ASIC releases impairment guidance

The Australian Securities and Investment Commission (ASIC) has released useful information to assist directors in considering the value of non-financial assets as shown in company financial reports.  

ASIC said it continues to find issues with the impairment of goodwill and other non-financial assets in these reports with common issues being unrealistic cash flows and assumptions. While ASIC states that “directors do not need to be accounting experts” it does strongly indicate that directors should seek explanations and assistance from experts and even “challenge asset values in the financial report”.

The assets most often associated with impairment testing are: 

  • Goodwill.
  • Identifiable intangible assets.
  • Property, plant and equipment.

The value of these assets in the balance sheet needs to be the recoverable amount – which is the higher of its fair value less disposal costs and its value in use. 

ASIC suggests that directors question the company’s approach to impairment testing especially if they suspect that the assets may be materially impaired. Directors should review the future cash flows and the assumptions used in the context of the business, the assets and the external environment, both present and future. Given the subjectivity of many of these elements, it is important that directors then consider whether the disclosures are adequate for users of the reports.

The document provides essential guidance with helpful questions to consider when assessing:

  • The need for impairment testing. 
  • The process for assessing impairment. 
  • Common issues with impairment calculations.
  • Questions to ask external auditors.

Directors should consider based on their understanding of the business whether there are one or more of the indicators of impairment and consider whether it is appropriate to perform an impairment of assets.

In certain instances the accounting standards require annual impairment testing even if there are no indicators of impairment.

The guidance can be found here.