Impairment considerations during COVID-19

(First of two parts)

The unprecedented disruption caused by the COVID-19 pandemic has brought economies to a standstill — shutting down markets, halting international and domestic trade, forcing businesses to close, and displacing workers on a massive scale. Governments are grappling with the situation, struggling to come up with measures to combat the disease and preparing record stimulus programs to help keep their respective economies afloat while balancing this against the need to protect their citizens. This pandemic has reset the way we live, dictating what is considered the new normal, and drastically impacting financial markets around the world.

It is turning swiftly into a critical situation, notably for industries such as travel, hospitality, retail and entertainment. Financial markets are reeling and businesses have had to shut down with revenue reduced to zero, dwindling cash, overdue debt, limited accessible to capital, and assets that have become stale, unusable and unproductive. This begs the question: Is there still value left for businesses and the assets that remain in their balance sheets?

Companies reporting their financial performance and condition will be hard-pressed to report the influence of the pandemic on their businesses and on the value of their long-lived assets, including goodwill. These assets are the bread and butter of most companies, comprising a substantial portion of their asset portfolio. Given the unfolding impact of this crisis, there is a rebuttable presumption that the recoverability of their assets may be put into question.

The first part of our previous article published on July 13, COVID-19 Pandemic and its Accounting Implications, briefly discussed the impairment of non-financial assets. We will now discuss the sets of accounting, disclosure and financial reporting matters related to annual and interim impairment review that companies must consider.

TIMING OF ASSESSMENT
For financial reporting purposes, Philippine Accounting Standard (PAS) 36, Impairment, requires an entity to assess, at the end of each reporting period, whether there is any impairment for an entity’s non-financial assets. Non-financial assets include, among others, property, plant and equipment, intangibles, and goodwill. For goodwill and intangible assets with indefinite useful lives, the standard requires an annual impairment test and a testing of when indicators of impairment exist. The reporting period can be quarterly, semi-annual, annual or any other periods that regulations may require. An entity that is required to prepare an interim report (i.e., listed companies and public companies) needs to assess if there are any indicators of impairment or if there is a need to perform impairment testing on its assets at the end of each interim period and not only at year-end.

EXISTENCE OF IMPAIRMENT INDICATORS
Except for the mandatory annual testing for goodwill and intangible assets with indefinite useful lives, an entity must first determine if there are indicators of impairment (i.e., events or changes in circumstances suggesting that the carrying amount of an asset may no longer be recoverable). The pandemic and its corresponding effects (e.g., the Enhanced Community Quarantine) are likely indicators of impairment but the analysis should go beyond the surface. Determining indicators of impairment requires significant judgment, as well as identification of the events and circumstances that really drive and determine the value of the assets. The source of information can be internal or external. High-level indicators might include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. Specific circumstances can include, among others, the decline in stock and commodity prices, fall of market interest rates, manufacturing plant and shop closures, distribution and supply chain issues, reduced demand or selling prices, and limits to accessing capital. Indicators can vary for each business and type of asset, but the assessment must be robust enough before concluding whether such indicators of impairment are present and thus require impairment testing.

PERVASIVE EFFECTS OF THE PANDEMIC
As the search for proper intervention against this pandemic continues, the more uncertain the financial market becomes. Measures must be taken to anticipate further impact from this crisis.

In the second part of this article, we continue our discussion by covering how to estimate the recoverable amount of an asset, the recognition and reversal of impairment, and providing detailed disclosure on assumptions used in impairment assessment.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Meynard A. Bonoen is an Assurance Partner of SGV & Co.