Course Name
:
FINANCIAL REPORTING
Course Code
:
ACC470
Week
:
07
Topic
:
TOPIC 4 (CHAPTER – 13)
IMPAIRMENT OF ASSETS (IAS 36)
Name
:
Dr. Atul Bansal
IMPAIRMENT OF ASSETS (IAS 36)
Impairment is the estimated loss of value of an asset. There are
certain circumstances that reduce the value of an asset that a
company has purchased until it is eventually depreciates fully. The
impairment reflects how in accounting it is often difficult to recover
the full value of the asset.
Impairment of assets can be explained as a sudden or unexpected
decline in an asset’s service utility, like factory, vehicle, or property.
This might result from physical damage to the asset, changes to
the legal code, or uselessness resulting from technological
innovation.
What is impairment of assets?
Impairment of assets refers to the concept in accounting
when the book or carrying value of an asset exceeds its
‘recoverable amount’. IAS 36 defines the recoverable amount
of an asset as the higher of its fair value less cost to sell (or
net realizable value) and its value in use.
Objective of IAS 36
To ensure that assets are carried at no more than their
recoverable amount, and to define how recoverable amount is
determined.
Objective

Assets should not be carried at amounts in excess
of their recoverable amount.

IAS 36 defines recoverable amount as the higher
of value in use and net selling price.

Asset is “impaired” if carrying amount exceeds
recoverable amount.
4
Impairment Applies to :
1.
Property – Plant - & Equipment's
2.
Goodwill and Intangible Assets
3.
Investments in subsidiaries, associates and Joint ventures
Scope or Impairment does not Applies to :
inventories;
deferred tax assets;
assets arising from construction contracts;
assets arising from employee benefits;
financial assets included in scope of IAS 32
( IAS 36 applies to investments in subsidiaries, associates and joint ventures).
DEFINITIONS OF TERMS: IMPAIRMENT OF ASSETS
Recoverable amount of an asset or a cash-generating unit. The
higher of its fair value less costs to sell and its value in use.
Value in use. The discounted present value of the future cash
flows expected to arise from an asset or a cash-generating unit.
Carrying amount: the amount at which an asset is recognized in
the balance sheet after deducting accumulated depreciation and
accumulated impairment losses
Recoverable amount: the higher of an asset's fair value less
costs of disposal* (sometimes called net selling price) and its value
in use
* Prior to consequential amendments made by IFRS 13 Fair
Value Measurement, this was referred to as 'fair value less
costs to sell'.
DEFINITIONS OF TERMS: IMPAIRMENT OF ASSETS
Cash-generating unit. The smallest group of assets that can be
identified that generates cash flows independently of the cash
flows from other assets.
Fair value less costs to sell. The amount obtainable from the
sale of an asset or cash generating unit in an arm’s-length
transaction between knowledgeable, willing parties, less the
costs of disposal.
Impairment loss. The amount by which the carrying amount of
an asset or cash-generating unit exceeds its recoverable amount.
Value in use: the present value of the future cash flows expected
to be derived from an asset or cash-generating unit
Identifying Impaired Assets
 Assess
at each reporting date whether any
indication that asset may be impaired.
- IAS 36 includes list of internal and external factors
that must, at a minimum, be considered and
whose existence provides evidence that asset may
be impaired.
 Only
need to test for impairment (i.e.,
measure recoverable amount) if there is
indication that asset may be impaired.
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Measuring Recoverable Amount
 Higher
Price
of Value in Use and Net Selling
Net Selling Price
 Amount
obtainable from sale in arm’s length
transaction between knowledgeable, willing parties,
less costs of disposal.
Value in Use
 Present
value of estimated future cash flows
expected to arise from continued use and disposal at
end of useful life.
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Value in Use Considerations
1.
The basis for the entity’s estimates of future
cash flows – that is, what estimates to make
about how much those cash flows should be;
this is inherently very judgmental;
2.
The composition of estimates of future cash
flows – that is, which cash flows should be
included; detailed guidance is provided on this;
and
3.
The discount rate that should be used;
detailed guidance is provided on this, but again
it is a very judgmental area.
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Measuring Recoverable Amount

Value in Use – Future Cash Flow Estimates
Should be based on:
 management’s
best estimate of economic
conditions that will exist over asset’s remaining
useful life; and
 most
recent
financial
budgets/forecasts
approved by management and covering maximum
period of 5 years (unless longer period can be
justified).
 Cash flows beyond 5 years to be estimated by
extrapolating budgets/forecasts using steady or
declining growth rate (unless increasing rate can
be justified).
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Continued-Measuring Recoverable...
Value in Use – Future Cash Flow Estimates
(cont.)
 Must be estimated for asset in its current
condition and should included expected:

 cash
inflows from continuing use;
 cash outflows necessarily incurred to generate
cash inflows and either directly attributable to
asset or that can be allocated on reasonable and
consistent basis; and
 net cash flows on disposal at end of useful life
in arm’s length transaction after deducting
disposal costs.
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Continued-Measuring Recoverable...
 Value
in Use – Future Cash Flow
Estimates (cont.)
Should not include future cash
flows expected to arise from:
 future
restructuring to which enterprise is
not yet committed;
 future capital expenditure to enhance asset in
excess of originally assessed standard of
performance; or
 financing
activities
or
income
tax
receipts/payments.
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Future Cash flow Considerations

Use one of the following two methods:
 Forecast
cash flows in real terms – do not increase to reflect
future inflation—Discount at a real discount rate
 Include estimated inflation –Discount at a nominal rate of
interest (one including inflation)
To avoid double counting, only include cash
inflows and outflows from the asset or CGU
under consideration in the forecasts and
calculations
 Exclude cash inflows relating to the following:

a
future restructuring to which an enterprise is not yet
committed; or
 future capital expenditures that will improve or enhance
the asset in excess of its originally assessed standard of
performance.
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Measuring Recoverable Amount
 Value
in Use – Discount Rate
 Pre-tax
rate that reflects current market assessments of
time value of money and risks specific to the asset.
 Should
not reflect risks for which future cash flow estimates
have been adjusted.
 As
a starting point, can take into account WACC, incremental
borrowings rate and other market borrowing rates.

These rates are then, adjusted to reflect market assessment of
specific risks associated with projected cash flows and to
exclude not relevant to projected cash flows.

Next Class on Thursday
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Impairment Losses
 Impairment
loss = any excess of
carrying amount over recoverable
amount.
 Reduce
carrying amount of asset to
recoverable amount and recognize
impairment loss as an expense,
unless asset carried at revalued
amount (in which case treat as
revaluation decrement).
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Recording Impairment Losses
If asset is maintained at historical
amortized cost (the “benchmark”
treatment)
 Recognize
as current period expense in
income from operations as either:
 Part
A
of depreciation; or
separately identified charge
17
Continued-Recording….
If asset is maintained under revaluation
(the allowed alternative treatment)
 Impairment
adjustment will be accounted for as
revaluation decrease of a previous upward
revaluation in stockholder’s equity
 Charge
impairment
loss
against
revaluation
surplus
 If the entire revaluation account is eliminated
due to recognition of impairment, charge any
excess impairment to expense
 The revaluation account cannot contain a net
debit balance.
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Cash Generating Units

Recoverable amount should be estimated for
individual asset where possible.

But, recoverable amount of individual asset not
determinable if:
 asset’s
value in use is likely to differ from its net selling
price (e.g., specialized item of plant); and
 asset
does not generate cash inflows from continuing use
that are largely independent of those from other assets.
In such cases, recoverable amount must be
determined for cash generating unit asset
belongs to.
19
Continued-Cash Generating Units
 CGU
= smallest identifiable group of assets
generating cash inflows from continuing
use that are largely independent of cash
inflows from other assets/groups
of
assets.
 Only
include assets that can be allocated to CGU
directly or on reasonable and consistent basis.
 Must
be identified consistently from period
to period (unless a change is justified).
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Identification of cash-generating unit–
Practical applications
See separate handout for detailed discussion
on identification of:
Multi
locations
Restaurant
chains
Retailers
Bank
branches
Hotels
Petrol
stations
Vertically
integrated operations
21
Next Class
Cash Generating Units
 Even
if part/all of the output produced by an
asset/group of assets is used by other units
within the enterprise, treat as separate CGU
if active market exists for that output.
 Use
best estimate of future market prices for output
to determine value in use.
 CGU
recoverable amount = higher of CGU’s
value in use and net selling price.
 Test CGU for impairment by comparing CGU
carrying amount to CGU recoverable amount.
22
Continued-Cash Generating Units
Goodwill and “Corporate” Assets

Do not generate independent cash flows and can
support one or more CGU.

Need to assess whether they can be allocated to
CGUs they support on reasonable and consistent
basis.

Therefore, when testing CGU for impairment,
include in CGU’s carrying amount any part of
goodwill and corporate assets that can be allocated
to that CGU on reasonable and consistent basis.
23
Continued-Cash Generating Units
Goodwill and “Corporate” Assets (cont.)
 For goodwill and corporate assets
that cannot be allocated to CGUs
they support on reasonable and
consistent basis:
 identify
smallest CGU to which carrying
amount of goodwill and corporate assets
can be allocated on reasonable and
consistent basis (the “larger” CGU);
 then, test “larger” CGU for impairment by
comparing “larger” CGU carrying amount to
“larger” CGU recoverable amount.
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Continued-Cash Generating Units
Allocating CGU Impairment
Individual Assets in CGU
 Allocate in the following order:
 first,
Loss
to
to any goodwill allocated to the CGU;
 then,
to other assets in the CGU on pro-rata basis
based on carrying amount of each asset.
 When
allocating, must not reduce carrying
amount of asset below higher of:
 net
selling price (if determinable);
 value
 zero.
in use (if determinable);
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Reversal of Impairment Loss
 Assess
at each reporting date whether any
indication that all/part of impairment loss
recognized in previous period has reversed.
 IAS
36 includes list of internal and external factors
that must, at a minimum, be considered and whose
existence provides evidence that impairment loss may
have reversed.
 Only
need to test for reversal of impairment
if there is indication that impairment loss
may have reversed.
26
Continued-Reversal of Impairment Loss
 Can
only reverse impairment loss if
estimates used to determine recoverable
amount
have
changed
since
last
impairment loss recognized.
E.g.,
change in amount/timing of
estimated future cash flows or discount
rate if recoverable amount based on value
in use.
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Continued-Reversal of Impairment Loss
Reversing Impairment Loss for Individual
Asset
Increase
carrying
amount
to
recoverable amount (but cannot exceed
carrying amount asset would have had if
impairment loss had not previously been
recognized).
Recognize reversal of impairment loss
as revenue, unless asset carried at
revalued amount (in which case treat as
revaluation increment).
28
Reversals of Previously Recognized
Impairments on Revaluation Assets
Report the recovery as a reversal of the
impairment
 If
the previous impairment was accounted for
entirely as reversal upward revaluations, account
for as an upward revaluation and increase to an
equity account, not reported through earnings.
 If
impairment had eliminated the entire
revaluation capital account, and the excess loss was
reported in earnings, account for later recovery in
earnings to the extent the earlier write-down had
been so reported, with the balance taken to the
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stockholders’ equity.
Impairments Mitigated by Recoveries or
Third Party Compensation

Typically related to natural or physical damages
to long-lived assets
 Example:
Commercial insurance payment for flood damaged
equipment

Impairment must be recognized and cannot be
offset by actual or estimated recovery

Account
separately
reimbursement claim

Third party compensation should be recognized as
income when funds become receivable
for
impairment
and
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Disclosure
Disclosure by class of assets: [IAS 36.126]
•
•
impairment losses recognized in profit or loss
impairment losses reversed in profit or loss
•
which line item(s) of the statement of comprehensive
income
•
impairment losses on revalued assets recognized in
other comprehensive income
•
impairment losses on revalued assets reversed in
other comprehensive income
Disclosure
Disclosure by reportable segment: [IAS 36.129]
•
impairment losses recognized
•
impairment losses reversed
Other disclosures:
If an individual impairment loss (reversal) is material
disclose: [IAS 36.130]
•
events and circumstances resulting in the impairment loss
•
amount of the loss or reversal
•
individual asset: nature and segment to which it relates
•
cash generating unit: description, amount of impairment loss
(reversal) by class of assets and segment
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