Business Resilience Facilitated by Accounting Standards

The stewardship objective has been portrayed as being about information that provides a foundation for a constructive dialogue between the management of an entity and its stakeholders. This is deemed to be a fundamental building block of corporate governance.

Key Statutory Mandates under Ind AS 1:

• Ind AS 1.122 (Judgements): Requires disclosure of the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognised in the financial statements.
• Ind AS 1.125 (Estimation Uncertainty): Requires disclosure of information about the assumptions the entity makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes to the financial statements include details of their:
  1. Nature; and
  2. Carrying amount at the end of the reporting period.

Value to Investors: Information about the key judgements and estimates made is of value to investors as it helps them to assess an entity’s financial position and performance and understand the sensitivities to changes in assumptions. Transparent disclosure in this area, including quantified information such as sensitivities or a range of possible outcomes on how changes to estimates could affect the following year’s results, enables users to assess the quality of management’s accounting policy decisions and the likelihood of future changes in a way that generic disclosures do not.

• Paragraph 25 of Ind AS 1: The management of an entity shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
• Paragraph 26 of Ind AS 1: To assess whether the going concern assumption is appropriate, management should consider all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period.

Assessment Under Hostile Market Conditions:

Management typically relies upon historical financial results, known changes in the business and competitor and industry data to provide evidence of the reasonableness of the assumptions used in its assessment. However, given current economic and market conditions, historical results may be unlikely to provide a basis for future cash flows and therefore management may need to consider additional sources of information when evaluating the reasonableness of the assumptions used in its assessment. Management is expected to prepare a range of scenarios based on different dates till which the COVID-19 impact will prevail to determine the potential impact on underlying performance and future funding requirements.

Paragraph 134 Disclosures (Significant Goodwill & Indefinite-Life Intangibles):

An entity shall disclose the information required by (a)–(f) for each cash generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives:

• (a) The carrying amount of goodwill allocated to the unit (group of units).
• (b) The carrying amount of intangible assets with indefinite useful lives allocated to the unit (group of units).
• (c) The basis on which the unit’s (group of units’) recoverable amount has been determined (i.e. value in use or fair value less costs to sell).
• (d) If the unit’s (group of units’) recoverable amount is based on value in use:
  • (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 sensitive.
  • (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 information.
  • (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 justified.
  • (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 dedicated.
  • (v) The discount rate(s) applied to the cash flow projections.
• (e) If the unit’s (group of units’) recoverable amount is based on fair value less costs to sell: The methodology used to determine fair value less costs to sell. If fair value less costs to sell is not determined using an observable market price for the unit (group of units), the following information shall also be disclosed:
  • (i) A description of each key assumption on which management has based its determination of fair value less costs to sell. Key assumptions are those to which the unit’s (group of units’) recoverable amount is most sensitive.
  • (ii) A description of management’s approach to determining the value (or values) assigned to each key assumption, whether those values 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 information. If fair value less costs to sell is determined using discounted cash flow projections, the following information shall also be disclosed:
  • (iii) The period over which management has projected cash flows.
  • (iv) The growth rate used to extrapolate cash flow projections.
  • (v) The discount rate(s) applied to the cash flow projections.
• (f) Reasonably possible changes in key assumptions: If a reasonably possible change in a key assumption on which management has based its determination of the unit’s (group of units’) recoverable amount would cause the unit’s (group of units’) carrying amount to exceed its recoverable amount:
  • (i) The amount by which the unit’s (group of units’) recoverable amount exceeds its carrying amount.
  • (ii) The value assigned to the key assumption.
  • (iii) The amount by which the value assigned to the key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the unit’s (group of units’) recoverable amount to be equal to its carrying amount.

Paragraph 135 Disclosures (Goodwill Allocated Across Multiple Units):

If some or all of the carrying amount of goodwill or intangible assets with indefinite useful lives is allocated across multiple cash-generating units (groups of units), and the amount so allocated to each unit (group of units) is not significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives, that fact shall be disclosed, together with the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to those units (groups of units).

In addition, if the recoverable amounts of any of those units (groups of units) are based on the same key assumption(s) and the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to them is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives, an entity shall disclose that fact, together with:

• (a) The aggregate carrying amount of goodwill allocated to those units (groups of units).
• (b) The aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units (groups of units).
• (c) A description of the key assumption(s).
• (d) A description of management’s approach to determining the value(s) assigned to the key assumption(s), 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 information.
• (e) If a reasonably possible change in the key assumption(s) would cause the aggregate of the units’ (groups of units’) carrying amounts to exceed the aggregate of their recoverable amounts:
  • (i) The amount by which the aggregate of the units’ (groups of units’) recoverable amounts exceeds the aggregate of their carrying amounts.
  • (ii) The value(s) assigned to the key assumption(s).
  • (iii) The amount by which the value(s) assigned to the key assumption(s) must change, after incorporating any consequential effects of the change on the other variables used to measure recoverable amount, in order for the aggregate of the units’ (groups of units’) recoverable amounts to be equal to the aggregate of their carrying amounts.

Critical Insight: Dispelling the Common Misconception on Impairment Disclosures

The above disclosures of paragraphs 134 and 135 of Ind AS 36 kick in to inform the users of the financial statements of the risk associated with a reduced headroom for impairment.

Ind AS 36 includes disclosures about impairments and reversals of impairments that have arisen during the period. 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.

These disclosures 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 Ind AS 36.

The Mandatory Annual Trigger: But inspect paragraphs 134 and 135 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. Therefore, if financial statements include goodwill and/or intangible assets with indefinite useful lives, which are tested for impairment routinely annually, then certain disclosure must be made each year. The disclosures in paragraph 134(f) and paragraph 135(e) represent “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 entity to finding that the headroom has reduced, triggering an impairment loss as a result of a routine annual estimate of recoverable amount?

A. Qualitative Disclosures [Ind AS 107.33]

The qualitative disclosures describe:

• Risk exposures for each type of financial instrument;
• Management’s objectives, policies, and processes for managing those risks; and
• Any changes from the prior period.

B. Quantitative Disclosures [Ind AS 107.34]

The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. These disclosures include:

• Summary quantitative data about exposure to each risk at the reporting date;
• Disclosures about credit risk, liquidity risk, and market risk and how these risks are managed; and
• Concentrations of risk.

Core Principle for Decision-Making:

Appropriate and timely financial reporting would ensure maintaining a sense of integrity and transparency as the basis for trustworthy and ethical decision-making.