IFRS 13 and Impairment under IAS 36 practical implications

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Ewa Iwona Bielecka
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1 IFRS 13 and Impairment under IAS 36 practical implications 6 December 2012 Tomasz Konieczny,

2 IFRS 13 practical application

3 IFRS 13 Fair value measurement IFRS 13 is not yet approved by EU Practical implication of the application of IFRS 13 are not yet known Expected implications: Changes introduced by IFRS 13 Many of the requirements codified in IFRS 13 are largely consistent with valuation practices that already operate today Expected implications IFRS 13 is unlikely to result in substantial change in how we determine fair value Introduces more disclosure requirements There is a risk that IFRS 13 disclosure will be just added on the top of the current disclosure which in many cases is already excessive/not tailored/not required/relate to nonmaterial items Attempt to improve disclosures (make them more relevant for users while ensuring that only useful information is disclosed)-> EFRAG Disclosure Framework (Discussion Paper issued in July 2012) 3

4 IFRS 13 Fair value measurement experience from the US In May 2011, FASB issued Accounting Standards Update No , Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (the ASU).; Effective from annual period beginning on or after 15 December 2011 ASU primarily clarifies existing fair value measurement guidance and is intended to align U.S. GAAP and IFRS. Some of the observation on implementation of ASU in 2012: ASU has not caused widespread changes in fair value measurements; Most companies included the new quantitative disclosures required by the ASU, however, the information was not always comprehensive and at times, it was somewhat difficult to follow. Disclosures were likely focused on substantial compliance, rather than readability. The disclosures were more in-depth for companies in the financial services industry (given the focus on financial instruments in the ASU) 4

5 IAS 36 practical application in Poland

6 IFRS practical application IAS 36 issued in 1998 and revised in 2004 Despite the fact that the standard has been in force for number of years its application remains an issue both in Europe and in Poland regulators continue to focus on it Non amortisation of goodwill exacerbates this issue companies are not amortising goodwill in good times and have to defend vigorously against impairment during bad times market analysis indicate a mismatch between Value in use calculations and market assessment 6

7 Market capitalization below net assets impairment indicator? In 2010: Total number of companies covered by research: 60 (WIG20 + WIG40) Number of companies with the book value of net assets higher than market capitalization: 17 And among of those 17 companies: Book value of net assets (bnpln) Market capitalization (bnpln) Value of goodwill (bnpln) No of companies that recognized impairment of goodwill Value of impairment recognized (bnpln) 86,1 70, ,1 For those17 companies: Net Book Value varied between 0,09 and 49,3 bnpln Market capitalisation varied between 0,01 and 37,0 bnpln Source: Prepared by on the basis of financial statements of the companies included in WIG20 and mwig40 indices; Thomson Reuters; Stooq.pl 7

8 Goodwill by industry IT & Telecommunications 52% (12,8 bnpln) Goodwill (24,3 bnpln) Financial Services and Insurance 13% (3,2 bnpln) Construction & Materials, Real Estate 3% (0,7 bnpln) Chemicals 2% (0,6 bnpln) Basic Resources 6% (1,4 bnpln) Mining, Oil & Gas 4% (1,0 bnpln) more than a half of goodwill stems from IT & Telecommunications no major change of goodwill in IT & Telecommunications between decline in goodwill in Financial Services & Insurance between Retail 15% (3,8 bnpln) Food & Beverage 1% (0,3 bnpln) increase in goodwill share in Metallurgical and Oil & Gas Other services 4% (0,9 bnpln) Source: Prepared by on the basis of financial statements of the companies included in WIG20 and mwig40 indices; Thomson Reuters; Stooq.pl 8

9 Financial crisis impairment indicator? Goodwill* (bnpln) Total market cap - WIG20+WIG40+WIG80 (bnpln) Market Cap Goodwill Goodwill* (at the end of the financial year, bnpln) Goodwill impairment* (bnpln) Goodwill impairment (as % of goodwill) *for Companies included in WIG20 and WIG40 as at ,2 9,3 13,6 17,3 21,1 22,2 24,3 0,4 0,1 0,4 0,4 0,1 0,2 3,4 5,1% 1,5% 2,7% 2,3% 0,4% 0,8% 14,0% Source: Prepared by on the basis of financial statements of the companies included in WIG20 and mwig40 indices; Thomson Reuters; Stooq.pl 9

10 Changes in goodwill 2010/2011 bn PLN 25 24,1 (2,7) 5,2 1,1 (3,4) 24, Goodwill (incl. companies excluded from indices over the year) Goodwill of companies excluded from Indices Impairment (1) Mergers & acquisitions (2) Other Goodwill (1) The impairment mainly relates to one company CEDC (2) The amount mainly relates to transactions carried out by Cinema City, Eurocash and Tauron Source: Prepared by on the basis of financial statements of the companies included in WIG20 and mwig40 indices; Thomson Reuters; Stooq.pl 10

11 IAS 36 Impairment Report of Polish Financial Supervisory Authority (KNF) on most frequent areas of non-compliance with IFRS based on the review of FS 2010 and H issues relate to impairment under IAS 36 (qualification in auditor s report), for example: Failure to recognize impairment loss in relation to subsidiary's shares Failure to recognize impairment loss of goodwill related to subsidiary that will be liquidated Performance of the impairment test for intangible assets before the process of their allocation to CGU has been finished Failure to perform and document the estimate of the recoverable amount of the PPE despite impairment indicators Failure to submit for auditor's assessment goodwill impairment tests Source: Report issued by KNF "Report on the review of financial statements by issuers of securities in the context of their compliance with IFRSs. The review carried out in 2011" is available on KNF's webpage: 11

12 IAS 36 Impairment Impairment testing is also an area of interest of the European enforcers 4 out of 9 decisions published in the recent ESMA's report on enforcements decisions relate to impairment testing: Discount rate used in ViU - Calculation of discount rate does not comply with IAS 36 Sensitivity disclosure - reasonable changes in combination of several key assumptions should be considered, not only change in discount rate Assumptions used in impairment test of goodwill are not reasonable/supportable Allocation of goodwill and intangible assets to CGU not disclosed Source: ESMA - European Securities and Markets Authority; ESMA's Report '12th Extract from the EECS's Database of Enforcement' was published on 10 October 2012 and is available on ESMA's webpage: 12

13 Conclusions Value In Use model may not be robust enough for companies to recognise impairment Arbitrary goodwill amortisation charge has been replaced with impairment that rarely occurs Gap between accounting values and market values may widen in the future Source: ESMA - European Securities and Markets Authority; ESMA's Report '12th Extract from the EECS's Database of Enforcement' was published on 10 October 2012 and is available on ESMA's webpage: 13

14 Questions? Niniejsza publikacja została opracowana w celach informacyjnych i zawiera jedynie ogólne wskazówki odnośnie przedmiotu publikacji. Jej zadaniem nie było udzielenie specjalistycznej porady. Nie powinni Państwo działać na podstawie informacji zawartych w publikacji bez uzyskania odnośnej specjalistycznej porady. Nie udziela się żadnego oświadczenia ani gwarancji (wyraźnej lub dorozumianej) co do dokładności lub kompletności informacji zawartych w publikacji i w zakresie dozwolonym prawem PricewaterhouseCoopers Sp. z o.o. nie bierze na siebie żadnych zobowiązań i zrzeka się wszelkiej odpowiedzialności i obowiązku zachowania staranności w związku z konsekwencjami działań lub zaniechań Państwa lub dowolnej innej osoby na podstawie informacji zawartych w niniejszej publikacji oraz wszelkich decyzji podejmowanych na jej podstawie PricewaterhouseCoopers. Wszelkie prawa zastrzeżone. Nazwa PricewaterhouseCoopers oraz odnosi się do sieci firm członkowskich PricewaterhouseCoopers International Limited (IL). Każda z firm stanowi oddzielny i niezależny podmiot prawny i żadna nie jest przedstawicielem IL ani żadnej innej firmy członkowskiej. IL nie świadczy żadnych usług na rzecz klientów. IL nie przyjmuje odpowiedzialności ani nie bierze na siebie zobowiązań z tytułu działań lub zaniechań dowolnych swoich firm członkowskich i nie ma zdolności do kontrolowania ich zawodowego osądu ani do zobowiązania ich do czegokolwiek w jakikolwiek sposób. Żadna firma członkowska nie przyjmuje odpowiedzialności ani nie bierze na siebie zobowiązań z tytułu działań lub zaniechań dowolnych innych firm członkowskich i nie ma zdolności do kontrolowania zawodowego osądu jakiejkolwiek innej firmy członkowskiej ani IL, ani do zobowiązania ich do czegokolwiek w jakikolwiek sposób.

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