Some of you of a certain age reading this post will remember in the mid-1980s, the representation of an Artificial Intelligence character called Max Headroom. (For those of you a little younger, look for Max Headroom in an Internet search engine). The background story provided for the Max Headroom character in his original appearance comes from a concept of a future dominated by television and large corporations. The AI of Max Headroom was shown to have been created from the memories of crusading journalist Edison Carter. The character's name came from the last thing Carter saw during a car accident that put him into a coma—a warning sign marked "MAX. HEADROOM: 2.3 M" (i.e., a clearance of 2300 mm) suspended across a car park entrance. (Thanks to Wikipedia for this extract).
So what does this have to do with certain disclosures required under IAS 36 Impairment of Assets? Well a few weeks back I was talking to the newly appointed finance director of a large business reporting under IFRS, and I asked him about the effort involved in achieving the extensive disclosures required under IAS 36 (He had recently been applying the IFRS for SMEs, where the impairment disclosures are far less onerous). His response was, I suspect, quite typical, when he said that they hadn’t had an impairment in recent years, and that he thought the risk of an impairment was pretty small, so “…IAS 36 is not relevant to us at the moment”. “That’s great”, I replied, “So you don’t have any goodwill or indefinite life intangibles in your Balance Sheet, then” I said. “Oh yes… we bought a brand last year, and it’s not being depreciated” was his response. So I explained about “Max Headroom”, and that there is a potential car crash waiting to happen, and that the disclosures of paragraphs 134 and 135 of IAS 36 kick in to inform the reader of the risk associated with a reduced headroom.
Let’s look at this a little closer… IAS 36 includes at paragraphs 126 – 131 (and to a degree 132 and 133), disclosures that are required about impairments and reversals of impairments that have arisen during the period. (Perhaps I can encourage you to use a highlighter pen in these paragraphs for the phrase during the period). Now these impairment or reversal events are the result of either:
indications of impairment
(ad hoc events arising during the period relating to all assets, including goodwill and certain intangibles); or
annual estimation of recoverable amount
(required whenever the financial statements include goodwill and certain intangibles)
So the disclosures in these paragraphs are only needed when an impairment (or reversal) has taken place
during the period.
Hence many people will feel that if there are no impairments during the period, then there are no disclosures triggered by IAS 36.
But now, armed with that highlighter pen, go through paragraphs 134 and 135 (and to a lesser degree 136) and highlight the phrase during the period. You discover that the phrase is not there at all, for the disclosures required concerning goodwill and/or intangible assets with indefinite useful lives. The point is that if financial statements include such items, which are tested for impairment routinely annually, then certain disclosure must be made
Now focus particularly on paragraph 134 (f) (and paragraph 135 (e))… these are the disclosures that I and many others would characterize as “Headroom” disclosures. By how much could the inputs used in estimating recoverable amount change, before the resulting figure for recoverable amount becomes perilously close to the current carrying amount? Or put another way, what is the existing headroom, and how close is the company to finding that the headroom has reduced, triggering an impairment loss as a result of a routine annual estimate of recoverable amount? Or, to imagine the somewhat diabolical character of the TV show host Max Headroom, “Is there a car crash waiting to happen?”
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