Headroom made me smile

I recently discovered a new accounting term in the 2022 annual report of Associated British Foods: headroom.  I had always thought this was the space between the top of my head and the ceiling. However a more figurative meaning of headroom does exist meaning: ‘freedom of action’, and perhaps accountants have adapted this meaning to this accounting term.

What surprises me too is that headroom can have a value:

“Headroom was $232m on a CGU carrying value of $1,003m.”

To me, this statement means completely nothing. Now naturally, I have taken it out of context and thrown it into my article for effect, but believe me, even in context, I have no idea what it means. The context is impairment testing and estimates and judgements made by management. Here is another one in this same context, giving a little more insight:

“Each of the Group’s CGUs had headroom under the annual impairment review.”

Reading this, I guess when the accountants do their impairment tests, the future cash flows exceed the carrying value, and this excess could be headroom. If so, my assumption above is incorrect. Accounting headroom is closer to the space between the top of my head and the ceiling than it is to freedom of action.

The writers of the annual report of Associated British Foods appreciate headroom by mentioning it 14 times in 2021, and another 16 times in 2022. It appears in many of their accounting issues: goodwill, intangible assets and property plant and equipment, but also in the appreciation of going concern and surprisingly in the company’s liquidity risk.

Headroom has become versatile. It is very much part of the accounting environment in Associated British Foods.

Therefore, there is a chance it might get out into the accounting public domain as a recognised, much used accounting term. It would certainly contribute to enlivening the rather austere vocabulary we use. But for the moment, headroom remains colloquial and relatively unknown.

It still made me smile.