AASB 13 and fair value in superannuation: Key ASIC findings

Superannuation is the bedrock of Australia’s financial security, with assets totalling nearly $4.3tn. 

It is a sector that demands the highest levels of integrity, accuracy, and transparency. For members, trustees, regulators, and auditors, confidence in the accuracy of reported asset values is essential.

With the introduction of new financial reporting obligations under Chapter 2M of the Corporations Act 2001, registrable superannuation entities (RSEs) are now operating under increased scrutiny.

AASB 13 Fair Value Measurement serves as the relevant financial reporting standard, establishing the principles for fair value measurement and disclosure.

ASIC’s recent surveillance report (Report 816) offers critical insights into how the industry is adapting to these requirements. The findings highlight significant variation in how funds are valuing and disclosing unlisted assets. This shows that applying AASB 13 in practice is far from straightforward. 

AASB 13 and the valuation of super funds

AASB 13 provides the framework for measuring fair value. It is a market-based, not entity-specific, measure, focused on what others would pay, not what the fund intends to do.

Consider an orderly transaction between market participants. If one entity sells an asset to another, what price would they receive? That price is the fair value for the asset. 

For superannuation funds, which often hold diverse portfolios ranging from listed equities to complex unlisted infrastructure assets, applying this standard correctly is critical.

The fair value hierarchy

The standard establishes a fair value hierarchy that categorises inputs into three levels:

• Level 1: Quoted prices in active markets for identical assets.
• Level 2: Observable inputs other than quoted prices. (e.g., prices for similar assets).
• Level 3: Unobservable inputs. These are the entity’s own assumptions, used only when market data isn’t available.

Entities must maximise observable inputs and minimise unobservable ones, with disclosures explaining valuation techniques, inputs, and sensitivity to changes.

ASIC’s findings: A call for greater transparency

Report 816 indicates that the regulator expects more rigorous evidence to support valuation decisions.

Inconsistent hierarchy application

The application of AASB 13 is rarely black and white. In reviewing 60 RSE financial reports, ASIC found that funds are taking vastly different approaches to categorising similar investments.

The challenge for many super funds lies in the valuation of unlisted managed investment schemes (MIS). These are unlike listed shares, which have an observable daily traded price. Instead, these investments often rely on redemption prices provided by external fund managers.

Some entities consider this redemption price to be an observable input. They thus categorise all unlisted MIS investments as Level 2 in the fair value hierarchy.

Others look through to the underlying assets, such as unlisted property or infrastructure assets. They categorise the investment as Level 3 because the underlying valuation relies on unobservable inputs.

This variability creates a lack of comparability across the sector. If one fund classifies a billion-dollar unlisted infrastructure holding as Level 2 while another classifies a similar holding as Level 3, it becomes difficult for members and analysts to assess the true risk profile of the portfolio.

We encourage trustees to look beyond the redemption price. If a redemption price is calculated infrequently, or if there are restrictions on redemptions, it may not represent a truly observable market price. In these cases, a robust governance framework requires you to assess the valuation techniques used for the underlying assets.

Expense disclosures 

Beyond valuation, ASIC identified issues with the disclosure of expenses related to sponsorship and advertising. These costs may not be quantitatively material in the context of a multi-billion dollar fund. However, they are often qualitatively material to members. 

Trustees must consider whether obscuring these costs influences member decision-making. ASIC found that some RSEs aggregated these costs, reducing transparency.

Audit quality concerns 

The surveillance also highlighted gaps in audit evidence. In four out of five audit files reviewed, ASIC concluded that auditors did not obtain reasonable assurance regarding the valuation of unlisted investments.

Common issues included:

• Over-reliance on control assurance reports without adequate testing.
• Insufficient challenge of valuation assumptions provided by external managers.
• Setting materiality thresholds too high (often based on total assets), which limited the scope of detailed testing.

Implications for superannuation trustees and auditors

The message from the regulator is clear: passive reliance on external data is no longer sufficient.

For trustees:

You must take charge of your investment governance. It is not enough to simply accept a redemption price from a fund manager. You need to understand the methodology behind that price. 

Does it reflect current market conditions? Are the underlying assets impaired?

We recommend ensuring your position papers are robust, contemporaneously documenting the judgements made when categorising assets. 

Are you using a redemption price for a Level 2 classification? Ensure you have evidence to prove that the price is active, observable, and reliable.

For auditors:

The heightened scrutiny on audit quality means that 'tick-box' compliance will not suffice. Auditors must exercise professional scepticism. When dealing with unlisted assets, you should look to obtain independent evidence of value. Do not rely solely on management representations or stale reports.

This may involve:

• Testing the design and operating effectiveness of the RSE’s own valuation controls.
• Performing substantive testing on the underlying assets where redemption prices are not current.
• Reconsidering materiality levels to ensure that qualitatively significant items, like member-sensitive expenses, are adequately tested.

Preparing for future compliance reviews

ASIC has indicated that this surveillance is just the beginning. The regulator intends to review the financial reports of all remaining RSEs in the coming year and will continue to target valuation practices.

To prepare, organisations should conduct a proactive review of their fair value frameworks. Ask yourself:

• Are our valuation policies consistent with AASB 13 principles?
• Have we adequately disclosed the valuation techniques and inputs for our Level 3 assets?
• Is our distinction between Level 2 and Level 3 defensible and documented?

Furthermore, with the increasing focus on private credit and unlisted assets, the complexity of valuations will only increase. Engaging with specialists who understand both the accounting standards and the commercial realities of these asset classes can provide the confidence you need to navigate the next reporting season.

Building trust through transparent reporting

Ultimately, high-quality transparent reports give your members confidence in the care you take with their retirement savings.

Yes, the transition to a new reporting regime is a significant undertaking. It is also a powerful opportunity to demonstrate the strength and integrity of your governance.
 

FOR MORE INFORMATION

If you need support with applying AASB 13 or independent valuation advice, please contact your local RSM office.