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 offers businesses 12 tips for starting the 2012/13 financial year

RSM_Bird_Cameron_Logo@2xMay 3, 2012RSM Bird Cameron offers businesses 12 tips for starting the 2012/13 financial year.

Andrew Graham, national head of business solutions, RSM Bird Cameron, said, “Often the end of financial year creeps up on businesses. While we know it is coming, preparation and planning does not need to be frantic and last minute.

“Wrapping up the end of financial year successfully helps businesses minimise tax and be better prepared for the year ahead. It is important to have a check list to methodically work through to ensure that every aspect is covered, and nothing is missed.”

RSM Bird Cameron offers the following 12 tips for starting the 2012/13 financial year:

1. Trading stock – physically count stock on hand at June 30. If this is not practical, ensure systems are in place to ascertain correct stock levels at year end so your balance sheet is correct. Incorrect or unexpectedly low (or high) stock levels can change the fundamental financial position of your business and impact cash flow, debt management or even the overall liquidity of your business. It can also assist to uncover fraud, theft and inventory control systems which may need to be upgraded or reviewed to reduce stock loss through damage or inadequate logistics.

2. Obsolete stock – identify any obsolete stock and write it down or off your books as a special rule. It is unlikely that obsolete stock can ever be sold and it should not be reflected on your balance sheet as an asset as it will give you an inaccurate reading of your financial position.

3. Bad debts – review debtors prior to June 30 to identify all bad debts. In order to write off a debt it must be bad, not merely doubtful. That means the business can demonstrate that it has tried all reasonable, practical measures to recover the monies owed to it and, in spite of that, it is unlikely that the debt will be repaid. A bad debt must have been previously included as assessable income.

4. Superannuation guarantee – ensure that superannuation obligations are paid and cleared prior to June 30 to obtain a deduction in the current financial year.

5. Additional superannuation – consider making additional superannuation contributions as an employer (subject to current limits) before June 30 to take advantage of concessional tax rates afforded to superannuation contributions.

6. Consumables/repairs – consider restocking consumables such as fuel, stationery, sprays and chemicals before June 30. Also undertake any necessary repairs before the end of the financial year to minimise taxable income and prepare yourself for the year ahead.

7. Staff bonuses and commissions – a tax deduction may be claimed for staff bonuses and commissions that are unpaid at June 30, provided they were ‘definitely committed’ to the expense prior to the date.

8. Accrued wages – wages that have been accrued at June 30 but not paid until after that date may be claimed as a tax deduction.

9. Defer income – cash flow permitting look to defer income if possible until after June 30 to decrease taxable income

10. Prepayments – are available if the entity is permitted to prepay expenses under tax legislation i.e. SBE (Small Business Entity).

11. Prepaid interest on passive assets, such as commercial and residential properties – look to prepay interest prior to June 30.

12. Fixed assets – review last year’s depreciation schedule to determine if assets listed still exist. Identify missing items, any that have been scrapped or disposed, and any new ones that have been acquired. Update your depreciation schedule accordingly.

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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.