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Listed companies do not seem to fully recognise changes in the economic circumstances

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Dossier

In 2011, listed companies had to depreciate more of their assets than in the previous year. The reporting of so-called 'impairment of assets' have increased sharply, but, in view of the current share price of some companies, investors appear to be pricing in more impairment losses to come, as is evident from the reviews conducted by the AFM. The AFM points out to companies that it is precisely during these difficult economic circumstances that timely information concerning valuations is of great importance to investors.

Thematic reviews

In 2012, the AFM performed thematic reviews of the 2011 financial reporting. In the annual reports, the supervisor focused specifically on impairment of assets, but also investigated the valuation of investment property and the manner in which non-controlling interests affect the financial situation of companies. Exposure to risks arising from sovereign and non-sovereign debts was also assessed. The AFM has already published its conclusions  in this connection. The financial statements are an important source of information for all parties with an interest in a company. Companies and their auditors therefore have to ensure that they provide a true and fair view of their financial situation.

Investment Property

In the 2011 financial reporting, property investment institutions provided more information on the valuation of property, but this information is not readily comparable.  The AFM encourages further harmonisation within the sector.

Non-Controlling Interests

The AFM has established that companies are not transparent enough regarding the effect of non-controlling interests on the financial position, financial results and cash flows of the group. Furthermore, one third of the companies do not provide a proper description of the composition of the group.

Additional information per thematic review:

Impairment losses increased sharply
The thematic review regarding impairment of non-financial assets shows that in both nature and size many more impairment losses were recognised in 2011 when compared to 2010. It is notable that 11 of the 20 companies that did not report an impairment loss have a market capitalisation that is lower than the carrying amount of their net assets. Investors in these cases appear to be already pricing in an impairment loss, while the companies themselves do not (yet) see the need to do so.

Furthermore, it is remarkable that the majority of the companies report the loss in the fourth quarter, although indications that a loss could occur were already present earlier. In view of the uncertain market conditions, it is important that investors are informed promptly with regard to impairment of assets.

Property investment institutions are providing more information on property valuation, but this information is not readily comparable
When compared with 2010, the collective property investment schemes provide more information concerning 2011 in the notes to the property valuations, and more data on the valuation methods and the assumptions on which they are based. The most prevalent assumptions are expected rental income, the discount rate and the expected vacancy levels. Nearly all collective property investment schemes also include sensitivity analyses.
This more comprehensive explanation, both in a quantitative and a qualitative sense, has increased the relevance, and consequently the quality, of the financial reporting. Definitions of the assumptions and the aggregation levels at which this information is being provided do, however, differ quite significantly. It is therefore difficult for investors to compare information. And it is precisely such comparable information that is of great importance to their decision-making. Further coordination within the sector would be desirable.

It is furthermore remarkable that the market value of collective property investment schemes is considerably lower than the carrying amount. The above indicates that investors are taking into account future depreciations of the property portfolio.

In contrast to the collective property investment schemes, the financial institutions with material property investments provide considerably less information. In addition, financial institutions subject their property portfolios to an external valuation significantly less often than collective property investment schemes. This does not benefit the credibility of the established fair value of the property investments.

Companies are not yet providing transparency regarding the effect of non-controlling interests on the financial position, financial results and cash flows of the group
The interests of third parties in one or more group companies (non-controlling interests) form a material part of the total group equity of a quarter of the companies subject to supervision. For a further quarter of the companies under supervision, the size of these interests measured as part of total group equity is not material. This, however, does not exclude the possibility that these non-controlling interests may well have a material effect on one or more individual items in the financial statements.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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