Improving impairment disclosures for non-financial assets

06 November 2019

In October 2019, the FRC published a thematic review of impairment disclosures provided by a sample of listed companies. This article highlights the learning points for companies preparing impairment-related disclosures in their 2019 accounts if they have material impairment charges or reversals and/or have material goodwill balances.

Scope and purpose of the review

The FRC reviewed the full year accounts of a small sample of listed entities across a number of industries with a focus on retail and business services, mainly drawn from FTSE 350 companies. 

The review considered the comprehensiveness and quality of the impairment disclosures provided against the requirements of IAS 36, as well as detail provided within the strategic reports to assess the adequacy of commentary on impairment and the broader performance and prospects of the businesses. The FRC also considered the insights provided by investors on what they identify as useful information in impairment disclosures - a particular area of interest given current uncertainty in the macroeconomic environment.

Key areas for improvement identified

The Review identified (and reproduced) a number of instances of good practice. However, it also identifies that there were common disclosure omissions and deficiencies across the following four aspects of impairment disclosure:

Assets and Cash Generating Units (CGUs) subject to impairment

Issue Suggested improvement
Identification of CGUs Entities should clearly describe how they:
  • Identify single sites or clusters of sites as CGUs, and whether there has been a change from the prior period.
  • Group CGUs together for the purposes of testing goodwill for impairment.
Impairment Triggers Companies should give clear and specific explanations of the triggers of impairment, for example:
  • Distinguishing between external data and own estimates.
  • Make clear the timing as well as the nature of the changes in circumstances that affected the impairment testing, including explaining reasons for the change from prior periods.
They should also ensure that impairment losses and the recoverability of non-financial assets are assessed as part of the fair, balanced and comprehensive review of the business in the Strategic Report.
Recoverable amount Most of the companies with a material impairment loss failed to disclose the recoverable amount of the asset(s) or CGU(s) affected. Companies are explicitly required by IAS 36.130 (e) to disclose this.


Key assumptions and significant judgements

Issue Suggested improvements
Recoverable amount of assets Cash flow forecasts for companies using the Value in Use method must not include the benefits of developing new business or rely on future investment in capacity.
Base case values Where sensitivity disclosures are required by IAS 36.134 (f) the ‘base case’ values for the key assumptions must also be disclosed.
Significant judgements Companies should distinguish more clearly between the matters of significant judgement, such as the determination of CGUs, and estimating uncertain amounts, such as future cash flows and discount rates.


Discount and growth rates

Issue Suggested improvements
Discount rates Companies should explain specifically how the discount rate has been derived and differentiate between the discount rates used for different CGUs. They should also ensure it is an appropriate discount rate, ie pre-tax and not based on entity-specific borrowing.


Sensitivity analysis

Issue Suggested improvements
Changes in key assumptions Disclosures should state which changes in key assumptions management thinks are reasonably possible, along with the impact of such a change (eg reducing headroom to nil or giving rise to a potential material adjustment).
Headroom Where a reasonably possible change in key assumption would reduce headroom to nil, companies should disclose the excess of the recoverable amount over the carrying amount (‘headroom’) of a CGU.
Headroom sensitivity

The disclosure requirement for sensitivity requires disclosure of the amount by which the value assigned to the key assumption must change in order to erode headroom to nil. 

This is different to what was disclosed by a number of companies who simply gave the effect of a % change (eg +/- 1%) in the key assumption. 


Next steps

The FRC makes clear that it will continue to challenge entities’ disclosures during its routine reviews, and it is likely to focus on those areas that it has already identified as needing improvement. Therefore, all entities should take note of the deficiencies and areas of good practice it lists when preparing their own impairment disclosures.

In addition to the specific requirements of the standard, the FRC has also identified a number of areas which may be relevant to impairment reviews in 2019 accounts such as Brexit, climate change and interaction with IFRS 16. There is specific guidance of points to consider on page 31 of the FRC review.

Read the FRC review of impairment disclosures.

For help and advice on impairment related matters please get in touch with your usual BDO contact or Scott Knight.

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