Impairment of Non-Financial Assets and Deferred Tax Assets

The following are the reasons why the Financial Reporting Council of Nigeria (FRCN) should focus on the impairment of non-financial assets and deferred tax assets of listed companies:

• Particular attention should be paid to the valuation of goodwill and intangible assets with indefinite life spans.
• The entity should focus on certain specific areas including cash flow projections, disclosure of key assumptions and judgments, and appropriate disclosure of sensitivity analysis for material goodwill and intangible assets with indefinite useful lives.
• IAS 36 Impairment of Assets points out that greater weight should be given to external evidence when determining the best estimate of cash flow projections.

The following are the key areas which entities should focus on when accounting for these items:

• A continuous period of slow economic growth could indicate to regulators that non-financial assets will continue to generate lower than expected cash flows, especially in those industries experiencing a downturn in fortunes.
• In measuring value-in-use, cash flow projections should be based on reasonable and supportable assumptions which represent the best estimate of the range of future economic conditions.
• Each key assumption should be consistent with external sources of information, or there should be disclosure of how these assumptions differ from experience or external sources of information.
• Such an economic climate could result in the recognition of tax losses or the existence of deductible temporary differences where perhaps impairments are not yet deductible for tax purposes.
• The recognition of deferred tax assets requires detailed consideration of the carry forward of unused tax losses, whether future taxable profits exist, and the need for disclosing judgments made in these circumstances.
• IAS 12 Income Taxes limits the recognition of a deferred tax asset to the extent that it is probable that future taxable profits will be available against which the deductible temporary difference can be utilized.
• IAS 12 states that the existence of unused tax losses is strong evidence that future taxable profit might not be available. Therefore, recent losses make the recognition of deferred tax assets conditional upon the existence of convincing other evidence.
• The probability that future taxable profits will be available to utilize the unused tax losses will need to be reviewed and if convincing evidence is available, there should be disclosure of the amount of a deferred tax asset and the nature of the evidence supporting its recognition.

It is particularly relevant to disclose the period used for the assessment of the recovery of a deferred tax asset as well as the judgments made.