Effects of the COVID-19 pandemic on impairment tests

Current situation: Due to the economic consequences of the COVID-19 crisis, an impact on the financial reporting in IFRS consolidated financial statements and group management reports or interim financial reports according to IAS 34 in connection with the measurement of assets (including goodwill) and of participations according to German Commercial Law is expected. This is especially relevant for companies with a financial year and (interim) reporting periods ending after 31 December 2019. Hence, we recommend a careful analysis of the individual risk position and the possible impact of the latest events.

That means: Impairment tests are to be conducted according to IAS 36 whenever there is an indication ("triggering events") that the asset may be impaired. Companies should therefore assess whether there is such indication. This includes significant changes with an adverse effect on the asset which have taken place during the period, or will take place in the near future, in the economic or market environment. In addition, an impairment test might be required if the carrying amount of the net assets of the entity is more than its market capitalisation.

Due to the negative consequences for many companies in connection with the spread of the coronavirus, we recommend conducting an in-depth analysis of whether an impairment is required under consideration of the following factors:

• Is there an event requiring an impairment test for goodwill outside the annual impairment test or for other non-financial assets (including decrease of the stock price)?
  
  
• Are future cash flows expected to decrease due to the spread of the coronavirus and the measures taken to contain the disease, and are their effects material?
  
  
• Do the previously used models and expected cash flows on which the impairment tests are based need to be updated in order to reflect the expected consequences in connection with the coronavirus?
  
  
• Should cash flows be derived based on expected losses instead of a single scenario to reflect the uncertainties regarding the future effects of the coronavirus?
  
  
• How can the selected assumptions be documented appropriately (e.g. for regulators)?
  
  
• Assessment, whether the current systematic basis for deriving costs of capital may be adjusted due to the impact of COVID-19.
  
  
• Evaluation of the underlying peer group companies under consideration of the increased volatility on financial markets and its effects on the beta factor, as well as of the different local consequences of the coronavirus, if any.
  
  
• Preparation of appropriate sensitivity analyses of material valuation assumptions for the consideration of existing uncertainties (e.g. interest capitalisation, revenue/sales, margins, growth rates).
  
  
• In addition, it is to be assessed whether the circumstances cast doubt on the company's ability to continue as a going concern. In this regard, the impact of the measures taken by governments and banks are to be taken into account.

Act now: We conduct analyses of the economic impact on goodwill and participations, and impairment tests as part of the financial reporting.