With another 31 December financial year ending, finance teams across the state are pulling together financial statements for their entities. In preparing and reviewing these statements, it’s important to consider whether they appropriately disclose the key events that have had the greatest impact on the financial performance and position of your entity this year.
While 2020–21 was relatively quiet in terms of new accounting standards, entities should be aware of several key areas that may require specific consideration when preparing financial statements.
Assessing and disclosing the continuing impact of COVID-19
Last year, many entities included specific disclosures to explain how COVID-19 impacted on their financial performance and position. In some cases, these disclosures also highlighted how the continuing impact of COVID-19 increased uncertainty, which may impact future financial years.
When assessing COVID-19-related disclosures this year, it’s important that your entity ensure it updates any such disclosures to reflect the actual impact on the financial statements. This may include explaining how uncertainties existing at 31 December 2020 developed during the year, or possibly that they did not eventuate or had less of an impact than you anticipated.
As the impact of COVID-19 in Australia remains fluid, it’s also important that your entity continues to assess any events that arise after 31 December and determine whether you should reflect these in your financial statements. This assessment needs to occur up to the date that management signs the financial statements, and even up to the time you make the statements publicly available.
Last year we published a blog to help entities assess the impact of COVID-19 events occurring after the reporting date: Assessing COVID-19 events after the reporting date and why auditors are required to review this.
Disclosure of climate-related risks
In January 2020, we published a blog post to help entities determine whether they should disclose climate-related risks in their financial statements
When entities prepare their 2020–21 financial statements, we continue to encourage them to consider:
- whether users could reasonably expect that emerging climate-related risks could affect the amounts and disclosures in the financial statements
- including only material disclosures about the impact of climate-related risks on the assumptions made in preparing the statements.
In doing so, we encourage entities to focus on how the risks specifically relate to amounts reported in the financial statements, or the basis on which they have prepared the statements. Disclosures on the entity’s policies or overall approach to managing climate-related risks more appropriately belong in the annual report or other documents outside of the financial statements.
Changes in accounting policies, estimates and prior period errors
Many entities obtain better information with the passage of time. Entities need to consider if new information changes their judgements and estimates; for example the fair value of property. Where entities obtain new information that wasn’t reasonably accessible in the prior year, they don’t need to change the comparative figures. However prior year figures should be corrected if information should have been sought and used in determining an estimate or judgement.
Entities are also considering the impact on their financial statements from IFRS Interpretations Committee’s (IFRIC’s) clarified decision on how to account for software as a service. Some entities will have capitalised significant investment in customising software. IFRIC’s decision was that there are limited circumstances where these costs can be capitalised. This will change entities’ accounting policy and will need retrospective adjustment. See our recent blog post which contains questions governance committees need to ask when capitalising cloud computing arrangements.
Always consider whether corrections are material when developing your disclosures.
Final thoughts
Over the last few years, QAO has worked with entities to declutter financial statements by removing disclosures that are not required to enhance the users’ understanding of the statements. While we continue to support this approach, it’s also important to ensure that information included in financial statements remains relevant and focuses on areas that are of greatest importance to users.