Date posted: 9/11/2020 4 min read

Impairment challenges to persist

The COVID-19 downturn has created impairment challenges across a range of industries, with respondents believing that retail was most affected.

In Brief

  • The report shows most (75%) believe impairment increased in FY20
  • 22% of respondents believe the retail sector will face impairment challenges in the next financial year
  • The survey show that the cost of capital has stayed relatively stable

The first Chartered Accountants Australia and New Zealand Valuation Practice Survey has provided an expert insight into the attitudes and assumptions shaping valuations.

Made up of responses from about 100 business valuation specialists in Australia and New Zealand, the report shows a high level of correlation in the views of valuation specialists on technical factors such as impairment and market risk premiums.

The report sets a benchmark for multiple factors that are inputs to valuations, providing a useful resource for practitioners in our region to help calibrate and refine their valuations.

“There is very little valuation consensus data in Australia and New Zealand, compared with bigger markets like the US and Europe,” says business valuation specialist and CA ANZ Business Valuation Committee member Fiona Hansen.

“That means that valuers often have to rely on data that doesn’t directly apply to the local market. So, it’s incredibly valuable to have this information, and understand how it may differ across the valuation community.”

We asked valuation professionals to share their views on key factors such as impairment and cost of capital. Here’s what we found.

Impairment increases across the board

The report shows that 75% believe impairment increased in FY20, with further impairment yet to come. Three-quarters (74%) expect greater impairment in FY21. Since the survey was taken, however, it’s become clear that not all industries have been affected equally.

While it is certainly true that the pandemic has heightened general perceptions of risk, sectoral considerations should dominate valuation thinking for the duration of the COVID-19 crisis.
Fiona Hansen Business valuation specialist and CA ANZ Business Valuation Committee member

“We’ve seen some sectors bounce back quickly as restrictions have lifted. Others have pivoted their offering to adapt and thrive in the new COVID-normal,” Hansen says.

“So, while it is certainly true that the pandemic has heightened general perceptions of risk, sectoral considerations should dominate valuation thinking for the duration of the COVID-19 crisis.”

Cost of capital remains stable

The survey shows that the cost of capital has stayed relatively stable. Low risk-free rates from quantitative easing have been largely offset by increased risk premiums, both domestically and abroad. This reflects the extent to which monetary stimulus has offset the increased in risk perception, especially due to the volatility arising from the COVID-19 crisis.

Retail impairment to remain a challenge

Almost a quarter (22%) of respondents believed that the retail sector will face impairment challenges in the next financial year due to slower retail activity from COVID lockdowns. However, this hasn’t eventuated for those retail businesses that have established a good online presence.

Finance, insurance and real estate (15%), construction (13%) and manufacturing (11%) were also seen to be facing impairment challenges in 2021 – while mining (5%) and agriculture, forestry and fishing were considered relatively immune (2%).

“For mining, this appears to be on point – in Western Australia mining is already almost back to normal,” Hansen says. “On the other hand, travel, gyms, personal services and hospitality remain heavily affected by ongoing restrictions – and it remains to be seen how quickly they can rebound.”

About the survey

The 2020 Valuation Practice Survey was conducted in August 2020. It includes results from more than 100 respondents working in valuation-related disciplines across the public and corporate sectors. The survey was conducted by Chartered Accountants Australia and New Zealand and distributed online to business valuation specialists.

Stay up to date with the latest in business valuation

The Chartered Accountants ANZ Business Valuation Community Newsletter is your go-to resource for the latest information on topical news items, technical updates and upcoming CPD events including qualify as a CA Business Valuation Specialist.  

Subscribe here

Become a recognised Difference Maker in Business Valuation

Invest in your reputation in the field as a CA Business Valuation Specialist. Register your interest for the CA Business Valuation Specialisation Program today.

Learn more

Search related topics