Impairment test according to IFRS in times of the Corona Pandemic

“Due to the currently unforeseeable global consequences of the coronavirus pandemic, these estimates and judgments are subject to increased uncertainty. Future changes in the expected cash flows and discount rates may lead to (further) impairment losses or reversals of impairment losses in the future.” (adidas Group, report on the first half of 2020)

Since the outbreak of COVID-19 at national and international level, the economic situation for companies has become increasingly difficult. The majority of the companies has to deal with various shortfalls, such as cancelled orders, delivery bottlenecks as well as sick leave and quarantine related absences of employees, that already led to sales losses as well as profit collapses.

The economic consequences of the corona pandemic are accompanied by a call for action regarding accounting. The impairment test in accordance with IAS 36 plays a particularly important role in this context. The European Securities and Markets Authority (ESMA) has also selected this as the focus of its audit for the upcoming busy season. ESMA is of the opinion that the development of the corona pandemic provides a strong indication that one or more impairment indicators according to IAS 36 exist for many companies.

For non-current assets falling within the scope of IAS 36, such as goodwill, intangible assets or property, plant and equipment, an assessment must be made at least at each reporting date as to whether there are any indications of impairment, so-called triggering events. Based on IAS 34, this applies not only to annual (consolidated) financial statements, but also to previous interim financial statements. In view of the increasing number of infections and the measures taken in response, the corona pandemic is likely to continue to be identified as a triggering event for many companies at the end of the financial year. If such an event occurs, an impairment test must always be carried out.

The basis for the impairment test are the updated forecasts and estimates regarding the corona-related business development. The management has to estimate the impact of the pandemic on the cash flow. Due to the currently still unforeseeable worldwide consequences of the corona pandemic, these estimates are subject to increased uncertainty.

The average cost of capital (WACC) is generally used to determine a discount rate. So-called peer groups are used to calculate the parameters (e.g. beta factor, capital structure, cost of debt capital). In the context of a pandemic, the beta factor in particular may be distorted due to corona-related stock market price fluctuations, requiring additional analyses.

It is recommended to include in the notes to the financial statements an explanation of how the effects of the Corona pandemic were taken into account in the impairment test and whether and when a return to pre-pandemic cash flow levels can be expected.

We will gladly advise and support you in carrying out an impairment test in these unprecedented times.

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