ASIC warns on asset valuation reports for listed companies

Based on financial reports of more than 100 listed entities reviewed by the Australian Securities and Investments Commission (ASIC), unrealised losses on investment property carried at fair value represented around 6 per cent of the total asset value over the six months to December 31, 2008.

ASIC recently reviewed the full-year and December 31 half-year reports of more than 100 listed entities. The regulator said while its review of the December 31, 2008, financial reports “did not reveal any significant non-compliance with financial reporting obligations”, the regulator did urge companies to focus on appropriate recognition and measurement of assets and liabilities. It also urged companies to provide appropriate disclosure and explanations in financial reports.

ASIC commissioner Michael Dwyer said in preparing financial statements directors and auditors must focus on the areas most affected by the current economic conditions, including going concern and valuation of assets.

In regards to asset impairment within listed companies, the regulator said further write-downs may be expected at June 30, 2009. As such, directors should focus on asset values, particularly for more recently acquired assets.

Regard should also be given to “the higher yields that may be expected from assets to cover risk, as well as impacts on rents, rental incentives and vacancy rates”, the report said.

ASIC’s review found “some entities had not followed methods required by accounting standards for impairment testing, or used cash flow information or discount rates that did not appear reasonable having regard to historical cash flows, market information and future expectations”.

“In view of this, directors should consider whether there is appropriate ‘in-house’ expertise to perform impairment calculations and apply requirements of the standards,” the report said.

Furthermore, the review found “some property trusts did not disclose key valuation assumptions, included a narrative description, or referred to a separate unaudited document”, the regulator said.

ASIC said a company’s full-year financial report must contain key assumptions such as capitalisation rates, expected vacancy rates and expected changes in future rentals.

The regulator also said movements in fair values of assets of sponsored defined benefit superannuation funds “can have a material impact on their sponsors and should be reviewed”. ASIC reviews showed an average 3 per cent negative return on plan assets in the 12 months to December 31, 2008.

Its upcoming review will cover the June 30, 2009, financial reports of around 350 listed entities and unlisted entities with a large numbers of users, a statement from the regulator said.

In the upcoming reporting period directors should continue to assess the appropriateness of the “going concern” assumption, the regulator said, particularly in regard to reduced liquidity and ability to refinance debt and raise new funds and compliance with lending covenants.

The market should also be kept informed where the ability of a company to continue as a going concern is subject to negotiations with financiers.