Auditors are increasing their scrutiny of goodwill valuations as
the incidence of goodwill impairment charges escalates in the
Nick Rea, a partner in the Pricewater-houseCoopers UK (PwC)
market and value advisory practice, said impairment disclosures
will be a key area of focus for auditors this year.
“We are looking now at some transactions that were conducted at
the time when the markets were much higher and that’s led to large
amounts of goodwill,” he said.
“PwC, along with all the other accounting firms, is looking at
this issue as part of the year-end audits as a key area where the
companies need to make very robust calculations. It is probably a
more difficult task now than it has been in previous years.”
Goodwill is the term used to describe intangible assets that
cannot be valued separately, such as the value of brand and client
Companies are required to stress test the value of goodwill for
each of their cash generating units each year. These business units
are broken up into the way management reports on business
performance, for example by product type or geography.
IAS 36 Impairment of Assets requires companies to
disclose the key assumptions and the approach taken to make those
assumptions when using valuation models to check that goodwill does
not need to be written down.
The standard also requires more detailed quantified and
narrative disclosures when a “reasonably possible change” in a key
assumption would have caused a material goodwill impairment loss to
IAS 1 Presentation of Financial Statements requires
companies to provide additional information about key assumptions
and other key sources of estimation uncertainty that have a
“significant risk” of causing a material goodwill impairment loss
within the next financial year.
Rea said the area of valuation where companies will need to take
extra caution is discounted cash flow valuations, which needs to be
supported by benchmarking.
“Given the market conditions we are facing now I think it is
even more important the assumptions that are in the value-and-use
calculation are verified and validated against the market data,” he
added. “What you will see with stock markets coming down is saying
something about expected growth and profitability for
The valuations expert said impairment charges of goodwill have
been on the rise and this trend is likely to continue well into
2009 as companies with December 2008 year-ends have their accounts
Watchdog targets impairment disclosures
The Financial Reporting Review Panel
(FRRP), a watchdog that reviews the annual accounts and reporting
of companies to ensure they comply with UK laws, will investigate
the impairment disclosures of 30 companies this year.
FRRP chairman Bill Knight explained that the
adequacy of impairment disclosures, their extent and clarity, and
the assumptions on which they are based, are of key interest to
users of accounts prepared during an economic downturn.
In October last year, the UK Financial
Reporting Council published a review of the information disclosed
by 32 listed companies on their testing for impairment of goodwill
in 2007 accounts. It found 53 percent of companies only provided
boilerplate disclosures, while less than 20 percent provided
information that was company specific and very useful.