This paper seeks to identify macroeconomic risks due to Brexit and how these risks influence the subsequent measurement of assets under IAS 36 Impairment of Assets.
The central research question is whether Brexit leads to an increased impairment risk for German corporations with cross-border relations. To investigate the question, chapter 2 discusses the UK’s relevance to the German economy and explains the relevant procedures under IAS 36. Chapter 3 analyses the macroeconomic changes since the referendum and derives macroeconomic risks for future economic development. Finally, the paper examines the impact of identified macroeconomic risks on key assumptions of impairment testing under IAS 36. An illustrative example of a German car manufacturer with production and dis-tribution in the UK shall demonstrate a potential impairment risk due to Brexit. The analysis closes with a critical evaluation of impairment testing in the context of Brexit. The scope of the paper encompasses German corporations which prepare financial statements in accordance with IFRS.
"What is happening is a disaster for the economy, looking at it from a purely economic point of view", states C. Pissarides, a Nobel Prize-winning economist, commenting on the United Kingdom’s (UK) exit from the European Union (EU). The referendum in June 2016 has triggered a series of unfavourable changes in the UK’s economic climate, which in turn has affected other European countries. Numerous businesses in and outside of the UK are suffering from political uncertainties due to the fear of a disorderly Brexit and the accompanying macroeconomic effects, e.g. devaluation of the British pound and declining con-sumer demand in the UK. Foreign companies that are exposed to the UK through trading relationships, especially those with cross-border supply chains and operations, are required to reassess the future of their businesses in the UK due to adverse market prospects.
German companies with close relations to the UK can be directly and indirectly affected by economic changes due to Brexit. It is therefore necessary to examine whether and to what extent the economic changes need to be reflected in entities’ financial statements. Particular attention should be paid to the faithful presenta-tion of companies’ assets and liabilities.
Table of Contents
1 Problem description
2 Background
2.1 UK’s relevance to the German economy
2.2 Impairment of assets under IAS 36
3 Identification of impairment risk for German companies due to Brexit
3.1 Macroeconomic Brexit effects
3.2 Impact on impairment testing under IAS 36 for German companies
3.3 Illustrative example: Impairment risk for goodwill under IAS 36
3.4 Critical evaluation
4 Conclusion
Research Objective and Focus
This paper investigates whether the economic consequences of the United Kingdom's exit from the European Union (Brexit) lead to an increased impairment risk for German corporations with cross-border business relations, specifically focusing on the measurement of assets under IAS 36.
- Analysis of macroeconomic Brexit effects on the UK and German economies
- Examination of asset impairment procedures and requirements under IAS 36
- Assessment of Brexit-induced risks on key impairment testing assumptions
- Illustrative modeling of impairment risk for goodwill using scenario analysis
- Evaluation of corporate disclosure and management discretion in impairment reporting
Excerpt from the Book
3.1 Macroeconomic Brexit effects
The following section examines evident as well as potential macroeconomic Brexit effects on the UK economy with particular regard to the implications for German corporations. Due to the high complexity and interdependencies of different effects, the scope of the risk analysis is limited to relevant aspects for recoverable amount calculations under IAS 36. Therefore, it is not claimed that this list is exhaustive. The time horizon for the identified risks extends over the short to medium term but can also be extended to long term depending on further political action, i.e. outcome of withdrawal agreement negotiations.
Foreign currency exchange risk
An immediately visible macroeconomic effect due to the referendum has been the depreciation of the Great Britain Pound (GBP). After the referendum in 2016 the GBP depreciated from 1.30 EUR to 1,10 EUR, approximately 15% (App. Fig. 1). Since 2016 the GBP remained on a depreciation level of at least 10% below pre-referendum. Consequently, imports from Germany became more expensive for UK consumers and exports from the UK cheaper for German consumers. Therefore, the devalued GBP poses a substantial risk for the demand for German goods and services in the UK. Furthermore, investments in UK based assets translate to lower EUR amounts leading to impairments in the balance sheets of German companies due to pure currency effects. The GBP mainly depreciated due to uncertainties on the financial markets, which themselves are linked to political uncertainties in the course of Brexit negotiations. Hence, the magnitude of the GBP’s volatility in the future will strongly depend on the course of political actions taken.
Summary of Chapters
1 Problem description: This chapter introduces the economic impact of the Brexit referendum and defines the paper's core research question regarding impairment risks for German companies under IAS 36.
2 Background: This section details the relevance of the UK as a trading partner for the German economy and provides a fundamental overview of the procedures for asset impairment testing as prescribed by IAS 36.
3 Identification of impairment risk for German companies due to Brexit: This chapter analyzes specific macroeconomic risks—such as currency fluctuations, inflation, and trade barriers—and their subsequent impact on impairment testing assumptions, illustrated by a case study of a car manufacturer.
4 Conclusion: This chapter synthesizes the findings, noting that while Brexit creates significant impairment risks for UK-exposed assets, empirical evidence suggests companies may be utilizing management discretion to defer or avoid recognizing these losses.
Keywords
Brexit, IAS 36, Impairment of Assets, Goodwill, Recoverable Amount, German Economy, Macroeconomic Effects, Discounted Cash Flow, WACC, Foreign Currency Exchange Risk, Valuation, Financial Statements, UK Market, Automotive Industry, Management Discretion
Frequently Asked Questions
What is the primary focus of this research paper?
The paper examines whether the United Kingdom's withdrawal from the European Union creates an elevated risk for German corporations regarding the impairment of assets as defined by International Accounting Standard 36 (IAS 36).
What are the key themes addressed in the analysis?
Key themes include the economic interdependence between Germany and the UK, the mechanics of IAS 36 impairment testing, the identification of macroeconomic risks triggered by Brexit, and the impact of these risks on company valuations and financial reporting.
What is the central research question?
The research asks whether the consequences of Brexit lead to an increased impairment risk for German corporations that maintain cross-border trade relationships or operational subsidiaries in the UK.
Which scientific methodology is applied in this paper?
The author uses a qualitative research approach, combining an analysis of macroeconomic data with a technical review of accounting standards and an illustrative scenario-based valuation model (DCF method) to simulate impairment risks.
What topics are covered in the main section?
The main section covers the analysis of macroeconomic effects like currency devaluation, inflation, interest rate risks, and customs duties, alongside an examination of how these factors influence the recoverable amount of assets and goodwill under IAS 36.
Which keywords best characterize this research?
The most relevant terms are Brexit, IAS 36, Asset Impairment, Goodwill, German Economy, Discounted Cash Flow, and Financial Reporting.
How does the depreciation of the British pound affect German assets?
The depreciation of the GBP against the EUR negatively impacts German companies by making their exports to the UK more expensive, potentially reducing demand, and leading to lower EUR-denominated values for assets held in the UK, which can trigger impairment losses.
Why might German car manufacturers be reluctant to report Brexit-related impairments?
The paper suggests that companies might be accounting for future restructuring gains to secure cash flows, operating under the hope of an orderly Brexit, or using management discretion in valuation assumptions to avoid the negative market signal and potential debt covenant violations associated with goodwill impairments.
- Citar trabajo
- Anastasia Harder (Autor), 2019, What balance sheet risks arise from Brexit?, Múnich, GRIN Verlag, https://www.grin.com/document/537951
