IFRS – impairment
IFRS – Interest rates are going up, my assets will be impaired, what do I do?
Companies are often affected by external forces beyond their control. In fact good executive boards use external market change to add shareholder value. As the saying goes, “never let a crisis go to waste.” When interest rates go up, shareholders demand higher returns for the same value of asset. That means the market will force the impairment of assets through a higher discount rate.[1] The smart CFO will take advantage of higher interest rates to restructure prices and get rid of low profit margin goods. This means the company can avoid impairment by arguing cash flow increase will offset higher market discount rates.[2]
IFRS – do I have to test impairment every year?
Companies pay a lot of money for valuations. If they can avoid annual impairment tests, they save money on valuation fees. An audit of a publicly traded company is laborious with tight schedules. Unlike an income tax return, a stock exchange is much less likely to permit late financial statement filings. Stock exchanges routinely halt trading on companies. Generally, companies must annually test impairment of intangible assets not yet placed in service and goodwill in business combinations whether or not placed in service.[3]
Although business combinations occur to create value, more often than not a business combination in the first few years turns in less than expected cashflow. That means a company can avoid annual valuation costs if it can establish that the value of the total purchase less assets is below expectations and potential writedown goodwill to zero. The company isn’t saying there was no value in the combination, merely that the value from operations did not exceed asset value of the purchase. No more goodwill, no more annual valuations. That also doesn’t mean companies willy nilly write-down goodwill when it suits them, it merely means a thinking CFO keeps a lookout for a year already containing net losses to completely write-down goodwill. The company is losing money that year already so an additional loss from the write-down will not affect shareholder value. Going forward, the company will save on annual valuation costs.
[1] International Accounting Standard 36 Impairment of Assets, Paragraph 12
[2] International Accounting Standard 36 Impairment of Assets, Paragraph 12
[3] International Accounting Standard 36 Impairment of Assets, Paragraph 10