Review of impairment disclosures: not bad, but we still want more!

The UK’s Financial Reporting Council has published a report on its “Thematic Review: Impairment of Non-Financial Assets.”

The specific focus was on disclosures relating to such impairments. The overview was that the FRC “found numerous instances of good practice across each aspect of disclosure – events and circumstances triggering an impairment loss, description of cash generating units, key assumptions used to estimate the recoverable amount, and sensitivity analysis. However, no company stood out as clearly providing fully compliant disclosures in all relevant areas.” The review “also identified a number of common disclosure omissions and opportunities to clarify and enhance disclosures, particularly around sensitivity and significant judgements and estimates.”

This is hardly a new area of concern of course: Canadian regulators have certainly noted some similar omissions in the past. Here are a couple of observations made, with my comments:

Better disclosures identified the key assumptions used in the cashflow projections to estimate the recoverable amount of a CGU or group of CGUs, not just the long term growth rate and discount rate. They explained how management determines the key assumptions, linking future expectations to external conditions and/or the company’s own strategy. As I noted previously in the context of IFRS 15, disclosures in this area will be most effective when they explain the business as much as they do the accounting methodology applied. IAS 36 requires addressing, for instance, to what extent the values assigned to key assumptions reflect past experience, or how and why they differ. This should align comfortably with the company’s broader story about where it’s going, and how that differs from where it’s been.

Better disclosures described how the entity identified single sites or clusters of sites as CGUs, and grouped CGUs for the purposes of testing goodwill for impairment. I’ve noted in the past that management’s view of these matters may not always be entirely aligned with the requirements of the standards. For example, management might regard the assets of a particular loss making entity as a strategic investment to build name recognition and market presence, as valuable to its overall direction as the assets attached to its individual profitable businesses. Even so, if that entity meets the definition of a CGU, such an analysis won’t be sufficient to prevent recognizing any resulting impairment loss.

The FRC provides an example, by The Restaurant Group plc, of what it views as better disclosure in this area:

  • Cash generating units are deemed to be individual units or a cluster of units depending on the nature of the trading environment in which they operate. We only consider sites as a cluster of units, i.e. as a single CGU, where they are in a single, shared location, such as an airport, such that demand at one unit can directly affect that of other units in the same location.

Another example, from Reach plc, describes how two previous CGUs were combined into one, illustrating how these determinations aren’t necessarily static:

  • The increase in the interdependency has been accelerated due to the increased scale of advertising packages sold across all titles and websites and reflects the groupwide nature of our wholesale and distribution contracts.

The report also sets out some “key points to consider in 2020” – here are a couple of them:

Brexit and other political / macro-economic risks The FRC notes: “Uncertainty over a ‘no deal’ exit from the EU may remain unresolved when reporting on 2019. Even if it has been resolved, businesses with larger import / export volumes may foresee a wider range of reasonably possible changes in key assumptions than in the past. Similarly, businesses affected by developments in trading relationships and the prospect of growing protectionism globally should consider the impact on their forecasting.” It  indicates that best practice will link these assessments with descriptions of business model, viability and principal risks and uncertainties. This is a prime example of a circumstance where there’s nothing to be gained from downplaying the uncertainty and imposing an artificially minimal disclosure. No doubt investors may differ widely in their assessments of what Brexit may mean for individual entities and for the world in general: an entity should try to think its way into both optimistic and pessimistic perspectives, ensuring that such parties understand the potential impact of being right and wrong.

Climate change and environmental impact The FRC expects that “companies for whom climate change and environmental impact are significant will explain how such factors, specific to the company’s industry and value chain, have been taken into account in assessing medium and long term growth potential, costs and licence to operate.” Again, there’s nothing for a company to gain by trying to brush such uncertainties under the carpet.

And of course, the impact of new standards is always a focus area. In particular, the application of the IFRS 16 leasing model may raise new impairment issues, both of right of use assets and of CGUs containing such assets.

The opinions expressed are solely those of the author


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