IAS 36 – Impairment of Assets (Chapter 11)
Financial Accounting 2B
Learning Unit 2
Week 2
Recap of Week 1
Unit 1 and Unit 2
1.
Calculate the cost of the asset at acquisition date
2.
Start depreciating the asset from the date it was available foruse:
3.

Using straight line method; or

Diminishing balance method; or

Units of production
Unit 1
Calculate carrying amount of the asset at the end of the reporting period
 Cost less
 Accumulated depreciation (sum of all previous year's depreciation expenses + the current year)
4.
If the company has incurred subsequent expenditure, and the expenditure meets the recognition criteria, capitalise it to thecost/carrying
amount of the asset.
5.
Once you have calculated the carrying amount, you need check the asset for indications of impairment at the end of every reporting
period.
 If no indication of impairment exists – no need for Unit 2
 Carrying amount = Cost less Accumulated depreciation as learned in unit 1
 If an indication of impairment exists – Unit 2 applies!!
Unit 2
 Carrying amount = Cost less Accumulated depreciation – Accumulated Impairment losses
3
Unit 2: IAS 36 – OVERVIEW
 Objective
 Scope
 Definitions
 Identify an asset that might be impaired
 Impairment indicator test
Covered in
Week 1
 External indicators of impairment
 Internal indicators of impairment
 Measure recoverable amount
 Recognise and measure impairment
 Reversing an impairment loss
 Presentation
 Disclosure
Covered in
Week 2
4
Recap of Week 1 - What does impairment mean?
In accounting, impairment describes a reduction in
the value of a company's asset, typically a fixed
asset or an intangible asset.
(example, when as asset is damaged)
https://www.investopedia.com/terms/i/impairment.asp
5
Recap of Week 1 - IAS 36.1 – OBJECTIVE
IAS 36’s objective is to prescribe
the procedure that an entity
should apply to ensure that its
assets are not carried at no more
than their recoverable amount.
6
Recap of Week 1 - IAS 36 – PURPOSE
Purpose of an impairment test is to ensure:
 Assets are not carried at amounts higher than the
recoverable amount.
 So that assets are not overstated on the statement of
financial position.
However, in order for an impairment test to be
performed, there must be an indicator of an impairment.
 NB: No impairment indicator, No impairment test
7
Recap of Week 1 – Summary
Carrying Amount =
Cost less
Accum Deprec less
Accum Impair. Loss
Refer to Unit 1 - PPE
(Unit 3)
Economic benefits from an
asset may be recovered
through:
• Use of the asset OR
• Disposal/Sale of the asset
Carrying Amount
reflects the future
economic benefits.
IMPORTANT: Assets should not be recognised at an amount exceeding the future economic benefits expected to
be received
8
Recap of Week 1
Taught in Unit 1 –
PPE (Chap 7: IAS 16)
Taught in this unit.
Unit 2 – Imp (Chap
11: IAS 36)
Taught in this unit (Unit 2 – IAS 36)
Important: the carrying amount is not
reduced by crediting the asset's cost
account but rather by crediting either:
•
Accumulated impairment loss account
•
Accumulated depreciation
Note: The credit part of both of the options
above are a negative assets
Mixture of:
•Unit 1: PPE: IAS 16
•Unit 2: Imp: IAS 36
9
Recap of Week 1
Step 1:
Is an asset impaired?
Step 2:
If yes, calculate the impairment loss
Step 3:
Recognising and Presenting the
Impairment Loss in the FS
Important: Don’t reduce/credit the cost of the asset. Credit
Accum. Imp Loss (negative asset)
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Recap of Week 1
Step 1
Impairment loss
• Recognised if the CA > RA
• Impairment Loss = CA - RA
Step 2
Note: After an impairment is processed, depreciation in subsequent
periods must be calculated using the new depreciable amount and using
the asset’s remaining useful life RUL/remaining production/depreciation
rate ?
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Learning Objectives – Week 2
Learning Outcomes/Objectives
1. Have an overview of what the concept of impairments is (LO1)
2. Know and understand the scope of IAS 36 (Impairment of
Assets) i.e. which type of assets are affected by this standard
(LO1)
3. Know and understand what factors to consider to identify
whether an asset is impaired or not (Impairment Indicator
Test) (LO 2)
4. Know and understand what a Recoverable Amount is and how
to calculate it. This includes Fair Value less Costs of Disposal
and Value in Use (LO 3)
5. Know and understand how to recognize and measure an
impairment loss (LO 4)
6. Know and understand how to recognise and measure a
REVERSAL of an impairment loss (LO 5)
7. Know and understand how to present and disclose impairment
losses and reversals (LO 6)
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Topics OUT OF SCOPE
• Section 3.1.1: Recoverable amounts: indefinite useful life
intangible assets, intangible assets not yet available for use and
goodwill
• Section 3.3.1.2: Assumptions made
• Section 3.3.1.4: Growth rate
• Section 3.3.1.5: General inflation
• Section 3.3.5: Foreign currency future cash flows
• Section 4.3: Impairments and the Revaluation Model
• Section 5.3: Impairment reversals and the revaluation model
• Section 6: Cash Generating Units
• Section 7: Deferred Tax
• Section 8.3: Impairment testing; CGU
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Introduction – Things to Consider… (Week 1 Content)
Question
Answer
Learning
Objective
1
Is the carrying amount of an asset
different from its recoverable amount?
Yes it can be different. Hence an impairment indicator test
needs to be performed at the end of each year.
LO 2
2
What could cause an asset to be
impaired?
Examples: physical damage, technical obsolescence, an
economic downturn may reduce demand for an asset’s output,
in which case the asset becomes less valuable to the entity
and other factors
LO 2
3
What if… an asset’s recoverable amount
is higher than it’s carrying amount (CA)?
•
•
The asset is not impaired. Leave the asset at CA
Unit 2 does not apply
N/A
4
What if… an asset’s recoverable amount
(RA) is less than it’s carrying amount???
•
The asset is overstated (valued at more than what it is) &
impaired
Unit 2 applies. CA needs to be reduced (impaired) to RA
•
5
What should an entity recognize this
impairment as?
Impairment Loss
6
Where should the impairment loss be
recognized?
Statement of Profit and Lost/Comprehensive Income
LO 3 and 4
LO 4
LO 4
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Introduction – Things to Consider… (Week 2 Content)
Question
Answer
Learning
Objective
7
Can an impairment be reversed in the
future?
Yes but it depends.
8
Where is the impairment loss shown
(presented and disclosed) in the financial
statements?
Statement of Comprehensive Income, Statement of Financial
Position and the Notes to the financial statements
LO 6
Where is the impairment loss reversal
shown (presented and disclosed) in the
financial statements?
Statement of Comprehensive Income, Statement of Financial
Position and the Notes to the financial statements
LO 6
9
LO 5
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Definitions and Abbreviations
IAS 36 Important Definitions
Terms
Definition
Carrying Amount
The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and
accumulated impairment losses.
Historical Carrying
Amount
This is the carrying amount of an asset if no impairment was processed i.e. original cost less accumulated depreciation
based on the original useful life and residual value.
Fair Value less
Costs of Disposal
•
•
Fair value: The price that would be received to sell an asset (or paid to transfer a liability) in an orderlytransaction
between market participants at the measurement date.
Disposal Costs: Costs directly attributable to the disposal of an asset excluding finance costs and income tax
expense
Impairment
In accounting, impairment describes a reduction in the value of a company's asset, typically a fixed asset
Recoverable
Amount
The higher of an asset’s:
• Fair value less costs of disposal (FV-CoD); and
•Value in use (VIU)
OR
Recoverable amount is an estimate of the highest possible future economic benefits that you expect to be able to get
from the asset through:
• Using the asset (VIU) or
• Selling the asset (FV – CoD)
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Abbreviations – Week 1
Abbreviation
Full Word
Accum Dep
Accumulated Depreciation
Accum Imp Loss
Accumulated Impairment Loss
ACA
Actual Carrying Amount (new in week 2)
CA
Carrying Amount
FCF
Future Cash Flows
FEB
Future Economic Benefits
FV
Fair Value
FV – CoD
Fair Value Less Costs of Disposal
HCA
Historical Carrying amount (new in week 2)
IIT
Impairment Indicator Test
Imp Loss
Impairment Loss
NDA
New Depreciable Amount
RA
Recoverable Amount
RUL
Remaining Useful Life
RV
Residual Value
VIU
Value In Use
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Recognising a REVERSAL of a Previous Impairment Loss (Sec 5)
Impairment Loss Reversal Overview – Section 5.1 (LO 5)
• An impairment can be reversed IF
 There is an indication that a previously recognised impairment loss no longer exists or has reduced
 Or the circumstances that originally caused the impairment have reversed
• An assessment needs to happen annually. Therefore, an entity needs to consider (similar to LO 2 but the
opposite):
External Information
Internal Information
Significant changes (market, technology, legal, economic)
Significant changes (restructuring, enhancement)
Decrease in interest rates
Internal reporting evidence
Increase in market value
Watch out for the following!!
If an asset is impaired because it was damaged (the damage being an example of an internal impairment indicator),
and in subsequent years the damage on asset was repaired:
 If the asset is repaired to be restored to its original state before it was impaired, then this an
example of the indicator no longer existing and thus:
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 The impairment loss has to be reversed.
Impairment Loss Reversal Overview – Section 5.1 (LO 5)
• An impairment can not be reversed if:
There is a change in the asset’s Recoverable amount due to passage of time. This means:
 The asset’s value in use may become greater than the assets carrying amount simply because the
present value of the future cash flows increases as they become closer, however the service potential or
the usage of the asset has not increased.
•
•
Please ignore all comments about Goodwill in this section
Please refer to Section 4.4 (Impairments) in Chapter 7 (PPE) for additionnotes
22
Impairment Loss Reversal – Section 5.2 (LO 5)
General Rule
1. If indication exists, calculate the recoverable amount to see if it is more than the actual CA
IF RA > CA then…
Impairment Loss Reversal = Recoverable Amount – Actual CarryingAmount
2. Effect of an impairment loss reversal: Increase the carrying amount
New Carrying Amount
=
Carrying Amount before reversal + impairment loss reversal
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Impairment Loss Reversal – Section 5.2 (LO 5)
BUT… There is an exception to the rule
• When reversing an impairment, an entity must never increase an asset’s carrying amount above the
carrying amount it would have had, had the asset never been impaired
• An entity must not increase the asset’s carrying amount above its historical carrying amount (HCA),
because HCA represents what the CA would have been if it was not initially impaired.
NOTE:
This HCA exception is NOT covered in FAC2B!!!!!!
NB:
• Please ignore all comments about Goodwill in this section
• Please refer to Section 4.4 (Impairments) in Chapter 7 (PPE) for additionnotes
24
Impairment loss reversal – Difference between HCA and ACA)
Components
HCA
ACA
Notes
Cost
XXX
XXX Same for both
Depreciation Expense
(XXX)
(XXX) Same for both
Impairment Loss
Carrying/
Recoverable
Amount
Depreciation Expense
Impairment
Loss Reversal
Carrying amount after
reversal
Original UL
Original UL
Not applicable
(XXX)
Imp Loss = Carrying amount – Recoverable amount
HCA: Cost – Accum Depr. ONLY
XXX
XXX ACA: Cost – Accum Depr - Accum Imp
(XXX)
Original UL
(XXX) ACA: Based on RA(new cost) and RUL
Not applicable
XXX
HCA: Based on CA excluding imp loss
Remaining UL
Imp Loss reversal = Recoverable amount –
XXX Actual carrying amount
HCA: Cost – Accum Depr. ONLY
XXX New CA = CA before reversal + Impairment Loss
reversal
NB:
• Please ignore all comments about Goodwill in this section
• Please refer to Section 4.4 (Impairments) in Chapter 7 (PPE) for additionnotes
25
Impairment Loss Reversal – Section 5.2 (LO 5)
IF RA > ACA then…
Impairment Loss Reversal = Recoverable Amount (limited to the HCA) – Actual Carrying
Amount
Scenario 1: IF RA>ACA then reverse up to RA
HCA
RA
Impairment Loss
Reversal (ILR)
Starting
point
NOTE:
• You always need to calculate the HCA to
ensure the Imp Loss Rev is up to the RA
• This is a “normal” impairment loss reversal
because the reversal is up to the given RA
• You cannot reverse more than the original
impairment loss
ACA
NB:
• Please ignore all comments about Goodwill in this section
• Please refer to Section 4.4 (Impairments) in Chapter 7 (PPE) for additionnotes
26
Impairment Loss Reversal – Section 5.2 (LO 5)
1. Measurement:
Impairment Loss Reversal = Recoverable Amount (limited to HCA) – Actual CarryingAmount
2. Recognition:
Date
XXX
Description
Accumulated Impairment Loss (SFP: -A) Note 1
Impairment Loss Reversal (P/L:I) Note 2
Debit
Credit
XXX
XXX
Reversal of impairment loss for XXX financial year
Note 1:
•
The debit is reducing the accumulated impairment loss previously recognized.
•
It is NOT a debit to the cost of the asset
Note 2:
• The reversal of the impairment loss is recognized as income and not an expense because it is an increase in economic
benefits from an enhancement in an asset (that were initially lost through the impairment) that will increase equity.
NB:
• Please ignore all comments about Goodwill in this section
• Please refer to Section 4.4 (Impairments) in Chapter 7 (PPE) for additionnotes
27
Impairment Loss Reversal – Summary (LO 5)
Step 1: Refer to LO 4 in Week 1
Step 2:
You always need to calculate
the HCA
Step 3a = Scenario 1
Step 3b = IGNORE!!!
(Not covered in FAC2B)
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Example
Impairment Loss Reversal (Cost Model) - Example
Example: Cost model – reversal of an impairment loss
•
Cost of plant at 1/1/20X1: C100 000
•
Depreciation: 20% straight-line pa to a nil residual value (i.e., over a useful life of 5 years)
•
An impairment indicator was present at year-end and the recoverable amount at
31/12/20X1: C60 000
•
The impairment indicator that was present in the 20X1 financial year no longer exists.
Required:
1. Show all journals 31/12/20X1 linked to the plant
2. Show all journals for 20X2, assuming the recoverable amount at 31/12 /20X2 is estimated at
C55 000
Source: Example 30 in GAAP Graded Questions
32
Impairment Loss Reversal (Cost Model) - Solution
Question 1: Workings (20X1)
Description
Amount
Comments
Cost (01/01/20X1)
100 000
Given
Depreciation Expense
(20 000)
(100 000 – 0)/5 years
CA: 31/12/20X1
80 000
100 000 – 20 000
RA: 31/12/20X1
60 000
Given
Impairment Loss
20 000
80 000 – 60 000
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Impairment Loss Reversal (Cost Model) - Solution
Question 1. Answer
Date
31/12/20X1
Description
Depreciation Expense (P/L:E)
Debit
Credit
20 000
Accumulated Depreciation (SFP: -A)
20 000
Depreciation expense for 20X1 financial year
31/12/20X1
Impairment Loss (P/L: E)
Accumulated Impairment Loss (SFP: - A)
20 000
20 000
Impairment loss for 20X1 financial year
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Example - Question 2 Workings
Impairment Loss Reversal (Cost Model) - Solution
Question 2: Workings (20X2)
Description
Step 1: What is the new cost of
the asset after impairment?
Step 2: Calculate the new
depreciable amount (NDA)?
Amount
Comments/Calculation
60 000 New cost = Recoverable amount (RA)
60 000
Step 3: Determine the remaining
useful life (RUL)
4 years
Step 4: Calculate the
depreciation expense
(15 000)
Step 5: Calculate the
accumulated depreciation
35 000
Step 6: Calculate the carrying
amount (ACA)
45 000
NDA = RA less Residual value
= 60 000 - 0
RUL = Total useful life – No. of years
asset has been used
=5-1
Depreciation expense = NDA/RUL
(60 000)/4 years
PY depr + CY depr
= 20 000 + 15 000
Step 1 – Step 4
= 60 000 – 15 000
37
Impairment Loss Reversal (Cost Model) - Solution
Question 2: Workings (20X2)
Steps
1. Calculate the ACTUAL
carrying amount (ACA)
Description
Comments
Carrying amount (01/01/20X2)
60 000
Given
Depreciation Expense
(15 000)
(100 000 – 0)/5 years * 2 years
ACA: 31/12/20X2
45 000
2. RA: 31/12/20X1
3. RA>ACA
Then the Imp Loss
Reversal is up to RA
Amount
Impairment Loss Reversal
55 000
Given
10 000
55 000 – 45 000
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Impairment Loss Reversal (Cost Model) - Solution
Question 2a. Answer
Date
31/12/20X2
Description
Depreciation Expense (P/L:E)
Debit
Credit
15 000
Accumulated Depreciation (SFP: -A)
15 000
Depreciation expense for 20X2 financial year
31/12/20X2
Accumulated Impairment Loss (SFP: - A)
Impairment Loss reversal (P/L: I)
10 000
10 000
Impairment loss for 20X2 financial year
Impairment Loss Reversal
It is recognised as an income (not an expense) in the Statement of Profit and Loss
It is recognised as a reduction to Accumulated Impairment Loss and not an increase to the cost of the asset
39
Presentation and Disclosure (LO 6)
Presentation
• Affected line items in financial statements:
Financial Statement
Impairment Loss
Impairment Loss Reversal
Statement of Profit &
Loss
Expense
• Impairment Loss
Income
• Impairment Loss Reversal
Statement of
Financial Position
Non-Current Assets
• PPE - Carrying Amount
Non-Current Assets
• PPE – Carrying Amount
* IMPORTANT
• Impairment Loss
• It is recognised as an expense in the Statement of Profit and Loss
• It is recognised as Accumulated Impairment Loss as a negative asset and not a reduction to the cost of the asset
• Impairment Loss Reversal
• It is recognised as an income (not an expense) in the Statement of Profit and Loss
• It is recognised as a reduction to Accumulated Impairment Loss and not an increase to the cost of the asset
Gripping GAAP reference: Section 8
38
Presentation
ABC Limited
Extract of Statement of Profit & Loss for the period ended 31 December 20X1
Income
Impairment Loss Reversal
Expenses
Impairment Loss
Gripping GAAP reference: Section 8
20X1
20X0
XXX
-
-
(XXX)
39
Presentation
ABC Limited
Extract of Statement of Financial Position as at 31 December 20X1
Non Current Assets
Property, Plant and Equipment*
20X1
XXX
20X0
XXX
* The carrying amount of the asset is presented on the face of the SFP but the breakdown of the carrying
amount (i.e. cost less accum depr less accum imp loss) is disclosed in the Notes in the form of the
PPE Reconciliation Note (taught in Unit 2)
Gripping GAAP reference: Section 8
40
Disclosure
For every material impairment loss or impairment
loss reversal, the entity must disclose:
1. the events and circumstances that led to the
impairment loss or reversal thereof;
2. the nature of the asset
3. the amount of the impairment loss or impairment
loss reversed;
4. if the recoverable amount is fair value less costs of
disposal or value in use;
5. if recoverable amount is value in use, the discount
rate used in the current and previous estimate (if
any) of value in use (NB: PV factor is not the
discount rate)
Gripping GAAP reference: Section 8
41
Disclosure – PPE Reconciliation Note
ABC Limited
Extract of Notes to the Financial Statements for the period ended 31 December
20X1
Property, Plant, and Equipment Reconciliation Note
20X1
Carrying amount at the beginning of the year [A]
XX
Cost price [B]
XX
Accumulated depreciation [B]
(XX)
Accumulated impairment loss [B]
(XX)
Movements during the year: [C]
X/(X)
Acquisitions or additions [D]
X
Disposals [D]
(X)
Depreciation [D]
(X)
Impairment loss/reversal [D]
(XX)/XX
Carrying amount at the end of the year [E]
XX
Cost price [F]
XX
Accumulated depreciation [F]
(XX)
Accumulated impairment loss [F]
(XX)
Gripping GAAP reference: Section 8
Notes:
• All the text in black was taught in Unit 2
• The red text is how impairments need to be
disclosed in the PPE reconciliation note
• The sum of all the [B] must equal [A]
• The sum of all the [D] must equal [C]
• The sum of all the [F] must equal [E]
42
How Will This Unit Be Tested?
 Discussion questions
 Calculations
 Journal entries
 Presentation
 Disclosure
43