By Gurjit Singh
Businesses with long-lived assets which include real estate, have some serious challenges ahead. In the current environment, the effect of the slowdown will soon need to be reflected in the value of these assets and how they will sit on company balance sheets.
The impairment in value of these assets have the effect of materially reducing earnings and balance sheet strength. This will be especially important to companies that have leveraged on their balance sheets. The multi billion dollar question facing businesses the world over, is how to reflect the impairment value due to the impact of Covid 19. Grant Thornton in an opinion piece have outlined the numerous considerations on impairment in this Covid era.
With the financial year well into its second half, soon the end of the third quarter will see the commencement of the budget and business plan cycle. This will also see the arrival of external auditors who will put a higher level of scrutiny on in-house teams that are charged with the responsibility of performing impairment testing. PWC explains the impact of real estate valuations on financial reporting especially with the lack of price discovery which will require a more careful valuation process and methodology.
It will therefore become even more important that professional independent real estate valuations are carried out. Stephen Flanagan, Knight Frank Middle East Head of Valuation and Advisory, in a comprehensive recent article explains the various factors that need to be considered for development valuations in light of Covid 19. This is especially true of companies which have numerous development properties in their portfolio.
As the dust settles, it will be interesting to see how the transparency in reporting impairments unfolds for businesses across the world.
PropSherpa 