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 organization, 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.
"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.", Jim Eales, Global Valuations & Business Modelling leader at Ernst & Young, says.
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%).
"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.", Eales continues.
Leading companies will need to adopt a robust and integrated impairment testing process to improve and maintain stakeholder confidence.
"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.", Christian Mouillon, Global Vice-Chair, Assurance, at Ernst & Young, says.
"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.", Mouillon continues.
Ernst & Young conducted research with investors, investment analysts and lenders - key users of financial statements. A total of 170 participants from 32 countries representing leading banks and investment houses took part in an online survey during September and October 2009.