Assistance in the implementation of impairment tests for the FY 2022 reporting
The year 2022 has been impacted by several economic downturns:
- the war in Ukraine
- the increase in oil prices
- global inflation
- the increase of interest rates
- the energy crisis
This items can all be considered as an indication of impairment as defined by IAS 36. As a reminder, IAS 36 standard (related to “impairment of assets“) states that “at the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount)“.
To appreciate this potential impairment, the company must analyze both internal and external sources. Among the external sources, the standard names for example “market value declines, negative changes in technology, markets, economy, or laws, but also increases in market interest rates or net assets of the company higher than market capitalisation“.
SORGEM Evaluation acted as independent advisor for several clients, in relation to the implementation of their impairment tests.
In this context, we made sure that we did not consider any mechanical impact, without further analysis, between economic downturns and potential decrease in the value of the assets analyzed. Indeed, actual economic downturns do not necessarily have mid term or long term impacts and therefore do not necessarily have a significant impact on the value of assets valued to infinity. This impact is also lowered by the fact that the terminal value often accounts for most of the total value of the asset.
We have also analyzed the potential impact of recent events on the discount rates used for impairment testing. All parameters of the discount rate could be impacted: the risk-free rate, the equity risk premimum, the beta of the company, the cost of debt, etc.
In any case, we have encouraged our clients to analyze whether this current impact of the recent economic downturns might have long term consequences. In this context, we have computed assumptions and scenarii on the potential timetable to exit this crisis, that can be updated regurlarly to anticipate any risk of impairment in the future.