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Hi SMSFAAA,
I am auditing a fund that invested 99% ($24,500) of his assets in Digital or Broadcasting licences.
Last year's auditor advised the trustees about the importance of diversifiaction in the investment portfolio and this has been discussed in the new investment strategy.
Furthermore, the Investment Strategy mentions "The trustees have decided to invest in some high risk strategies to try and enhance the assets of the fund and build assets for their future retirement. For this reason they have decided with this fund to invest 99% of the assets of the funds in the form of Licences/ Digital Certificates that will yield a high income stream if successful."
The broadcast certificates were acquired in year 2020 and were reported in the 2022 annual financial reports without any movement in value. Last year's auditor requested that the trustees obtained a market valuation report for next year audit. Therefore, this year the trustees provided a market valuation from the provider:
"There has been no resale of the Broadcast certificate in part or whole and is held within our distribution corporate reservation lists for both Broadcasts and any pre allocated or prelaunch benefits.
There have been no refunds against this member account since purchase. The historic purchase price is the current market valuation of the broadcast consignment, as the price has not changed and is supported by a full unrestricted refund up until full launch of XXX™ and XXX™ applications and desktop software.
All broadcasts will re-list upon launch of the applications and software at their full wholesale price plus."
I don't believe that I should make comment on the viability of this investment and I don't believe that the audit report should be qualified. However, I would love to hear the types of advice you would give the trustees in their Management letter.
Thank you very much in advance.
Thanks for the question.
As you refer to, it is not your role as auditor to comment on the viability of the investment in Digital or Broadcasting licences.
It is noted that this particular investment (almost 100% of the fund’s assets) has been expressly contemplated in the fund’s investment strategy.
It is also noted that trustees have provided a basis upon which the historical cost is still considered to be reflective of market value.
Perhaps the Management Letter could make reference to the continuing need for the trustee of a superannuation fund to ensure that assets are valued at their market value at the end of each income year as per Regulation 8.02B and section 35B(2) of the SIS Act.
Once the “full launch” of the applications has occurred, presumably the “unrestricted refund” feature ceases.
So, it is assumed that valuing these investments is more problematic once full launch has occurred.
It is assumed that the fund’s members are not likely to commence a pension any time soon (there would be obvious liquidity issues if this was to occur).
It would be interesting to see if other auditors have thoughts as to whether anything else should also be referred to in the Management Letter to the trustees of a fund with this type of investment.