CASE STUDY 7.1 Indications and determination of impairment losses

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Ausdrill dives on write-off

Shares in contract driller Ausdrill plunged on Wednesday following the disclosure of asset write-offs of as much as $90 million, which is equal to nearly one third of the company's worth.

Ausdrill warned of impairment charges of up to $90 million as it battles a severe downturn in the resources sector, with any pick-up expected to be slower than it had anticipated.

The write-down will push earnings sharply into the red, since Ausdrill had earlier signalled a year to June net profit of $25-$30 million.

Ausdrill shares were dumped on the announcement, closing down 9 per cent at 97c, clear of the day's low of 88.5c.

The latest write-down of asset values will be in addition to the $5.8 million charge booked in the December half.

'A review of the company's longer term forecast on the back of the recent fall in the iron ore price and continued challenging market conditions have resulted in a view being taken that the recovery of the Australian mining services sector will be slower than Ausdrill had previously anticipated,' it said.

More importantly, Ausdrill said the write-down 'will not have a material impact on banking covenants'. The principal covenant affected is the gearing ratio which would increase by approximately 2 per cent, 'which is well within the required limit allowing the company to maintain a significant level of headroom under its gearing covenant test'.

Even though it generates around half of its revenue from servicing gold and copper miners, as much as one third of revenue comes from iron ore miners, where cutbacks are acute following the plunge in commodity prices.

Prior to the latest write-downs some analysts had valued Ausdrill shares at around 90c, which is less than Wednesday's closing price.

Source: Robins (2014).

Required

Describe the process undertaken by Ausdrill in determining:

its assets may have been impaired

the extent of the impairment losses would be up to $90 million.

Explain how Ausdrill's gearing ratio would increase as a result of an impairment loss.