Corporate regulator to keep an eye on solvency this reporting period

The corporate regulator has revealed its areas of focus this reporting period, sending a clear warning to businesses that solvency and asset valuation are at the top of its list of concerns.

The Australian Securities and Investments Commission issued a statement on Thursday, calling on directors and financial auditors to pay attention to “solvency and going concern assessments” and “asset values” when submitting financial reports before the end of the year.

Sean Hughes, ASIC commissioner, said the regulator is aware disruptions to trading conditions continued during 2021, affecting companies differently depending on their industry, location and suppliers.

“The changing environment in which each company operates will affect its strategies and its assumptions about the future performance of its assets and businesses,” Hughes said.

The warning applies to entities required to lodge reports under the Corporations Act, which generally includes a set of small propriety companies, larger companies, foreign companies and publicly-listed entities.

John Winter, chief executive of the Australian Restructuring Insolvency Turnaround Association, tells SmartCompany any businesses preparing financial statements ahead of the end of the year should consider their ability to meet long-term financial obligations.

“When you are doing your end of year reporting, it’s a really important opportunity for you to look at whether or not your business is going to be able to keep trading,” Winter says.

Winter says insolvencies are still tracking well below 2019 levels but they have begun to slowly increase.

“There’s been a very slight lift, we’re still trending at about half of pre-pandemic levels but we are starting to see a pick up in insolvencies and enquiries,” he says.

“That’s not surprising because what we’re now seeing is that firms that have been waiting to see what would happen when restrictions eased are assessing their solvency.”

Businesses should have an understanding of the solvency of their businesses because trading while insolvent opens directors up to a host of legal and financial risks.

“If insolvency occurs, one of the first things a liquidator is required to look at is whether the business traded insolvent,” Winter says.

“And if they did, liquidators are required to chase your personal assets to pay the creditors.”

ASIC’s list of concerns, which also includes asset values and provisions, is broad and according to Winter is designed to ensure reporting entities are compliant.

“People are pumping up their assets in order to make their business more viable which is a really significant issue for investors and creditors,” he says.

“So, these are all very balanced measures.”