UK: Impaired Value

Last Updated: 25 July 2019
Article by John Stittle

Retail stores hit by reporting impairments

The stormy financial headwinds continue to decimate British high streets. Many business sectors have been affected, including banks, travel agents, estate agents, fashion clothing shops and, certainly not least, long established departmental retail outlets. The online retail revolution is, directly or indirectly, hitting most of these business sectors. But over the last few years, it's the retail chain stores that have been particularly affected.

The list of leading high street retail casualties continues to lengthen: BHS, Toys R Us, House of Fraser, Mothercare, HMV and now, Debenhams. In many cases, the trading distress of retail companies is evidenced by the increasing application of asset impairments (write-downs) being recognised in financial statements. Some of the assets requiring impairment often include intangible items such as goodwill, property and onerous leases.

The impairment reporting rules, contained in IAS36, Impairment of Assets, is the reporting framework that most companies are required to adopt in their financial statements. However, many of these international accounting rules are not always straight forward to implement in a practical or 'real-life' context. Frequently, IAS36 requires companies to make significant and uncertain estimates, make difficult judgements and often construct precarious cash flow projections – all of which can significantly impact on the amount of impairments being recognised in the accounts. But is determining the level of many impairments often little more than just calculated guess work?


This April, Debenhams, a former High Street stalwart, became another victim of the retail revolution and entered into a 'pre-pack' Administration after a last minute failed rescue attempt by Sports Direct. The effect of the 'pre-pack' was that shareholders were wiped out and negotiations were started to restructure its debts, close stores and reduce the company's lease rentals through a Creditors Voluntary Arrangement.

Debenhams' failings - as with other distressed 'bricks and mortar' retailers, have largely stemmed from falling sales, excessive debt, expensive maintenance of property portfolios and inescapable onerous store rentals. Many have failed to fully embrace more imaginative retailing methods, for example, often having a weak, restricted and poor-quality on-line sales base. Indeed, Debenhams' most recent financial statements typify many of these challenges facing retailers today.

Financial Position

Debenhams' year-end financial statements issued last autumn before entering Administration, highlighted the bleak performance of the ailing retail group with reported operating losses being a disastrous £481.3m. But this reported loss has partly arisen from exceptional items in the accounts resulting from restructuring costs, high debt servicing, impairments and onerous lease costs.

Significantly, the group has recognised a whopping £524.7m pre-tax hit for exceptional items in its income statement. If these exceptional items are then dissected, it is apparent that the majority of the charges-419.6m-relate to costs for impairments and onerous leases; and the remaining balancees attributed to other asset write-offs and restructuring.

In particular, the notes to the financial statements further point out that the 'material' non-cash impairment for goodwill amounted to £302.1m – which is considered 'significant in value' to the Group's results and 'reflect a change in the direction of the outlook of the business'. Perhaps rather an understatement considering that Administration followed shortly after these results were announced.

Determining Write-offs

The rules relating to impairments used by Debenhams and other companies are not as objective or reliable as some users of financial statements often believe. IAS36 applies mainly to land and buildings, plant, equipment, intangible assets including goodwill and investments in subsidiaries.
Every year, companies are required to evaluate whether there are any indications that an asset may have suffered an impairment. IAS36 suggests that both external and internal sources of possible impairment should be examined.

The external factors that may indicate impairment include changes in markets, technology or in the economy; and internal sources may include obsolescence or damage to assets and under-performance of investments in subsidiaries. But for some assets an impairment test is often conducted annually - irrespective of whether there is any evidence. This category includes such items as goodwill arising upon consolidation and intangible assets with an indefinite life.

Recoverable Amount

The key objective of IAS36 is to ensure that assets are not carried in a company's balance sheet in excess of their recoverable amount (RA). The RA is defined as the higher of fair value (FV) and economic value (EV) – often also called 'value in use'.

But firstly, the definitions: FV is defined more fully in IFRS13, Fair Value Measurement. FV is largely regarded as the price that would be paid for the asset in the open market. EV is the present value of the future net cash flows expected from using the asset.

For example, if Company A is carrying an asset at £100 in its balance sheet, the assets at fair value (FV) are £80, and its EV is £85; then its recoverable amount is £85 (the higher of FV or EV). So the asset is being recognised in the balance sheet at £100 - when its RA is only £85. As a result, IAS36 requires the difference of £15 to be written off as an impairment loss in the income statement and the asset also correspondingly reduced in the balance sheet.

Economic value

In practice, fair values of assets are not always easy to determine. But the area that frequently causes companies (and later for their auditors) the most challenges is how to calculate the EV.
The accounting regulations require companies to estimate the future cash flows that are expected to arise from using an asset; then take account of possible variations in the amounts and timings of the cash flows; and finally apply a discount factor based on the current market risk-free rate of interest in order to find the present value.

Then,to further add to the complexity and uncertainty, IAS36 requires the estimates of the cash flows to be based on 'reasonable and supportable assumptions.' Normally, these cash flow projections should not exceed five years – although the rules allow companies to exceed this level, but the cash flows would then need to be extrapolated from earlier budgets. So, there is plenty of scope for individual judgement and estimates here.

Discount factor

Even the discount rate is subject to considerable discretion. The rules require that in determining the EV, the future cash flows are discounted at the pre-tax rate which reflects the market assessment of the time value of these cash flows and the risks inherent in the underlying asset.
In summary, IAS36 then states that the rate should equal the rate of return that investors would normally require if they were investing in another asset that would be expected to generate equivalent cash flows.

Debenhams has decided to use a 7.2% discount rate which it believes reflects specific risks in the retail business. But even small variations in this rate can have quite significant implications. The sensitivity analysis in the notes reveals that a mere 0.5% variation either way in this discount factor may affect the impairment charge by around £48m; certainly not an inconsiderable amount within the context of the currently reported level of impairments.

Overall, increasing numbers of retail chain stores are reporting impairments in the financial statements. This is perhaps unsurprising, considering the pressure that online trading disrupters are exerting on the traditional and costly 'bricks and mortar' retail model. But the nature of IAS36 often gives companies generous scope in determining the recoverable amounts of assets in general and of the economic values in particular. Users of financial statements should be aware that these impairment tests are frequently just approximate indicators – not always precise write-off numbers. 

John Stittle is a Senior Lecturer at University of Essex

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions