Download ASIC focus areas - Asset values and impairment testing

September 2014
Japan Business Services
Newsletter
ASIC focus areas - Asset values and
impairment testing
As many companies commence preparation of their 30 June 2014 Financial
Reports we believe a timely reminder is required concerning annual impairment
testing – both performance of testing and disclosure of this testing. ASIC continues
to focus on asset values and impairment testing. In this edition we highlight the
impact this is having on market participants and we also focus on one area of
common error – Cash Generating Unit identification.
What is happening in the Market?
Over the last three years there has been a significant increase in the number of
ASX100 companies reporting impairment as well as the quantum of the
impairment charges being recorded. In the latest financial year, 57 of ASX100
companies recorded impairment compared to 47 in the prior year and of these
charges, the average impairment charge was 5.2% of equity compared to 4.0% in
prior year and 0.7% in 2011.
Reviewing 2013 Financial Reports, EY has continued to see goodwill write downs,
with goodwill continuing to be the most significant component of the overall
composition of total impairment charges. As seen in Table 1 - similar to 2012, the
next most significant category was PP&E write downs.
Table 1 – Recent Impairment Trends among ASX100 companies
Category
Goodwill
PP&E
Other intangibles
Equity accounted
investments
2013
45%
33%
12%
10%
2012
49%
35%
11%
5%
2011
42%
44%
7%
7%
Impairment in 2011 and 2012 was
characterised by a small number of companies
making very large write downs in both goodwill
and PP&E. In 2013, the impact of a similar
number of companies was not as significant on
the overall impairment charge – the increase is
as a result of more companies booking
impairment (While overall the average
impairment charge has decreased, the number
of companies incurring impairment has risen).
Table 2 below presents some interesting
statistics for the ASX 100.
Table 2 – Impairment statistics for ASX100
companies in Australia
Category
Number of
companies
recording an
impairment
charge
Average
impairment
charge over
equity
2013
57%
(57
out of
100)
2012
48%
(47
out of
97)
2011
36%
(35
out of
97)
5.2%
4.0%
0.7%
Our discussions with entities who have taken
impairment charges suggests that as a result of
declining economic conditions, the entities
have made significant impairment write-downs
of assets. As part of this greater focus on
impairment, we have also seen entities improve
their disclosures concerning impairment testing
and fair values of assets. Also, the entities are
making greater disclosure of key assumptions
underlying asset impairment calculations.
These disclosures are important to investors
and other users of financial reports given the
subjectivity of any calculations – if you are
uncertain about your disclosures please consult
your Auditor.
Cash Generating Unit (“CGU”)
Identification
As a result of our work with our clients, EY has
noted at there is an increasing focus on the
identification of CGU’s both by businesses and
ASIC. At 30 June 2014 there are three key
issues amongst others that should have your
full focus – these are areas of common error:
ASIC focus areas - Asset values and impairment testing
1. CGUs set at too high a level of
aggregation:
It is important to challenge whether, too many
assets have been aggregated into a CGU –
remember a CGU is defined as the lowest
grouping of assets capable of generating
independent cash inflows – remember not a
profit. The consequence of this is that entities
may group assets together which should really
be separate CGUs and while overall impairment
is passed, it may be failed in one or more of the
actual CGUs if they were correctly identified.
2. CGU groupings set too high:
Does your business have goodwill? It is
necessary to allocate this goodwill to CGUs
individually or if not possible to groupings of
CGUs – as long as this grouping reflects the
level at which management monitors goodwill
internally and is not larger than an operating
segment. Entities should be challenging their
goodwill allocation and assessing whether it
should be allocated at a lower level (e.g., to a
CGU group that is a component of an operating
segment).
3. The effects of reorganisation and
disposals:
Have you disposed or reorganised of part of
your operations? – Yes, then read on. When
part of a CGU is reorganised or disposed of, it is
important to consider whether the entity has
allocated (remaining) goodwill in accordance
with AASB 136. If the CGU grouping has been
set at too high a level, this may cause
anomalies when goodwill is allocated on a
relative fair value basis. On a disposal, for
example the entity may assert that much too
much/much too little goodwill has been
allocated to the group disposed of. This may
indicate that goodwill was not actually
monitored at the level of the CGU group to
which it had been allocated.
If you have reorganised or disposed of part of
your operations we strongly encourage you to
consult with your auditor prior to balance date
– these situations can be complex.
In conclusion
ASIC will continue to focus on impairment. This complex area
should be focused on not only by management but the Board of
Directors. Our experience is that impairment should and must be
addressed prior to year end. While all elements of impairment are
important there should be strong focus on the identification of
your CGUs and the disclosure of the results of your impairment
testing in your Financial Statements.
Many entities will often just refresh impairment calculations from
prior years – while this can be a supportable approach we strongly
encourage entities to review all assumptions, inputs and
calculations in 2014 as the world economy starts to show growth
and recovery. This may even impact on reversals of non-goodwill
impairments which will be required where CGU values increase
over previously impaired values.
We strongly encourage, directors and auditors to exercise
professional scepticism and challenge the appropriateness of
asset values and assumptions underlying impairment
calculations, particularly in the context of current economic
conditions and where prior period financial forecasts have not
been met.
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax,
transaction and advisory services. The insights
and quality services we deliver help build trust
and confidence in the capital markets and in
economies the world over.
We develop outstanding leaders who team to
deliver on our promises to all of our
stakeholders. In so doing, we play a critical role
in building a better working world for our
people, for our clients and for our
communities.
EY refers to the global organization, and may
refer to one or more, of the member firms of
Ernst & Young Global Limited, each of which is
a separate legal entity. Ernst & Young Global
Limited, a UK company limited by guarantee,
does not provide services to clients. For more
information about our organization, please
visit ey.com.
About EY’s Tax services
Region
Name
Telephone/Email
National
菊井隆正 Takamasa Kikui
Partner
Japan Business Services
Asia-Pacific / Oceania Leader
+61 2 9248 5986
[email protected]
鈴木大介 Daisuke Suzuki
Transaction Advisory Services
Sydney
+61 2 9276 9083
[email protected]
篠崎純也 Junya Shinozaki
Director
Japan Business Services
NSW Leader
+61 2 9248 5739
[email protected]
カーンズ裕子 Yuko Kearns
Director, Tax
+61 2 9248 5518
[email protected]
Melbourne
加藤雅子 Masako Kato
+61 3 9655 2766
[email protected]
Brisbane
荒川尚子 Shoko Arakawa
Senior Manager, Assurance
+61 7 3011 3189
[email protected]
渡辺登二 Toni Watanabe
Tax
+61 7 3011 3526
[email protected]
井上恵章 Shigeaki Inoue
Director, Tax
+61 8 9217 1296
[email protected]
諸貫 健太郎 Kentaro Moronuki
Manager, Assurance
+61 8 9429 2222
[email protected]
川井真由美 Mayumi Kawai
+61 8 8417 1974
[email protected]
Perth
Adelaide
Your business will prosper as you build it on
strong foundations and grow it in a sustainable
way. At EY, we believe that managing your tax
obligations responsibly and proactively can
make a critical difference. Our global teams of
talented people bring you technical knowledge,
business experience and consistency, all built
on our unwavering commitment to quality
service — wherever you are and whatever tax
services you need.
We create highly networked teams who can
advise on planning, compliance and reporting
and help you maintain constructive tax
authority relationships — wherever you
operate. Our technical networks across the
globe can work with you to reduce
inefficiencies, mitigate risk and improve
opportunity.
Our 32,000 tax professionals, in more than
140 countries, are committed to giving you the
quality, consistency and customization you
need to support your tax function
For more information, please visit
www.ey.com/au.
© 2014 Ernst & Young, Australia.
All Rights Reserved.
AU00002062
This communication provides general
information which is current as at the time of
production. The information contained in this
communication does not constitute advice and
should not be relied on as such. Professional
advice should be sought prior to any action
being taken in reliance on any of the
information. Ernst & Young disclaims all
responsibility and liability (including, without
limitation, for any direct or indirect or
consequential costs, loss or damage or loss of
profits) arising from anything done or omitted
to be done by any party in reliance, whether
wholly or partially, on any of the information.
Any party that relies on the information does
so at its own risk.