APPLYING IAS 16 & 36 IN REPORTING PPE
AND IMPAIRMENT LOSSES
IMPAIRMENT OF ASSETSIAS 36
INTRODUCTION
 Normally systematic depreciation or
amortisation ensures that assets are not
overstated but circumstances can arise
which cause assets to decline in value.
 This makes it unlikely that the entity
will be able to recover the current book
value (referred to as the carrying
amount in the standard) of the asset.
INTRODUCTION
 If the carrying amount cannot be recovered the asset
is said to be impaired.
 IAS 36 deals with the impairment of assets.
 The objective of the standard is to prescribe the
procedures that a company applies to ensure that its
assets are carried at no more than their recoverable
amount ie the amount to be recovered through use or
sale of the assets
IAS 36 CONT
 IAS 36 applies to all assets except those for which other Standards
address impairment. The exceptions include inventories, deferred tax
assets, assets arising from employee benefits, financial assets within the
scope of IFRS 9, investment property measured at fair value, biological
assets within the scope of IAS 41, some assets arising from insurance
contracts, and non-current assets held for sale
LEARNING OUTCOMES
 Define an impairment and describe when
an impairment review is necessary;
 Calculate an impairment loss in a straight
forward situation;
 Account for an impairment loss and the
reversal of an impairment loss;
 Describe the disclosure of an impairment
loss.
Meaning/Definitions
 The main types of assets it does
refer to are property, plant and
equipment and intangible assets
and goodwill.
 Impairment arises when the
recoverable amount of the
asset falls below its carrying
amount.
Recoverable amount is defined as the higher
of an asset’s
- fair value less costs to sell (NFV) and
- value in use (VU).
 NFV is the sales price in an arm’s length
transaction less the costs of disposal.
 VU is the present value (PV) of future cash
flows expected to arise from the asset over its
remaining life and from its disposal.
RECOVERABLE AMOUNT
 Fair value – IASB defines as ‘ the amount fro which
an asset could be exchanged or a liability settled
between knowledgeable, willing parties in an arm’s
length transaction.’ This fair value definition is
essentially a market value.
IMPAIRMENT TEST
EXAMPLE 1
A fixed asset was acquired in January 2017 for Tzs
200,000. Depreciation policy is 15% straight line
with a nil estimated residual value. At 1 January
2020 the NFV of the asset is Tzs 95,000 and the
value in use is estimated at Tzs 87,000.
Required:
Has an impairment occurred and, if so, of how
much?
SOLUTION
NBV (carrying amount) of asset at 1.1.06
Cost Tzs 200,000
Less: depreciation 2017-19 (200,000 x 15% x 3 years)
90,000
NBV – 1.1.17
Tzs 110,000
Recoverable amount
This is measured as the higher of NFV and value in use
(VIU) (higher of Tzs 95,000 and Tzs 87,000 ie Tzs
95,000).
As the recoverable amount is Tzs 95,000, there has
been an impairment of Tzs15,000 (carrying amount of
Tzs 110,000 less Tzs95,000).
REQUIREMENT FOR IMPAIRMENT
REVIEWS
 A company should assess at each balance sheet date
whether there are indications of impairment. If
there are, the recoverable amount should be
calculated (para 9).
 Para 12 details some external and internal sources of
information that might indicate an impairment eg
falls in market values, changes in legislation,
physical damage of an asset, operating losses.
REQUIREMENT FOR IMPAIRMENT
REVIEWS
 Para 10 has additional requirements for intangible
assets and goodwill. A company should estimate the
recoverable amount of the following assets at least
annually even if there is no indication that the asset
is impaired:
1.
2.
an intangible asset with an indefinite useful life; and
an intangible asset not yet available for use.
 Goodwill acquired in a business combination should
be tested for impairment annually.
MEASUREMENT OF RECOVERABLE
AMOUNT
 Impairment calculations in practice can be complex.
This Topic provides an overview of the impairment
process and its application in more straightforward
situations.
 The impairment review requires us to compare the
carrying amount (which we will know as it is the
figure in the current accounts) with the recoverable
amount (the higher of NFV and VU).
Note: that if either of these is higher than the carrying
amount no impairment has occurred and we do not need to
find the other figure.
A. Calculation of Fair Value less costs to sell
(NFV)
 NFV is the amount the asset could be sold for less any
direct selling costs. Where there is an active market, NFV
will be based on market value or, if there is no active
market, the best information available. The NFV will often
be easier to find than the VU. If the NFV is equal to or
greater than the carrying amount we do not need to
calculate VU.
 If the asset is specialised it may not be possible to estimate
fair value.
 Costs of sale include such items as legal costs, stamp duty
and costs of removing the asset.
B. Calculation of Value in use (VU)
 VU is the discounted future cash flow that the asset
will generate. This is a two stage process involving:
1.
2.
Estimation of the future cash flows from continuing use
and ultimate disposals, and
Applying an appropriate discount rate. This is a pre-tax
discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset; the discount rate
should not reflect risks for which the future cash flows have been
adjusted.
Present value (PV) of the future cash flow is
then calculated which gives VU
Paragraphs 30 to 57 of IAS 36 deal with this issue
CASH-GENERATING UNITS (CGUs)
 Ideally, recoverable amount should be calculated for
each individual asset that may be impaired.
 In practice few individual assets generate separate
cash flows and it is not possible to calculate their VU.
 If it is not possible to estimate the recoverable
amount of an individual asset, the recoverable
amount of the CGU to which it belongs should be
estimated. Paragraphs 66 to 93 deal with CGUs.
 A CGU is the smallest identifiable group of assets
that generates cash inflows that are largely
independent of cash inflows generated by other
assets or CGUs.
 A company should identify the maximum number of
realistic CGUs, by identifying the smallest group of
assets that includes the asset under review and
generates cash inflows independent of others (para
68).
The following points should be noted in calculating the carrying
amount of a CGU:
i.
a CGU includes only those assets that can be attributed
directly, or allocated on a reasonable and consistent basis, to
the CGU and that will generate the future cash flows. This will
normally include tangible and intangible fixed assets and
goodwill (see (iii) below);
ii.
exclude liabilities unless the recoverable amount cannot be
determined without considering the liability eg if a CGU has an
obligation to repair goods under warranty the NFV (and hence
recoverable amount) will reflect this obligation. The liability
should be included and the cash flows should reflect estimated
repair costs under warranty. This will give consistency in the
way NFV and VU are calculated.
iii. goodwill should be allocated to individual CGUs
if they benefit from synergies of the business
combination. Section 5.9 deals with goodwill in
more details
iv. corporate assets (assets such as head office
buildings, central computing facilities etc which
serve more than one CGU) should be allocated to
CGUs if possible. Refer to 5.9 where this is not
possible.
CLASS DEMONSTRATION 1
ACCOUNTING FOR AN IMPAIRMENT LOSS
Loss for an individual asset (para 58 – 64)
 the asset should be written-down to recoverable amount if
this is below the carrying amount.
 the loss should be an expense in the profit and loss account,
except when the asset has been previously revalued.
 if the asset is carried at revalued amount the impairment
loss should be treated as a revaluation loss per IAS 16 or
IAS 38.
 if the impaired asset has been revalued the impairment loss
should be treated as a new revaluation. If the asset is at
cost the impairment loss is additional depreciation.
 depreciation is based on the adjusted carrying amount of
the asset.
Loss for CGU (para 104 – 108)
The loss should be allocated by writing-down assets
in the CGU in the following order:
a)
b)
first, any goodwill allocated to the CGU;
then, to other assets in the CGU pro-rata on carrying
amount.
In carrying out (b) no individual assets in the CGU
should be written-down below the highest of:
a)
b)
c)
its NFV (if determinable);
its VU (if determinable); and
zero.
The amount of loss not deducted from the carrying
amount of the asset is spread over other assets in the
unit.
the other rules above relating to individual assets apply to
a CGU eg loss to profit and loss account/ revaluation
reserve.
 if the recoverable amount of an individual asset cannot be
determined no impairment loss should be recognised if
the related CGU is not impaired. This applies even if the
NFV is less than the carrying amount.

EXAMPLE 3
How would the impairment of the assets of James (in
Class demonstration example 2) be recorded as at 31
December 2020?
Recall from Class demo example.
Oil
services
Tzs 000
Carrying amount of net assets 12,160
Market value (NFV)
9,600
Value in use
9,315
Impairment:
(Tzs 12,160 – Tzs 9,600)
2,560
(Tzs 10,100 – Tzs 7,828)
Rail
franchise
Tzs 000
10,100
7,500
7,828
2,272
Solution
There is no indication that any specific assets
are impaired. The assets are held at cost therefore
losses go to profit and loss account. The write-down
should be treated as additional depreciation.
Oil services
The impairment loss would first be allocated to the
goodwill (Tzs 240,000) and then to tangible fixed
assets (Tzs 2,320,000).
Each tangible fixed asset would be written-down by
19.46% (2,320/(10,000 + 1,920)).
Dr Profit and loss account 2,560
Cr Goodwill
240
Tangible fixed assets – acc. Depreciation 2,320
being recognition of impairment loss
Rail franchise
The impairment should first be allocated to goodwill,
then to the other assets. No distinction is made
between intangible and tangible assets.
Dr
Profit and loss account 2,272
Cr Goodwill
720
Intangible assets – acc. depreciation
199
Tangible fixed assets – acc. depreciation 1,353
being recognition of impairment loss
Working
NBV
Tangible fixed assets
Intangible fixed assets
8,180
1,200
9,380
%
Loss
allocated
87.2 1,353
12.8
199
100.0 1,552
EXAMPLE 4
Assume in the rail franchise of James it was known
that the operating licence (the intangible asset) had a
net fair value (NFV) of Tzs 1,100,000. As the licence
does not itself generate cash flow it is not possible to
calculate its VU. What effect would this have on the
write-off of the impairment loss?
Solution
 The goodwill should still be written-off.
 The operating licence should not be written-down
below the higher of NFV (Tzs 1.1m) and VU (not
available) ie by a maximum of Tzs 100,000 (Tzs 1.2m
– Tzs 1.1m).
 The remainder of the loss should be split between
the remaining assets ie the tangible fixed assets.
The required journal would be:
Dr Profit and loss account 2,272
Cr
Goodwill
Intangible assets
Tangible fixed assets
being recognition of impairment loss
720
100
1,452
REVERSAL OF A PAST IMPAIRMENT LOSS
A company should assess at each balance
sheet date whether a previously recognised
impairment loss on an asset other than
goodwill may no longer exist or has
decreased. If so, recoverable amount should
be recalculated. Paragraph 111 details
indications of reversal – they are essentially
the opposite of the indicators of impairment.
 There is no reversal if there has been no
change in the estimates used to determine
recoverable amount since the last
impairment loss was recognised ie an
increase in VU purely due to the passage of
time (hence an increase in PV of the cash
flows) is not the reversal of an impairment.
 Accounting for a reversal of an impairment
loss is essentially the opposite of accounting
for the original loss. Paragraphs 114 – 125 of
IAS 36 deal with this.
Reversal for an individual asset
 the asset should be increased to a maximum of its carrying
amount (net of depreciation) had no original impairment
occurred. Any increase above this figure is a revaluation
not the reversal of an impairment loss. For a revaluation
the company should apply the IAS relating to that asset.
 the reversal should be credited to profit and loss account
and treated as income unless the asset is carried at revalued
amount in which case it should be treated as an upward
revaluation (refer to Topic 3).
 depreciation should be based on the revised carrying
amount.
Reversal for a CGU
 the reversal should be applied by increasing the
carrying amount of assets except for goodwill, pro
rata
 entries in the profit and loss account/revaluation
reserve are as for individual assets;
 in allocating a reversal no individual asset in a CGU
should be increased above the lower of:
a)
b)
recoverable amount (if determinable); and
the carrying amount (net of depreciation) had no
original impairment loss arisen.
 the remaining reversal is spread amongst the
remaining assets, except for goodwill.
 Goodwill

An impairment loss on goodwill cannot be reversed.
EXAMPLE 5
A CGU comprising a factory, plant and equipment etc
and associated goodwill became impaired because its
products became out of date and unattractive
compared to those of competitors. The recoverable
amount fell to Tzs 25m, resulting in an impairment
loss of Tzs 15m, allocated as follows:
Goodwill
Tangible fixed assets
Total
Carrying
amounts
before
impairment
based on HC
Tzs mill
10
30
40
Carrying
amounts
after
impairment
Tzs mill
25
25
 The impairment loss of Tzs 15m was recognised in
the profit and loss account as the assets were at
historic cost.
 After 2 years, the entity improves its product range
substantially by adding new models and the
recoverable amount of the CGU increases to Tzs35m.
The carrying amount of the tangible fixed assets is
now Tzs 23.5m. The carrying amount of the tangible
fixed assets at that time had the impairment not
occurred would have been Tzs 27m ie they would
have been continued to be depreciated.
Required
How should the reversal of the impairment loss be
accounted for?
Solution
 The reversal of the impairment loss is recognised to the
extent that it increases the carrying amount of the tangible
fixed assets to what it would have been had the impairment
not taken place, ie a reversal of Tzs 3.5m of the impairment
loss is recognised in the profit and loss account and the
tangible fixed assets written back to Tzs 27m (Tzs 27m –
Tzs 23.5m – this is equivalent to the original Tzs 5m
impairment loss on the tangible fixed assets less the
reduced depreciation of Tzs 1.5m). Any uplift beyond Tzs
27m is a revaluation.
 Reversal of the impairment in relation to the goodwill is not
permitted.