Impairment of assets
IAS 36
Impairment of Assets
Chicago , June 2011
IFRS Academy (Israel)
Impairment of assets
Overview of presentation

Scope

Identifying an asset that may be impaired

Measuring recoverable amount

Recognising and measuring an impairment loss

Cash-generating units and goodwill

Corporate assets

Reversing an impairment loss
September 2011
Impairment of assets
Case study 1
Which of the following is in IAS 36 scope?
Inventories
Property,
Plant and Equipment
Deferred
tax assets
Investment
Subsidiaries,
Intangible
An
?
property
associates and joint ventures
assets
acquired in-process R&D
September 2011
IFRS Academy (Israel)
Impairment of assets
An asset is impaired when
its carrying amount exceeds its
recoverable amount
September 2011
IFRS Academy (Israel)
Impairment of assets
Indicators
What triggers impairment testing?
September 2011
IFRS Academy (Israel)
Impairment of assets
Indications that an impairment loss may
have occurred:
An asset's market value has declined significantly more than would
be expected as a result of the passage of time or norm
Significant changes with an adverse effect on the entity in the
technological, market, economic or legal environment in which the
entity operates or in the market to which an asset is dedicated
Market interest rates or other market rates of return on investments
have increased during the period
The carrying amount of the net assets of the entity is more than its
market capitalisation
September 2011
IFRS Academy (Israel)
Impairment of assets
Indications that an impairment loss may
have occurred:
Evidence is available of obsolescence or physical damage of an asset
Significant changes with an adverse effect on the entity have taken
place during the period, or are expected to take place in the near future
Evidence is available from internal reporting that indicates that the
economic performance of an asset is, or will be, worse than expected
September 2011
IFRS Academy (Israel)
Impairment of assets
Evidence from internal reporting that indicates
that an asset may be impaired includes:
Cash flows for acquiring the asset, that are significantly higher than
those originally budgeted
Actual net cash flows or operating profit or loss flowing from the asset
that are significantly worse than those budgeted
A significant decline in budgeted net cash flows or operating profit, or a
significant increase in budgeted loss, flowing from the asset
Operating losses or net cash outflows for the asset, when current period
amounts are aggregated with budgeted amounts for the future
September 2011
IFRS Academy (Israel)
Impairment of assets
Indicators
Investment
property
cost model
IPR&D
IAS 39
IFRS 6
IAS 36
September 2011
Investment
in associated
companies
Exploration
and
evaluation
assets
IAS 36
impairment
testing
Indefinite
life
intangible
assets
Long – lived
tangible
assets
Definite
life
intangible
assets
IFRS Academy (Israel)
Impairment of assets
Testing is also required:
1. annually (at least)
Indefinite useful life
An intangible
asset
Not yet available for use
Goodwill
2. When assets are reclassified (indefinite > definite life)
3. When goodwill is reallocated
September 2011
IFRS Academy (Israel)
Impairment of assets
Recoverable amount (RA)
Fair Value Less
Costs To Sell
(FVLCTS)
The amount obtainable
from the sale of an
asset in arm's length
transaction between
knowledgeable, willing
parties, less the costs of
disposal*
The higher of…
Value In Use
(VIU)
Present value of
the entity specific
future
cash flows
*Incremental costs directly attributable to the disposal, excluding finance costs and income
tax expense.
September 2011
IFRS Academy (Israel)
Impairment of assets
Recoverable amount
The higher…
60
50
40
30
Carrying
amount
FVLCTS
VIU
20
10
0
A
September 2011
B
C
IFRS Academy (Israel)
Impairment of assets
Value In Use (VIU)
The following elements shall/not be reflected in the calculation of an
asset's VIU:
YES
NO
Expected future cash flows
The time value of money
Future restructurings
Financing activities
The price for bearing the
uncertainty inherent in the asset
Income tax receipts or
payments
Net cash flows to be received (or
paid) for the disposal of the asset
at the end of its useful life
Future investment
September 2011
Improving or enhancing
the asset's performance
IFRS Academy (Israel)
Impairment of assets
Value in use
Future cash flows are estimated in the currency in which they
will be generated and then discounted using a discount rate
appropriate for that currency.
An entity translates the present value using the spot exchange
rate at the date of the value in use calculation
September 2011
IFRS Academy (Israel)
Impairment of assets
Value in use
Basis for estimates of future cash flows

Reasonable and supportable assumptions

Most recent financial budgets/forecasts

Management approved projections (usually will no
exceed 5 year)

Cash flow projections beyond the above period, using a
steady or declining growth rate

Should take into account the remaining useful life and
salvage value for stand alone assets
September 2011
IFRS Academy (Israel)
Impairment of assets
Value in use
To avoid double-counting, estimates of future cash
flows do not include:
cash inflows from assets that generate cash
inflows that are largely independent of the
cash inflows from the asset under review
cash outflows that relate to obligations that
have been recognised as liabilities
September 2011
IFRS Academy (Israel)
Impairment of assets
Value in use
The discount rate shall be a pre-tax rate that reflect
current market assessments of:
the time
value
of money
September 2011
the risks
specific to
the asset
IFRS Academy (Israel)
Impairment of assets
Recoverable amount
VIU
FVLCTS
Entity specific cash flows
Market participant
Discount rate
WACC
Pre-tax calculation
Tax assets and tax liabilities
Tax consequences are built in
Exclude working capital elements to
avoid double accounting
Includes working capital
Exclude improvements
Includes improvement
Restructuring not allowed
Restructuring can be taken in to account
Does not consider costs to sell
Net of expected costs to sell
Operating items
Operating items
September 2011
IFRS Academy (Israel)
Impairment of assets
IFRS - Diagram
Recoverable
amount > B.V
Yes
No
impairment
No
Impairment
provision to
recoverable amount
Reversal if
circumstances
change
September 2011
IFRS Academy (Israel)
Impairment of assets
Recognising and measuring an impairment loss
An impairment loss shall be recognised
immediately in profit or loss
Unless…
unless the asset is carried at revalued
amount in accordance with another Standard*
*Any impairment loss of a revalued asset shall be treated as a
revaluation decrease in accordance with that other Standard
September 2011
IFRS Academy (Israel)
Impairment of assets
Recognising and measuring an impairment loss

Requires adjustment of related deferred tax balance
Depreciation (amortization) charge
for the asset shall be
adjusted in future periods
No
liability is recognized unless required by another
Standard (onerous contract under IAS 37)
September 2011
IFRS Academy (Israel)
Impairment of assets
Reversing an impairment loss
1. Positive indicators will require reassessment of impairment loss
recognised in prior periods
2. If recoverable amount > carrying value, impairment
loss (or part of) is reversed
3. Following reversal, the carrying amount of an asset will not
exceed the carrying amount that would have been determined
had no impairment loss been recognised in the past
4. A reversal of an impairment loss shall be recognised immediately in profit
or loss
September 2011
IFRS Academy (Israel)
Impairment of assets
Case study 2
Historical cost
Accumulated depreciation (2/10)
Carrying amount
Impairment loss
Carrying amount(recoverable amount)
at 31/12/2010
Historical cost
Accumulated depreciation
Net
Impairment loss
Carrying amount after impairment loss
September 2011
31/12/2010
$000
100
(20)
80
(16)
64
31/12/2011
$000
100
(30)
70
(14) 16*7/8
56
IFRS Academy (Israel)
Impairment of assets
Case study 2
Historical cost
Accumulated depreciation
Carrying amount
Impairment loss
Carrying amount after impairment loss
Recoverable amount
Historical cost
Accumulated depreciation
Carrying amount
Impairment loss
Carrying amount
September 2011
31/12/2012
$000
100
(40)
60 MAX
(12) 16*6/8
48
65 >48
31/12/2012
$000
100
(40)
60
60
IFRS Academy (Israel)
Impairment of assets
CASH GENERATING UNITS (CGU)
September 2011
IFRS Academy (Israel)
Impairment of assets
Recoverable amount
Recoverable
amount
Can be estimated
for individual
assets
No
Test
CGU
Yes
Test
individual asset
September 2011
IFRS Academy (Israel)
Impairment of assets
Recoverable amount (RA)
Recoverable amount for individual
asset can not be determined, if:
1. VIU
= FVLCTS, and
2. It does not generate Cash inflows that
are largely independent of those from
other assets
September 2011
IFRS Academy (Israel)
Impairment of assets
Identifying the CGU to which an asset
belongs
A 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
If an active market exists for the output produced the
asset shall be identified as a CGU,
even if some or all of the output is used internally
September 2011
IFRS Academy (Israel)
Impairment of assets
Geographic region
Convenient
stores
Store Store Store
A
B
C
September 2011
Supermarket
1
2
3
Wholesaler
A
B
C
IFRS Academy (Israel)
Impairment of assets
cash-generating unit to which an asset belongs
The smallest identifiable group of assets:
That is largely independent of cash inflows from
other asset’s/ CGU’s
Inflows inter-dependency NOT outflows
September 2011
IFRS Academy (Israel)
Impairment of assets
Goodwill
Allocating goodwill to cash-generating units
shall be allocated to each of the acquirer’s CGUs
that is expected to be benefit from the synergies of the
combination
Goodwill
Represent
the lowest level within the entity at which the
goodwill is monitored for internal management purposes.
The
CGU level/ group can not be larger than an operating
segment determined in accordance with IFRS 8 Operating
Segments.
September 2011
IFRS Academy (Israel)
Impairment of assets
Testing cash-generating units with goodwill for
impairment
When goodwill relates to a
cash-generating unit but has not
been allocated to that unit
whenever there is an indication
the unit shall be tested for
impairment
(excluding any goodwill)
A cash-generating unit to which
goodwill has been allocated
tested for
impairment
annually
Whenever
there is an
indication
the unit
shall be tested
for impairment
including the goodwill
September 2011
IFRS Academy (Israel)
Impairment of assets
Group of CGUs (higher level CGU)
CGU B
CV-40
RA-30
CGU A
CV-30
RA-50
CGU C
CV-20
RA-30
Convenient Stores department
September 2011
Impairment of assets
The impairment loss shall be allocated:
• Goodwill
• Other assets
In allocating an impairment loss an entity shall not
reduce the carrying amount of an asset below the
highest of:
(if determinable)
September 2011
IFRS Academy (Israel)
Impairment of assets
Case study 3
goodwill
An intangible asset
machine A
machine B
Total
recoverable amount
impairment loss for a
cash - generation unit
31.12.2010 STEP 1 STEP 2
$000
$000
$000
700
(700)
1,000
(172)
400
(69)
1,500
(259)
3,600
(700)
(500)
2,400
(1,200)
NET
$000
828
331
1,241
2,400
1200-700= 500
September 2011
IFRS Academy (Israel)
Impairment of assets
Case study 3
Net
$000
goodwill
An intangible asset
machine A
machine B
Total
828
331
1,241
2,400
STEP 3
$000
(8)
19
(11)
828+1241=
September 2011
Net
$000
820
350 MIN
1,230
2,400
2,069
IFRS Academy (Israel)
Impairment of assets
Case study 3 - Reversing an impairment loss for a CGU
impairment
31.12.2011
loss
$000
$000
goodwill
An intangible asset 4/5
800
(144)
machine A
7/8
350
(44)
machine B
7/8
1,313
(236)
Total
2,463
(424)
recoverable amount
September 2011
NET
$000
656
306
1,077
2,039
31.12.2011
B.V
$000
800
350
1,313
2463
3,000
961
(424) MAX
IFRS Academy (Israel)
Impairment of assets
Impairment tests – short-cut option
An entity could use the most recent detailed calculation
made in a preceding period for the current period
provided all of the following criteria are met:
1. CGU has not changed significantly
2. RA > CV ( a substantial margin)
3. Remote likelihood for RA(t1) < RA(t0)
September 2011
IFRS Academy (Israel)
Impairment of assets
Corporate assets
Corporate assets are assets other than goodwill that
contribute to the future cash flows of both the
CGU under review and other CGU’s.
do not generate cash
inflows independently
their carrying amount
cannot be fully attributed
to the CGU under review
September 2011
IFRS Academy (Israel)
Impairment of assets
Corporate assets
cost of corporate assets
can be allocated to CGU
cannot be allocated to CGU
CGU is tested with
allocated asset
CGU is tested without
allocated asset
Test higher level CGU to which assets
can be allocated
September 2011
IFRS Academy (Israel)
Impairment of assets
Impairment testing of investments in associates
Impairment indicators - IAS 39 (par. 59), Dividend - IAS 36.59
Under IAS 36
RM < > CV, Reversible, however
Determining the VIU under IAS 28 (par.33)
(1) Its share of the present value of the estimated cash flows + disposal
(2) Present value of the estimated future cash flows expected to arise from
dividends + disposal
Different from U.S GAAP
The entire carrying amount of the investment is tested for impairment
September 2011
IFRS Academy (Israel)
Impairment of assets
Case study 4
Snacks products CGU - Projections of cash flows (in million of $)
Sales of snacks
Income from investment property
Gain from sales of AFS investments
Reversal of deferred tax liabilities
Operating costs
Working capital(WC) movements
WC opening balance
Terminal value
Gross pre-tax cash flow
Discount factor
Present value of cash flows
2011
2012
2013
120
85
110
12
15
13
4
2
(5)
(3)
(4)
(80)
(70)
(74)
(16)
(10)
(15)
(8)
27
0.926
25
Total value in use of CGU
Pre-tax discount rate – market participants’
Growth rate
September 2011
19
0.857
16
30
0.794
24
2014
2015
118
120
8
8
6
5
(6)
(4)
(80)
(82)
(10)
(10)
36
0.735
26
Term inal
value
617
37 617
0.681
25 420
536
8%
2%
IFRS Academy (Israel)
Impairment of assets
Case study 4
Carrying amount of snack net assets at 31/12/2010:
$ millions
Goodwill
Brand
PPE
Investment property
Current assets:
AFS
Trade receivables
Inventory
Trade payables
Borrowings
Deferred tax liabilities
Carrying amount of Snacks CGU
Fair value less costs to sell
Value in use
September 2011
28
70
84
100
25
10
10
(12)
(35)
(35)
245
150
536
IFRS Academy (Israel)
Impairment of assets
Case study 4 - solution
Snacks products CGU - Projections of cash flows (in million of $)
Sales of snacks
Operating costs
Working capital(WC) movements
WC opening balance
Terminal value
Gross pre-tax cash flow
Discount factor
Present value of cash flows
2011
2012
2013
120
85
110
(80)
(70)
(74)
(16)
(10)
(15)
(8)
16
0.877
14
5
0.769
4
21
0.675
14
Total value in use of CGU
184
Pre-tax discount rate – market participants’
Growth rate
14%
2%
September 2011
2014
2015
118
120
(80)
(82)
(10)
(10)
28
0.592
17
28
0.519
15
Term inal
value
233
233
121
IFRS Academy (Israel)
Impairment of assets
Case study 4
The carrying amounts are:
FVLCTS VIU
Brand
Goodwill
PPE
Investment property
AFS investments
Trade receivables
Inventory
Trade payables
Borrowings
Deferred tax liabilities
Carrying amount of Snacks CGU
Recoverable amount
Carrying amount
Impairment charge
September 2011
70
32
84
10
10
(12)
(35)
70
32
84
-
159
186
184 [Higher of 184 and 150]
186 [VIU is recoverable amount]
2
IFRS Academy (Israel)
Impairment of assets
Case study 4 - solution second approach
Snacks products CGU - Projections of cash flows (in million of $)
Sales of snacks
Operating costs
Working capital(WC) movements
WC opening balance
Terminal value
Gross pre-tax cash flow
Discount factor
Present value of cash flows
2011
2012
2013
120
85
110
(80)
(70)
(74)
(16)
(10)
(15)
24
0.877
21
5
0.769
4
21
0.675
14
Total value in use of CGU
192
Pre-tax discount rate – market participants’
Growth rate
14%
2%
September 2011
2014
2015
118
120
(80)
(82)
(10)
(10)
28
0.592
17
28
0.519
15
Term inal
value
233
233
121
IFRS Academy (Israel)
Impairment of assets
Case study 4
The carrying amounts are:
FVLCTS VIU
Brand
Goodwill
PPE
Investment property
AFS investments
Trade receivables
Inventory
Trade payables
Borrowings
Deferred tax liabilities
Carrying amount of Snacks CGU
Recoverable amount
Carrying amount
Impairment charge
September 2011
70
32
84
10
10
(12)
(35)
70
32
84
10
10
(12)
-
159
194
192 [Higher of 192 and 150]
194 [VIU is recoverable amount]
2
IFRS Academy (Israel)
Impairment of assets
Summary
IFRS
Test
One step, RA<>CV
Measurement basis
RA (higher of FVLCTS or VIU
entity specific)
Impairment loss
Provision to RA
Reversal
Yes, except for goodwill
Carrying amount
Ability to revalue assets (to fair
market value)
September 2011
IFRS Academy (Israel)
Impairment of assets
Summary
IFRS
Goodwill
Measurement basis
RA of CGU<>CV of CGU
Impairment loss
First allocate loss to goodwill then
to other assets
Different indicators (IAS 39)
No allocation to
goodwill & PPA
Reversible
Associated
companies
September 2011
IFRS Academy (Israel)
Impairment of assets