The Australian Securities and Investment Commission has warned it will target statements about a company’s ability to continue as a going concerns and problems with asset valuations in its continuing crackdown on company reporting.
ASIC’s review of accounts for 2008-09 – which for the first time included a review of 150 private companies – found three specific areas of focus: the appropriateness of going concern assumptions, asset impairments and fair value determinations.
While the economy is in the early stages of recovery, ASIC Commissioner Michael Dwyer said there are still a number of areas where companies and auditors need to pay greater attention.
“Despite signs of improvement in the Australian economy, we encourage companies and their auditors to continue to focus on issues such as going concern, asset impairment and fair value determination.”
A review of going concern statements found that 18% of reports contained an “emphasis of matter” paragraph, which draws attention to an issue with a company’s financial report and how this affects the company’s ability to continue as a going concern.
Common problems mentioned in the “emphasis of matter” paragraph include negative or minimal net assets or net current assets and debt refinancing requirement.
While accounting standards only require companies to mention if they will need to refinance a debt in the next 12 months, ASIC says businesses should take a longer-term view.
“Where refinancing is required outside 12 months, entities are still required to consider their prospects of obtaining the necessary funding for the entity to continue as a going concern,” ASIC says.
The other big problems involve asset values.
ASIC found that writedowns were 11% of the total value of intangible assets (including goodwill) for 2008-09, compared with less than 1% in the previous corresponding period.
Similarly, ASIC found writedowns of investment properties accounted for 12% of the carrying value of the properties, compared to 6% in the half year to December 31, 2008.
The watchdog found the main issues were with unrealistically optimistic discount and growth rates used to value assets and flawed discounted cashflow valuations.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
