One of the most critical inputs in impairment testing is determining the cost of capital or discount rate. Determining the appropriate cost of capital is often seen as a dark art at the best of times, but in uncertain economic conditions, the difficulty has been compounded. In addition, while IAS 36 requires the use of "a pre-tax discount rate" for the discounting of cash flows, it has long been accepted by valuation practitioners that the direct determination of a pre-tax cost of capital is difficult if not impossible to derive.
To assist users and preparers of financial statements, Duff & Phelps analyzed, by industry group, the impairment disclosure notes of the FTSE 100 group of companies. Our analysis is intended to allow users and preparers of financial statements to understand and benchmark against the broad ranges for cost of capital and long term growth rates being used in practice within their industry for impairment testing purposes.