As part of the 30 June reporting period and with the beginning of a new financial year, companies are undoubtedly focused on many aspects of the future, one of which is likely to be how to approach budgets and projections for business planning, capital requirements, and impairment testing. Forecasting 3-5 years in the future has never been an easy task even in normal times, however, the current environment means the crystal ball is particularly hazy at the moment!
Whilst share markets have recovered most of the losses experienced subsequent to the onset of COVD-19, the economic implications appear likely to have a much longer tail, particularly once government stimulus measures dissipate and the real economic impact of the crisis takes hold. We anticipate that due to this uncertainty, any cash flow projections are likely to be subject to more scrutiny from board members, auditors and regulators whilst at the same time being more complicated and subjective.
Based on discussions with clients and preparing valuations based on long-term projections in the current environment, we thought it would be useful to share some quick tips and observations about how we are approaching the preparation of projections in the current environment.
First of all, when preparing forecasts, we recommend considering the key assumptions and/or scenarios to utilise and obtain feedback from directors and other key stakeholders well before a detailed model is prepared. This can be captured in ‘Key Assumptions on a Page’ which allows for key factors to be summarised and feedback obtained from key stakeholders such as the board and auditors.
In addition to the normal process of identifying key business drivers and assumptions (such as market/price growth, volume drivers, cost drivers, earnings margins, capital investment requirements, working capital flow and tax profile, etc.) some of the factors that need to be considered currently that have not been in the past may include:
|Covid-19 restrictions and other implications
More than ever, there is probably no right or wrong answer. For 30 June impairment testing, the critical aspects to get boards and auditors across the line will be documenting (and agreeing) the key assumptions underpinning your cashflow model. For businesses that are experiencing uncertainty due to the economic and other implications of COVID-19, it is also important to ensure that adequate consideration is given to the understand the ‘best’ case and ‘worst’ case scenarios at a minimum so that the goal posts are established.
We have been more involved with clients in recent months in providing a framework and models for projections for impairment testing and for other strategic purposes. For questions or assistance, don’t hesitate to contact us.
- Our latest guidance on discount rates: Market Risk Premium analysis as at 31 March 2020
- A technical guide to how valuation analysis is impacted: Technical Guidance to Valuations during COVID-19
- A DCF model that includes both fair value and value in use: Valuation impairment model
- A template to assist the calculation of discount rates: Discount rate calculator