How do you determine the discount rate (WACC) for an IAS 36 impairment test?
A core Group Accounting interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
IAS 36 requires a pre-tax discount rate reflecting current market assessments of the time value of money and the risks specific to the CGU. In practice you usually build a post-tax WACC and then gross it up (or, properly, iterate to a pre-tax rate that gives the same value on pre-tax cash flows). WACC = (E/V)·Re + (D/V)·Rd·(1−T), with Re from CAPM (risk-free + beta × ERP, plus size/specific risk where relevant). Key nuances: use a CGU-specific rate, not a blanket group WACC, when CGUs differ in risk/geography (add country risk where needed); the rate must be independent of how the asset is financed (use a market/target capital structure, not the entity's actual leverage); and don't double-count risk already in the cash flows. The recoverable amount is the higher of value-in-use (using this rate) and fair value less costs of disposal.
WHAT INTERVIEWERS LISTEN FOR
- ✓IAS 36 needs a pre-tax rate reflecting CGU-specific risk (often post-tax WACC grossed up/iterated)
- ✓WACC via CAPM cost of equity + after-tax cost of debt at target structure
- ✓CGU-specific, not blanket group WACC; add country risk where relevant
- ✓Don't double-count risk in both rate and cash flows; recoverable = higher of VIU and FVLCD
COMMON MISTAKES
- ✗Using one group WACC for all CGUs
- ✗Reflecting actual leverage instead of market/target
- ✗Double-counting risk in rate and cash flows
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