What are the common pitfalls and challenges of performing an impairment test for restructuring plans?

1 Identifying the cash-generating units

One of the first steps in impairment testing is to identify the cash-generating units (CGUs) that are affected by the restructuring plan. A CGU is the smallest group of assets that generates cash inflows that are largely independent of other assets or groups of assets. Identifying the CGUs is not always straightforward, especially when the restructuring plan involves changes in the business model, strategy, or operations. You need to consider how the restructuring plan will affect the way the assets are used, managed, and monitored, and whether it will create or eliminate any synergies or dependencies among the assets. You also need to ensure that the CGUs are consistent with the internal reporting and decision-making of the management.

2 Estimating the recoverable amount

Another key step in impairment testing is to estimate the recoverable amount of each CGU, which is the higher of its fair value less costs of disposal and its value in use. Both methods require significant assumptions and estimates, such as future cash flows, discount rates, growth rates, and market conditions. You need to use reliable and relevant data and information, and apply appropriate valuation techniques and models. You also need to consider the impact of the restructuring plan on the expected benefits, costs, and risks of the CGUs, and reflect them in the cash flow projections and discount rates. Moreover, you need to disclose the key assumptions and sensitivities of the impairment test, and explain how they relate to the restructuring plan.

3 Comparing the carrying amount and the recoverable amount

The final step in impairment testing is to compare the carrying amount and the recoverable amount of each CGU, and recognize an impairment loss if the former exceeds the latter. The carrying amount is the amount at which an asset or a CGU is recognized in the balance sheet, after deducting any accumulated depreciation or amortization and any accumulated impairment losses. The carrying amount may need to be adjusted to reflect the effects of the restructuring plan, such as asset disposals, reclassifications, or write-offs. You need to ensure that the carrying amount is measured consistently with the recoverable amount, and that any impairment loss is allocated and recorded correctly among the assets within the CGU.

4 Dealing with uncertainty and volatility

One of the main challenges of performing an impairment test for restructuring plans is dealing with the uncertainty and volatility of the business environment and the restructuring outcomes. The restructuring plan may involve significant changes in the market conditions, customer demand, competitive landscape, regulatory framework, or technological innovation, which may affect the value and performance of the assets and the CGUs. The restructuring plan may also encounter unexpected delays, difficulties, or failures, which may affect its feasibility and effectiveness. You need to monitor and update the impairment test regularly, and reflect any changes in the assumptions and estimates as they occur. You also need to exercise professional judgment and skepticism, and apply a reasonable level of prudence and caution in the impairment test.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?