Chapter 5
• IAS 36 Impairment of Assets
• Cash generating units
Impairment of assets
• Goodwill and the impairment of
assets
• Accounting treatment of an
impairment loss
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Syllabus learning outcomes
• Define, calculate and account for an impairment loss
• Account for the reversal of an impairment loss on an
individual asset
• Identify the circumstances that may indicate impairments
to assets
• Describe what is meant by a cash generating unit
• State the basis on which impairment losses should be
allocated, and allocate an impairment loss to the assets of
a cash generating unit
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Chapter summary diagram
Impairment of assets
After the
impairment
review
Recoverable
amount
Impairment
indicators
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Cash-generating
units
Recognition of
impairment
losses
IAS 36 Impairment of Assets 1
• IAS 36 aims to ensure that the carrying amount of
assets in the financial statements is not more than
their recoverable amount.
• Carrying amount:
– The value at which the asset is included in the
financial statements
– Cost/valuation less accumulated depreciation and
impairment losses
• This concept of materiality applies, and only material
impairment needs to be identified
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IAS 36 Impairment of Assets 2
Impairment of assets
Comparing
Carrying amount
Recoverable amount
Higher of
Fair value less
costs to sell
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Value in
use
IAS 36 Impairment of Assets 3
Recoverable amount
Higher of
Fair value less costs to sell
– The price that would be received to sell the
asset in an orderly transaction between market
participants at the measurement date
– If there is an active market in the asset, the fair
value should be based on the market price, or
on the price of the recent transactions in similar
assets
– If there is no active market in the asset it might
be possible to estimate fair value using best
estimates of what market participants might pay
in an orderly transaction
– Less the direct incremental costs attributable to
the disposal of the asset
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Value in use
–The present value of future cash
flows expected to be derived from
the asset or cash-generating unit
IAS 36 Impairment of Assets 4
• If the carrying value of an asset in the statement of
financial position is higher than the recoverable amount
of the asset then the asset is said to be impaired.
• The impairment loss is the amount by which the
carrying amount exceeds the recoverable amount.
• An entity should consider whether there are
indications that an asset might have been impaired at
the end of each reporting period.
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IAS 36 Impairment of Assets 5
Impairment indicators – external sources
Indicators that an asset's value has declined during the period
significantly more than would have been expected due to the passage of
time or normal use
Significant changes with an adverse effect on the entity in the
technological, market, economic or legal environment in which the entity
operates
Increased market interest rates or other market rates of return affecting
discount rates and therefore reducing value in use
The carrying amount of the entity's net assets exceeds market
capitalisation
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IAS 36 Impairment of Assets 6
Impairment indicators – internal sources
Evidence of obsolescence or physical damage
Adverse changes to the asset's use
Internal evidence that the asset's performance will be worse than
expected
If there is no indications of impairment, the following assets must always be
tested annually for impairment :
1. IA with indefinite useful life
2. Goodwill acquired in a business combination
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Recognition and measurement of impairment loss
IF THE ASSET IS CARRIED AT ;
Historical cost model
•
RA<CA= the CA should be reduced by the difference (IL). Therefore,
that this stage, CA=RA.
•
The differences should be charged as an EXPENSES in SOPL
Revaluation model
•
RA<CA= the CA should be reduced by the difference (IL). Therefore,
that this stage, CA=RA.
•
The differences should be treated as a REVALUATION
DECREASE under the relevant IAS
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Recognition and measurement of impairment loss
For an asset that RA<CA, where IL occurred;
•
After reducing the asset to RA, the depreciation charged on the
asset should then be based on its new carrying amount, its
estimated residual value and its estimated remaining useful life.
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Examples
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Cash-generating units
Definition
• Where it is not possible to estimate the recoverable
amount of an individual asset, an entity should
determine the recoverable amount of the cashgenerating unit to which the asset belongs.
• A cash-generating unit 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.
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Examples
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Example 2
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Cash-generating units
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Example recoverable amount and carrying amount
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Goodwill and the impairment of assets
• Goodwill acquired in a business combination does not
generate cash flows independently of other asset.
• It must be allocated to each of the acquirer’s cash
generating units that are expected to benefit from the
synergies of the combination
• Goodwill and corporate assets (such as a head office)
should be allocated to a cash-generating unit in order
to determine its carrying amount and recoverable
amount.
• Where an impairment loss is allocated to reduce the
carrying amount of the assets in a cash-generating
unit, it will firstly be taken against any goodwill
allocated to the cash-generating unit.
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Accounting treatment of an impairment loss 1
Where a cash-generating unit is impaired, the impairment
loss is allocated in the following order:
• Firstly to an goodwill allocated to the cash-generating
unit
• Then to the other assets of the unit on a pro-rata basis
based on the carrying amount of each asset in the
cash-generating unit
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Example ; allocation of impairment loss
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Example IL1
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Example IL 2
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Reversal of an impairment loss
•
If previously RA<CA, IL occurred might turn out to be HIGHER than
the asset’s current carrying amount, THUS REVERSAL of IL is
needed
•
The carrying amount of the asset should be increased to its new RA
•
The asset cannot be revalued to a carrying amount that is higher
than what it would have been if the asset had not been impaired
originally, ie the depreciated carrying amount had impairment
not taken place.
•
THEREFORE, Depreciation of the asset should now be based on its
new RA and remaining useful life.
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Example of reversal
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Example of reversal- cost model (try this)
Alam Co rents out boats to Lake Co. These boats were bought on 1.1.x3
for $1,500,000 mil and were depreciated at 20% per annum on cost. An
accident took place and the business was badly hit. On 31.12.x4, the FVCTS of these boat was $750,000 and the VIU was $680,000.
Required:
Determine the carrying amount of the boats :
1) On 31.12.x4
2) On 31.12.x5, if the demand for boat picked up and the boats now
have RUL at 3 year and RA of
i) $650,000
ii) $550,000
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Example of reversal – Revaluation model
•
Xin Co acquired a plant costing $1,000,000
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Question: Invest
On 31 December 20X1 Invest purchased all the shares of MH for
$2m. The net fair value of the identifiable assets acquired and
liabilities assumed of MH at that date was $1.8m.
MH made a loss in the year ended 31 December 20X2 and at 31
December 20X2 the net assets of MH – based on fair values at 1
January 20X2 – were as follows:
$'000
Property, plant and equipment
1,300
Capitalised development expenditure
200
Net current assets
250
1,750
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Question: Invest (continued)
An impairment review on 31 December 20X2 indicated that the
recoverable amount of MH at that date was $1.5m.
The capitalised development expenditure has no ascertainable
external market value and the current fair value less costs of disposal
of the property, plant and equipment is $1,120,000.
Value in use could not be determined separately for these two items.
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Question: Invest (continued)
Required
Calculate the impairment loss that would arise in the consolidated
financial statements of Invest as a result of the impairment review of
MH at 31 December 20X2 and show how the impairment loss would
be allocated.
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Answer: Invest
Asset values
at 31.12.X2
before
impairment
Goodwill (2,000 – 1,800)
PPE
Development exp.
Net current assets
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$'000
200
1,300
200
250
1,950
Allocation of
impairment
loss
(W1)/(W2)
$'000
Carrying
amount
after
imp. loss
$'000
Answer: Invest (continued)
(W1) Calculation of impairment loss
Carrying value (1,750 + 200 (GW))
Recoverable amount
$'000
1,950
(1,500)
450
Impairment loss to write off goodwill
200
Impairment loss to write off other assets
on a pro-rata basis
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250
Answer: Invest (continued)
Asset values
at 31.12.X2
before
impairment
$'000
Goodwill
(2,000 – 1,800)
PPE
Dev exp
Net current assets
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200
1,300
200
250
1,950
Allocation of
impairment
loss
(W1)/ (W2)
$'000
(200)
Carrying
amount
after
imp. loss
$'000
–
Answer: Invest (continued)
(W2) Allocation of impairment loss to other assets (pro-rata basis)
1,083
$'000
PPE (250 × 1,300 / 1,500)
Dev exp (250 × 200 / 1,500)
217
33
250
37
Loss
allocated
$'000
180
70
250
However, PPE cannot be reduced below FV – CTS of
$1,120,000
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Answer: Invest (continued)
Asset values
at 31.12.X2
before
impairment
$'000
Goodwill (2,000 – 1,800) 200
1,300
PPE
200
Dev. exp.
250
Net current assets
1,950
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Allocation of
impairment
loss
(W1)/(W2)
$'000
(200)
(180)
(70)
–
(450)
Carrying
amount
after
imp. loss
$'000
–
1,120
130
250
1,500
After the impairment review
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Past exam questions
Nature of question
Exam details
Explain the meaning of an impairment review.
Calculate the carrying amount of assets after
impairment losses.
The impairment of goodwill is often examined in
consolidated financial statement questions.
Impairment of associate
These topics could now be examined by OTQ,
both as knowledge (what drives an impairment
review) and application (calculate the
impairment)
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Dec 2011
Practice and revision kit
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Practice and revision kit
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Practice and revision kit
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Practice and revision kit
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Practice and revision kit
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Practice and revision kit
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Section B
• Plethora Plc
• Dearing Co
• Elite Leisure
• Dexterity
• Advent
• Systria
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