JSE Proactive Monitoring Report: Limited Scope Thematic Review– October 2022

The JSE published its proactive monitoring report on its limited scope thematic review in October, detailing the JSE’s findings from their review.  The limited scope review is an in-depth review of specific focus areas in the financial statements. 

The specific focus areas for the thematic review related to:

• Cash Flow Statement presentation;
• Liquidity-based disclosures and their impact on debt covenants; and
• Going concern disclosures.

The JSE considers these areas were considered relevant in assessing the overall financial health of entities in a strained post-Covid-19 economy; the findings provide some insight as to whether financial statement disclosures are providing users with the correct quality of information to assess this.

The lack of entity-specific and meaningful disclosures is the main concern raised by the JSE in respect of the following:

• The nature of the assumptions made by management in assessing the going concern ability of the entity;
• Details of target debt covenants imposed on the entity by financial institutions and the entity’s performance against those targets; and
• Lack of disaggregation of contractual cash flows into smaller, more relevant time bands that would provide more meaningful liquidity risk disclosures.

Some of the findings relating to the cash flow statement include:

• Discrepancies between amounts disclosed in the statement of cash flows and elsewhere in the financial statements;
• The inclusion of non-cash flows on the face of the cash flow;
• Lack of disclosure explaining non-cash movements; and
• Incorrect classification of cash flows between operating, investing and financing activities.

 The full report and list of findings can be found here.

These disclosures should be assessed in terms of the entity’s materiality, which is guided by the principles in IFRS Practice Statement 2: Making Materiality Judgements. The disclosure may not be considered quantitatively material, liquidity risk has a direct impact on going concern which could result in the disclosures becoming qualitatively material.

Another point for issuers (and auditors) to consider is that the information contained in the financial statements need to present a consistent picture. The commentary in the financial statements should speak to the primary statements and related notes, almost like a golden thread linking all the pieces of information in the financial statements together.

02 November 2022