IFRS 13 - World Bank

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IFRS 13 and Impairment
under IAS 36 – practical
implications
6 December 2012
Tomasz Konieczny, PwC
www.pwc.com
IFRS 13 – practical
application
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
Expected implications
Many of the requirements
codified in IFRS 13 are largely
consistent with valuation
practices that already operate
today
• 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)
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PwC
IFRS 13 Fair value measurement – experience from
the US
• In May 2011, FASB issued Accounting Standards Update No. 2011-04, 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 PwC 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)
PwC
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IAS 36 – practical application
in Poland
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
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PwC
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
70,6
8
4
0,1
For those17 companies:
• Net Book Value varied between 0,09 and 49,3 bnPLN
• Market capitalisation varied between 0,01 and 37,0 bnPLN
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PwC
Source: Prepared by PwC on the basis of financial statements of the companies included in WIG20 and mWIG40 indices; Thomson Reuters; Stooq.pl
Goodwill by industry
Goodwill - 2011
(24,3 bnPLN)
Construction &
Materials, Real
Estate
3%
(0,7 bnPLN)
Financial Services
and Insurance
13%
(3,2 bnPLN)
Chemicals
2%
(0,6 bnPLN)
• more than a half of goodwill
stems from IT &
Telecommunications
• no major change of goodwill in IT
& Telecommunications between
2005-2011
Basic Resources
6%
(1,4 bnPLN)
IT &
Telecommunications
52%
(12,8 bnPLN)
Mining, Oil & Gas
4%
(1,0 bnPLN)
Retail
15%
(3,8 bnPLN)
Food & Beverage
1%
(0,3 bnPLN)
• decline in goodwill in Financial
Services & Insurance between
2005-2011
• increase in goodwill share in
Metallurgical and Oil & Gas
Other
services
4%
(0,9 bnPLN)
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PwC
Source: Prepared by PwC on the basis of financial statements of the companies included in WIG20 and mWIG40 indices; Thomson Reuters; Stooq.pl
Financial crisis – impairment indicator?
Goodwill*
(bnPLN)
Total market cap - WIG20+WIG40+WIG80
(bnPLN)
1 200
30
25
1 000
Goodwill
20
800
Market Cap
15
600
10
400
5
200
0
0
2005
2006
2007
2008
2009
2010
2011
2005
2006
2007
2008
2009
2010
2011
Goodwill*
(at the end of the financial year, bnPLN)
8,2
9,3
13,6
17,3
21,1
22,2
24,3
Goodwill impairment*
(bnPLN)
0,4
0,1
0,4
0,4
0,1
0,2
3,4
Goodwill impairment
(as % of goodwill)
5,1%
1,5%
2,7%
2,3%
0,4%
0,8%
14,0%
*for Companies included in WIG20 and WIG40 as at 31.12.2011
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PwC
Source: Prepared by PwC on the basis of financial statements of the companies included in WIG20 and mWIG40 indices; Thomson Reuters; Stooq.pl
Changes in goodwill – 2010/2011
bn PLN
24,1
25
(2,7)
5,2
1,1
24,3
(3,4)
20
15
10
5
0
Goodwill - 2010
(incl. companies
excluded from
indices over the
year)
Goodwill of
companies
excluded from
Indices
Impairment (1)
Mergers &
acquisitions (2)
Other
Goodwill - 2011
(1) The impairment mainly relates to one company – CEDC
(2) The amount mainly relates to transactions carried out by Cinema City, Eurocash and Tauron
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PwC
Source: Prepared by PwC on the basis of financial statements of the companies included in WIG20 and mWIG40 indices; Thomson Reuters; Stooq.pl
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
H1 2011
• 14 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
PwC
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: www.knf.gov.pl
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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: www.esma.europa.eu
PwC
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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: www.esma.europa.eu
PwC
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Questions?
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