ASIC’s approach to regulation during COVID-19

Intro:
Hello, and welcome to the CPA Australia podcast, your weekly source for accounting, education, career and leadership discussion.

Ram Subramanian:
Hello and welcome I'm Ram Subramanian, policy adviser in reporting at CPA Australia. Joining us today is Doug Niven, who is ASIC's chief accountant. He is responsible for ASIC's strategy and policy on financial reporting, audit matters, complex and contentious accounting issues and advising other ASIC teams. He's a member of IOSCO Committee 1 on accounting, audit and disclosure and the member of the International Forum of Independent Audit Regulators. Doug has been with ASIC for 22 years and was previously with a large audit firm for 15 years. The topic for today's discussion is around ASIC's approach to regulation and support in the COVID-19 environment that we're all living in.

Ram Subramanian:
The COVID-19 pandemic has affected all aspects of everyday life, and we are continuing to assess the ongoing impacts of the pandemic on the Australian economy. One very important source of information available to markets to make this assessment is the annual financial reports produced by Australian companies. In order to assist companies understand some of the main challenges that may arise from the current economic uncertainties we all face, ASIC has produced a number of frequently asked questions. Also, as part of its regulatory oversight of the corporate sector, ASIC has published its focus areas for financial reporting on the COVID-19 conditions. Whilst I appreciate that financial reporting season is well underway, we expect some of the insights Doug will be able to share with us will be useful for companies and their stakeholders in the current economic environment. Welcome, Doug, and thank you for joining us today.

Doug Niven:
Thank you, Ram.

Ram Subramanian:
Doug, could you start off by telling listeners what initiatives ASIC has undertaken to assist the barriers of financial reports, their advisors, and auditors to comply with their financial reporting obligations during these challenging times?

Doug Niven:
We were very conscious with the COVID-19 conditions that there are a number of challenges for preparers, advisers, and auditors that includes of course directors, management, as well as others preparing financial report. And that leading into the reporting season, so it was important that we give guidance as we normally do, not only around the areas of focus for financial reporting, but also to try and answer some of the issues that we could see coming for preparers and auditors leading into those reporting seasons.

Doug Niven:
And a large part of that did go to the issues around COVID-19 impacts on entities, some positively impacted but quite a number of course unfortunately adversely impacted by these conditions. And so, thinking about what that meant, and particularly in the context of number of uncertainties relating to the future. So we were in the unusual situation that there are a whole range of factors that were mentioned in the frequently asked questions that you referred to around uncertainties on when you would have a vaccine, how your supply chains would be affected, domestic and international economies, ability to refinance, I won't go through the whole list but... so we thought it was important in that context to both give frequently asked questions with guidance, the media release, of course that you've mentioned around focus areas which we put out for the June reporting season, but applies for September and December as well.

Doug Niven:
And large part of it was educative as a starting point. We did have an enormous number of discussions with stakeholders, whether it was audit firms of various sizes, obviously CPA Australia, other accounting bodies, preparer bodies just a broad range of communications as you would understand them. That was to understand people's preparedness, the issues that they had, and so forth. And did help us in putting together those frequently asked questions that are available on our website. We also did think about given some of the practical issues of working remotely and also the more difficult judgments, because those more difficult judgments need the more disclosures around underlying assumptions, how businesses were affected and so forth. And I'm sure we can go into that in more detail around the focus areas and the areas that we gave guidance on.

Doug Niven:
It was also important that we thought about the pressures on the reporting process, particularly given that a large number of listed and unlisted entities do balance at 30 June. So we did actually give an additional 30 days for all entities, this is other than registered foreign companies, companies disclosing entities, the AFS licensees and registered schemes for their compliance plans, audits and so forth. An additional 30 days to report, having said that, we did recognise it was important that companies report on a timely basis with quality information. And so, we did say that companies should only take advantage of that 30 days where it was necessary to do so.

Doug Niven:
And in fact of course what we found is that certainly the listeners base, the vast majority of companies did not take additional time to report. But nevertheless, that was an important element. We did also give additional time through a no action situation to hold annual general meetings, and also originally no action situation in relation to virtual meetings so that it's covered by determination that's been put out by the treasurer.

Doug Niven:
So we did think about the broad range of aspects on this. So public company AGMs, effectively an additional two months. So those pieces of belief in the no action situation run through for balanced dates effectively 30 June, but it's actually up to the 7th of July, recognising that the corporations act allows balanced space to vary by plus or minus seven days. And some companies do take advantage of that. So certainly a broad range of aspects that we looked at there, I can probably go into more detail around but that gives you a little bit of a flavour of the sorts of things that we'd been looking at. And I'd certainly recommend that listeners do have a look at those frequently asked questions. And also the focus here is... because they will be important, not just for the affording season that we're going through at the moment, which is continuing particularly for unlisted and that they just... but also thinking about reporting, going into September and December as well.

Ram Subramanian:
Those focus areas that ASIC published that you've just mentioned was back in July 2020, and FAQs were published earlier in May 2020. And they're certainly very useful reference points and guidance documents for preparers and others. Looking just at these focus areas and there are some areas such as asset values, including impairment considerations that are regular feature of ASIC focus area announcements. There are also some new focus areas such as solvency and going concern assessment hardly surprising I would say given the current situation, could you expand on the recent publication, the focus areas publication that is, and the thinking behind some of the focus areas that have been included this time round?

Doug Niven:
Very happy to do so, Ram. And we did effectively completely rethink what the focus areas should be, with reporting under COVID-19 conditions. These sorts of conditions hadn't been encountered previously, and so there is a degree of overlap with previous focus areas because we already had a focus on asset values, but we were thinking particularly in the context of COVID-19 conditions and those entities or grevers we affected by those conditions that potentially asset values could be affected, partly because of short term impacts but also importantly the possibility of longer term impacts on entities.

Doug Niven:
So you need to take into account there of course a range of government and other support, but recognising that there can be changes that are occurring and the new norm of course may be different from what we've faced in the past. And so different industries will be affected differently, but certainly a focus on asset values is very important, whether you're looking at recoverable amount of non-financial assets on value and use and fair value or looking at investment properties you have retail commercial properties for example, or other assets inventories receivables, where you have to think about a new financial instrument requirements about applying expected credit loss model as opposed to an incurred loss model.

Doug Niven:
But we certainly thought asset values was going to be quite important. Also, the need for liabilities in terms of particularly provisions companies may need to restructure. It could be a range of reasons, perhaps contracts become onerous as a result of the circumstances. We also did have a focus on as you say, solvency and going concern assessments. And this was recognising that unfortunately there will be some companies that will be affected and may face particular difficulties in the current environment. Some businesses may be fundamentally seldom, perhaps maybe going concerns but actually not be solvent, able to meet the discuss some way forward and their various provisions dealing with solvent at the moment as well. But you could actually end up with those sorts of unusual situations where a company is not solvent, but is a going concern. But the importance is making those assessments.

Doug Niven:
And in all of these areas, it is about making sure that investors, potential investors, creditors, other users of financial reports are properly informed. And this does go back to the importance of the quality of information and financial reports to the broad range of users you making decisions about allocations case resources in a sense, and the importance of the quality of financial reports being supported by quality orders. So it's quite important to think about the users in this context and what information they need. And it does go back to thinking about disclosures as well. We did have a focus bud way on events occurring after balance date, which could be adjusting or not adjusting, but disclosures more broadly were quite important because of the uncertainties. And the factors that I mentioned before that different companies in similar circumstances potentially might reach reasonably different judgments. We want people to come up with reasonable and supportable assumptions, but it's going to be so important that they disclose what assumptions they're making and for example, valuing their assets.

Doug Niven:
But there were estimation uncertainties, perhaps more information around sensitivity analysis, scenario analysis probably weighted scenarios. So that users have a better understanding of how numbers were put together and can better understand those numbers and make comparisons across companies, for example, in the same industry. But it's also the financial, in addition to the financial report disclosures, the disclosures in the operating financial review of those companies or the review of operations for unlisted companies that we focused attention on, because that's going to be so important to understanding what was driving the numbers, the underlying drivers of the result and the financial performance, and also what the risks are, the management strategies and the future prospects. Not necessarily here quantification in terms of forecast but certainly understanding what's impacting on the business going forward. And that's what we did also include some specific areas like making disclosure around government support, such as job cable, rent concessions of the received.

Doug Niven:
And the like, so that uses of financial reports had a better understanding of what's going on and is very much about telling the story that is so important. And so it is about, yeah, one lesson is disclose, disclose, disclose, and that's so important to dealing with what is important to use the financial reports, but also questions about hindsight, so that if questions are raised later on is possible to point to in the financial report and operating the financial review, but also internal documentation in the company, what circumstances were there at the time that these judgments were being made and how they were approached, how you got to breach more and supportable assumptions, and that will make it so much easier to deal with those sorts of questions down the track. I could continue Ram, but I think I should probably take a breath there and back to you.

Ram Subramanian:
Thank you, Doug. I think you hit upon quite an important point there, right at the very end about disclosure, because obviously I first base financial reporting is filled with estimates and judgement calls on many of the metrics that are included and some of them are based on forward looking information and given the current circumstances, I suppose the challenges are there in terms of making reliable estimates on forward-looking information. So I suppose the point you made about disclosure is probably even more important than any other time. Not that it's not important in other times, but now more so than ever, I think this culture is going to be quite critical. Now, obviously ASIC continues its surveillance activities innovated, I'm assuming as part of the financial reporting surveillance activities that it undertakes. And to some extent, I suppose it's got its own audit inspection programme as well. That is ongoing. Is there any difference in approach that ASIC is taking both for its financial reporting surveillance activities and also the audit inspection programme that it runs continuously.

Doug Niven:
There certainly are some changes in activities and recognising COVID-19 conditions. We did re-examine what we're doing and when we're doing it. So there were some policy matters, for example, that we deferred some consultation around regular reporting of findings from audit inspections to audit committees, for example, that that was deferred in some of the work at the firms around quality controls, but fundamentally the financial reporting surveillance, particularly with the 30 June reporting season is fundamentally important. And so an audit inspections are of course important as well, given the importance of the role of the auditors and maintaining quality and that's base. But we've put more effort at the moment into the financial reporting surveillance and we scheduled some of the inspector work, which also gave a bit more time for auditors during the peak of the reporting season as well. But for the financial reporting surveillance, you can understand that we would be focusing on similar areas to those that we've outlined as focus here is for preparers.

Doug Niven:
We have management, directors, auditors and as a part of that process, you could probably understand that we've done a lot of analysis around industries that will be affected in particular ways, trying to understand businesses. What we would expect would be the impacts on those businesses, what disclosures they would be making to the market. So as always, we will be having a look at... and we're already are but have a look at financial reports and make inquiries of companies where we have concerns, for example, around asset values. But more importantly this time giving greater focus to disclosure to the market. As I mentioned before, informing users through disclosures around uncertainties assumptions, management strategies, the risks, the future prospects is going to be so important in the current environment. So we're certainly placing greater emphasis on that. And you can expect that some companies will receive questions in those areas.

Doug Niven:
Certainly it's a very good company so far, we are at through the whole was at 30 June reporting season for the unlisted. But it's good to hear that certainly at the larger end of town, a lot more effort has been put into reporting with the COVID-19 conditions and thinking very much about what information is needed by use of the financial reports and how you can satisfy their needs and provide a useful and meaningful information. The audit spectrum process will have a similar focus on some of these areas. And yes, we have deferred some of the inspections but as I say that, that is an important process. The cycle of inspection is leading through for the 12 months to 30, June, 2020 was completed as normal. And that will be reported on publicly in December of this year.

Ram Subramanian:
So, Doug, you talked a little bit about your financial reporting surveillance activities just then. And if I may delve a little bit into that particular area of regulatory activity of ASIC, 30th of June, 2020 is obviously gone now and we're well into the post 30th of June 2020 period, the reporting season as we call it. And as it could presume would have looked at some of the financial reports that have being prepared for the 30th of June, 2020 urines. And you may be considering some of the disclosures that are been included in there that are relating to the COVID-19 pandemic. Are you... I appreciate that this is probably still an ongoing process, but are you able to share some very broad, general points or findings from your post study of June 2020 surveillance?

Doug Niven:
Happy to do so, Ram and you're quite right in saying the process is underway. It's still a case that not all this companies as of the date we're recording this podcast of completed and launched their financial reports. But, and by the way with the caveat that our surveillance is risk based, so that can affect the early results. But I guess if first observation is a positive one, that there are certainly a company financial reports and annual reports that we've looked at that do appear to have a good level of disclosure around the effects of COVID-19 the impacts and so forth. But having said that in the financial reports that we've been looking at so far, there are some areas that have been identified subject to further inquiries of companies, of course, to better understand what they've done and why, and of the areas in a sense how to surprise.

Doug Niven:
They are areas that we've touched on in terms of the focus areas that we were talking about, but perhaps if I just run through a few of them and not necessarily suggesting that there's any systemic issues here, small numbers of companies involved so far, but we have certainly identified cases where there are adverse impacts on results. It might be imperative of assets or other factors that are affecting the company. And we had already called out the possibility that companies would attribute the sorts of impacts to the COVID-19 conditions. When in fact they might be attributable to a combination of factors, or in fact the impacts may have occurred before COVID-19 came along, they might be independent of COVID-19. And so we've already identified circumstances where it appears that companies have attributed, for example, in payment losses to COVID-19 where those losses were wholly, or at least partly attributable to factors of all the impacting on the company's business prior to COVID-19.

Doug Niven:
We have seen a couple of companies where further questions are warranted because they have got clean solvency statements, no uncertainties in relation to going concern it being highlighted. And it... when you look at the business and the circumstances, potentially with actions being taken, for example, by creditors, there are questions about whether those were the appropriate forms of reporting. We've also found cases where not all forms of support make concessions or whatever have been disclosed by entities, there are some material questions around that as well. We've seen complications where assets have been revalued upwards in industries and markets where on the face of it, we wouldn't have necessarily expected values to have been increasing. Now this is of course, over a 12 month period, but that might include for example, properties in retail and commercial sectors. So obviously some questions about, are there some circumstances unique to those particular entities that enable them to be revaluing assets in those circumstances?

Doug Niven:
There's interestingly enough cases where companies have not referred to COVID-19 at all. I'm not saying a large number, and there is a question if a company wasn't impacted at all by COVID-19 what they should be calling that out. But these are in circumstances where it does appear that the companies were effected by COVID-19 conditions. And lastly, I didn't mention before, but we do have a focus on the use of non-egress financial information in the current environment and how results will be presented. So we want good disclosures to investors and other users of financial reports around how the company is performing, what's driving the results, whether it's COVID-19 or other factors, but we did have some concerns about how that information might be presented in a way which perhaps intentionally or unintentionally is potentially misleading or gives the wrong message. And so an example is, we've seen some cases where companies have presented segment results for just say the first eight or nine months of the year.

Doug Niven:
Now, of course, there's a question whether that is actually the segment result for the year every timing for that period, but then they'll perhaps have commentary on that first part of the year, whether that's representative of the enormous question, whether with COVID-19 impacts at the start of that period already impacting on their businesses. But then you'll find that when they reconcile, at least in one case, when they reconcile, as it required to do back to the statutory profit and face of the income statement, they don't start with the eight or nine months result. But with the 12 month result, which raised the question to where's the result for the last few months of the year gone? And that's still an important period because how COVID-19 affects an individual company is not necessarily linear. There's no clean cut off for most businesses. There are actually range of factors occurring, passive the business may be closed or different markets in which they operate are affected differently at different times.

Doug Niven:
And so good disclosure, so people can understand what's happened to the business and put narrative of what's been happening is important, but just slicing the numbers arbitrarily with a cutoff that isn't necessarily a clean cutoff would not appear to be the best way to go. And we have covered this off in one of our frequently asked questions as well. And again, with the caveat that we do need to talk to companies around some of these matters is still early days. And so we're always open to the possibility that there's a yeah, aspects we don't understand or justify approaches that are being taken by companies as well. But just to highlight those few matters, there may be other matters that emerge and come to our attention as the reporting season goes on and as we look at further financial reports.

Ram Subramanian:
Thank you, Doug. Right at the end there, you mentioned the frequently asked questions. And maybe if you could just explore that a little bit, obviously, as he has published a series of FAQ to assist preparers tackle some of the challenges that could arise from COVID-19 related impacts. And I think you've already touched on one of them in the form of knowledge non-infringement or non-gap information, what areas in addition to the non-infringement or gap information have you covered in this FAQ and what is the rationale for covering these areas of FAQs? If you could just expand on that a little bit. That would be great, Doug.

Doug Niven:
It's a good question Ram. And I should say the FAQ are available of course on our website, the best way to find them is using Google, putting COVID-19 frequently asked questions and it will probably be the first hit, but it's probably the easiest way to actually find them just a tip there. We do check if the Linkedin app media release for the focus areas so they can be found, but we did cover quite a number of areas, well it focused particularly on financial porting and audit. They go a little bit beyond that. And there are some areas that we do touch on that affect 30 June reporting, which may not be strictly related COVID-19. So for example, we did touch on the decisions in the federal court around casual employees, which CPA Australia with others has put also some guidance out on as well.

Doug Niven:
But if I go back the COVID-19 as well as the focus areas, yeah as it values by [inaudible 00:30:16], going concern solvency and disclosures in the notes and in the operating financial view and use of non-infringe financial information, we did go beyond it into some particular areas that we thought was important. And the first one of those was around half year financial reports because a number of disclosing entities, listening Gs, and many of the people listening to this podcast to interest intelligent reporting for the analyst is that we did recognise that the first financial reports could actually be half year financial reports and at a high level of disclosure often approaching that in full financial reports around COVID-19 impacts would be important. We also do think about some aspects of the solvency question, perhaps won't go into all the detail at the moment, but you'll be aware that there is some relief given through determination from personal liability for directors, for incurring debts or trading while insolvent, there are limitations on that it's in the ordinary course of business.

Doug Niven:
And yet, I've heard director [inaudible 00:31:33] still apply general duties, fiduciary obligations, and so forth. So you need to be aware of that. It's probably an area that someone's relying on it. You want legal advice but fundamentally it was about businesses that are fundamentally send having short term liquidity problems and expected to train through. And how about that one as an important area to think about because, and it's well known now that the level of insolvencies this year compared to last year is down. And so there are questions as to what will happen when some of this relief and government assistance drops away as to what that might mean. So certainly an area to think about. There's no relief from the requirement in financial reports, of course, to provide a solidarity statement. And if a company isn't able to pay statism when they forward you and easing the situation where they trade, having regard to the liability relief and so on, it doesn't relieve them from calling out the fact that they aren't able to pay the debtism when they forward you, they can't give a clean solvency statement.

Doug Niven:
So, and at courts it can be companies that have uncertainties in that regard as well. So we certainly thought it was important to cover that area. Hopefully not many of those listening to this podcast are facing those circumstances, but nevertheless that was an area that we thought did require particular attention. We obviously also did have frequently asked questions and still do of course, around the extension of time that I talked about before and the AGM requirements and virtual meetings and the like.

Doug Niven:
We had a number of questions in relation to auditors perhaps a white coming into enormous amount of detail on that, but the need for again, specific reporting around key audit matters and any exceptions mutual uncertain relating going to send whatever it may be relating to the entity, not general boilerplate or we've got COVID-19, which won't be very helpful to anyone. So we certainly gave some guidance for auditors there. And we did also talk about some changes in our activities, but that gives you a little bit of a flavour, but I'd certainly recommend having a look at the frequently asked questions is over 20 questions there. That doesn't mean it's hard reading. We tried to keep it high level and as simple and straightforward to readers as possible as well. But reading those in conjunction with that, we release on the focus here is for financial reporting as well is important.

Ram Subramanian:
Doug, thank you very much for providing your thoughts and insights into some of the key matters that preparers and auditors need to be considering during these somewhat challenging times where we are going through a global pandemic. I think you've provided some very good thoughts on both the ASICs FAQ on COVID-19 related the national reporting matters. And of course, the focus areas, publication, the media release that ASIC published a little while ago for the benefit of listeners, both those resources, we have provided the links to them on the same page where this podcast resides.

Ram Subramanian:
And we also provided links to a couple of other resources. One particularly, Doug mentioned around the accounting for entitlements for casual employees. That's a guide that can be prepared jointly with the chartered accountants, Australia and New Zealand and the Australian Institute of company directors with input from a number of stakeholders. So that guide linked to that is also available on this website and a few other resources that will be relevant to listeners who are interested in this topic, but I'd like to thank you again once again for all your valuable insights during this podcast recording.

Doug Niven:
Thank you very much, Ray.

Outro:
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