Grappling with the assets challenge

Tom Ravlic

Whispers are reaching Banking Day that some people are wanting to reopen debates about the way in which accounting for certain intangible assets such as goodwill is regulated, as well as accounting dilemmas related to determining asset impairment.

Some folks even throw up the idea of going back to some kind of amortisation of goodwill.

It is no surprise that people are dwelling on these issues at the present time because the coronavirus pandemic has caused a range of challenges people needed to deal with in relation to these issues.

There is also no surprise here because there is something people tend to crab walk away from when they talk about accounting standards: things you have to account for that have volatility generally wreak havoc on the final reported result and could look a bit uglier to the market when the accounts are released.

I’ll take a stab and suggest that what I call the Avon complex of accounting is the reason why companies spend their time coming up with notes that slice up the income statement like Hungarian salami so that people can find a figure that suits a particular metric they want to pop into their analyst models.

There are several things going on here and they need to be articulated. The first issue is that companies must comply with statutory accounting standards. These standards, which are set by the Australian Accounting Standards Board, need to be complied with and most companies that the Australian Securities and Investments Commission looks at do.

A pre-Christmas release of the financial reporting surveillance program release told all of us that 170 entities had their accounts reviewed and 27 of those got their financial reporting tyres kicked.

Those 27 sets of financial statements resulted in conversations about 58 issues. Top of the list is that evergreen topic of determining asset values and impairment testing. This is the topic that drives people in business nuts and drives the regulator crazy, too.

It is also an area that has excited the Federal Parliamentary committee in corporations and financial services that dipped into the audit regulation area.

Some folks had clearly complained along the way about challenges with accounting for the carrying amounts of assets in the era of coronavirus.

This was a tough year and people found it challenging to grapple with how to deal with asset impairment and similar issues during lock downs that forced businesses to shut up shop as a part of a big exercise in preventative medicine.

Companies already have pressure from the ASIC to get their numbers right in financial reports with most trying to make a good fist of it. There are businesses, however, that will use the levers of accounting to minimise the write downs that hit the income statement because they have some kind of incentive to ensure the entity looks attractive to the investors.

Regulators and market players such as analysts and brokers watch for this kind of mischief over time. Auditors do this job as well but there are circumstances in which management fraud or accounting fraud is hidden well until trends start to emerge over time for which there is no answer other than management has been fiddling the books.

Determining the carrying amounts of assets on the books of a company is not particularly easy and nor is assessing whether the blob on the company balance sheet called goodwill has to be written down for whatever reason.

Challenges in valuation are no reason to go back to simpler methods of dealing with accounting for carrying amounts.

What these challenges in accounting might actually require of companies is to increase the head count in their accounting and finance divisions so they have a chance of getting it right.