The business and operations of many entities have already been seriously affected by the rapid global spread of COVID-19 and related government actions. Unfortunately, many businesses will continue to be affected for some time. This has consequences for their value and the value of many of their commercial assets.
In this volatile environment, any impairment of goodwill and other long-lived assets has the potential to materially reduce reported earnings. While impairment losses provide only a lagging indicator of negative developments, this does not reduce the importance of ensuring that the reported values for goodwill and other intangibles reflect an appropriate value. This includes any impairment in value reflecting the economic impact of COVID-19.
Management teams that perform impairment testing fully in-house may find this requirement a significant addition to their role at a time when, more than ever, management’s full attention on operations is crucial. This is also an area that will likely be subject to particular scrutiny and challenge by external auditors.
IAS 36 ‘Impairment of Assets’
IAS 36 seeks to ensure that the assets of a reporting entity are carried at amounts not in excess of their recoverable amounts.
IAS 36 defines the recoverable amount of an asset as the higher of its fair value less costs of disposal (FVLCD) to sell and its value in use (VIU). Fair value is defined as an amount obtainable in an arm’s length transaction between knowledgeable and willing parties. VIU is based on an estimate of the future cash flows the entity expects to derive from the use of an asset or associated cash generating unit (CGU) in its current form. COVID-19 is likely to impact both FVLCD and VIU.
If the carrying amount of an asset exceeds its recoverable amount the asset is impaired. IAS 36 then requires the entity to write down the asset to its recoverable amount and recognise an impairment loss.
IAS 36 requires that both intangible assets with an indefinite useful life (and any intangibles not yet ready for their intended use) and goodwill be tested for impairment at least annually. For other asset classes that fall under the standard, the entity is required to test the asset for impairment when indicators of impairment are present.
Below are some issues for management to consider in assessing impairment together with some direction as to how best to respond to them.
How can Grant Thornton help?
Preparers of financial statements will need to be agile and responsive as the situation unfolds. Having access to experts, insights and accurate information as quickly as possible is critical – but your resources may be stretched at this time. We can support you as you navigate through accounting for the impacts of COVID-19 on your business.
Grant Thornton valuation experts provide time critical independent support and advice to organisations who must review or quantify any impairment risks relating to intangible assets and goodwill caused by the impact of COVID-19. Now more than ever the need for businesses, their auditor and any other accounting advisors to work closely together is essential.
If you would like to discuss any of the points raised, please speak to expert Chetan Hans.