South Africa


  • Service: Advisory, Transactions & Restructuring
  • Type: Survey report
  • Date: 2011/08/11

Cost of Capital and Impairment Testing Study 2011 

The international economy continues to be plagued with a number of unexpected and devastating events such as the crisis in the Middle East and the natural disasters that have hit Japan. Surprisingly, despite this, the global recovery seems to be continuing at a slow and steady pace.

In South Africa, the economy continues its recovery from the recession period with some solid improvements in GDP growth during 2010 and this progress appears to be continuing positively into 2011. Interest in South African assets from foreign investors remains high, contributing to a stronger rand as well as more merger and acquisition activity. This coupled with a stable interest rate environment bodes well for further economic progress in South Africa.


Notwithstanding these uncertain economic times, companies continue to make acquisitions, albeit at a much slower rate than in the period leading up to the recession of 2008/9. These acquisitions frequently reflect significant premiums being paid over net asset value which then need to be analysed into components in terms of International Financial Reporting Standards. These components result in assets, namely goodwill or other assets, which later have to be tested for impairment. These impairments, how they are performed and their resultant impact are of interest to the financial reporting community. This survey attempts to provide some insight as to the manner in which these tests are being conducted in South Africa and some of the outcomes of these tests.


This survey has been run for several years in Europe. This is the first time that this survey is being run in South Africa and although the response rate was fairly low, we are confident that this maiden version will spur interest for future years as was the case in Europe, where response rates increase from year to year. Trends and developments are analysed against the European survey responses in this version.


The format follows that of our European survey, and covers the following four main areas:


  • Organisation and implementation of impairment tests
  • Measurement of cash flows
  • Determination of cost of capital
  • The level of the cost of capital parameters.


Our survey was conducted from November 2010 to February 2011 and therefore financial statements from 31 December 2009 to 31 October 2010 were included in our analysis.


This survey is an empirical investigation with the aim of setting out company practice in South Africa in relation to the areas outlined above. Information and remarks in the survey are not intended to provide complete information as to the correct treatment or interpretation of the regulations for impairment testing.



Clive Farquhar
Transactions & Restructuring
Tel: +27 (0)11 6478317