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Financial reporting by directors in the time of COVID - ASIC provides guidance

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

ASIC key focus areas

The FAQs provide that the key focus areas for financial reports ended 31 March 2020 to 30 June 2020 include:

  • value 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;
  • key assumptions and sensitivity analysis;
  • operating and financial review - underlying drivers of results, business strategies, risks and future prospects; and
  • going concern assessments and solvency.

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:

  • Melbourne-wide Stage 3 that took effect from 7 July 2020;
  • Stage 4 restrictions that took effect from 2 August 2020; and
  • changes in JobKeeper that were announced on 23 July and 7 August 2020.

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.

Discharging Director Duties

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:

  • any statements are appropriately qualified (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; and
  • both directors and auditors 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.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555.

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Lawyer in Profile

Leigh Baring
Leigh Baring
PH: 61 3 9258 3673

Leigh is a partner in the Maddocks Tax & Revenue team.

Leigh regularly provides advice on:

  • structuring of businesses and transactions;
  • mergers and acquisitions;
  • corporate reorganisations and distributions;
  • sale of businesses;
  • demergers;
  • capital raisings;
  • joint ventures and property developments;
  • international tax (both inbound and outbound);
  • succession planning; and
  • liquidations.

His advice covers both direct and indirect tax considerations.

Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.