CHAPTER 10
IMPAIRMENT
Connolly – International Financial Accounting and Reporting – 4th Edition
10.1 INTRODUCTION
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Impairment = sudden diminution in value of an individual
non-current asset or cash generating unit (CGU)
CGU is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the
cash inflows from other assets or groups of assets
CGUs are likely to follow the way in which management
monitors and makes decisions about
continuing/discontinuing different parts of the business
Connolly – International Financial Accounting and Reporting – 4th Edition
10.2 IAS 36 IMPAIRMENT OF ASSETS
Fundamental principles
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To prescribe the procedures to ensure that non-current
assets and CGUs are recorded at no more than their
recoverable amounts
Recoverable amount is the higher of fair value less costs
of disposal (FVLCD) and value in use (VIU)
An impairment loss is the amount by which the carrying
amount (NBV) of an asset or CGU exceeds its recoverable
amount
Connolly – International Financial Accounting and Reporting – 4th Edition
Figure 10.1: The impairment decision
LOWER OF:
CARRYING
VALUE
(NBV)
RECOVERABLE
AMOUNT
HIGHER OF:
FVLCD
EV or VIU
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 10.1: The impairment decision (1)
Take an asset at 31 December 2012:
Carrying amount
€10,000
Fair value less costs to sell
€12,000
Value in use
€13,000 -
– take higher
No impairment because carrying amount < recoverable
amount.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 10.2: The impairment decision (2)
Take an asset at 31 December 2012:
Carrying amount
€10,000
Fair value less costs to sell
€8,000
Value in use
€9,000
– take higher
Impairment = carrying amount less recoverable amount =
€10,000 - €9,000 = €1,000
Connolly – International Financial Accounting and Reporting – 4th Edition
Scope of IAS 36
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IAS 36 to all assets except:
 Inventories (IAS 2) (See Chapter 11)
 assets in the course of construction (IAS 11) (See
Chapter 12)
 deferred tax assets (IAS 12) (See Chapter 13)
 assets arising from employee benefits (IAS 19) (See
Chapter 17)
 financial assets dealt with in IAS 39 (See Chapter 25)
 investment property measured at fair value (IAS 40)
(See Chapter 5)
 biological assets related to agricultural activity that are
measured at fair value less sales costs (IAS 41) (See
Chapter 34)
 assets classified as held for sale (IFRS 5) (See Chapter
20)
Connolly – International Financial Accounting and Reporting – 4th Edition
Identifying an asset that may be impaired
• External sources
 decline in assets’ market value
 adverse changes in technological, market, economic or
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legal environment
 market interest rates
 carrying amount of the net assets is more than market
capitalisation
Internal sources
 Obsolescence or physical damage of an asset
 Plans for a significant reorganisation/discontinuation or
sale of an asset
 evidence that an asset’s performance is worse than
expected
Connolly – International Financial Accounting and Reporting – 4th Edition
Measuring recoverable amount
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Fair value less costs of disposal
Value in use
Connolly – International Financial Accounting and Reporting – 4th Edition
Fair value less costs of disposal (FVLCD)
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The best evidence of an asset’s FVLCD is a price in a
binding sale agreement in an arm’s length transaction, after
adjustment for incremental costs of disposal
If there is no binding sale agreement, but the asset is
traded in an active market, FVLCD is the market price less
costs of disposal. (The appropriate market price is usually
the current bid price.)
If there is no binding sale agreement or active market for an
asset, FVLCD is calculated as expected selling price in an
arm’s length transaction less direct costs of selling, such as
stamp duty or legal costs (but not items such as associated
redundancy costs)
Connolly – International Financial Accounting and Reporting – 4th Edition
Value in use (VIU) or economic value (EV)
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VIU or EV is the present value of the future cash flows
derived by the asset from its continuing use and ultimate
disposal
Two key decisions – the discount rate to be used and
estimating future cash flows
Connolly – International Financial Accounting and Reporting – 4th Edition
Discount rate
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The discount rate used should be an estimate of the rate
that the market would expect on an equally risky investment
It should exclude the effects of any risk for which the cash
flows have been adjusted
It should be calculated on a pre-tax basis
Estimates of this market rate may refer to:
 the rate implicit in market transactions of similar assets
 the enterprise’s incremental borrowing cost adjusted
for specific risks of the projected cash flows
 the WACC for the entity adjusted for the particular risks
of the projected cash flows
If cash flows expressed in current prices use a real
discount rate
If cash flows expressed in future prices use a nominal
discount rate
Connolly – International Financial Accounting and Reporting – 4th Edition
Cash flows
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Expected cash flows should be based on:
 Reasonable and supportable assumptions of management’s
best estimates of the economic conditions over the RUEL of
the asset. Greater weight should be given to external
evidence
 Up to date plans and budgets approved by management.
These should not cover more than 5 years unless justified
Cash flows should be estimated for assets in their current
condition. They should not include:
 future cash inflows or outflows that are expected to arise from a
future restructuring to which an enterprise is not yet committed
 future capital expenditure that will improve or enhance the CGU
or asset
 cash inflows / outflows from financing activities
 income tax payments or receipts
Connolly – International Financial Accounting and Reporting – 4th Edition
Recognising an impairment loss for an individual asset
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Should be recognised in the SPLOCI – P/L unless it arises
on a previously revalued non-current asset
For revalued assets, it is recognised as a revaluation
decrease and will be deducted as far as possible from the
revaluation surplus on that asset (See IAS 16 revaluation
model – Chapter 6)
Connolly – International Financial Accounting and Reporting – 4th Edition
Recognising an impairment loss for a CGU
Example 10.3: Independent cash flows
A mine owns a private railway to support its mining activities. It
could only be sold for scrap and does not generate
independent cash flows from those of the mine.
The CGU, in this case is, therefore, the mine as a whole,
including the railway as the railways value in use cannot be
independently determined and would be very different from its
scrap value.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 10.4: Lowest aggregation of assets
A bus company has a contract to provide a minimum service on
five separate routes. Cash flows can be separately identified for
each route. Even if one route is operating at a loss, the entity
has no option to curtail any one route and the lowest
independent level is the group of five routes together.
The CGU is the bus company itself.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 10.5: Identifying CGUs
Example 10.5(A): Retail store chain
Store X belongs to retail chain, M. X makes all purchases
through M and pricing, marketing, advertising and human
resources policies are decided by M. M also owns 5 other
stores in the same city as X and 20 other stores in other cities.
All are managed in the same way as X and X was purchased
with 4 other stores 5 years ago.
X generates independent cash inflows and the stores are in
different neighbourhoods thus it appears X is a CGU.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 10.5: Identifying CGUs
Example 10.5 (B): Plant for an intermediate step in a production process
A significant raw material used for Y’s final production is an intermediate product
bought from X. X sells to Y at a transfer price that passes all margins to X. 80% of
X’s output is sold to Y and 40% to outside customers.
Case 1: X could sell to Y in active market. Internal prices are higher than market
prices.
Case 2: There is no active market for the products X sells to Y.
Case 1
Likely X is a separate CGU and Y is also. However, internal transfer prices do not
reflect market prices for X’s output. Thus, in determining value in use for both X and
Y, the entity adjusts financial forecasts/budgets to reflect management’s best
estimate of future market prices for those of X’s products.
Case 2
It is likely that the recoverable amount of each plant cannot be assessed
independently as the majority of X’s production is used internally and could not be
sold in an active market and the two plants are managed together. X and Y is the
smallest group of assets that are largely independent.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 10.9: Liabilities and CGUs
A company must restore a mine by law, and it has provided
€500 for the cost of restoration which is equal to the present
value of restoration costs. The CGU is the mine as a whole.
Offers of €800 have been received to buy the mine and
disposal costs are negligible. If the mine is sold, the buyer will
assume responsibility for the restoration costs. The value in use
is €1,200 excluding restoration costs and the carrying amount is
€1,000.
Requirement
What is the impairment loss, if any?
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 10.9: Liabilities and CGUs
Solution:
Determine the recoverable amount:
Fair value less costs of disposal
€800
Value in use (€1,200 – €500)
€700
Therefore the recoverable amount is the higher amount = €800
There is no impairment loss as the carrying amount is les than
the recoverable amount.
Connolly – International Financial Accounting and Reporting – 4th Edition
Impairment losses and CGUs
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First, to reduce carrying value of any goodwill
Then, to reduce the carrying values of other assets in the
CGU pro rata on the basis of carrying values
Subject to proviso that carrying value of an asset is not
reduced below highest of:
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Fair value less costs to sell
Value in use
Zero
See Chapter 10, Example10.11, 10.12 and 10.13
Connolly – International Financial Accounting and Reporting – 4th Edition
Reversal of an impairment loss
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The enterprise should assess at each reporting date whether
there is an indication that an impairment loss previously
recognised for an asset other than goodwill has reversed or
decreased.
An impairment loss for an asset other than goodwill shall be
reversed if, and only if, there has been a change in the
estimates used to determine the asset’s recoverable amount
since the last impairment loss was recognised
If this is the case, then the carrying amount of the asset
should be increased to its recoverable amount (see proviso
later)
Connolly – International Financial Accounting and Reporting – 4th Edition
Indications of a reversal
As a minimum the enterprise should consider the following:
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External sources of information
 increase in market value of asset
 significant favourable changes in technological, market,
economic or legal environment
 favourable changes in market interest rates
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Internal sources of information
 changes in the way the asset is to be used
 evidence that performance of asset is better than
expected
Connolly – International Financial Accounting and Reporting – 4th Edition
Reversal of an impairment loss for an individual asset
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The carrying value of an asset should be increased to its
recoverable amount but the increased carrying amount
cannot exceed the carrying amount that would have been
determined had no impairment loss been recognised
A reversal of an impairment loss should be recognised
immediately in the SPLOCI – P/L, unless the asset is
carried at revalued amount (e.g. revaluation model IAS 16
(See Chapter 6)) when the reversal would be treated as a
revaluation increase
Recalculate depreciation after reversal of impairment loss
Connolly – International Financial Accounting and Reporting – 4th Edition
Reversal of an impairment loss for a CGU
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An impairment loss recognised for goodwill shall not be
reversed
Allocate reversal to the CGU assets pro rata with carrying
values
Subject to proviso that carrying value of an asset shall not
be increased above lower of:
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Recoverable amount
Carrying amount that would have been determined
(net of amortisation or depreciation) had no impairment
loss been recognised for the asset in prior years
Connolly – International Financial Accounting and Reporting – 4th Edition
Depreciation
After reversal of an impairment loss, depreciation (amortisation)
should be adjusted to allocate the asset’s revised carrying
amount, less any residual value, on a systematic basis over its
remaining useful life.
Connolly – International Financial Accounting and Reporting – 4th Edition
10.3 Disclosure
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For each class of assets:
 Amount of impairment losses and reversals recognised in
profit or loss and line item in statement of comprehensive
income in which they are included
 Amount of impairments and reversals recognised directly
in equity during the period
 Details of assets or CGU’s subject to impairments or
reversal of impairments
 Whether recoverable amounts are fair value less costs to
sell or value in use and any relevant discount rates
Connolly – International Financial Accounting and Reporting – 4th Edition