Significant impairment losses of goodwill among European issuers are limited to only a handful, a report by the European Securities and Markets Authority (ESMA) has found.
The report, European enforcers review of impairment of goodwill and other intangible assets in the IFRS in their report financial statements, looked into the accounting practices of a sample of 235 European issuers with significant amounts of goodwill from 23 countries.
It found €800bn ($1trn) worth of goodwill balances in the 2011 financial statements of issuers with only 5% (€40bn) of that amount are recognised as impairment losses in 2011.
ESMA said the review provides an overview of the accounting practices related to the impairment of goodwill and other intangible assets and helps evaluate the sufficiency of the related disclosures in the 2011 financial statements prepared in accordance with IFRSs.
"Goodwill, and its impairment, are key components in making a realistic evaluation of firms. In that respect ESMA’s review will help in providing a more harmonised approach to the disclosure of goodwill impairment under IFRS throughout the European Union," ESMA chair Steven Maijoor said.
In order to improve the overall disclosure provided by issuers, ESMA proposes that issuers should:
– Better specify the key assumptions used in the impairment test;
– Include sensitivity analyses with sufficient detail and transparency, especially in situations when indicators are present that impairment might have occurred;
– Determine the growth rates used to extrapolate cash flows projections based on budgets and forecasts; and,
– Disclose specific discount rates for each material cash-generating unit rather than average discount rates.
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The European Securities and Markets Authority