Wednesday 18 August 2021
Let’s go back in time. Briefly. Back to the late 70’s, and back to a television series (from the UK) of the era.
Tales of the Unexpected. You may remember them?
Based on the writings of Roald Dahl, for sure if any chocolate was to be found in these stories, it would’ve been very dark and very bitter. Even now, over forty years on, I remember each episode, vividly. Well, to be more precise, I remember the unforgettable opening credits. I’m also aware of that uncomfortable, strange feeling of unease, that increased as each episode unfolded. Queasy, uncertain, unsettled. Unmissable!
I remember that same ‘pit of the stomach’ feeling on the first day of my first job after qualifying when asked by my boss, "So Rob, now you’re with us, how far are you prepared to bend the rules". Answer - "I’m not". I didn’t stay long.
That same feeling again, a few years later, when asked to perform my first major impairment test. An impairment test! On multi-million-pound plant! All those variables!
What assets to include within the CGU? What discount rate to use? What cash flows? How to allocate any loss?
What could possibly go wrong!!! Cue unease, uncertainty.
Now? Well, with greying hair (what’s left of it) and experience I’m more than happy to be discussing the use of adjusted WACC’s, extrapolation of cash flows for the VIU, the difference between maintenance and improvements, pre and post-tax.
I suspect many others are too. Especially now. Because of the unexpected.
Because of Covid.
Consider IAG, the parent company of British Airways, Iberia and other European airlines. Impairment testing was not necessarily top of their reporting agenda towards the back end of 2019. But then the new year arrived.
The picture below was taken in March 2020 at one of the UK’s regional airports. British Airways had thirty planes parked here. Just sitting, just doing nothing. As another former boss of mine would delight in saying, "Rob, to make a return we’ve got to make the assets sweat". I see no sweat.
So, we turn to IAG’s 2020 financials and head to note three:
- ‘Impact of Covid 19 on financial reporting’ and then to sub-section C
- ‘Impairment testing of the Group’s cash generation units’.
"Due to the estimation uncertainty of the timing and duration of the recovery from COVID-19, the Group has adopted a weighted average multi-scenario discounted cash flow model derived from the cash flow forecasts from the approved business plans. The Group exercises judgement in determining the weighting between these scenarios in the value-in-use model."
And then this:
"Having undertaken this impairment testing, the Group has not recognised any impairment charge. While no impairment charge is arising, the headroom in the impairment test of the British Airways, Iberia and Aer Lingus cash generating units are particularly sensitive to changes in key assumptions."
No impairment loss. Unexpected?
‘Headroom sensitive to changes in key assumptions….’
No loss now, but for how long?
It just goes to show. The need for the impairment test doesn’t necessarily mean there’ll be a loss. And just because ‘the feeling’ is the numbers won’t call for a charge doesn’t negate the need to carry out the test to find out, if the indicators exist.
IAG’s report for 2021 may well turn out to be different, and maybe for many others so heavily affected by the events that have unfolded over the past eighteen months. Let’s wait and see.
Even without Covid though, I suspect the expectation for more regular impairment testing is likely to increase in the years to come. Why? ESG is at least one reason.
Consider ‘Stranded Assets’. Not necessarily those idle jets of BA (at least not yet), but rather other types of asset - often intangible - having links to the environment, to carbon, to emissions etc. As the momentum gathers for standardised ESG metrics and reporting the spotlight will inevitably focus more on these and their impact on societies, and sustainability. And with that comes increased risk. Cue unease, uncertainty. Testing required.
We can help. Whether it’s for an upcoming impairment review or a longer term need for ESG knowledge, IASeminars have various courses to increase understanding in these technical areas, each of which can be tailored for individual requirements.
As financial reporters we need these tools. As financial reporters we need to be able to tell our story, the story of our business. As financial reporters, it’s expected.
Upcoming courses relating to Impairment
Essentials - A Focus on IAS 36 Impairment of Assets
03 Dec 2021 (Virtual 4 hours)
31 Mar 2022 (Virtual 4 hours)
IFRS Update and Application Briefing
20 – 23 Sep 2021 (Virtual 4 x 4 hours)
06 – 07 Dec 2021 (London 2 days)
25 – 26 Apr 2022 (Amsterdam 2 days)
09 – 12 May 2022 (Virtual 4 x 4 hours)
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