Managed fund asset valuations must be reliable during COVID-19
ASIC is aware that valuations of illiquid assets have been challenging as a result of increased economic and financial uncertainties due to the COVID-19 pandemic. In this context, it is more important than ever that valuations of managed fund assets are regular, robust and reasonable.
ASIC is reminding responsible entities of their obligation to ensure that valuations of their managed fund assets are regular and reasonably current having regard to the nature of the assets. One of ASIC’s focus areas this year is reviewing valuation practices amongst investment managers (see ASIC Interim Corporate Plan 2020-21, p14).
Accurate valuation of fund assets, including illiquid assets, is needed for a responsible entity to determine:
- the value of the units of a scheme for performance measurement
- the unit price to allow for investors to enter into and exit from a scheme
- the price for the selling and buying of specific assets, including stakes in a company
- the value of assets in financial reports required by the Corporations Act 2001.
Ensuring fund assets are valued regularly and valuation processes are robust are part of responsible entities’ statutory duties to:
- exercise a reasonable degree of care of care and diligence
- ensure scheme property is valued at regular intervals appropriate to the nature of the property
- act in the best interest of members of the fund
- carry on their financial services business efficiently, honestly and fairly.
During COVID-19, responsible entities may face issues such as a lack of comparable transactional data, and uncertainties around cash flow forecasts, the shape and timing of any economic rebound, the selection of an appropriate discount rate in an environment of very low government bond yields, and the risk premiums that should be attached to the risk free rate.
As a result, responsible entities may need to carry out valuations more often to ensure reliable asset values and member unit prices. Where valuations are uncertain for a material proportion of a fund’s assets, the responsible entity needs to consider whether it is in a position to establish a reliable unit price. If not, the responsible entity may need to temporarily suspend entry and exit from the fund.
While the COVID-19 pandemic continues to disrupt financial markets, ASIC encourages responsible entities to ensure:
- valuations are reasonably current and regular
- valuations are performed using appropriate methods and assumptions for that asset class
- assets are promptly written down should the cash flows of an asset be negatively impacted directly or indirectly by COVID-19 restrictions
- estimates are developed on a sound and reasonable basis, and that they consider whether past performance and historical inputs are still reflective of future outcomes
- valuation polices are regularly reviewed by the responsible entities’ management and board
- valuations are carried out by unbiased valuers and valuers are periodically rotated by the responsible entity.
Responsible entities should also ensure that they provide their members and investors with timely, full and fair disclosure of asset values. They should inform their members about the processes they are implementing to support the valuations given the current circumstances and uncertainties.
Accurate and timely valuation of assets is central to the fair and efficient operation of managed funds. ASIC is actively monitoring the valuation practices of responsible entities during this period of market disruption. ASIC may take regulatory action against responsible entities that do not comply with their obligations to provide fair and reasonable valuations of fund assets.
For more information on financial reporting and audit matters relating to the impact of the COVID-19 pandemic, refer to the frequently asked questions on the ASIC website.
Refer also to ASIC guidance for responsible entities on valuation:
- RG 45 Mortgage Schemes: Improving disclosure for retail investors
- RG 46 Unlisted Property Funds: Improving disclosure for retail investors
- RG 94 Unit Pricing: Guide to Good Practice
- RG 132 Funds Management Compliance and Oversight
- RG 134 Funds Management: Constitutions
- RG 231 Infrastructure Entities
- RG 240 Hedge Funds
This article was published on 11 August 2020.