Impairment disclosures for non-financial assets

The Financial Reporting Council (FRC) would like entities to provide more transparent reporting of the recognition or reversal of an impairment loss. It has conducted a Thematic Review - Impairment of non-financial assets to look at compliance with the disclosure requirements in IFRS and commentary in the strategic report.

The review identified instances of better practice but also a number of common disclosure omissions and opportunities to clarify and enhance disclosures. Specifically, the FRC encourage companies to pay greater attention to:

• providing relevant information around significant judgements and key assumptions made in estimating the recoverable amount of assets and cash-generating units; and
• explaining the sensitivity to changes in key assumptions, where reasonably possible changes could give rise to impairment of goodwill or material further adjustments to already-impaired assets.

The FRC encourages clear disclosures about the events and circumstances that lead to the recognition or reversal of an impairment loss and the basis on which the directors concluded the carrying amounts of non-financial assets are recoverable. Common disclosure omissions and areas of good practice are summarised below.

Strategic Report

Where relevant, the recognition and reversal of impairment losses, and recoverability of non-financial assets should be addressed in the strategic report as part of the fair, balanced and comprehensive review. This might require explanation that management’s forecasts may be more optimistic than market indications.

Events and circumstances

Better disclosures:

• give clear explanation of the trigger(s) for impairment;
• describe the timing as well as the nature of changes in circumstances that lead to the recognition or reversal of an impairment loss;
• distinguish between external and entity-specific events and circumstances and avoid generic language; and
• give a history of headroom when the changes in circumstances are gradual.

Assets and Cash Generating Units subject to impairment

Better disclosures:

• describe how the entity identified cash generating units (CGUs) and grouped CGUs for goodwill impairment testing and changes from the prior period;
• distinguish impairments at the individual CGU level from testing of goodwill and other assets allocated to a group of CGUs;
• report significant judgement exercised in defining CGUs and groups of CGUs and determining “dependent” cashflows attributed to each CGU; and
• clearly identify the order in which impairment testing is applied (ie assets within the CGU, the CGU, then groupings of CCUs for goodwill).

Omitted disclosures included:

• recoverable amount of assets and CGUs subject to an impairment loss or reversal.

Recoverable amount

Better disclosures:

• explain circumstances giving rise to a change in the basis for measuring recoverable amount (ie fair value less costs of disposal or value in use).

Omitted disclosures included:

• fair value disclosures (including fair value hierarchy level) when recoverable amount is based on fair value less costs of disposal.

Key assumptions

Better disclosures:

• identify all key assumptions used in cashflow projections (not just long-term growth rate and discount rate);
• explain how management determines the key assumptions, linking future expectations to external conditions and/or the company’s own strategy;
• disclose values assigned to key assumptions, with comparative figures, for each significant CGU or group of CGUs; and
• explain significant changes in key assumptions.

Omitted disclosures included:

• ‘base case’ values for key assumptions for which sensitivity is given.

Discount rate

Better disclosures:

• clearly explain how the discount rate has been derived for CGUs with different risk profiles;
• concisely explain key inputs used in determining the discount rate;
• identify source data used for the time value of money (eg government bond yields); and
• make it clear that an appropriate discount rate is used for value-in-use calculations (ie pre-tax and not based on entity specific leverage).

Growth rates

Better disclosures:

• identify the specific growth rate for each significant CGU, with comparatives and explanation of significant changes from prior period;
• explain the basis on which long-term growth rates are determined and data source(s) used;
• confirm the growth rate does not exceed the relevant long-term average growth rates;
• explain how the applied growth rate differs from relevant long-term average growth rates; and
• explain how the long-term growth rate is considered to be consistent with other assumptions (including how the entity bridges between short-term growth assumptions and long-term growth rate).

Period of cash flow projections

Better disclosures:

• specify the relevant forecasting period for each significant CGU (or group of CGUs) rather than stating the maximum period;
• link to strategic planning periods;
• explain how budgets are extrapolated up to five years;
• explain how the entity bridges between short term forecasting assumptions and the long term growth rate; and
• explain why periods are extended beyond five years in specific circumstances.

Sensitivity analysis

Better disclosures:

• clearly state reasonably possible changes in key assumptions and the impact of such changes (whether reducing headroom to nil or giving rise to a potentially material adjustment to the carrying value);
• disclose headroom of each CGU or group of CGUs for which sensitivity information is relevant;
• state that management considers no reasonably possible changes would reduce headroom to nil; and
• clearly mark additional information provided over and above the requirements in IFRS.

Omitted disclosures included:

• the excess of the recoverable amount over the carrying amount where a reasonably possible change in key assumptions would reduce headroom to nil; and
• specific changes in assumptions that would erode headroom to nil.

Estimates and judgements

Clearer distinction between matters of significant judgement (such as the determination of CGUs, allocation of revenue and costs to CGUs) and estimating uncertain amounts (such as future cash flows and discount rates) is encouraged.

There is also an expectation when the net assets of the company exceed the market capitalisation, that relevant information about estimates and assumptions carrying significant risk of material adjustment in the following year are disclosed.

Better disclosures:

• focus on changes in assumptions with a material impact on carrying values in the following year;
• explain alternative scenarios clearly; and
• are clear as to whether changes are reasonably possible or illustrative.

Investments in subsidiaries

Better disclosures:

• explain the relationship between impairment of operating assets in subsidiaries as an indicator of impairment for the parent company when making the assessment of its investment recoverability; and
• confirm that there has been an assessment of impairment or that the directors considered there to be no indicators of impairment.

2020 disclosures

Key points to consider in 2020 for impairment-related disclosures are:

• Brexit impact on the range of reasonably possible changes in key assumptions and/or forecasts, linking these assessments with descriptions of the principal risks and uncertainties as set out in the strategic report, the business model and the viability statement, where relevant;
• The impact on medium to long-term growth potential, costs and operating licenses for businesses where climate change and environmental impact are significant; and
• Implementation of IFRS 16 – impact on the impairment of right of use assets (CGU carrying values increased by ROU assets, discount rates, cash flows excluding rental outflows).

For more information on any of the above areas, please speak to Stella Cooper.