Impairments Getting You Down?

Posted by Kelley Lear on Oct 19, 2011 | 0 comments

Impairments Getting You Down?

I just read an interesting report by Ernst & Young, LLP, called “Meeting Today’s Financial Challenges:  Impairment reporting: improving stakeholder confidence”.  Thought I would share some of the key points I learned from the article.  It is particularly interesting to me these days since we deal with so many accounting and tax professionals that need to handle impairments on a regular basis.  Additionally, the question of needing to fully automate regular impairments comes up more and more in talking with clients who are using or are getting on board using our Fixed Assets Manager (FAM) product (all of which we easily handle in FAM).  Impairment activity although often led by Finance, and used in business strategy/tactics for future planning with respect to assets procurement, holding or disposals of assets, should also regularly include the tax department, as impairments can have an effect across the board.  Further, once these impairments are planned and decided upon, it looks as though they are being heavily scrutinized by the financial sector.

Due to the uncertain nature of our current economy and the pervasive doubt in basically every area of our global economy, it is even more imperative for investors and lenders to have reliable information in order to make solid decisions.  However, valuing businesses and their underlying assets has become more challenging than ever before.   Ernst & Young recently conducted a survey to determine how those who use financial statements regularly are interpreting impairment reporting and what they will find the most valuable over the next 18-24 months.  The survey included 170 users of financial statements (including analysts, lenders and investors from 32 countries). 

Here are some of the findings:

  • More than half the survey respondents were not convinced that the global recovery is in fact underway.  In fact, lenders were even more pessimistic about the recovery than other stakeholders.
  • Most of the respondents believe that impairments are below expectations and that the real estate, automotive sectors, and banking and capital markets are the most likely to see further improvements.
  • Over 90% noted that forecasting cash-flows in the next 12-18 months will be challenging (or “very challenging”).
  • More than 90% also use impairment information as disclosed in financial statements in either investment or lending decisions.
  • When communicating impairment, it was also believed that management needs to “place at least as much importance on the impact of the impairment on the future prospects of the business as it does on the size, magnitude and reason for the impairment”.

Four key impairment testing steps were also shared, and include the following:

  1.  Escalate to the highest levels of the organization – here it is important for not only Financial Leadership to be involved in this process.  Collaboration with impairment specialists, tax and other senior leadership is extremely valuable. 
  2. Integrate with capital management and strategic planning – impairment elements should be properly “embedded” in regular processes.
  3. Improve reliability of valuation with better forecasting- the latest economic and industry analyses should be brought to bear (including carefully thought out discount rates).
  4. Communicate the information that stakeholders need – just like everything else these days, stakeholders will require ever greater transparency.  This will include regular communication, disclosures and detailed assumptions management uses in its sensitivity analysis.

 

How are impairments being handled in your organization?  Are you being brought in for this analysis and disclosure?  What are your thoughts?

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