Impairments: a major topic in 2022 Impairments: a major topic in 2022 Impairments: a major topic in 2022

How significant were the impairment losses that the 20 SMI^®️ companies had to recognize for the first six months of 2022, and for what asset classes? What reasons were disclosed? And what does this mean for your year-end impairment testing?

Impairment losses are relevant for almost all companies, especially during uncertain times in which major disruptive external factors such as the Russia-Ukraine conflict, inflation, supply chain challenges and increasing interest rates all come together. An impairment loss represents an unplanned reduction of the carrying amount of an asset (or multiple assets included in a cash-generating unit) to its recoverable amount. Depending on the business model, the negative development of internal and/or external factors can have adverse consequences on the valuation of different asset classes, and therefore lead to major impairments.   

Due to the increased uncertainty in the first six months of 2022, we expected that a large number of companies would record an impairment loss for that period. Therefore, we generally analyzed the consolidated half-year financial statements of the following companies that make up the Swiss Market Index (SMI^®️). As a blue-chip index, the SMI^®️ is the most important stock index in Switzerland. It covers around 80% of the Swiss equity market and is thus a strong indicator of Swiss economic success. Twenty of Switzerland’s largest and most liquid companies make up the SMI^®️.

The most significant impairments were recognized by two pharmaceutical companies, with impairment losses amounting to approx. CHF 1 billion in total. Total impairment losses reported by the 12 SMI^®️ companies amounted to CHF 2.7 billion.

When it comes to the nature of the impairments, three of the companies have cited the Russia-Ukraine conflict as the primary reason for their impairment losses, as they were forced to close or withdraw their operations from the affected regions. One of the entities explained that changes in the interest rate environment led to impairment losses. 

Impairments are a very delicate topic, as some believe that such losses tend to be recognized too late and for an amount that is too low. Disclosures in the financial statements, specifically with regard to the amount and nature of the losses, are of high interest to the readers for a better understanding of the reporting entity. Indeed, with the challenging economic situation and continuing interest rate increases by central banks around the world, the situation remains complicated. Therefore, impairments will stay a topic that will cause headaches for many companies over the months to come when many of them enter the reporting season. 

To support the preparers of financial statements, KPMG performed an update of its cost of capital study that was published only recently and may help companies navigate through a number of estimates and assumptions. It is clear that the auditors and regulators will closely monitor this topic in their upcoming audits and reviews of the next annual financial statements. 

Are impairments due to current challenges a major topic for your company as well? How do you intend to communicate these unplanned losses to your investors? If in doubt, reach out to us – we would be happy to help.