NFRA highlights failure of Audit Committees on Asset Impairment
The National Financial Reporting Authority (NFRA) has flagged gaps in communication between statutory auditors and audit committees, calling for stronger oversight of accounting estimates and judgments, especially related to the impairment of non-financial assets. The warning comes in Auditor-Audit Committee Interaction Series 4, which highlights areas where auditors must ensure compliance with Ind AS 36 (Impairment of Assets) and SA 540 (Auditing Accounting Estimates, Including Fair Value Accounting Estimates).
NFRA noted that boards, under Section 134(5) of the Companies Act 2013, must confirm that accounting policies are applied consistently and that judgments and estimates are reasonable. SEBI’s listing regulations further mandate that audit committees review major accounting entries involving management estimates.
The report emphasizes complex areas including:
- Impairment of PPE, intangible assets, and goodwill
- Expected credit loss (ECL) for financial assets
- Deferred tax assets and provisions
NFRA identified multiple areas where audit committees should question auditors:
- Allocation of assets to cash-generating units (CGUs) and annual goodwill impairment testing
- Evaluation of management assumptions in forecast cash flows, discount rates, and fair value calculations
- Use and competence of management or auditor experts
- Accuracy of impairment loss recognition and disclosure, including reversals and re-valued assets
NFRA also emphasized that key audit matters (KAMs) should cover all areas of significant management judgment, ensuring investors are aware of risks in asset valuation.
