Almost 50% of investors, analysts and lenders believe provisioning is below expectations
• Regaining stakeholder confidence critical for access to capital
• Global study reveals that the 3 global 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
DUBAI, 2 February 2010: Impairments reported during the last two years were lower than expected according to 47% of investors, analysts and lenders, in a new survey released 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 global 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. The survey included 20 respondents from the Middle East.
Interestingly, more than 50% of the respondents were unconvinced that the global recovery is under way. Lenders were notably more pessimistic about the state of recovery than other stakeholders and whatever the timeline for recovery, scarcity of capital and increased risk aversion are driving investors and lenders to focus on the reliability of information provided.
Over 90% of the survey respondents indicated that forecasting cash flows in the next 12-18 months will be challenging or very challenging.
Confidence and communication is key
Noor Abid, Managing Partner, Assurance, Ernst & Young Middle East, says: “Stakeholders will require improved transparency through more effective communication and disclosures of the assumptions management has used and the sensitivity analysis it has conducted. Poorly executed communications will further undermine stakeholder confidence. Disclosures are most useful in determining the enterprise value of a company. But importantly, disclosures are most valued overall to check for consistency with other information provided by management or by others in their industry.”
He added: “Companies can make significant inroads towards building trust and confidence with shareholders and other stakeholders through robust and well-prepared financial reports and other communications. These communications should provide clear and consistent explanations about business prospects and management’s judgment in determining asset values.”
Integrated impairments testing process
Phil Gandier, Managing Partner, Transaction Advisory Services, Ernst & Young Middle East, says: “Impairment testing is not just an accounting exercise; it is an assessment of the business.Senior management should be involved and reflect the latest economic and industry analysis in its cash flow projections. They should embed it into its strategic planning, internal management, investment decision-making and the company’s capital management process − issues that are all within the company’s overall capital agenda of optimizing, raising, investing and preserving capital.”
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%).
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.