South Africa

Details

  • Service: Advisory, Transactions & Restructuring
  • Type: Survey report
  • Date: 2013/03/20

2012 Cost of Capital and Impairment Testing Study 

KPMG in South Africa released its Cost of Capital Impairment Testing Study: 2012  in which 42 South African companies participated.

Cost of Capital and Impairment Testing Study
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Key points

The survey sought to establish a number of practice issues in valuations for impairment accounting but, most importantly, to determine if companies are seeing more impairments than in the past. It also aimed to determine what the cost of capital is that companies used in their financial reporting valuations in 2012.

 

The study found that more companies recognised some form of impairment during the 2012 period than in the previous survey period. Asset impairments were up quite significantly whilst goodwill impairments were up slightly. South Africa’s lower-than-expected growth in 2012 and a relatively subdued outlook beyond are likely the primary causes, while increased risk due to macroeconomic instability would also have contributed.

“We’ve seen the continuing poor growth here impact a number of sectors rather negatively,” said Neeraj Shah, Head of Valuations at KPMG in South Africa, “and are seeing the results 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. The latter, calculated by companies, is in the region of 13.5 percent compared to 12.3 percent in the previous study. This tells us that the projected business performance was more likely the driver of impairments rather than the cost of capital movement.

The cost of equity also showed a slight increase at 14.2 percent compared to 13.6 percent in the previous study.

Some inconsistencies remain in the way companies are interpreting accounting requirements and in the manner in which they are preparing their valuations for financial reporting purposes, the survey also showed. 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.

On a positive note

Companies that participated in the study indicated that they expect interest rates to remain stable, with a few companies expecting a slight decrease.

Though participating companies had decreased their long-term growth estimates for their valuations from just over 5 percent previously to slightly below 5 percent this year, most expect 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 that companies are now working off due to the fact that they did a clean-out of over-valued assets in the 2012 period, reducing the need for further impairments in the immediate future.” said Elizabeth Sherratt, Director, T&R at KPMG in South Africa.

Peter Harris, Manager, T&R at KPMG in South Africa agreed. “Companies seem to be expecting this trend to reverse,” he said, “indicating that the effects of tough economic times may be behind us. But we will need to see policy certainty from Government, as well as clear positive indications of improved foreign direct investment and materialisation of expected Government infrastructure spend.”

 

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