Declining Economic Conditions:

Impact on Business Valuation, Requirement for Asset Impairment Testing

Economies around the world have witnessed slow growth resulting from the spillover effect of the COVID-19 pandemic and economic restrictions. The outbreak of the Russia-Ukraine war in February 2022 has made this situation worse by intensify-ing supply chain interruptions, raising the cost of food, energy, and other commodities.

Inflation has risen sharply around the world, prompting major central banks to raise policy rates. Rising policy rates began in the second quarter of 2021 when some central banks in Latin America and Central Europe focused on curbing inflationary pressures and the attendant impact on currency – when inflation increases, the purchasing power of money reduces. In other words, consumers can buy fewer goods with the same amount of currency.

This trend has been sustained in 2022 as the U.S. Federal Reserve and other major central banks across the globe continue to increase rates at a pace faster than experienced in the last five decades. 

Following recovery from the recession induced by the COVID-19 pandemic, key economic indicators such as inflation rates, policy rates and exchange rates have worsened in West Africa. For example, according to data from the National Bureau of Statistics in Nigeria, the head-line inflation rate has risen from 15.6% in December 2021 to 21.1% in October 2022, which represents a 17-year high. The high inflation rate is largely due to rising food prices, disruptions in the food supply chain, currency depreciation, insecurity, and high input cost. Consequently, the Central Bank of Nigeria (CBN) has adopted a tight monetary policy stance, raising the benchmark interest rate to 16.5% at its last policy meeting in November 2022, from 11.5% at the start of the year.

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