Impairment of Assets

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” William Arthur Ward.

Copenhagen listed Ørsted, the world`s largest offshore wind company - role model of renewable energies - would know a thing about the wind. Ørsted finalised the financial year 2023 with a loss of ca. $ 2.9 billion struggling for the good part of 2024 and the share price continues to fall since 2021. The loss was driven by an impairment loss of ca. $3.6 billion plus cancellation fees related to a major project Ocean Wind 1 in the North Sea.

Born out of the booming trend of sustainable energies, Ørsted (and others) now face inevitable challenges of their trade:

• a cost-intensive, asset-heavy business model,

• high sensibility to interest rates,

• increased cost competitiveness,

• unpredictability in terms of output,

• US presidential vote results.

Ørsted claims supplier delays were the main cause for the project cancellation but admits internal issues such as project execution and monitoring.

Let`s break down the accounting:

The standard: IAS36 Impairment of Assets

An asset is:

• a resource controlled by an entity,
• result of past events,
• from which probable future benefits are expected.

Impairment is incurred whenever an asset fails to deliver on expected future economic benefits (in terms of revenue, cost reductions, cash flows). An entity assesses occurence of potential impairment indicators at the end of each reporting period. Intangibles not yet available for use and those with an indefinite useful life plus goodwill are tested for impairment annually.

Impairment indicators (selected):

• actual cash flows from acquiring/ operating/ maintaining an asset significantly worse than budgeted,
• operating profit/ loss from the asset significantly worse than expected,
• an asset gets damaged or becomes obsolete.

Both internal and external indicators of potential impairment must be considered (market, technology, product). An asset is impaired, whenever its carrying amount (balance sheet amount) is higher than its recoverable amount. The recoverable amount is the higher of the fair value less cost of disposal or value in use (which is an estimate of future discounted cash flows from the use of an asset & from its ultimate disposal).

An impairment loss must be recognized in Profit & Loss immediately.

How to detect impairment in practice?

• Have sound detection, monitoring and reporting practices in place.

• Speak-up culture in the workplace and on the management level.