1 Best disclosure requirements for impairments

What are the disclosure requirements for impairments – Impairments relate to the (potential) impairment of:

and the primary goal is to ensure that an entity’s assets are not carried at more than their recoverable amount (i.e. the higher of carrying value and one of the fair value basis of each above mentioned assets, for example value in use from IAS 36). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a ‘cash-generating unit’ where an asset does not generate cash inflows that are largely independent of those from other assets.

Impairment testing

IAS 36 requires at least annual impairment tests for goodwill, other intangible assets assigned an indefinite useful life, and intangibles not yet available for use. Moreover, for any asset, an impairment test has to be carried out at each reporting date if there is any indicator of impairment (a triggering event). The outcome of such tests has to be disclosed (i.e. that the tests were conducted and for tests resulting in (new) impairments extended disclosures regarding amount, assumptions etc).

Key disclosures

IAS 36 requires extensive disclosures in respect of the impairment tests performed and impairments recognised. The disclosures are even more extensive for goodwill than for the impairment of other assets. The key disclosure requirements are the following:

  • The amounts of impairments recognised and reversed and the events and circumstances that were the cause thereof
  • The amount of goodwill per CGU or group of CGUs
  • The valuation method applied: FVLCS or VIU and its approach in determining the appropriate assumptions
  • The key assumptions applied in the valuation, including the growth and discount rate used
  • A sensitivity analysis, when a reasonably possible change in a key assumption would result in an impairment, including the ‘headroom’ in the impairment calculation and the amount by which the assumption would need to change to result in an impairment.

Common disclosure omissions and areas of good practice

Common disclosure omissions and areas of good practice are summarised below.

Where relevant, the recognition and reversal of impairment losses, and recoverability of non-financial assets should be addressed 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 circumstancesWhat are the disclosure requirements for impairments

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.
Something else -   Fair value less costs of disposal

Assets and Cash Generating Units subject to impairment

Better disclosures: What are the disclosure requirements for impairments

  • describe how the entity identified cash generating units (CGUs) and grouped CGUs for goodwill impairment testing and changes from the prior period; What are the disclosure requirements for impairments
  • 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: What are the disclosure requirements for impairments

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

Recoverable amount What are the disclosure requirements for impairments

Better disclosures: What are the disclosure requirements for impairments

  • 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: What are the disclosure requirements for impairments

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

Key assumptions What are the disclosure requirements for impairments

Better disclosures: What are the disclosure requirements for impairments

  • 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: What are the disclosure requirements for impairments

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

Discount rate What are the disclosure requirements for impairments

Better disclosures: What are the disclosure requirements for impairments

  • clearly explain how the discount rate has been derived for CGUs with different risk profiles;Cash-generating unit (CGU) Cash-generating unit (CGU)
  • 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).
Something else -   IAS 36 Determine if and when to test for impairment

Growth rates What are the disclosure requirements for impairments

Better disclosures: What are the disclosure requirements for impairments

  • 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 What are the disclosure requirements for impairments

Better disclosures: What are the disclosure requirements for impairments

  • specify the relevant forecasting period for each significant CGU (or group of CGUs) rather than stating the maximum period;
  • link to strategic planning periods; What are the disclosure requirements for impairments
  • explain how budgets are extrapolated up to five years; What are the disclosure requirements for impairments
  • 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 What are the disclosure requirements for impairments

Better disclosures: What are the disclosure requirements for impairments

  • 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); What are the disclosure requirements for impairments
  • 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: What are the disclosure requirements for impairments

  • 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. What are the disclosure requirements for impairments

Estimates and judgements What are the disclosure requirements for impairments

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. What are the disclosure requirements for impairments

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. What are the disclosure requirements for impairments

Better disclosures: What are the disclosure requirements for impairments

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

Investments in subsidiaries What are the disclosure requirements for impairments

Better disclosures: What are the disclosure requirements for impairments

  • 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 What are the disclosure requirements for impairments
  • confirm that there has been an assessment of impairment or that the directors considered there to be no indicators of impairment.

2020 disclosures What are the disclosure requirements for impairments

Key points to consider in 2020 for impairment-related disclosures are: What are the disclosure requirements for impairments

  • 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; What are the disclosure requirements for impairments
  • 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).
Something else -   IFRS 2 Shares to the value of a fixed amount

Other disclosures

The disclosure requirements are listed by class of assets, reportable segments, and other disclosures.

Disclosure by class of assets: What are the disclosure requirements for impairments

  • impairment losses recognised in profit or loss; What are the disclosure requirements for impairments
  • impairment losses reversed in profit or loss; What are the disclosure requirements for impairments
  • which line item(s) of the statement of comprehensive income; and What are the disclosure requirements for impairments
  • impairment losses on revalued assets recognised in other comprehensive income
  • impairment losses on revalued assets reversed in other comprehensive income.

Disclosure by reportable segment:
(for entities that present operating segment information)

  • impairment losses recognised; and What are the disclosure requirements for impairments
  • impairment losses reversed. What are the disclosure requirements for impairments

Other disclosures:

If an individual impairment loss (reversal) is material disclose:Commodity

  • events and circumstances resulting in the impairment loss; What are the disclosure requirements for impairments
  • amount of the impairment loss or reversal; What are the disclosure requirements for impairments
  • individual asset: nature and segment to which it relates; What are the disclosure requirements for impairments
  • cash generating unit: description, amount of impairment loss (reversal) by class of assets and segment;
  • if the recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy (from IFRS 13 Fair Value Measurement) within which the fair value measurement is categorised, the valuation techniques used to measure fair value less costs of disposal and the key assumptions used in the measurement of fair value measurements categorised within ‘Level 2’ and ‘Level 3’ of the fair value hierarchy; and
  • if recoverable amount has been determined on the basis of value in use, or on the basis of fair value less costs of disposal using a present value technique*, disclose the discount rate.

If impairment losses recognised (reversed) are material in aggregate to the financial statements as a whole, disclose:

  • main classes of assets affected main events and circumstances; and What are the disclosure requirements for impairments
  • detailed information about the estimates used to measure recoverable amounts of cash generating units containing goodwill or intangible assets with indefinite useful lives.

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What are the disclosure requirements for impairments

See also: IFRS Community – Disclosures impairments

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Something else -   Recoverable amount

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