Category Investments

Almost 50% of investors, analysts and lenders believe impairments are below expectations

01 February 2010 Ernst & Young

Regaining stakeholder confidence critical for access to capital

Impairments reported during the last two years were lower than expected according to 47% of investors, analysts and lenders, in a new survey released today by professional services organisation, Ernst & Young.

Impairment reporting – Improving stakeholder confidence, a survey of 170 users of financial statements across 32 countries, also found that the 3 sectors most likely to experience further impairments over the next 18-24 months are the real estate, banking and capital markets, and the automotive industry.

Over 90% of the survey respondents indicated that forecasting cash flows in the next 12-18 months will be challenging or very challenging.

Jim Eales, Global Valuations & Business Modelling leader at Ernst & Young, says:
“Investors, analysts and lenders recognize the uncertainties and difficulties of managing a business in the current uncertain economic environment. Nevertheless their confidence remains fragile and they are cautious about management’s outlook for the future of the business. As a result, they will naturally be more inquisitive, wanting greater transparency and explanation behind the assumptions management makes about the company’s future.”

Anil Khimjee, Director Valuations & Business Modelling in South Africa, confirms that in his experience the findings of the survey are relevant to the local market. The challenge of companies preparing reliable forecasts is further complicated by a lack of adequate and timeous planning in many instances. Given our unique environment, volatility in exchange rates adds more uncertainty to the outcomes, and the lack of comparable transactions in the market makes results difficult to compare.

Confidence and communication is key
More than 90% of respondents use impairment testing information disclosed in financial statements in their investment or lending decision making process, including to check for consistency with other information provided by management, and to value the company.

The most important impairment testing disclosures are those relating to management’s view of the future of the business (cited by 44%) and an explanation of the events that have led to the impairment (41%).

Eales continues: “When communicating impairment, it is in management’s best interest to place at least as much importance to explaining the impact of the impairment on the future prospects of the business as it does on the size and reason for the impairment – this will help improve confidence with the market.”

Integrated testing process
Leading companies will need to adopt a robust and integrated impairment testing process to improve and maintain stakeholder confidence.

Christian Mouillon, Global Vice-Chair, Assurance, at Ernst & Young, says:
“Management should reflect the latest economic and industry analysis in its cash flow projections, and embed the impairment testing process in the company’s overall capital management and strategic planning process. Accordingly, it’s important for senior management to actively participate in the impairment testing process.”

Mouillon continues, “Those companies that provide well prepared financial statements which are consistent with their overall communication on business prospects and any impairments will improve confidence and trust with their stakeholders, giving better access to capital.”

About the survey
Ernst & Young conducted research with investors, investment analysts and lenders – key users of financial statements. 170 participants from 32 countries representing leading banks and investment houses took part in an online survey during September and October 2009.

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