The Israeli economy faced significant challenges over the past year, with additional fiscal pressures anticipated in the near future. Preparing financial statements has become increasingly complex against the backdrop of the country’s longest conflict, which carries profound and lasting macroeconomic implications. These circumstances raise thorny questions for financial managers about how to assess and quantify the potential impacts
As companies prepare their 2024 financial statements, they are already focused on producing cash flow forecasts to evaluate goodwill impairments for previously acquired operations. This process unfolds amidst a prolonged conflict impacting the local economy, with long-term macroeconomic consequences. Globally, the technology sector continues to face headwinds, and Israel’s technology industry is experiencing heightened strain due to the effects of the Iron Swords War. The disruption includes many professionals being called to prolonged reserve service, plans to extend mandatory military service, and a sustained increase in the size of the army. As a result, Israeli technology firms have scaled back growth plans, with some freezing hiring entirely, signaling significant changes within the sector.
In this challenging environment, credit rating agencies S&P and Moody’s downgraded Israel’s credit ratings about a month ago to A and Baa1, respectively. This marks a two-notch downgrade by S&P and a three-notch downgrade by Moody’s within the past year. The agencies cited the escalating conflict with Hezbollah, the likelihood of prolonged hostilities, and increased geopolitical and security risks as primary reasons for the downgrade[1]. These developments occurred before October’s Iranian missile attack and the subsequent Israeli response.
Can Impairment Testing Be Delayed?
Accounting standards require annual impairment testing for intangible assets with indefinite lives, which must be conducted at the same time each year. However, if events or circumstances arise that may reduce the value of the asset, more frequent impairment tests are mandated. This ensures that any potential declines in value are promptly identified and accounted for in financial reporting[2].
To determine whether impairment indicators exist, several factors must be evaluated. These include business factors, such as significant changes or anticipated developments that could negatively affect the relevant business area. In addition, one must consider market conditions such as increases in interest rates or yields that may impact discount rates, and, for public companies, a comparison of the asset’s market value to its book value.
Despite the credit rating agencies’ pessimism, the Israeli economy has demonstrated resilience, with a relatively modest underperformance since the start of the year. As an example, the Tel Aviv 125 index has shown only an 8% yield gap compared to the Nasdaq, both of which are at record highs. Historically, wars have had minimal long-term effects on company valuations. However, the unprecedented uncertainty currently affecting the local economy has elevated the specific risk premium for Israeli companies, potentially leading to higher discount rates. While cautious optimism about the long-term outlook is possible, ignoring present indications of value declines amid this uncertainty could be difficult to defend before regulatory bodies.
Expert Valuation Services: Collaboration Is Key
S-Cube is the largest valuation firm in the technology sector in Israel, performing approximately 650 valuations per year. However, despite over 17 years of experience in valuations, purchase price allocation (PPA), and impairment testing, S-Cube believes that no one knows a company better than its founders and finance professionals. Therefore, the cash flow forecasts that serve as the basis for determining the value of the activities valued in our work are not dictated by us, but are based on normative market data and the assessments of the companies’ management.
Our experienced team of analysts advises, guides and directs the company’s management in building and establishing forecasts, in a manner that is consistent with the past results of the activity, with the normative profitability rates accepted in the industry and with the current and expected macroeconomic environment. These valuations, which are recognized by leading accounting firms (the Big Four), are defensible, reasonable, and reflective of the available data and assumptions. This collaborative approach ensures valuations that meet both professional standards and the realities of the businesses being assessed.
[1] Israel Long-Term Ratings Lowered To ‘A’ From ‘A+’ On Heightened Security Risk; Outlook Negative
Moody’s Ratings downgrades Israel’s ratings to Baa1, maintains negative outlook
[2] IAS 36 Impairment of Assets
What is said in this article is provided for informational and general purposes only. The aforementioned does not constitute “investment consulting” and/or “investment marketing” as defined in the Law on the Regulation of the Practice of Investment Consulting, Investment Marketing and Investment Portfolio Management, 1995 and/or a substitute for the above and/or a substitute for legal, financial, taxation advice, financial or any professional and personal advice. The S-CUBE company and/or the IBI group and/or any of the group companies will not be responsible for any loss or damage caused to any third party due to reliance on the above information.