Steps are being taken by the Italian Valuation Board for Impairment (OIV) to help ameliorate the after-effects of Covid-19.
The OIV is looking to set out new guidelines and an impairment testing framework to help businesses estimate the recoverable value of their assets in a crisis.
Its recently published discussion paper also proposes best practice solutions that can be adopted to deal with the uncertainties around valuation in the wake of Covid-19.
In Italy, companies adopting International Accounting Standards and International Financial Reporting Standards (IAS/IFRS) are required to carry out an impairment test on fixed assets – tangible, intangible and equity investments – whenever expectations of external or internal loss of value arise (IAS 36.12).
In this phase of the pandemic crisis, the need for impairment tests is being driven by great uncertainty in the global economy, which makes it difficult to make forecasts and requires continual adjustments to the scenario.
Company managers should formulate a new plan, starting from the current situation of the business. They need to adopt a step-by-step approach that looks at the projection on the basis of the past results and identify actions and remedies to improve the performance expected from a simple inertial development.
However, as the health crisis is still evolving, it is possible many companies are still focused on emergency management phases and their management is not yet able to revise new strategic financial plans for the purposes of impairment testing.
In these circumstances, carrying out a multi-scenario analysis can be an option. Through the adoption of adequate probability indices, the various scenarios must then be reconciled into a single expected scenario.
The values obtained by discounting the flows deriving from alternative scenarios must take into consideration the probabilities of them actually occurring.
Where there is correlation between the value-drivers responsible for projected changes to future flows, analytical methods based on multi-variate simulations, such as the Monte Carlo Method, can be used effectively.
It must be considered though, that while the characteristics of the crisis continue to progress and have different impacts in different sectors, any approach taken will not necessarily apply across the board.
The highest valuation risks arise in sectors where the uncertainty from Covid-19 tends to be long-term, or in sectors where it is difficult to estimate the time needed to return to normality.
In these situations, the horizon for explicitly forecasting result flows should not extend beyond five years.
If the specific uncertainty from Covid-19 is not resolved in the specified period of flow forecasts, it should be dealt with through the adjustment of the capitalisation rate used for calculating terminal values, or reflected in the normalised cash flows on which the terminal value is calculated, avoiding double counting problems.
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Date: January 2021