with accounting estimates and forward-looking statements in such a volatile and uncertain market.Alexandra Hodsman, Maddocks lawyers
The FAQs provide that the key focus areas for financial reports ended 31 March 2020 to 30 June 2020 include:
ASIC has also reminded entities to appropriately account for each type of support and assistance from landlords, lenders, government and others and provide clear disclosure of significant amounts, the commencement date and expected duration of support or assistance. For a description of how to document rent-relief given to entities by their landlords and how the Cleardocs Rent Relief (COVID-19) product can assist you, please read our other article here.
According to ASIC, the key events occurring after 30 June 2020 that may affect financial reports include the:
The impact of these events on companies depends on their exposures to the Victorian market, such as operations, suppliers and/or customers in Victoria.
ASIC concedes that the possibility of a 'second wave' of COVID-19 cases in Australia may also be factored into assessments by directors and auditors and, where applicable, some of the probability weighted scenarios. Directors and auditors can also assume that some events may be associated with other events - for example, the possibility of a 'third wave' may lead to different expectations on the degree of support by governments or others.
ASIC has also foreshadowed that, in some cases, uncertainties may lead to a wide range of reasonable and valid assumptions regarding future performance and cash flow. This could affect the assessment of asset values or liabilities/provisions of a business, or the assessment as to whether an entity is a going concern.
Directors have a duty to the company and this includes a duty not to be misleading or deceptive in respect of the preparation of accounting estimates or forward-looking information.
The FAQs remind directors of this obligation, saying that they should have a reasonable basis for each significant estimate in the financial report and any assessment on whether the entity is a going concern. Directors and auditors should challenge key assumptions and should communicate clearly, concisely and effectively.
Transparency is important to market and investor confidence in financial reports.
In ASIC's view, the risk of being found liable for misleading or deceptive accounting estimates or forward-looking information is a low risk, provided that:
For more information, contact Maddocks on (03) 9258 3555.
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Qualifications: BA, LLB, Deakin University
Sophie is a member of Maddocks Commercial team. She is a corporate and commercial lawyer with a particular focus on:
She regularly assists clients across multiple sectors including consumer markets (beauty and retail), industrial (manufacturing and distribution) and financial services. Her private sector clients include multinationals, private equity funds and founders.
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