CPA Australia, in co-operation with the Australian Institute of Company Directors and Chartered Accountants Australia and New Zealand, has published Impacts of COVID-19 on Annual Report Disclosures: A Guide for Directors, Preparers and Auditors.
The COVID-19 crisis has created a climate of uncertainty for everyone, but the pandemic does not mean that the information value of companies’ annual reports has evaporated.
In some respects, the need for reliable information has increased and it is up to finance professionals to ensure that not only are statutory obligations met but also that maximum transparency is provided.
For this reason, CPA Australia, in co-operation with the Australian Institute of Company Directors [AICD] and Chartered Accountants Australia and New Zealand, has published Impacts of COVID-19 on Annual Report Disclosures: A Guide for Directors, Preparers and Auditors.
The publication has been welcomed by the Australian Securities and Investments Commission [ASIC], and a commentary by ASIC chair James Shipton is included in the Guide.
ASIC has released guidance for reporting during the crisis, asking entities to focus on asset values, provisions, solvency and going concern assessments, events after year end, and disclosures in the financial report and the Operating and Financial Review.
All those topics are covered in the Guide, with pointers to relevant information sheets from ASIC and other agencies.
“We know that entities and auditors will be dealing with difficult issues around solvency, going concern and in areas like asset impairment,” says CPA Australia’s CEO Andrew Hunter.
“This guide does not seek to replace the material issued by the regulators and standard setters but instead is a roadmap to help navigate their guidance and FAQs.”
Reviewing accounting policies
Claire Grayston, CPA Australia’s policy adviser – audit & assurance, notes that the impact of the pandemic on most businesses will be pervasive, and accountants will need to consider the appropriate accounting policies to adopt.
For instance, government grants may not have figured in the entity’s revenue in the past but may now be significant enough to be included as a “significant accounting policy” under paragraph 117 of AASB 101.
She says: “It will also be critical to document the assumptions underpinning estimates. Estimates may need to be updated before final sign-off if circumstances have significantly changed since the estimates were made.
“No one can be sure how the pandemic will play out over the coming year so transparent disclosure is key.”
Transparency should provide investors and other stakeholders with the information they need and should also serve as a basis for directors and management to communicate issues and problems that might emerge going into the next accounting period.
It is impossible to know in detail when economic conditions might return to normal but there are many uncertainties arising from COVID-19 along with their potential impact that may need to be disclosed. These might include the impact of withdrawal of government support or the effect of a continuation of travel bans.
“The Guide sets out business risks which directors and accountants can consider in scenario modelling to help them make judgements, assumptions and estimates about the potential effect of COVID-19,” says Grayston.
“Sensitivity analysis on these scenarios will enable the potential impacts to be assessed as a basis for looking forward.”
Another pertinent point relates to the Australian Government’s decision to temporarily suspend the duty of a director to prevent insolvent trading with respect to any debts incurred in the ordinary course of the entity’s business.
This relieves the director of personal liability that would otherwise be associated with insolvent trading (unless the directors are dishonest or engaged in fraud), although there is still an obligation to pay debts in due course.
The waiver will expire on 25 September 2020 and, at time of writing, the waiver has not been extended.
Appendices in the Guide set out how the relevant accounting standards will apply in the COVID-19 environment and when auditor report paragraphs and modifications may be necessary, as well as the regulatory relief available.
Grayston also notes that auditors will need to take additional time to be satisfied that the impacts of COVID-19 are adequately considered and reflected in financial reports, and that disclosures in directors’ reports are consistent with the information and underlying assumptions in the financial report.
Questions for directors
For directors providing the narrative section of a report, the Guide lists issues that might be considered.
These include the management of liquidity risk, changes to plans and objectives, the status of reserves, the impact of changed work arrangements for employees, and the effect of travel and trade restrictions.
Mitigating factors that might be discussed include government support received, reductions in operating costs, changes to debt covenants, and re-negotiation of contracts.
AICD managing director and CEO Angus Armour emphasises that directors should ensure that there is thorough documentation.
“Data integrity is critical, and directors should check that proper systems are in place,” says Armour.
“To prepare for any retrospective review, they should focus on documenting the basis for assumptions, showing that any action was undertaken with reasonable grounds. This is essential in managing future litigation or regulator risk.”