Impairment of assets in the context of COVID-19
12 June 2020: ICAEW’s Financial Reporting Faculty considers accounting requirements relating to the impairment of assets in the context of the COVID-19 pandemic in their latest short webcast.
Under both UK and international accounting standards, the principle exists that assets should be stated at no more than their recoverable amount in an entity’s balance sheet, where the recoverable amount is the higher amount that the entity could generate from either using or selling the asset. Entities must consider at each reporting date whether an indicator exists which might suggest an asset’s carrying value exceeds its recoverable amount. When such an indicator exists, the asset’s recoverable amount must be calculated, and an impairment review carried out.
In light of the pandemic, indicators of impairment are likely to be common for many entities. Consequently, more entities will need to carry out impairment reviews and make related disclosures in the accounts.
In this 15-minute Bitesize Briefing Matt Howells, partner at Smith & Williamson, starts by outlining some of the typical impairment indicators likely to be relevant, including elements of a business being closed, reduced demand for products, customers facing financial difficulty and supply chain issues. Market capitalisation being below the carrying amount of the net assets of an entity is a further indicator specifically referred to in accounting standards that might be relevant for listed entities.
When carrying out an impairment review it will be necessary to forecast the future cash flows that will be generated from using the asset. Howells explains that an important aspect to consider is whether coronavirus is an adjusting or non-adjusting post balance sheet event for the entity as impairment reviews must be based on conditions that exist at the reporting date This in itself is a complex area of judgement for some and is an area on which the Financial Reporting Faculty has previously recorded a webcast and published guidance (see below).
Applying accounting requirements on impairment of assets can be a complex area that involves significant judgement. Applying those requirements in times of such uncertainty will only add to the challenge.
The Financial Reporting Faculty has temporarily made its premium factsheets Applying IAS 36 Impairment of Assets and FRS 102 Impairment of Assets available to all to support preparers and their advisers at this time. These factsheets, along with guidance on post balance sheet events, going concern and more can be found on the Coronavirus and financial reporting hub.