Impairment Considerations in a COVID-19 Reality
COVID-19 is an impairment indicator in all effects, in the context of IAS 36 ‘Impairment Of Assets’. An impairment indicator does not necessarily mean that an impairment will be booked, but it does mean that documentation of testing is required. At the same time, IFRS 9 ‘Financial Instruments’ imposes an impairment adjustment for all financial assets within the scope of the ECL model. This does not mean that the resulting impairment will be material, but once again, calculations will be required.
As discussed in a previous article, COVID-19 is viewed as a non-adjusting event for reporting periods before March 2020. This means that for these reporting dates, COVID-19 needs to be disclosed, but assets need not be assessed (and possibly adjusted for impairment) solely due to COVID-19. On the other hand, it may occur that assets within the scope of IAS 36’s impairment model be tested for impairment due to indicators other than COVID-19. In these cases, value-in-use calculations need to incorporate the COVID-19 reality (in the cash flow projections).
As 2021 kicks in, preparers will be mainly signing 2020 financial statements. Experts are viewing COVID-19 as an impairment indicator under IAS 36. Considering also IFRS 9’s requirements, this means that effectively, IFRS preparers will need to test almost all the assets on their balance sheet for impairment, for reporting dates happening during or after March 2020.
From those assets most commonly encountered by professionals, the following are the assets that will not need to be tested for impairment, since out of scope of both IAS 36’s and IFRS 9’s impairment models:
- Debt instruments classified at FVTPL
- Equity instruments – if the holder has less than significant influence
- Deferred tax assets
- Investment property – if this is already measured at fair value
- Non-current assets classified as held for sale
All other assets habitually encountered need to be tested for impairment. In the case of inventories, impairment is within the scope of IAS 2 ‘Inventories’ – inventories are held at the lower of cost and net realisable value.
Also, in the case of deferred taxes assets, even though these are excluded from the various impairment models, they need to be assessed for recoverability. A company with no future profitability prospects should not recognise a deferred tax asset.
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