As reporting season approaches, impairment testing is back in focus for finance teams, audit committees and boards.
In the current environment, it is not just a compliance exercise. It is a judgement call that can materially influence reported results. At the centre of that judgement is the discount rate, often one of the most sensitive and closely scrutinised inputs in any impairment model.
Get it wrong and the consequences are real. Asset values can be distorted, audit challenges can emerge, and confidence in reported outcomes can be undermined.
What to consider when setting discount rates
There are a few areas that consistently require close attention.
Market consistency
Discount rates should reflect current market conditions. Relying on long-term averages can lead to misalignment, particularly in periods of volatility.
Asset-specific risk
Care is needed to ensure risks are not double counted. If certain risks are already built into the cash flows, they should not also be embedded in the discount rate.
Valuation approach
The method matters. Whether you are applying fair value less costs of disposal or value in use will influence the appropriate discount rate, and the two are not interchangeable.
Documentation and governance
Clear and well-supported analysis is critical. Robust documentation helps withstand audit and regulatory scrutiny and provides confidence to stakeholders.
How Leadenhall can support
Leadenhall works with organisations throughout reporting season to support impairment testing and discount rate assessment. This includes:
- Discount rate analysis and reporting
- Independent impairment testing reviews
- Modelling support and refinement
- Regular cost of capital updates
We also make available a free impairment testing model and a detailed discount rate update (here is the 31 March 2026 update) for those looking to sense-check their assumptions.
For a deeper dive, our Impairment Guide, developed in collaboration with Chartered Accountants Australia and New Zealand, provides practical guidance for audit committees and management teams.
If impairment testing or discount rate assumptions are front of mind this reporting season, we would be pleased to assist.
