The Australian Securities and Investments Commission (ASIC) has recently emphasised the importance of material business risk disclosure in annual reports. ASIC has called on company directors to ensure that material business risks are adequately disclosed to better inform shareholders and prospective investors.
What is a material business risk?
A material business risk is any risk that may have a significant impact on a company’s operations, financial position, and prospects. Examples include:
- Economic risks such as market volatility.
- Competition risks such as new entrants.
- Regulatory risks such as changes in laws or regulations that may impact the company’s operations and profitability.
Where should material business risks be disclosed?
The directors’ report of a listed entity must contain information that shareholders would reasonably require to make an informed assessment of the entity’s operations, financial position and business strategies, and prospects for future financial years.
The part of the directors’ report containing this information is referred to as the “operating and financial review” (OFR). Material business risks should be disclosed in the OFR of the directors’ report.
Listed entities respond to ASIC’s concerns
Five entities disclosed material business risks in October and November 2022. ASIC’s ongoing financial reporting surveillance program and subsequent inquiries of a selection of 2022 annual reports has led to a further four listed entities disclosing material business risks.
The entities are:
- MedAdvisor Limited, which made disclosures in its AGM Presentation released on 30 November 2022.
- Alcidion Group Limited, which made disclosures in its 2022 AGM Presentation released on 30 November 2022.
- WOTSO Property (WOTSO), which made disclosures in its Business Update December 2022 released on 8 December 2022.
- Webcentral Limited, which made disclosures in its Corporate Governance Updates released on 18 January 2023.
The disclosures were in response to ASIC’s concerns that the risks had not been sufficiently disclosed in the OFR of the directors’ report.
ASIC emphasises importance of high-quality OFR disclosures
ASIC Commissioner Danielle Press said, “ASIC reiterates the importance of a high-quality operating and financial review, including disclosure of material risks that may affect the achievement of a listed entity’s strategies and prospects. Directors must provide investors with useful and meaningful information about the impact on current and future performance of changing and uncertain market conditions.”
ASIC also encourages investors and other interested parties to review the additional materials disclosed by these entities in their OFRs.
ASIC’s guidance to directors
ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review provides guidance for directors of listed entities on providing useful and meaningful information to investors in an OFR.
ASIC Regulatory Guide 230 Disclosing non-IFRS financial information provides guidance on the use of non-IFRS financial information in financial reports and other corporate documents, such as transaction documents and market announcements.
Key takeaways
ASIC has called on company directors to ensure that material business risks are adequately disclosed in the directors’ report, specifically in the operating and financial review (OFR) section. In response to ASIC’s concerns, several entities have recently made disclosures.
ASIC provides Regulatory Guides which can assist directors in producing high-quality OFR disclosures and providing useful and meaningful information to investors.
