While AASB 136 calls for limited disclosure of the assumptions and processes used by an organisation which has elected to use fair value as the benchmark for impairment testing23, several specific and detailed disclosures are called for in the event that value in use is the basis adopted for the determination of recoverable amount. These appear designed to assist financial statements users to assess the robustness of the discounted cashflow modelling process used to estimate recoverable amount, and include;
(i) a description of each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets/forecasts. Key assumptions are those to which the unit’s (group of units’) recoverable amount is most sensitive24;
(ii) a description of management’s approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information25;
(iii) the period over which management has projected cash flows based on financial budgets/forecasts approved by management and, when a period greater than five years is used for a cash-generating unit (group of units), an explanation of why that longer period is justified26;
(iv) the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts, and the justification for using any growth rate that exceeds the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit (group of units) is dedicated27; and
(v) the discount rate(s) applied to the cash flow projections28.
Inspection of the assumptions made in relation to key factors such as discount rates, growth rates, forecast periods and terminal value periods supports the development of a more nuanced comprehension of the degree of conservatism or aggression inherent in the development of value in use estimates, meaning that these are also of primary interest in developing an understanding of the operation of the goodwill reporting regime. Consequently, an assessment of the disclosures relating to both discount rates and growth assumptions made by sample firms pursuant to AASB 136 is reported in section four, below.
In order to generate quality assessments, it was necessary to develop a compliance and disclosure quality taxonomy for both discount rate and growth rate based disclosures. In relation to discount rate disclosures, the taxonomy applied required the allocation of each sample firm to one of four dimensions being “multiple explicit discount rates”, “single explicit discount rates”, “range of discount rates” and “no effective disclosure”.
Allocation of a firm to the first of these categories indicated that the firm was fully compliant with the requirements of AASB 136 in relation to discount rate disclosures, and that the degree of transparency inherent in its disclosures was sufficient to allow an external analyst to develop meaningful insights into the process of impairment testing employed by the sample firm. Firms assigned to this category provided details of the specific discount rate used to discount cashflows for the purpose of impairment testing for each defined CGU, and used varying discount rates as the risk characteristics of CGUs varied.
Firms were assigned to the second category “single explicit discount rate” where they provided details of a specific discount rate for each CGU, but there was no observed variation in discount rates assigned to CGUs, even though CGU risk levels were arguably different. The quality of compliance and disclosure for firms in this category was assessed as lower than that of firms in the first category.
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