Based
on a seminal review of IFRS-driven financial statements on the impairment of
goodwill at 235 EU issuers, the European Securities and
Markets Authority (ESMA) called for improved disclosure of goodwill impairment.
ESMA questioned if the level of goodwill impairment disclosed in 2011 corporate
financial statements properly reflected the difficult economic operating
environment for most companies. While the
major disclosures related to goodwill impairment testing were generally
provided, conceded ESMA, in many cases these were boilerplate and not entity-specific. ESMA
expects issuers and their auditors to consider the findings of this review when
preparing and auditing their IFRS financial statements.
ESMA
Chair Steven Maijoor said that good quality financial information is key for
investors in understanding the financial health of an issuer and, in turn,
goodwill, and its impairment, are key components in making a realistic
evaluation of firms. In that respect ESMA’s review will help in providing
a more harmonized approach to the disclosure of goodwill impairment under IFRS
throughout the European Union
IFRS
require recognition of goodwill in the consolidated financial statements of the
acquiring company when the company pays a premium over the fair value of the
identified assets and liabilities of the target company in a business
combination. After initial recognition,
goodwill and intangible assets with indefinite useful lives are subject to
annual impairment testing, but not to amortization.
According
to IAS 36, when the carrying amount of an asset exceeds the recoverable amount,
the asset is considered to be impaired and the company should reduce the
carrying amount, and recognize an impairment loss. Goodwill acquired in a business combination
or intangible assets with indefinite useful lives have to be tested for
impairment at least on an annual basis.
Goodwill impairment loss cannot be reverse
In
order to improve the overall disclosure provided in this area, ESMA urged
issuers to specify the key assumptions used in the impairment test and include
sensitivity analyses with sufficient detail and transparency, especially in
situations when indicators are present that impairment might have occurred.
Companies should also determine the growth rates used to extrapolate cash flows
projections based on budgets and forecasts; and disclose specific discount
rates for each material cash-generating unit rather than average discount
rates.
Disclosure
on the sensitivity of key assumptions is an area where different practices were
observed. ESMA noted that a considerable number of issuers provided very vague
sensitivity analysis disclosures. Including a negative confirmation of
impairment is wide-spread among issuers.
Disclosing such a confirmation might be helpful for the readers of the
financial statements, said ESMA, but it can also cause some confusion, as an
investor cannot determine either the amount of headroom or what management
considers to be not a reasonably possible change. As a result of these different practices,
users of financial information do not always know why the sensitivity analysis
was not provided. ESMA expects issuers to be more transparent and disclose the
sensitivity of the impairment calculation to changes in key assumptions.
In
addition, ESMA and national competent authorities responsible for IFRS
enforcement will use the review’s findings as areas to focus their assessments
on when reviewing 2012 IFRS-driven financial statements. These reviews
will aim at improving the rigor applied by issuers in the impairment test of
goodwill. Also important is monitoring the application and compliance with IAS
36 requirements on goodwill impairment, in particular with regard to the reasonableness
of cash flows forecasts, the key assumptions used in the impairment test, and
the sensitivity analyses provided.