Sitting in a meeting as an external consultant you hear the following discussion of the CEO and
Question:
Sitting in a meeting as an external consultant you hear the following discussion of the CEO and board member and advisor of the French company:
Board member: The whole COVID situation caused a dramatic decrease in demand for our services. I guess we should consider recording impairments on some of our fixed assets.
CEO: I don’t think this is a good idea. Our profits are already negative and adding extra write down would make the results even worse.
Board member: Well, you don’t have to put the write-downs on the profit and loss statement. You can reflect it directly to equity through other comprehensive income since this is not a realized loss yet. In this way, you could mitigate the negative effect of writing down but we need to recognize that. Advisor: I agree that there are clear indications for impairment and you should at least run the tests to see what is the impact of the COVID crisis.
CEO: Yes, I know. You want us to pay you additional money to run the tests. I don’t think it is necessary. Look at our US competitors. They have already published their financial statements in July 2021 and none of them recorded any impairments. So why would we do that? It’s a waste of time and money! Advisor: The fact that your US peers did not recognize any impairment losses does not prove that your company doesn’t have to do it. In the US they would typically wait until it is absolutely obvious that you need an adjustment because it has far reaching consequences. Your shareholders see what the global situation is and have to take it into account when assessing financial performance. They already expect huge losses due to COVID. Paradoxically, recording an impairment now could help you in the future….
CEO: It can only help me getting fired. All of us, actually.
Who turned out to be the only competent person in the room? Point out the statements that are wrong.
Management Science The Art of Modeling with Spreadsheets
ISBN: 978-1118582695
4th edition
Authors: Stephen G. Powell, Kenneth R. Baker