Questions 3 Regulators, investors prepare for COVID complications in reporting Large listed companies have been issued a firm directive to reveal just how reliant they are on the Morrison government's $70 billion JobKeeper program and other wage support packages around the globe as they prepare for the trickiest reporting season in recent years. Delivering profit numbers to the market was already a challenge as two major accounting changes came into effect this year but the COVID-19 crisis has added further complications, prompting the corporate watchdog to inform companies that despite the uncertainty, it will be expecting increased disclosure. We have been experiencing COVID-19 for a long time but in terms of reporting it is still to hit us," the Australian Securities and Investments Commission's senior executive leader, Doug Niven, told The Australian Financial Review. "[The period ending] June 30 is when the rubber hits the road, he said. In a release last week, the regulator stressed that it expected companies to disclose the extent to which companies relied on government grants, and how reliant on these programs they would be in the future. ASIC also cautioned against presenting what earnings would have been were it not for the COVID-19 crisis, as it had the potential to mislead. The full-year profit season is expected to kick off at the end of the month as companies with financial years ending on June 30 front the market. It comes as most firms have withdrawn profit guidance, creating the most uncertain reporting season in years. Further complicating reporting season is the unusual COVID-19-impacted trading period that has been accompanied by extraordinary government support measures to help businesses during the lockdown phase. Mr Niven said full disclosure around government assistance was vital so that investors could determine how much of the result is due to the performance of the entity, how much is due to support and what will happen if the support drops away. If there is no transparency, there will be questions asked of companies and they may be marked down in the market," he said. Rent complications Mr Lawrence said accounting for rent relief posed one of the trickiest problems for companies as new accounting standards required operating leases to be brought onto the balance sheet as a liability. Adopting the new lease standard in the year COVID hit turned out to be terrible timing, Mr Lawrence said. The new standards apply mainly to tenants such as retailers, and international accounting bodies. The international accounting standard bodies that created the standards have provided guidelines on work-arounds to deal with the unusual circumstances. Mr Lawrence cautioned there could some unintended outcomes, which make companies that present earnings before interest, tax, depreciation and amortisation "meaningless". For instance, a retailer could exclude part of the rent, which is a depreciation of a balance sheet item, under the new rules but add a negative expense for rent relief under the work-around. Retailers that are in dispute with their landlords, such as Solomon Lew's Premier Investments, could prove particularly problematic and at a minimum will result in a significant mismatch in cash flows and statutory profits. The other new accounting rule change relates to provisions as companies are expected to account not only for current bad debts but expected future bad debts. That has created another wrinkle for chief financial officers in preparing the accounts for a COVID-19-impacted period as bad debt expenses have increased. Page 6 of 6 Swinburne University of Technology ACC30008 Faculty of Business and Law Accounting Theory Mr Lawrence said he also expected there to be a significant increase in impairments, but it is unclear whether the pandemic was the cause for the write-downs. This is one of the big riddles. If you are an airline or a travel company, it is pretty clear something has changed [as a result of COVID] but in most cases it's not going to be that clear-cut, he said. He notes that Suncorp and Westpac had written down core banking and software investments as a result of COVID-19, and while he did not dispute the pandemic as the cause, he said it highlighted the difficulty of assigning changes. Mr Lawrence said there was a tendency to "never waste a good crisis" and investors should be on alert for opportunism in accounting. "Management teams which report significant goodwill or other asset impairments as a result of the COVID-19 pandemic but remain bullish about long-term prospects after the temporary disruption caused by the pandemic should expect to face close scrutiny from investors," he said in the report. While ASIC is expected to be on alert, there's an acknowledgment that judgments will be harder than ever for management and boards to make. The extent to which COVID-19 is temporary or permanent, and how it should be accounted for is difficult to determine. "We are not suggesting it is easy to get the disclosure right but it is about making sure there is enough detail provided," Mr Niven said, Mr Lawrence said: This is the first event that has hit everyone where you can genuinely say that you cannot blame management so there is some sympathy. Extracted from Shapiro, P and Cranston, W. Australian Financial Review. July 13, 2020

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I. Explain what fundamental earnings means and why such an earnings figure is important in the situation that the article above discusses. (Maximum words 250) ( 5 Marks)

II. Do you think fair value is a suitable measure to report on certain items discussed in the article under a Covid-19 pandemic situation? (Maximum words 350) ( 7 Marks)

III. What theories from ACC30008 can be applied to the situation reported in this article? (Maximum words 400) ( 8 Marks