European regulators call for better disclosure on goodwill impairment

However, the report also shows that significant losses were reported by only a handful of issuers, mostly in the financial services sector (accounting for almost half of the total) and the telecommunications industry (about one quarter). The ESMA says this “raises the question as to whether the level of impairment disclosed in 2011 financial reports appropriately reflects the difficult economic operating environment for companies.” It also notes that the major disclosures related to goodwill impairment testing were generally boilerplate, and not entity-specific.

In order to improve the overall disclosure provided by issuers, the ESMA recommends that issuers: better specify the key assumptions used in the impairment test; include sensitivity analyses with sufficient detail, 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.

Additionally, it says that it will use the findings from this review to help focus reviews of 2012 financial statements, in an effort to: improve the rigor applied by issuers in the impairment test of goodwill; monitor compliance with accounting standards on goodwill impairment, particularly the reasonableness of cash flow forecasts, the assumptions used in impairment tests, and sensitivity analyses; and, to assess whether issuers have provided sufficient disclosure in these areas.

The ESMA says that it expects issuers and their auditors to consider the findings of this review when preparing and auditing their financials. And, it says that regulators will take appropriate enforcement action whenever material misstatements are identified.

“Good quality financial information is key for investors in understanding the financial health of an issuer in whom they hold assets or in who they may wish to invest,” said Steven Maijoor, chair of the ESMA. “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 harmonized approach to the disclosure of goodwill impairment under IFRS throughout the European Union.”

The ESMA says it will collect data on how European listed entities have applied IFRS requirements in this area in 2012 and will report its findings to the market.