Companies can mislead investors by not openly assessing the true value of assets


Some companies take years to identify asset impairments and can mislead investors who are not privy to valuation decisions. Research shows that this is because managers at many companies believe or hope that assets are not overvalued.

This occurs when companies either fail to recognize asset impairments or delay recognition. This impairment of assets represents an adjustment in the value of assets down to what is known as ‘recoverable amount’. This is determined either by the value at which the asset could be sold or by its current value to the company.

An example of this asset impairment recognition process can easily be seen at Nine Entertainment Corporation Ltd in 2015. In the first half of 2015, the stock market value decreased significantly and by the end of the year its book value (the value of net assets on the balance sheet) decreased. Blatt) would have exceeded the market value of the company.

This likely happened as investors revised their estimates of future returns in response to changes in the television industry and increased competition from pay-TV, internet-based television and other online media. These factors are indicators of declining assets that are specifically identified in the regulation and this requires an asset impairment test by the company.

Next, Nine would have determined the recoverable amount of the assets. The company should have been estimating future returns, and while there are extensive guidelines on how to do so, significant judgment is still required. The end result in this case was an A$792 million asset impairment, which resulted in Nine posting a loss for the year.

The Australian Securities and Investment Commission (ASIC) regularly reviews the financial statements of listed companies. If necessary, he looks for their explanations for certain accounting treatments. Risk-based criteria are used to select which companies to review, and in some cases this results in significant changes in their reports.

The Company Regulatory Authority’s most recent year-end 2015 review of financial statements revealed that the majority of inquiries (11 out of 24) to accounting relate to asset valuations.

It is unlikely that this is a result of poor regulation. The Regulation sets out clear criteria identifying the circumstances in which asset impairment should be formally considered (ie when there are indications of impairment) and the basis for calculating the amount of asset impairment.

In some cases, determining asset impairment should be straightforward. For example, when companies are unprofitable and the book value exceeds the market value of equity, the indicators of impairment are readily apparent to all because they can be identified using ‘company level’ information.

In other cases, however, it is not so simple and determining whether impairment is required and calculating recoverable amount is then much more difficult.

Impairment of assets must be assessed at the level of business units or what the regulation calls “cash-generating units” and not at the corporate level. Accordingly, although asset impairments may be required in some business areas, the need or the extent of asset impairments may be obscured in company-level information.

For example, Arrium is clearly struggling financially and has taken a number of asset impairments. But it’s not all bad; Some of its businesses are profitable. Taking the information at the enterprise level into account can tend to mask very poor performance in other areas of the business. Therefore, whether the need for asset impairment is apparent depends on the relative size and number of the underperforming business units.

Significant judgment is required in these cases. This includes defining business units and allocating assets to them. Only then can future returns be estimated, and this can never be done with certainty. If there are problems in exercising that judgment, perhaps the assumptions on which asset impairment decisions are based should be clarified and disclosed.

Unfortunately, the people who use these degrees, such as B. Investors are often left in the dark because companies are only required to disclose the assumptions behind their estimates when an impairment actually exists. However, if these disclosures were always made, this would either support the reported assets or, alternatively, confirm that asset impairments are genuinely necessary.

Without these disclosures, investors and other users of financial statements are not provided with important timely information about future returns that would underpin stock prices.

It is time to change the regulation and disclose the explanations for not recognizing asset impairments. Whenever there is evidence that impairment is required, entities should be required to disclose their assumptions, even if the decision does not call for impairment.

This clarifies how asset impairments are determined (or, more importantly, is not determined) and increases the transparency of asset valuations.


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