Reporting on impaired assets

Situation

Amid a slump in asset values, financial reporting and audit are becoming increasingly important. Declining commodity and share prices should give companies a reason to consider whether financial assets, inventories, long-lived assets, intangibles and goodwill have become impaired. To avoid unexpected audit results, testing for impairment in all categories of assets is a must.

For the 2008 financial reporting, companies should focus on the following:

• EU-listed public companies: With the introduction of the European Transparency Directive, public companies will need to publish their annual reports no later than four months after the end of the financial year.
• Financial services firms: In the wake of the credit crunch, fair value accounting by financial services firms is coming under close scrutiny.
• Debt issuers: Many pledge their assets as collateral on loans at carrying value, which may be insufficient to meet their debt liabilities under the current circumstances. Others may need to comply with different financial covenants (e.g. debt to equity ratio, earning ratios), which may prove difficult to sustain in the current environment.

Measures of success

During the global financial crisis, companies should address the following financial reporting issues:

• Interim testing for impairment and adding value using a ‘headroom’ analysis to help management understand how much leeway they have (i.e. when management will need to recognise impairment or renegotiate loan covenants)
• Identifying fair values, which can be complicated under the current market conditions
• Estimating future cash flows, which will require serious consideration and professional expertise

• The company’s ability to continue its activities in the foreseeable future
• Impairment of long-lived assets
• Impairment of financial assets
• Compliance with long-term loan covenants for both financial and non-financial indicators
• An overview of subsequent events for 2007 financial statements as well as interim financial reports