Impact of COVID-19 on Impairment Analysis
Drastic changes in operating conditions and financial markets this year pose significant challenges for all of us involved in financial reporting and forecasting.
These challenges are illustrated by Prime Minister Scott Morrison’s announcement of a five-month delay in handing down the Federal Budget, due to the difficulty in preparing forecasts. Unfortunately, many of us will need to complete budgets, forecasts and impairment testing before life returns to normal.
For any company that has made an acquisition in the last few years, impairment analysis will require deeper consideration and will likely receive greater scrutiny from auditors and ASIC than in prior years.
It is likely that many businesses will experience a reduction in forecast cashflows coupled with increased uncertainty (i.e. an increase in discount rates). This is likely to result in reductions in headroom or impairment of assets. In some cases, these impacts will be significant.
The challenge for companies is how to risk adjust your forecasts (which may include multiple scenarios) and re-assess your discount rate, in an appropriate manner, and without double counting the expected impacts or valuation inputs.
We have collated the following resources to assist you in undertaking your impairment testing analysis:
- Technical guidance to valuations during COVID-19
- Q1 2020 economic snapshots
- World economic updates – Australia, Canada and the UK
- World economic updates – Argentina and Brazil
- Impairment fundamentals
- Fair value and impairment training
- Valuation impairment model
- Discount rate calculator
- Market Risk Premium analysis as at 31 March 2020
As always, we suggest early communication with and involvement of the directors of your company.