Asset values the big concern in ASIC review

The watchdog says impairments and asset values are the most troubling issues in a review of reports by 85 listed entities.

New ASIC chair Joe Longo, right, with his deputy Sarah Court and Treasurer Josh Frydenberg.

Impairments and other asset values is the biggest category of concern for ASIC after a review of the financial reports of 85 listed entities for the 2020 calendar year.

The review, which was conducted as part of the corporate watchdog’s ongoing risk-based scrutiny of financial reports, resulted in follow-up inquiries of 15 entities on 22 matters.

Ten of the matters related to impairment of non-financial assets and asset values, and a further three covered disclosure in the operating and financial review.

While many companies had continued to make useful and meaningful disclosures on the impact of Covid-19 conditions, ASIC said some firms adversely affected by the pandemic still did not appear to give sufficient attention to the reporting of asset values and financial position.

The regulator acknowledged that Covid-19 conditions could create uncertainty which required the use of probability-weighted scenarios, but said disclosure of assumptions was key.

“We continue to make inquiries where companies appear to have made unrealistic and unsupportable assumptions about future cash flows, and where disclosures did not clearly identify the impact of Covid-19 conditions on the business,” ASIC said in a statement.

“Our findings emphasise that directors and auditors need to focus on impairment of non-financial assets, particularly as businesses navigate through the continuing impact of the Covid-19 pandemic.”

The regulator said that material adjustments did not necessarily follow from inquiries made of individual entities.

Matters involving two of the 15 entities in the most recent review were concluded without any changes to their financial reporting.

Inquiries of the remaining 13 entities were continuing.

ASIC makes a public announcement when an inquiry results in a company making significant changes to information previously provided to the market.

The purpose of the announcement is to improve the level of market transparency, and increase the level of awareness of directors and auditors of other companies so they can avoid similar issues.

Since the last release of ASIC’s findings in December 2020, the regulator has made public announcements about LawFinance and Ainsworth Game Technology.

The total negative adjustment to profit was $53.5m for LawFinance and $32.4m for Ainsworth Game Technology.

On impairments, ASIC said its inquiries in relation to the recoverability of the carrying values of assets, including goodwill, mining assets, and property, plant and equipment included the reasonableness of cash flows and assumptions as well as disclosures.

It said cases were continuing where recoverable amounts were not reasonable or could not be supported by trading results, current and forecast commodity prices, or the level of uncertainty surrounding Covid-19.

Also, entities were not making the required disclosure of key assumptions, including discount rates and growth rates.

Valuation techniques and inputs had to be disclosed in fair value calculations.

“These disclosures are important to investors and other users of financial reports given the subjectivity of these calculations/assessments,” ASIC said.

“They enable users to make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations.”

Two inquiries were also made in relation to expected credit losses on trade receivables, with one entity failing to disclose the way it determined expected credit losses despite indications of increased credit risk.

ASIC also found that estimated loss rates did not adequately reflect the credit risk related to long outstanding receivables.