ASIC confirms market capitalisation cannot be used as an impairment test

ASIC’s financial reporting surveillance programme conducts regular reviews of the financial reports of listed companies. 

One recent inspection, raised concerns about an entity’s assumptions used to test its assets for impairment.

ASIC reviewed the financial report of Adslot Limited for the year ended 30 June 2022. ASIC expressed concerns about Adslot’s use of its own market capitalisation in order to test its goodwill for impairment, rather than using a discounted cash flow or other suitable method. 

ASIC highlighted that, while market capitalization may be an indicator of impairment, particularly when it is lower than the book value of net assets, it will generally not represent an appropriate fair value estimate for its underlying business, since the sale of a business would be in a different market from transactions in the company’s shares. ASIC noted that:

“The market capitalisation of a company and the fair value of the underlying business can differ significantly.”

Following ASIC’s review, Adslot Limited wrote the value of its goodwill down to zero as at 31 December 2022.

ASIC’s surveillance activity is a timely reminder that 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.

If you need to prepare an impairment assessment as at 30 June 2023, it will need to follow either the value in use or the fair value less cost to sell approach as set out in AASB 136 Impairment of Assets. We would recommend engaging in early discussions with the company’s auditors in order to confirm the suitability of the planned approach, and seeking specialist advice where appropriate.

For more information

Please contact Ralph Martin to find our more on financial reporting and ASIC's market capitalisation.