Discount rate early warning – impairment in focus
The 31 Dec reporting season is fast approaching and the impact of COVID-19 on asset values remains a key issue highlighted by ASIC in its message to companies. With market conditions continuing to evolve rapidly in response to COVID-19 and other news, the goal of our discount rate update is to remove one uncertain element in the raft of subjective assumptions utilised by companies in their valuations and impairment testing.
In relation to focus areas for 31 December 2020 financial reports, ASIC Commissioner Cathie Armour said, “Entities with businesses adversely affected by the COVID-19 pandemic should continue to focus on the reporting of asset values and financial position.”
To assist with your planning, we provide an early update on how overall market discount rates have changed since 31 December 2019. It will be followed by a more detailed analysis of the appropriate parameters to build-up a discount rate as at 31 December 2020 shortly thereafter.
Government bond yields have declined substantially since the onset of the pandemic, to 0.9% as at 30 November 2020. This has been more than offset by an increase in our assessed market risk premium (to a range of 7.0% to 7.5%) and reduced gearing levels, attributable to the uncertainty created by COVID-19. Whilst recent optimism has reduced the implied market risk premium slightly, overall market discount rates remain heightened compared to this time last year.
Given the increase in discount rates since December 2019, companies may have less headroom for impairment testing as at December 2020, particularly for companies adversely impacted by COVID-19. This will not of course be correct for all businesses and cash generating units given their individual circumstances but may serve as a guide.
For further information on selecting an appropriate discount rate for your company or cash generating units please feel free to contact us.