Asset impairments among South African companies rose significantly in 2012, while goodwill impairments were up slightly, KPMG’s 2012 Cost of Capital Impairment Testing Study, released in March, revealed.

The survey, which sought to establish a number of practice issues in valuations for impairment accounting, found that more companies recognised some form of impairment during the 2012 period than in the previous year.

South Africa’s lower-than-expected yearly growth, paired with a relatively subdued outlook beyond, was likely the primary cause, while increased risk owing to macroeconomic instability would also have contributed.

“We have seen continuing poor growth impact on a number of sectors rather negatively,” said KPMG South Africa valuations head Neeraj Shah.

“We are now observing the result of this in companies’ financials in the form of impairments.”

Companies reported an increased cost of equity and an increased weighted average cost of capital, with the latter in the region of 13.5%, compared to 12.3% in the previous study.

“This tells us that the projected business performance was more likely the driver of impairments than the cost of capital movement,” commented Shah.

The cost of equity also showed a slight increase at 14.2%, compared with 13.6% in the previous study.

KPMG reported that some inconsisten- cies remained in the manner in which companies were interpreting accounting requirements, as well as the way they prepared their valuations for financial reporting purposes.

“Due to the complex and subjective nature of valuations, companies could benefit from the involvement of specialists that have the necessary technical skills and the ability to draw on experience to apply relevant valuation methodologies using, for example, industry knowledge and benchmarking analysis,” the report recommended.

Meanwhile, companies indicated that they expected interest rates to remain stable, with some expecting a slight decrease.

Though participating companies had decreased their long-term growth estimates for their valuations from just over 5% to slightly below 5% this year, most expected positive economic developments in 2013, both for the overall economy and for their specific industry.

“One possible reason for this positivity is the low base companies are now working off due to the fact that they did a clean-out of overvalued assets in the 2012 period, reducing the need for further impairments in the immediate future.” explained KPMG South Africa director Elizabeth Sherratt.

KPMG South Africa manager Peter Harris agreed, adding that companies expected this trend to reverse.
“This indicates that the effects of tough economic times may be behind us. However, we will need to see policy certainty from government, as well as clear positive indications of improved foreign direct investment and the materialisation of expected government infrastructure spend,” he noted.