How Generative AI can help in IFRS5 Implementation ?

Generative AI can significantly enhance compliance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations by streamlining the processes involved in the classification, measurement, and reporting of non-current assets. Here are several ways generative AI can assist:

??1. Automated Classification of Assets

- Asset Identification: AI can analyze financial data to automatically identify and classify assets that may qualify as held for sale based on the criteria established in IFRS 5.

- Example: A retail company can leverage AI to evaluate its asset portfolio, flagging underperforming stores that could be candidates for divestment.

?

?2. Real-time Valuation Analysis

- Fair Value Assessments: Generative AI can help assess the fair value of non-current assets held for sale by analyzing market data, sales trends, and comparable asset transactions.

- Example: If a company plans to sell a piece of real estate, AI can gather data on recent sales of similar properties in the area to recommend an appropriate sale price.

?

?3. Scenario Analysis and Forecasting

- What-if Scenarios: AI can run simulations to evaluate the impact of different sale conditions (e.g., market fluctuations, changes in buyer interest) on the fair value of assets held for sale.

- Example: For a manufacturing facility, AI can project various sales outcomes based on different market conditions, assisting management in deciding when to sell the asset.

?

?4. Impairment Testing Automation

- Impairment Indicators: AI can continuously monitor market conditions and operational performance to identify impairment indicators for assets held for sale, prompting timely assessments.

- Example: If an asset's expected cash flows decline due to adverse market conditions, AI can flag this for an impairment review.

?

?5. Data-Driven Decision Support

- Enhanced Decision-Making: AI can provide insights into the timing and potential returns of asset sales based on historical data and predictive analytics.

- Example: Generative AI can analyze past sales data of similar assets and recommend the optimal timing for sale to maximize returns.

?

?6. Streamlined Reporting and Documentation

- Automated Reporting: Generative AI can automate the generation of reports and disclosures required by IFRS 5, ensuring that all relevant information is captured and presented accurately.

- Example: AI can compile documentation on the classification of assets as held for sale, including the rationale and expected financial impacts, simplifying the audit process.

?

?7. Continuous Compliance Monitoring

- Real-time Compliance Checks: AI can monitor compliance with IFRS 5 continuously, identifying potential discrepancies in asset classification and valuation.

- Example: If an asset’s market conditions change after being classified as held for sale, AI can alert finance teams to reassess its classification or fair value.

?

?8. Benchmarking and Peer Comparison

- Industry Analysis: Generative AI can compare an organization’s asset valuations and sales strategies with those of peers, providing insights into industry trends and best practices.

- Example: AI could analyze industry reports to determine whether the organization’s assets are competitively priced compared to similar assets in the market.

?

?Conclusion

?

By leveraging generative AI, organizations can improve their compliance with IFRS 5 through more efficient asset classification, accurate fair value assessments, and automated reporting processes. This not only streamlines internal operations but also enhances the accuracy and transparency of financial reporting related to non-current assets held for sale.

?

Here are some simple examples illustrating how generative AI can assist with IFRS 5 compliance, complete with calculations.

?

?Example 1: Automated Classification of Assets

?Scenario: A retail company has multiple stores and needs to classify which ones may be held for sale.

?

Data:

- Store A: Revenue $300,000; Expenses $350,000 (Loss: $50,000)

- Store B: Revenue $500,000; Expenses $450,000 (Profit: $50,000)

- Store C: Revenue $250,000; Expenses $275,000 (Loss: $25,000)

?

Calculation:

- Classification Criteria: Under IFRS 5, an asset may be classified as held for sale if its carrying amount will be recovered through a sale transaction rather than through continuing use.

?

Using AI, the company analyzes the operating results:

- Store A: Loss (flagged for divestment)

- Store B: Profit (not flagged)

- Store C: Loss (flagged for divestment)

?

?Example 2: Fair Value Assessment

?Scenario: A company plans to sell a piece of real estate.

?

Data:

- Current carrying value: $1,000,000

- Comparable properties sold in the last month:

? - Property 1: $950,000

? - Property 2: $1,050,000

? - Property 3: $980,000

?

Calculation:

- Average Selling Price of Comparable Properties:

?

Average = {$950,000 + $1,050,000 + $980,000} = {$2,980,000}/{3} = $993,333

?

?

Using AI to analyze these comparable, the estimated fair value for the property would be approximately $993,333. If this is lower than the carrying value, an impairment assessment may be necessary.

?

?Example 3: What-if Scenario Analysis

?Scenario: A manufacturing facility considers the impact of market conditions on asset value.

?

Data:

- Expected cash flows for next year without market changes: $500,000

- Expected cash flows with a 10% decrease in market demand: $450,000

?

Calculation:

- Impact of Market Change:

?

-Decrease in Cash Flows = $500,000 - $450,000 = $50,000

?

Using AI, the facility runs a simulation and finds that a 10% drop in market demand would reduce expected cash flows by $50,000. This may prompt an impairment review as cash flows fall below the carrying value.

?

?Example 4: Impairment Testing

?Scenario: An asset’s cash flows are evaluated for impairment.

?

Data:

- Carrying value of the asset: $800,000

- Expected cash flows: $600,000

?

Calculation:

- Impairment Assessment:

?

Impairment Loss = Carrying Value - Fair Value

?

Impairment Loss = $800,000 - $600,000 = $200,000

?

The AI flags this asset for impairment as the expected cash flows are significantly below the carrying value, leading to an impairment loss of $200,000.

?

?Example 5: Automated Reporting

?Scenario: Preparing a report after classifying assets as held for sale.

?

Data:

- Assets identified for sale:

? - Store A (carrying value: $400,000)

? - Store C (carrying value: $350,000)

?

Calculation:

- Total Carrying Value of Assets Held for Sale:

?

Total Carrying Value ?= $400,000 + $350,000 = $750,000

?

?

Generative AI generates a report summarizing the assets held for sale, documenting their carrying values, and preparing required disclosures for financial reporting. The total carrying value of assets held for sale is $750,000.

?

?Conclusion

?

These examples illustrate how generative AI can facilitate compliance with IFRS 5 by automating asset classification, fair value assessments, scenario analyses, impairment testing, and reporting, ultimately improving accuracy and efficiency in financial reporting.