Following an ASIC review, Adslot Limited (Adslot) has written down all its goodwill in its financial report for the half-year ended 31 December 2022, totalling $5.2 million.
ASIC reviewed Adslot’s financial report for the year ended 30 June 2022 as part of its financial reporting surveillance program and raised concerns about the assumptions it used to test its business for impairment.
Specifically, ASIC was concerned that Adslot:
- used its own market capitalisation as an estimate of its business’ fair value;
- did not adequately justify why market capitalisation is an appropriate fair value for the underlying business; and
- did not assess the fair value of the business using other, more relevant valuation methods such as using discounted future cash flows of the business.
Adslot subsequently revised its impairment testing using a discounted cash flow model and wrote down the goodwill.
ASIC reminds preparers of financial statements and their auditors that an entity’s market capitalisation will generally not represent an appropriate fair value estimate for its underlying business. Transactions in a company’s shares and the sale of the whole of its business would generally take place in different markets that have different market participants. The market capitalisation of a company and the fair value of the underlying business can differ significantly.
The valuation method used for impairment testing should be appropriate, use reasonable and supportable assumptions, and be cross checked for reliability using other relevant methods.
ASIC’s financial reporting surveillance program aims to improve the quality of financial reporting and to ensure financial reports have been prepared in accordance with the law, supporting investor confidence and the integrity of Australia’s capital markets.
ASIC conducts regular reviews on a risk-basis of the financial reports of selected listed companies and other significant public interest entities to monitor compliance with the Corporations Act 2001 and Australian Accounting Standards.
ASIC has previously highlighted asset values as a focus area for preparers and auditors (22-333MR), as companies may continue to face some uncertainties about future economic and market conditions. Assumptions underlying estimates should be reasonable and supportable.
Accounting standard AASB 13 Fair Value Measurement sets out the requirements for valuing businesses using the market approach.