Directors shouldn’t second-guess asset values: RSM Australia warns

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Regardless of their size, past acquisitions are coming back to haunt the financial statements of a growing number of ASX-listed companies. This is one of the major conclusions within the latest annual Business Acquisition and Impairment Review (2016) by national accounting firm RSM Australia (RSM) which has been assessing the financial reporting impact of recent acquisitions on the financial statements of ASX-300 and non-ASX 300 companies since 2013.

While median acquisition size for all classes of ASX-listed companies has increased in line with the All Ordinaries index, the 2016 review reaffirms the need to reassess future business plans and profitability forecasts in light of post-acquisition financial performance of acquired businesses.

Impact on reported earnings
What’s driving the need to reassess future business plans and profitability forecasts, advises Glyn Yates, Director and National Head of Corporate Finance at RSM, are rising impairment charges that significantly impact an entity’s reported result and net asset position.

Due largely to Australia’s economic recovery, and increased transaction multiples, the 2016 review also reveals a notable uptrend in the percentage of total consideration paid for intangible assets, from 74.1% in 2013 to 82.2% in 2015.

“Given that the bulk of purchase consideration relates to the acquisition of intangible assets – ie non-monetary assets, like goodwill, brands, trademarks, patents, customer contracts and software – the accounting treatment of these assets can and does have a profound impact on reported earnings,” says Yates.

Appropriately recognise impairment
Given that indefinite life assets, like goodwill and brands – which consistently comprise over 80 percent of intangible assets – are not amortised, but instead assessed for impairment annually, the 2016 review identifies a greater requirement to identify intangible assets before acquisitions are made.

This is of particular relevance, adds Yates when companies negotiate banking covenants and the impact on an acquiring entity’s earnings per share (EPS).

“With listed entitles unable to justify asset carrying values, impairment charges continue to be recognised in relation to acquired intangible assets,” says Yates. “It’s important to consider the potential financial reporting impact of these charges and consider downside sensitivity analysis before acquisitions are made to ensure there are no nasty surprises.”

Impairment write-offs
Impairment charges can have a significant impact on an entity’s reported position, and net asset position. Based on three years of review data, the percentage of impairments being recognised has increased from 24.2 percent in financial year 2013 to 30.0 percent in financial year 2015 for ASX-300 companies; and from 16.4 percent to 22.0 percent for non-ASX 300 companies respectively.

Having been an area of focus over the last three years, Yates expects impairment of goodwill and other non-current assets to again come up on ASIC’s radar for the June 2016 reporting period.

Challenge assumptions
Like ASIC, Yates urges directors to exercise professional scepticism and challenge the appropriateness of asset values and assumptions underlying impairment calculations, especially where prior period forecasts haven’t been met.

“The key to getting this right is accurately estimating future cash flows that will be generated by the cash generating unit and then discounting those cash flows at a discount rate that reflects the returns that an investor would require from cash generated unit, based on the related risk of that cash generating unit,” advises Yates.

“While median impairment rates used across various industries don’t vary significantly from sector to sector, there is still a size premium evident in the discount rates applied to non-ASX 300 companies of around 1.6 percent.”

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RSM Bird Cameron says business owners must ask more of their accountants in tough times

October 17, 2011RSM Bird Cameron, one of the largest mid-tier accounting firms in Australia, says business owners must ask more of their accountants in tough times.

Andrew Graham, national head of business solutions, RSM Bird Cameron, said, “It is easy to have accountants for many years that do the basics well – but not fully realise the value they should be offering beyond that. Or sometimes a business simply outgrows their existing accountant in terms of what they need and what can be offered.

“The depth of experience your accountant has, and the advice they can give, is vital to the success of your business, and should be a resource you can call on. This is particularly important as many businesses face an uncertain economic future.

“Most accountants provide basic retrospective analysis on the numbers given to them, coupled with some compliance, tax and super advice. The best accountants offer real practical business advice on how to effectively operate, manage and grow the business.”

RSM Bird Cameron has developed this simple test to help business owners assess the value their accountants offer them. Does your accountant:
* take time to understand your personal goals, needs and ambitions and actively work with you to achieve them
* take the time to understand the dynamics of your business and industry rather than just look at the numbers?
* identify opportunities for your business’ growth and improvement?
* provide ideas on how to make those opportunities work?
* help you identify your vision for the future of your business, your personal goals and the steps to get you there?
* create a regularly updated action plan to achieve those goals?
* agree on all fees and payment terms up front?
* help you understand the profitability of each product or service offered by your business?
* provide feedback and new ideas on marketing and advertising to generate better a return on investment?
* help you address any management and human resource issues, such as tax, payroll and superannuation questions or concerns?
* build key performance indicators specific to your business?
* help you understand what drives cash in your business?
* create plans to maximise cash flow?
* proactively monitor progress on a monthly basis so you can adjust quickly to maximise profits?
* help you establish business management systems so you have clearer picture of your operations?
* help you find ways to work ‘on’ your business rather than in it so you can realise a better quality of life?
* work to constantly increase your financial rewards and provide for a well-funded retirement?
* help you implement strategies for the future to make your business a more valuable and realisable asset by sale or succession?

“Having access to reliable and sensible advice could mean the difference between a business that thrives and a business that just gets by. If your accountant isn’t contributing to the success of your business it may time to look at other options.

“Ultimately you should be able to call on your accountant as a trusted adviser to help you make your business the best it can be,” Graham said.

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About RSM Bird Cameron
RSM Bird Cameron is the largest mid-tier accounting firm in Australia with national ownership and profit sharing and offers a full range of specialist advisory services, including business consulting and advisory, assurance and advisory, taxation consulting, corporate consulting and turnaround and insolvency. RSM Bird Cameron is a core member firm of RSM International, the sixth largest network of independent accounting and consulting firms in the world.