for Accounting Professionals
IAS 36 Impairment of assets
2011
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IAS 36 Impairment of assets
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Moscow, Russia
2011 Updated
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CONTENTS
1. Impairment of Assets - Introduction
1. Impairment of Assets - Introduction ........................ 3
OVERVIEW
2.Definitions
4
3. Bank accounting: Impairment .................................. 5
4. Identifying an Asset that may be Impaired .............. 9
5. Measuring Recoverable Amount ............................ 11
6. Recording and Measuring an Impairment Loss .... 16
7. Cash-generating Units and Goodwill ..................... 18
8. Reversing an Impairment Loss .............................. 28
9. Reversing an Impairment Loss for an Individual
Asset ............................ 30
10. Reversing an Impairment Loss for a Cashgenerating Unit ........... 32
11. IAS 36, Impairment – Frequently asked questions
(from IFRS News) ........ 34
12. Disclosure
48
13. MULTIPLE CHOICE QUESTIONS .......................... 52
14. Answers to Multiple Choice Questions ............... 57
Aim
The aim of this workbook is to assist the individual in understanding
Impairment of Assets according to IFRS 36.
Objective
The objective of IAS 36 is to prescribe the procedures to ensure that
assets are carried at no more than their recoverable amount and
what disclosures must be made.
An asset is described as impaired and the IAS 36 requires the
recording of an impairment loss when its carrying amount exceeds
the recoverable amount (amount to be recovered through use, or
sale).
EXAMPLE-impaired asset
Your machine has a carrying value of $100.000 in your books. It has
become obsolete in the market, and you will cease use of this
machine.
Having no further use for the machine within the firm, you attempt to
resell the machine. Your adviser tells you that the resale value
would be only $25.000.
Your machine is overvalued in the books of account, as the
$100.000 will not be recovered from either use, nor by resale. The
asset is impaired.
Scope
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IAS 36 Impairment of assets
IAS 36 is applied in accounting for the impairment of all assets,
other than:
IAS 36 applies to assets that are carried at revalued amount (fair
value) in accordance with other Standards, such as the revaluation
model in IAS 16 Property, Plant and Equipment.
(i) inventories ( IAS 2 Inventories);
Impairment
(ii) assets arising from construction contracts ( IAS 11 Construction
Contracts);
Identifying whether a revalued asset may be impaired depends on
the basis used to determine fair value:
(iii) deferred tax assets ( IAS 12 Income Taxes);
(iv) assets arising from employee benefits ( IAS 19 Employee
Benefits);
(v) financial assets that are within the scope of IFRS 9 Financial
Instruments)
(1) if the asset’s fair value is its market value, the only difference
between the asset’s fair value, and its ‘fair value less costs to sell’,
is the disposal cost.
The disposal cost can be:
(i) Insignificant – fair value = market value
(vi) investment property that is measured at fair value (IAS 40);
(ii) Significant – fair value = market value less disposal cost.
(vii) biological assets related to agricultural activity that are
measured at fair value less costs to sell (IAS 41);
(viii) deferred acquisition costs, and intangible assets, arising from
an insurer’s contractual rights under insurance contracts within the
scope of IFRS 4 Insurance Contracts; and
(2) if fair value is not based on market value the fair value may be
greater or less than its recoverable amount.
After revaluation, IAS 36 is applied to determine impairment.
2.
(ix) non-current assets (or disposal groups) classified as held for
sale in accordance with IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations.
IAS 36 applies to financial assets classified as:
(i)
subsidiaries,
(ii)
associates,
(iii)
joint ventures,
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Definitions
An active market is a market in which all the following conditions
exist:
(i) the items traded within the market are homogeneous;
(ii) willing buyers and sellers can normally be found at any time;
and
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IAS 36 Impairment of assets
(iii) prices are available to the public.
workbook, the term depreciation is used to cover both depreciation
and amortisation.
The agreement date for a business combination is the date of the
agreement and in the case of publicly-listed undertakings,
announced to the public.
In the case of a hostile takeover, the earliest date of the agreement
is the date when a sufficient number of the acquiree’s owners have
accepted the offer, for the acquirer to obtain control of the acquiree.
Carrying amount is the amount at which an asset is recorded,
after deducting any accumulated depreciation, and accumulated
impairment losses.
A cash-generating unit is the smallest identifiable group of assets
that generates cash inflows, which are independent of the cash
inflows from other assets.
Corporate assets are assets other than goodwill that contribute to
the cash flows of both the cash-generating unit under review, and
other cash-generating units. They may be assets belonging to the
group’s head office, or a central services unit, such as group
research and development.
Fair value The price that would be received to sell an asset, or
paid to transfer a liability, in an orderly transaction
between market participants at the measurement
date. (IFRS 13)
‘Fair value less costs to sell’ is fair value, less the costs of
disposal.
An impairment loss is the amount by which the carrying amount of
an asset or a cash-generating unit exceeds its recoverable amount.
The recoverable amount of an asset, or a cash-generating unit, is
the higher of its ‘fair value less costs to sell’, and its ‘value in use’.
Useful life is either:
(i)
the period of time over which an asset will be used; or
(ii)
the number of production units produced from the asset.
‘Value in use’ is the present value of the cash flows derived from
an asset or cash-generating unit.
Costs of disposal are incremental costs, directly attributable to the
disposal of an asset or cash-generating unit, excluding finance
costs and income tax expense.
3. Bank accounting: Impairment
Depreciable amount is the cost of an asset or valuation, less its
residual value.
For most banks, the major concern about impairment relates to the
banks’ financial assets. Valuation of financial assets is covered by
IFRS 9 rather than IAS 36, but is summarised here:
Impairment and uncollectibility of financial assets
Depreciation (Amortisation) is the systematic allocation of the
depreciable amount of an asset, over its useful life. In this
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IAS 36 Impairment of assets
A bank shall assess at each balance sheet date whether there is
any objective evidence that a financial asset or group of financial
assets is impaired.
iii. the lender, for economic or legal reasons relating to the
borrower's financial difficulty, granting to the borrower a
concession that the lender would not otherwise consider;
If any evidence of impairment exists, the bank shall apply IFRS 9
for
-financial assets carried at amortised cost
iv. it becoming probable that the borrower will enter bankruptcy or
other financial reorganisation;
to determine the amount of any impairment loss.
A financial asset or a group of financial assets is impaired, and
impairment losses are incurred, only if there is objective evidence of
impairment as a result of an event that occurred after the initial
recognition of the asset (a 'loss event') and that
loss event has an impact on the estimated future cash flows of
the financial asset,
or group of financial assets, that can be reliably estimated.
Combined effect of several events may have caused the
impairment. Losses expected as a result of future events, no matter
how likely, are not recognised.
Objective evidence that a financial asset or group of assets is
impaired includes observable data that comes to the attention of
the holder of the asset about the following loss events:
i. significant financial difficulty of the issuer or obligor;
ii. a breach of contract, such as a default, or delinquency, in
interest or principal payments;
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v. the disappearance of an active market for that financial asset
because of financial difficulties; or
vi. observable data indicating that there is a measurable decrease
in the estimated future cash flows from a group of financial assets
since the initial recognition of those assets, although the
decrease cannot yet be identified with the individual financial
assets in the group, including:
1. adverse changes in the payment status of borrowers in the group
(an increased number of delayed payments or an increased
number of credit card borrowers who have reached their credit
limit and are paying the minimum monthly amount); or
2. national or local economic conditions that correlate with defaults
on the assets in the group (an increase in the unemployment rate
in the geographical area of the borrowers, a decrease in property
prices secured by mortgages in the relevant area, a decrease in
oil prices for loan assets to oil producers, or adverse changes in
industry conditions that affect the borrowers in the group).
The disappearance of an active market because an issuer's
financial instruments are no longer publicly traded is not evidence
of impairment. A downgrade of an issuer's credit rating is not, of
itself, evidence of impairment, although it may be evidence of
impairment when considered with other available information.
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IAS 36 Impairment of assets
A decline in the fair value of a financial asset below its cost or
amortised cost is not necessarily evidence of impairment (for
example, a decline in the fair value of an investment in a debt
instrument that results from an increase in the risk-free interest
rate).
Also, objective evidence of impairment for an investment in an
equity instrument includes information about significant changes
with an adverse effect that have taken place in the technological,
market, economic or legal environment in which the issuer
operates, and indicates that the cost of the investment in the equity
instrument may not be recovered. A significant, or prolonged,
decline in the fair value of an investment in an equity instrument
below its cost is also objective evidence of impairment.
The observable data required to estimate the amount of an
impairment loss on a financial asset may be limited, or no longer
fully relevant to current circumstances. For example, this may be
the case when a borrower is in financial difficulties and there are
few available historical data relating to similar borrowers.
In such cases, a bank uses its judgement to estimate the amount of
any impairment loss. Similarly, a bank uses its judgement to adjust
observable data for a group of financial assets to reflect current
circumstances. The use of reasonable estimates is an essential
part of the preparation of financial statements and does not
undermine their reliability.
Financial assets carried at amortised cost
If there is an impairment loss on loans and receivables or held-tomaturity investments carried at amortised cost has been incurred,
the amount of the loss is measured as the difference between:
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-the asset's carrying amount; and
-the present value of estimated future cash flows (excluding
future credit losses that have not been incurred) discounted at
the financial asset's original effective interest rate (the
effective interest rate computed at initial recognition).
The carrying amount of the asset shall be reduced either directly or
through use of an allowance account. The amount of the loss shall
be recognised in profit or loss.
A bank first assesses whether objective evidence of impairment
exists for financial assets that are individually significant, and
individually or collectively for financial assets that are not
individually significant.
If a bank determines that no objective evidence of impairment
exists for an individually-assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets
with similar credit risk characteristics and collectively assesses
them for impairment. Assets that are individually assessed for
impairment and for which an impairment loss is, or continues to be,
recognised are not included in a collective assessment of
impairment.
Reversal of impairment losses
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised (such as an
improvement in the debtor's credit rating), the previously recognised
impairment loss shall be reversed either directly or by adjusting an
allowance account.
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IAS 36 Impairment of assets
The reversal shall not result in a carrying amount of the financial
asset that exceeds what the amortised cost would have been had
the impairment not been recognised at the date the impairment is
reversed. The amount of the reversal shall be recognised in profit or
loss.
When a decline in the fair value of an available-for-sale financial
asset has been recognised directly in equity and the asset is
impaired, the cumulative loss that had been recognised directly in
equity shall be removed from equity and recognised in profit or loss
even though the financial asset has not been derecognised.
Financial assets carried at cost (for those using IAS 39)
The amount of the cumulative loss that is removed from equity
and recognised in profit or loss shall be the difference
between:
If an impairment loss has been incurred on an unquoted equity
instrument that is not carried at fair value because its fair value
cannot be reliably measured, or on a derivative asset that is linked
to and must be settled by delivery of such an unquoted equity
instrument,
- the acquisition cost (net of any principal repayment and
amortisation); and
the amount of the impairment loss is measured as the
difference between:
- the carrying amount of the financial asset; and
- the present value of estimated future cash flows discounted
at the current market rate of return for a similar financial
asset.
No reversal of impairment losses
Such impairment incurred on unquoted equity instrument losses
shall not be reversed.
Available-for-sale financial assets (for those using IAS 39)
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-current fair value, less any impairment loss on that financial
asset previously recognised in profit or loss.
Reversal of impairment losses
Impairment losses recognised in profit or loss for an investment in
an equity instrument classified as available for sale shall not be
reversed through profit or loss.
If, in a subsequent period, the fair value of a debt instrument
classified as available for sale increases and the increase can be
objectively related to an event occurring after the impairment loss
was recognised in profit or loss, the impairment loss shall be
reversed, with the amount of the reversal recognised in profit or
loss.
Impairment for Banks – other assets
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IAS 36 Impairment of assets
Banks involved in acquisitions will have to test any goodwill for
impairment at least annually. The measurements applied are those
listed in IAS 36, although more details are in the IFRS 3 workbook.
Revalued property, either investment property (see IAS 40
workbook) or used for banking operations (see IAS 16 workbook)
will need to be regularly revalued to comply with those standards. If
values fall in any period, impairment charges may result. Property
held at cost is vulnerable to impairment charges if it has been
bought when prices have been high.
Bank equipment that needs to be reviewed for impairment includes
cash machines, computer and security systems. Significant
changes in technology may cause the bank to replace the systems
earlier than planned. This may result in the equipment being worth
less than its carrying value in the bank’s books, requiring an
impairment charge.
Where clients’ assets have been provided as collateral to the bank,
either specifically or as part of total assets classified as collateral,
the bank’s security may be reduced. In the event the value of the
security is less than the carrying amount of the loan, the loan may
be impaired.
4. Identifying an Asset that may be Impaired
These requirements apply equally to assets and cash-generating
units.
At each reporting date, if an indication of impairment exists the
recoverable amount of each asset should be estimated.
Even with no indication of impairment the following types of assets
should always be tested:
(i) Intangible asset with an indefinite useful life
Intangible assets owned by the bank may have been acquired
through acquisition (for example, client lists or the name of the bank
acquired) or purchased as a franchise, such as the use of Visa or
Mastercard as the bank’s credit cards. These assets will be
amortised over the expected life of benefits generated. If the
benefits are less than planned, the intangible asset may be
impaired.
The impairment test may be performed at any time during an
annual period, provided it is performed at the same time every year.
Impairment for Banks – financial statements of clients
(i)
Newly-acquired intangible assets are tested before the end
of the current annual period.
(ii)
Goodwill, acquired in a business combination, is tested
annually.
In reviewing financial statements of clients, any impairments should
be fully understood by the bank, or explained by the client.
Impairments may indicate that a client is not depreciating assets
correctly. It may also indicate that revaluations have been
aggressive.
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(ii) Intangible asset not yet available for use
Different intangible assets may be tested for impairment at different
times.
Assessing Impairment
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IAS 36 Impairment of assets
In assessing whether there is impairment at least the following
should be considered:
2
3
net cash flows significantly worse than those budgeted;
net cash outflows projected over the assets life.
External sources of information
(i)
significant decline in market value.
(ii)
significant changes (technology, market, economy, law).
(iii)
interest rates, or other factors affecting the discount rate
used in calculating an asset’s ‘value in use’.
(iv)
the carrying amount of the total net assets is more than
the market capitalisation.
Internal sources of information
(v)
‘Held for sale’ assets are accounted for under IFRS 5 (see IFRS 5
workbook).
Materiality applies in identifying whether the recoverable amount of
an asset needs to be estimated.
If interest rates, or other market rates, have risen during the period,
no estimate is required of an asset’s recoverable amount in the
following cases:
(i)
(ii)
evidence of obsolescence or damage of an asset.
(vi)
1.
2.
3.
4.
significant changes in usage including:
the asset becoming idle,
plans to discontinue (or restructure) the operation,
plans to dispose of an asset early, and
reassessing the useful life of an asset, as finite rather
than indefinite.
if the discount rate is not materially affected
if the recoverable amount is not materially affected (for
example, cash inflows rise and offset the interest rate
rise)
.
Possible impairment indicates a need to review and adjust the
depreciation method and residual value even if no impairment loss
is recorded.
Recognition of impairment on transition
Issue
(vii)
evidence that indicates that the performance of an asset
is or will be worse than expected.
(viii)
Other indications that an asset may be impaired include:
1
cash flows for acquiring or maintaining the asset are
significantly higher than those budgeted;
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Undertaking C will prepare its first IFRS financial statements for the
year ending 31 December 2XX4.The date of transition to IFRS will
be 1 January 2XX3 and the opening IFRS balance sheet will be
prepared as at that date.
C has previously applied US GAAP and has tested its long-lived
assets for impairment in accordance with SFAS 121.
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IAS 36 Impairment of assets
The US standard requires that assets are first tested for impairment
by reference to undiscounted cash flows.
months. At the end of the contract, you will cease use of this
machine. The machine will then be scrapped.
There were indications that some assets might be impaired at 31
December 2XX2, but C did not record any impairment in its US
GAAP financial statements as a result of applying SFAS 121.
Before the contract started, you calculated the costs of the product.
The work done by the machine cost $10 per unit. The contract is for
45.000 units, so the value in use of the machine is $450.000.
What adjustments might be required for the opening IFRS balance
sheet in respect of impairment of assets?
The net resale value of the machine is now $275.000. The
recoverable amount is the higher of ‘fair value less costs to sell’
($275.000) and its ‘value in use’
($450.000), so it is $450.000.
Solution
Undertaking C should test the long-lived assets for which there is
evidence of impairment at the date of transition, using the guidance
in IAS 36.
IAS 36 requires that assets are tested for impairment using
discounted cash flows. When C applies IAS 36 it might identify an
impairment that did not exist under US GAAP. The impairment
should be recognised on the opening IFRS balance sheet, with a
corresponding adjustment to reduce retained earnings. The
disclosures required by IAS 36 should be given in the first IFRS
financial statements.
5.
No impairment loss is needed.
It is not always necessary to determine both an asset’s ‘‘fair value
less costs to sell’’ and its ‘‘value in use’’. If either of these amounts
exceeds the asset’s carrying amount, the asset is not impaired.
It may be possible to determine ‘fair value less costs to sell’ even if
an asset is not traded in an active market.
If there is no basis for making an estimate of the amount obtainable
from a sale the ‘value in use’ may be used as the recoverable
amount.
Measuring Recoverable Amount
EXAMPLE-Impairment of an acquired early-stage project
IAS 36 defines recoverable amount as the higher of an asset’s or
cash-generating unit’s ‘fair value less costs to sell’ and its ‘value in
use’.
EXAMPLE-value in use
Your machine has a carrying value of $300.000 in your books. Its
output is a store card for which you have a contract, which will last 2
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Background
Town Bank acquired the rights to a new credit card security system
for shops. Town Bank capitalised the costs for acquiring the rights
as an intangible asset. Soon after acquisition of the rights, the
results of the trials show that the system is not secure.
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IAS 36 Impairment of assets
being used in the development of a new system.
Management terminates development of the system. Town Bank’s
technicians will use technology directly related to the acquired
intangible in developing one of Town Bank’s other systems.
How should Town Bank amortise an intangible asset related to an
acquired early-stage project when utilising the results for
development of a system other than the system for which the
project was originally acquired?
An intangible asset with a finite useful life shall be amortised on a
systematic basis over its useful life. Amortisation shall begin when
the asset is available for use in the manner intended by
management.
The ‘value in use’ of an asset held for disposal will consist mostly of
the net disposal proceeds, as the cash flows from use of the asset,
until its disposal, are likely to be negligible.
The recoverable amount is determined for an individual asset if it
generates cash inflows independent of those from other assets.
If this is not the case, the recoverable amount is determined for the
cash-generating unit to which the asset belongs, unless either:
(i) the asset’s ‘fair value less costs to sell’ is higher than its
carrying amount; or
(ii) the asset’s ‘value in use’ is close to its ‘fair value less
costs to sell’.
An impairment loss shall be recognised on an intangible asset
accounted for under the cost method, when the recoverable amount
of the intangible asset is less than its carrying amount.
The recoverable amount of an asset is the higher of its fair value
less cost to sell and its value in use.
Solution
Town Bank should not start to amortise the intangible asset when it
is acquired, as it is not ready for use. The poor results of the trials
indicate that the intangible asset may be impaired.
Management must perform an impairment test on the intangible
asset and may have to write it down to the higher of the system’s
fair value less cost to sell or the value in use of the directly related
technology.
Amortisation of any remaining carrying value of the intangible asset
should occur over the estimated development period of Town
Bank’s other system, as the intangible is linked to the technology
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Recoverable Amount - Intangible Asset with Indefinite Useful
Life
An intangible asset with an indefinite useful life is tested for
impairment annually irrespective of whether there is an indication
that it may be impaired.
The last calculation of the recoverable amount (from a previous
period) may be used in the current period, provided all of the
following criteria are met:
(i)
(ii)
there has been no material change in the assets and
liabilities making up that unit since the last calculation;
the last calculation showed that the recoverable amount
substantially exceeded the carrying amount. and
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IAS 36 Impairment of assets
(iii)
it is likely the current recoverable amount is not less than
the carrying amount.
‘Fair value less costs to sell’
The best evidence of an asset’s ‘fair value less costs to sell’ is a
binding sale agreement less disposal costs.
In an active traded market, ‘fair value less costs to sell’ is the
asset’s market price, less disposal costs.
Market price is usually the current bid price or, if unavailable, the
price of the most recent transaction.
If there is no sale agreement or active market, ‘fair value less costs
to sell’ is based on the best information available at the balance
sheet date.
Such a disposal of the asset should be between knowledgeable,
independent parties, net of disposal costs.
‘Value in use’
The ‘value in use’ is a calculation that reflects the expected present
value of the future cash flows. It is a based on:
(i)
(ii)
(iii)
(iv)
Estimates of Cash Flows
In measuring ‘value in use’ cash flow estimates should be based
on:
(i)
management’s best estimate of the range of conditions
that will exist over the remaining useful life of the asset.
(ii)
the most recent financial budgets/forecasts (maximum 5
years) excluding any cash flows from restructurings or
improving the asset’s performance. Maintenance costs
should be included.
(iii)
extrapolations - of a steadily increasing or declining
growth rate
‘Fair value less costs to sell’ should not reflect a forced sale, unless
management is compelled to sell immediately.
Examples of costs of disposal are:
 legal costs,
 stamp duty and similar transaction taxes,
 costs of removing the asset, and
 incremental costs to bring an asset into sale condition.
Examples of costs not recognised as disposal costs are:
 termination benefits (per IAS 19 Employee Benefits)
 costs associated with reorganising a business,
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an estimate of the expected cash flows from the asset;
risk-free rate of interest
the risk premium
other factors that could effect the cash flows and risk free
rate
Unless justified, the growth rate must not exceed the long-term
average growth rate for the products, industries, country of
operation, or market.
Management may use projections based on budgets/forecasts over
a period longer than five years if it is confident these projections are
reliable.
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IAS 36 Impairment of assets
Solution
Composition of Estimates of Cash Flows
Cash flows include:
(i)
cash inflows from the continuing use of the asset;
(ii)
cash outflows needed to generate the inflows including
funds to prepare the asset for use or service it and
(iii)
net cash flows, if any, to be received (or paid) for the
disposal of the asset.
As cash flows are estimated for the asset in its current condition,
‘value in use’ does not reflect:
(i)
outflows or related cost savings or benefits from a future
restructuring to which management has not yet
committed to; or
(ii)
outflows that will improve the asset’s performance, or the
related inflows that are expected to arise from such
outflows.
Reduced selling price of recently acquired asset
Issue
Bank C bought (and capitalised as a fixed asset) an off-the-shelf
computer system which cost £2m.
Shortly afterwards the manufacturer dropped its price of the same
system to £1.5m. Should C write down the carrying value of the
fixed asset?
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Just because the manufacturer has dropped its prices for similar
assets does not mean that C’s fixed asset is impaired, as an asset
is impaired under IAS 36, only when the asset’s recoverable
amount (that is, the higher of fair value less costs to sell and value
in use) is below carrying amount.
IAS 36 requires an undertaking to assess at each reporting date
whether there is any indication that an asset is impaired.
One such indicator is if, during the period, the asset’s market value
has declined significantly more than would have been expected as
a result of the passage of time or normal use.
If, as in this case, there is any indicator of impairment, the
undertaking should estimate the recoverable amount of the asset
and, if this is less than the asset’s carrying amount, the carrying
amount should be reduced to recoverable amount.
The recoverable amount will not necessarily be below the carrying
amount simply because the manufacturer has dropped the price.
This is because the value in use (present value of the future cash
flows expected to be derived from using the asset) may be above
its carrying amount.
However, the impairment test will have to be carried out to
determine the recoverable amount and whether the asset needs to
be written down.
IAS 37 Provisions contains guidance clarifying when an undertaking
is committed to a restructuring.
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IAS 36 Impairment of assets
Once the undertaking is committed to the restructuring, estimates of
inflows and outflows,
(i)
reflect the likely savings from the restructuring; and
(ii)
its estimates of outflows for the restructuring are included
as detailed in IAS 37
If outflows improve the asset’s performance the resultant inflows
can also be included.
When a cash-generating unit consists of assets with different useful
lives, the replacement of assets with shorter lives is considered part
of the day-to-day servicing of the unit.
Estimates of cash flows do not include:
(i)
cash flows from financing activities; or
(ii)
income tax receipts, or payments.
As the discount rate is determined on a pre-tax basis, cash flows
are also estimated on a pre-tax basis.
Discount rate for value-in-use calculations
Issue
Bank E is performing a value-in-use calculation to ascertain
whether the carrying value of an asset is impaired. It has difficulty in
obtaining a pre-tax discount rate so considers grossing up the posttax discount rate by the tax rate to arrive at a pre-tax rate, or using
post-tax cash flows and a post-tax rate.
Will this give the same answer as using a pre-tax rate?
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Solution
IAS 36 requires a pre-tax discount rate to be applied to pre-tax cash
flows to determine value in use. Unfortunately, neither of the shortcuts proposed by E gives the right answer unless there is no
deferred tax and no growth in the cash flows.
For example, an asset was purchased for £2,400 and is now two
years old.
It has a carrying value of £1,920 and a tax base of £800. If the posttax discount rate is 8% and the standard rate of tax is 35%,
grossing up the post-tax rate by 35% would give a pre-tax rate of
12.3%, while discounting the post-tax cash flows at 8% gives a
lower pre-tax rate.
However, adjusting for the deferred tax movements using an
iterative calculation shows that the actual pre-tax rate is 14.5%.The
use of a discount rate of 12.3% or less would result in a value in
use significantly different from that calculated using the more
accurate rate of 14.5%.
To obtain a pre-tax discount rate, the standard states that E should
look for market discount rates for similar assets. However, it is likely
that most such rates will be post-tax. Therefore, the company
should consider performing an iterative calculation to arrive at the
appropriate pre-tax rate.
For estimates based on similar assets, adjustments may have to be
made for a variety of factors such as inflation.
Foreign Currency Cash Flows
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IAS 36 Impairment of assets
Cash flows are estimated in the currency in which they will be
generated, and discounted using a rate appropriate for that
currency. Translation of the present value is at spot rate on the date
of the ‘value in use’ calculation.
Beginning of 2XX9
Discount Rate
Accumulated
depreciation
(2XX9)
The discount rate is a pre-tax rate that reflects current market
assessments of:
(i)
(ii)
(iii)
(iv)
the risk-free borrowing rate;
the risk premium;
inflation;
alternatively the weighted-average cost of capital may be
used or the weighted-average cost of capital of a listed
undertaking that has a portfolio of assets similar in terms
of service and risks.
Historical cost (or
valuation)
Carrying amount
Accumulated
impairment
Carrying amount
after impairment loss
Goodwill
Identifiable
assets
Total
1,000
2,000
3,000
0
(167)
(167)
1,000
1,833
2,833
(1,000)
(473)
(1,473)
0
1,360
1,360
Accumulated impairment is never a positive number.
6. Recording and Measuring an Impairment Loss
IFRS 3 Business Combinations workbook explains how to account
for an impairment relating to acquisitions.
Impairment is presented in the income statement as:
EXAMPLE - Impairment of development costs prior to use
Impairment losses or impairment gains if presenting the income
statement by nature of expense, or an expense within the function if
presenting the income statement by function.
Background
Impairment gains represent reversals of impairment losses (see
below).
Tamara Bank has capitalised franchise costs (paid to a foreign
bank) as an intangible asset relating to a loan scheme for high-cost
loans to clients with poor credit ratings, which it is about to launch.
Impairment is presented in the balance sheet (SFP) as:
Tamara Bank has just learned that legislation will be introduced to
limit interest and bank charges and believes the franchise value is
severely diminished and an impairment charge must be recognised.
Accumulated impairment:
Where should Tamara Bank classify impairment charges on
intangible assets before such assets are available for use?
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IAS 36 Impairment of assets
In an income statement in which expenses are classified by nature,
impairment is shown as a separate line item. By contrast, if
expenses are classified by function, impairment is included in the
function(s) to which it relates. [IAS1].
Solution
Tamara Bank should classify the impairment charge relating to the
franchise as a component of business development expense, if
presenting the income statement by function.
Any impairment loss of a revalued asset is treated as a revaluation
reduction, in accordance with any other Standard that may apply.
EXAMPLE carrying amount revaluation, then shortfall
Your head office had a carrying value of $10m. It has been
revalued at $12m. The $2m surplus is credited to the revaluation
surplus reserve within equity
I/B
DR
CR
Property, plant & equipment
B
$2
Equity - Revaluation Reserve
B
$2
This records the revaluation of the head
office in the first year
If presenting the income statement by nature of expense, Tamara
Bank should classify the charge as an impairment charge.
In the following examples, I/B refers to Income Statement and
Balance Sheet (SFP).
EXAMPLE - impairment loss
Your head office had a carrying value of $20m. It has been
revalued at $19m. The $1m shortfall is expensed to the income
statement.
I/B
DR
CR
Accumulated impairment
B
$1
Impairment
I
$1
This records the revaluation of the head office
in the first year
An impairment loss is recorded immediately in the income
statement, unless the asset is carried at revalued amount in
accordance with another Standard (e.g. in accordance with the
revaluation model in IAS 16 Property, Plant and Equipment).
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At the next valuation, it is revalued at $7m. $2m of the shortfall will
be charged to the revaluation reserve. The remaining $3m shortfall
will be charged to the income statement as an impairment charge.
I/B
DR
CR
Equity - Revaluation Reserve
B
$2
Impairment
I
$3
Property, plant & equipment
B
$5
This records the revaluation of the head
office at the next valuation in the second
year
An impairment loss on:
(i)
an asset carried at cost is recorded in the income
statement.
(ii)
a revalued asset is recorded initially against any
revaluation as a reduction with any remaining portion
charged to expense in the income statement.
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IAS 36 Impairment of assets
When the amount estimated for an impairment loss is greater than
the carrying amount of the asset, a liability is recorded only if there
is a liability that will need to be settled. (This would give the asset a
negative carrying amount.)
7. Cash-generating Units and Goodwill
After the recognition of an impairment loss, the depreciation charge
for the asset is adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value, on a systematic
basis over its remaining useful life.
If it is not possible to estimate the recoverable amount of the
individual asset, the recoverable amount of the asset’s cashgenerating unit should be estimated.
EXAMPLE-impairment loss-reduction of depreciation
Your head office had a cost of $60m. It is being depreciated over 20
years. It has been revalued at $40m. The $20m shortfall has been
charged to the Income Statement
I/B
DR
CR
Accumulated impairment
B
$20
Impairment
I
$20
This records the revaluation of the head
office
Depreciation = 5%, and is now decreased from $3m to $2m per
year.
This is charged to the income statement each year.
Accumulated depreciation
Depreciation
Annual depreciation charge
I/B
B
I
DR
CR
$2
Identifying the Cash-generating Unit to Which an Asset
Belongs
The recoverable amount of an individual asset cannot be
determined if:
(i) the asset’s ‘value in use’ cannot be estimated to be close
to its ‘fair value less costs to sell’; and
(ii) the asset does not generate cash inflows that are
independent of those from other assets.
In such cases, ‘value in use’ and, therefore, recoverable amount,
can be determined only for the asset’s cash-generating unit.
Identification of an asset’s cash-generating unit involves judgement.
If the recoverable amount cannot be determined for an individual
asset the lowest aggregation of assets that generate independent
cash inflows should be identified.
$2
If an impairment loss is recorded, any related deferred tax assets or
liabilities are determined in accordance with IAS 12 Income Taxes.
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Cash inflows are inflows received from parties external to the
undertaking.
EXAMPLE- cash-generating unit 1
A bank owns a clearing house to support its credit card activities.
The clearing house could not be sold as it is integrated within the
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IAS 36 Impairment of assets
head office and it does not generate inflows that are independent of
the cash inflows from the other assets of the bank. There is no
market in which to sell the operation as competitors have their own
clearing houses.
It is not possible to estimate the recoverable amount of the clearing
house, as its ‘value in use’ cannot be determined, and is probably
different from scrap value. Therefore, the bank estimates the
recoverable amount of the cash-generating unit to which the
clearing house belongs: the credit card activities as a whole.
EXAMPLE- cash-generating unit 2
A bank provides services to a town in each of five branches,
including one housed in the town’s largest company. Assets are
separately devoted to each branch and the cash flows from each
branch can be identified separately.
The branch in the largest company operates at a loss. The bank
does not have the option to close the branch as the company is a
major client of its head office. The lowest level of identifiable cash
inflows that are largely independent of the cash inflows from other
assets are the cash inflows generated by the five branches
together. The cash-generating unit for each branch is the group of
the five town branches as a whole.
If the bank had the option to close any individual branch, the cash
generating unit is an individual branch.
By way of a collaboration agreement, Global Bank acquired the
rights to market a student loan scheme in the Eastern Hemisphere.
The acquired rights apply broadly to the entire territory. For
unknown reasons, students in Eastland prove far more likely to
default on loans, causing Global Bank to withdraw the product from
that country.
As loans in Eastland were not expected to be significant, loss of the
territory, taken in isolation, does not cause the overall net present
value from loans to be less than its carrying value in the books of
Global Bank.
How should Global Bank account for the rescission of a products’s
marketing approval in a specific territory?
An undertaking shall assess at each reporting date whether there is
any indication that an asset may be impaired. If any such indication
exists, the undertaking shall estimate the recoverable amount of the
asset [IAS 36].
In assessing whether there is any indication that an asset may be
impaired, an undertaking shall consider significant changes with an
adverse effect on the undertaking that have taken place during the
period, or are expected to take place in the near future, in the
extent to which, or manner in which, an asset is used or is expected
to be used.
Solution
Single market impairment accounting
Background
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The cash-generating unit for the acquired marketing right should be
viewed as sales from the entire Eastern Hemisphere. Accordingly,
withdrawal from one territory does not cause the asset’s value in
use to be less than its carrying value and no impairment loss should
19
IAS 36 Impairment of assets
be recognised.
If Global Bank has capitalised any additional development costs
(such as legal and registration fees specifically for achieving
approval in Eastland), these capitalised development costs must be
written off with the withdrawal of the product from the territory.
However, Global Bank’s management should carefully consider
whether the problems in one jurisdiction are indicative of potential
problems in other territories. If the issue cannot be isolated, a
broader impairment analysis should be performed, including the
potential for more wide-ranging loan losses.
If an active market exists for the output produced by an asset, that
asset is identified as a cash-generating unit, even if the output is
used internally.
(i)
changes in cash-generating assets from the previous
period;
(ii)
changes in types of assets aggregated for the asset’s
cash-generating unit; and
(iii)
if an impairment loss is recorded (or reversed) for the
cash-generating unit.
Recoverable Amount and Carrying Amount of a
Cash-generating Unit
The recoverable amount of a cash-generating unit is the higher of
the unit’s ‘fair value less costs to sell’ and its ‘value in use’.
The carrying amount of a cash-generating unit:
If the cash inflows are affected by internal transfer pricing,
management’s best estimates of external prices will be used for
inflows and outflows.
(i)
includes the carrying amount of only those assets that will
generate the cash inflows used in determining the unit’s
‘value in use’; and
This is because the asset could generate cash inflows independent
of other assets.
(ii)
does not include any recorded liability, unless the
recoverable amount of the unit cannot be determined
without consideration of this liability.
Transfer prices are adjusted if they do not reflect the prices of
external transactions.
Cash-generating units are identified consistently from period to
period, for the same asset or types of assets, unless a change is
justified.
Disclosures must be made for:
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When assets are grouped for recoverability assessments, it is
important to include all assets that generate inflows.
Sometimes, assets contribute to the cash flows of a unit, but cannot
be allocated to the unit on a reasonable and consistent basis.
Head office assets are examples of these types of assets.
It may be necessary to consider some recorded liabilities to
determine the recoverable amount of a unit.
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IAS 36 Impairment of assets
This may occur when a buyer assumes the liability resulting in cash
saving to the undertaking. In this case, the ‘fair value less costs to
sell’ of the unit is the selling price for the asset and the liability
together, less the costs of disposal.
The ‘value in use’ of the head office is approximately $1,200,
excluding restoration costs.
To perform a meaningful comparison between the carrying amount
of the unit and its recoverable amount, the carrying amount of the
liability is deducted in determining both the unit’s ‘value in use’ and
its carrying amount.
The cash-generating unit’s ‘fair value less costs to sell’ is $800.
This amount considers restoration costs that have already been
provided for.
For practical reasons, the recoverable amount of a unit is
sometimes determined after consideration of assets that are not
part of the unit (for example, receivables or other financial assets),
or liabilities that have been recorded (for example, payables,
pensions and other provisions).
The carrying amount of the head office is $1,000.
The ‘value in use’ for the cash-generating unit is determined after
consideration of the restoration costs and is estimated to be $700
($1,200 less $500).
The carrying amount of the cash-generating unit is $500, which is
the carrying amount of the head office ($1,000) less the carrying
amount of the provision for restoration costs ($500).
In such cases, the carrying amount of the unit is increased by the
carrying amount of those assets, and reduced by the carrying
amount of those liabilities.
Therefore, the recoverable amount of the cash-generating unit
exceeds its carrying amount so there is no impairment.
EXAMPLE-testing for impairment (amounts expressed in $000)
Goodwill
A bank operates a head office in a historical building. The bank
must restore the site on completion of its banking operations.
Goodwill is the premium paid to buy an asset or business. It is
calculated as:
The carrying amount of the provision for restoration costs is $500,
which is equal to the present value of the restoration costs.
Purchase price minus the fair value of net assets acquired.
The bank is testing the building for impairment. The cashgenerating unit for the bank is the head office as a whole. The bank
has received various offers to buy the head office at a price of
$800. This price reflects the fact that the buyer will assume the
obligation to restore the building.
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For impairment testing, goodwill acquired in a business combination
will be allocated to each of the acquirer’s cash-generating units that
benefit from the acquisition.
Each unit will:
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IAS 36 Impairment of assets
(i)
(ii)
represent the lowest level at which goodwill is identified
for internal management
not be larger than a segment , per IFRS 8 Operating
Segments.
Goodwill acquired in a business combination represents a premium
in anticipation of benefits from assets that are not capable of being
individually identified.
Goodwill sometimes cannot be allocated to individual units, but only
to groups of units.
Impairment tests are made at a level that reflects the way an
undertaking manages its operations.
The initial allocation of goodwill acquired in a business combination
must be completed before:
(i)
(ii)
the end of the annual period in which the business
combination is effected, or
the end of the first annual period after the acquisition
date.
If the initial accounting can be determined only by the end of the
period in which the combination is effected (ie provisionally) the
acquirer:
(i)
(ii)
accounts for the combination, using those provisional
values; and
records any adjustments to those provisional values with
actual values, within twelve months of the acquisition
date.
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It may not be possible to complete the initial allocation of the
goodwill before the end of the annual period in which the
combination is effected.
Disposal of an operation within a unit requires allocated goodwill
associated with the operation disposed of must be:
(i)
included in the carrying amount of the operation, when
determining the gain or loss on disposal; and
(ii)
measured on the basis of the relative values of the
operation disposed of, and the part of the unit retained,
unless the undertaking can show a better method.
If an undertaking reorganises its reporting structure and changes
the composition of the units to which goodwill has been allocated,
the goodwill is reallocated to the units affected using a relative
value method.
EXAMPLE-sale of a unit – goodwill apportionment (amounts
expressed in $millions)
A bank sells for $100 an operation, which was part of a cashgenerating unit to which goodwill has been allocated. The goodwill
allocated to the unit cannot be identified at a level lower than that
unit, except arbitrarily.
The recoverable amount of the part of the cash-generating unit
retained is $300. As the goodwill allocated to the unit cannot be
identified, the goodwill associated with the operation disposed of is
measured on the basis of the relative values of the operation
disposed of and the part of the unit retained.
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IAS 36 Impairment of assets
Therefore, 25% (100/400) of the goodwill allocated to the cashgenerating unit is included in the carrying amount of the operation
that is sold.
Testing Cash-generating Units with Goodwill for Impairment
accumulated depreciation and impairment.
Undertaking C is preparing its interim results for the period to June
2005 and has identified that the assets of the CGU have become
impaired as a result of events occurring during the second quarter
of 2005.
Whenever there is an indication that the unit may be impaired, it
should be tested for impairment.
The recoverable amount of the CGU is £2.4m as at 30 June 2005.
EXAMPLE-Impairment of assets - acquisitions
Should any part of the impairment be recognised against the
revaluation reserve created during the step acquisition of D?
Issue
Bank C acquired 100% of bank D in two stages. It acquired 30% in
April 2002 and the remaining 70% in May 2004. Bank D was
therefore an associate of C from April 2002 to May 2004, when it
became a subsidiary.
C’s management undertook a purchase price allocation in April
2002 and identified the fair values of D’s assets and liabilities at that
date. Management used these to calculate the goodwill arising at
the date of D becoming an associate of C.
C’s management undertook a similar purchase price allocation in
May 2004 when C obtained control over D. The assets of one of D’s
cash generating units (CGUs) had a fair value of £2.1m at April
2002 and £2.9m at May 2004.
C’s management treated the change in fair value of the CGU.s
assets between April 2002 and May 2004 as a revaluation in
respect of the 30% interest it held prior to May 2004, as required by
IFRS 3, Business Combinations.
C accounts for all tangible and intangible assets at cost less
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Solution
No. IAS 36 requires an impairment loss to be recognised in the
income statement unless the asset is carried at a revalued amount
in accordance with another standard, for example IAS 16, Property,
Plant and Equipment.
The assets of the CGU were acquired by the group in May 2004
when C obtained control over D. The cost of the CGU.s assets was
determined as £2.9m at May 2004 in accordance with IFRS 3.
The subsequent measurement of these assets in the consolidated
financial statements is at cost less accumulated depreciation and
impairment. The assets are not carried at revalued amount in
accordance with IAS 16 or IAS 38, Intangible Assets.
The recognition of a revaluation reserve of £240,000 (30% x (£2.9m
- £2.1m)) in respect of the CGU as part of the step acquisition
accounting in May 2004 does not change the basis on which the
CGU assets are carried in the financial statements.
The whole of the impairment charge of £0.5m (£2.9m - £2.4m)
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IAS 36 Impairment of assets
should be recognised in the income statement.
If a unit includes an intangible asset that has an indefinite useful life
or is not yet available for use, the unit must to be tested for
impairment annually.
If the recoverable amount of the unit exceeds the carrying amount
of the unit it is regarded as not impaired.
If the carrying amount of the unit exceeds the recoverable amount
of the unit, the unit is impaired.
EXAMPLE-impairment loss of goodwill
A unit has a carrying value of $10 m, of which goodwill = $2 m.
The unit is revalued at $8 m. The goodwill is totally impaired, and
is written off.
I/B
DR
CR
Goodwill
B
$2
Impairment-goodwill
I
$2
This records the impairment of goodwill
EXAMPLE- goodwill reallocation in a reorganisation
Goodwill of $4m had previously been allocated to cash-generating
unit A. The goodwill allocated to A cannot be identified at a level
lower than A, except arbitrarily.
A is to be divided and integrated into three other cash-generating
units, B, C and M.
B is to have 50% of A’s net assets, C will have 40% of A’s net
assets, and M will have 10%
Goodwill to reallocated to units B, C and M to reflect the share of
net assets transferred:
B will have $2m (50% of $4m)
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C will have $1,6m (40%)
M will have $0,4m (10%).
The excess of impairment over goodwill is allocated to other assets
in the unit, pro rata to the carrying amount of each asset in the unit.
EXAMPLE-impairment loss of goodwill less than the total
impairment
Your unit has a carrying value of $10 m, of which goodwill = $2 m.
The unit is revalued at $7 m. The goodwill is totally impaired, and
is written off. The $1 m excess ((10-2)-7=1) is allocated to the
other assets of the unit, pro rata based on the carrying amount of
each asset in the unit.
I/B
DR
CR
Goodwill
B
$2
Impairment-goodwill
I
$2
Impairment -property, plant and equipment
I
$1
Accumulated impairment - property, plant and
$1
equipment
This records the impairment of goodwill and
other assets
Timing of Impairment Tests
The annual goodwill impairment test for a unit may be performed at
any time during the period, provided the test is performed at the
same time every year.
Different cash-generating units may be tested for impairment at
different times.
If some of the goodwill allocated to a unit was acquired in a
business combination during the current annual period, that unit is
tested for impairment before the end of the current annual period.
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IAS 36 Impairment of assets
The lowest level of cash-generating unit is tested before higher
levels:
If the assets and goodwill are tested for impairment at the same
time, the assets are tested before the goodwill.
Similarly, for cash-generating units constituting a group of units, test
the individual units for impairment before the group.
The most-recent calculation may be used in the impairment test of
a unit provided all of the following criteria are met:
(i)
the assets and liabilities making up the unit have not
changed significantly since the calculation;
(ii)
the recoverable amount exceeds the carrying amount of
the unit by a substantial margin; and
(iii)
the likelihood that a current recoverable amount
determination would be less than the current carrying
amount of the unit is remote.
EXAMPLE- most-recent calculation used in the impairment test
In 2XX5, you tested your unit for impairment. In 2XX6, you use the
2XX5 calculation, as:
(i) there has been no major change in the net assets;
(ii) the recoverable amount was $20 million, and the carrying value
was $16 million;
(iii) current recoverable amount is almost certainly more than the
current carrying amount of the unit
Corporate assets include group or divisional assets, such as the
headquarters building, or a division of the undertaking, IT
equipment, or a research centre.
The structure of an undertaking determines whether an asset meets
IAS 36’s definition of corporate assets.
Corporate assets do not generate cash inflows independently of
other assets so no value in use calculation can be made.
Their recoverable amount cannot be determined until disposal of an
individual corporate asset.
If there is an indication that a corporate asset may be impaired, the
recoverable amount is determined for the unit to which the
corporate asset belongs and is this is compared with the carrying
amount of this unit.
In testing a unit for impairment all the corporate assets that relate to
the unit under review must be considered.
EXAMPLE- Corporate assets included in review
Your cash-generating unit has net assets of $450m, excluding net
current assets. Your head office has a central research unit, of
which $20m of assets relates to your unit. When testing for
impairment, this $20m must be added to the $450m and compared
with the recoverable amount.
If a part of the carrying amount of a corporate asset:
1. can be allocated to that unit:
Corporate Assets
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IAS 36 Impairment of assets
compare the carrying amount of the unit, inclusive of the
part of the corporate asset allocated, with its recoverable
amount.
2. cannot be allocated
(i)
compare the carrying amount of the unit, excluding the
corporate asset, with its recoverable amount;
(ii)
identify the smallest group of units that includes the unit
under review, and to which a part of the corporate asset
can be allocated; and
(iii)
compare the carrying amount of that group of units,
including the part of the corporate asset allocated to that
group of units, with the recoverable amount of the group
of units.
Impairment Loss for a Cash-generating Unit
An impairment loss is recorded for a unit (the smallest group of
units to which goodwill, or a corporate asset has been allocated)
only if the recoverable amount of the unit is less than the carrying
amount.
Tiny Bank cannot afford to incorporate these enhanced features
and expects revenues from its store cards to drop quickly and
significantly.
Although positive margins are forecast to continue, management
identifies this as an indicator of impairment. Management may exit
the market for store cards earlier than previously contemplated.
(Tiny Bank had been planning to build up the business and then to
sell it.)
How should Tiny Bank assess the impairment and useful lives of
long-lived assets where impairment indicators have been identified?
An undertaking shall assess at each reporting date whether there is
any indication that an asset (or assets) may be impaired. If so, the
undertaking shall estimate the recoverable amount of the asset.
The recoverable amount is defined as the higher of an asset’s fair
value less costs to sell and its value in use. If either of these
amounts exceeds the asset’s carrying amount, no impairment is
indicated and the other amount does not have to be calculated.
EXAMPLE- Impairment testing and useful life
If there is an indication that an asset may be impaired, this may
indicate that the remaining useful life or residual value needs to be
reviewed and potentially adjusted, even if no impairment loss is
recognised for the assets.
Background
Solution
Tiny Bank has a major operation that supports its store card (credit
cards branded in the name of each store). The operation has no
alternative use. National Savings Bank launches a new store card
with better features.
Tiny Bank should evaluate the carrying value of the store card’s
cash-generating unit (including the assets being used in its
operating unit) for impairment relative to its value in use resulting
from revenue of the store card.
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26
IAS 36 Impairment of assets
Given the margin achieved on the remaining revenue, the value in
use may exceed the assets’ carrying value and Tiny Bank may
determine that no impairment is required. However, Tiny Bank
should reduce the remaining useful life to the revised period over
which revenues are expected.
It is allocated firstly to goodwill then, to the other assets of the unit
pro rata on the basis of the carrying amount of each asset in the
unit.
EXAMPLE-allocating loss to goodwill, then to other assets
pro-rata
Your unit’s assets are:
Goodwill
$ 100m
Tangible assets
$ 600m
Intangible assets $ 300m
Total
$ 1.000m
The recoverable amount is only $750m. The impairment loss will
be:
Goodwill
$ 100m
Tangible assets
$ 100m
Intangible assets $ 50m
Total
$ 250m
Goodwill
Impairment-goodwill
This records the impairment of goodwill.
Impairment -property, plant and equipment
Accumulated impairment - property, plant and
equipment
I/B
B
I
DR
I
B
$0,1
CR
$0,1
$0,1
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This records the impairment of tangible
assets
Accumulated impairment - intangible assets
Impairment - intangible assets
This records the impairment of intangible
assets
Note: In this case, goodwill should be subject
to the impairment loss first. However, the
other intangible assets should be reviewed to
ensure that their new carrying value ($250m)
is realistic. If not, the impairment charge
should be increased to intangibles and
decreased to property, plant and equipment.
B
I
$0,05
$0,05
The carrying amount of an asset must not be reduced below the
highest of:
(i)
fair value less costs to sell’ (if determinable);
(ii)
‘value in use’ (if determinable); and
(iii)
zero.
If it is not practicable to estimate the recoverable amount of each
individual asset of a unit, IAS 36 requires an arbitrary allocation of
an impairment loss between the assets of that unit, other than
goodwill.
$0,1
Individual Assets
27
IAS 36 Impairment of assets
If the recoverable amount of an individual asset cannot be
determined:
Nevertheless, the undertaking may need to reassess the
depreciation period or method for the machine.
(i)
an impairment loss is recorded if its carrying amount is
greater than the higher of:
‘fair value less costs to sell’, and its
recoverable amount after allocation.
Assumption 2: budgets/forecasts approved by management
reflect a commitment of management to replace the machine,
and sell it in the near future. Cash flows from continuing use of
the machine, until its disposal, are negligible.
(ii)
no impairment loss is recorded for the asset if the unit is
not impaired. This applies even if the asset’s ‘fair value
less costs to sell’ is less than its carrying amount.
The machine’s ‘value in use’ is close to its ‘fair value less costs to
sell’. The recoverable amount of the machine can be determined,
and no consideration is given to the unit to which the machine
belongs (the branch).
EXAMPLE-impairment test – cash-counting machine
A cash-counting machine has suffered physical damage but is
still working, although not as well as before it was damaged. The
machine’s ‘fair value less costs to sell’ is less than its carrying
amount.
The machine does not generate independent cash inflows. The
smallest identifiable group of assets that includes the machine
and generates cash inflows, is the branch, to which the machine
belongs. The recoverable amount of the branch shows that the
branch taken as a whole is not impaired.
Assumption 1: budgets/forecasts approved by management
reflect no commitment of management to replace the machine.
As the machine’s ‘fair value less costs to sell’ is less than its
carrying amount, an impairment loss is recorded for the machine.
A liability is recorded for any remaining impairment loss for a unit
only if that liability will need to be settled.
8. Reversing an Impairment Loss
An impairment loss recorded in prior periods for assets other than
goodwill may no longer exist, or may have reduced.
As a minimum the following indications should be considered:
External sources of information
The recoverable amount of the machine alone cannot be
estimated, as the machine’s ‘value in use’: may differ from its ‘fair
value less costs to sell’; and can be determined only for the cashgenerating unit to which the machine belongs (the branch).
The branch is not impaired. Therefore, no impairment loss is
recorded for the machine.
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(i)
if the asset’s market value has increased significantly
during the period.
(ii)
if significant technological, market, economic or legal
changes have or will take place.
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IAS 36 Impairment of assets
(iii)
if interest rates, or other market rates of affecting asset’s
recoverable amount materially have altered.
EXAMPLE- Reversals of impairment losses (cost model)
Background
Internal sources of information
(iv)
(v)
if significant changes in use have, or will take place.
Changes include costs of improving the asset’s
performance or restructuring the operation to which the
asset belongs.
if evidence is available that indicates that the
performance of the asset is, or will be, better than
expected.
An impairment loss, recorded in prior periods, is reversed only if
there has been a change in the estimates used to determine the
asset’s recoverable amount since the last impairment loss was
recorded.
To reverse an impairment loss, increase the carrying amount of the
asset to its recoverable amount.
Examples of changes in estimates include:
(i)
a change in the basis for recoverable amount (e.g.
whether recoverable amount is based on ‘fair value less
costs to sell’ or ‘value in use’);
if recoverable amount was based on ‘value in use’, a
change in the amount, or timing of cash flows, or in the
discount rate
(iii)
if recoverable amount was based on ‘fair value less costs
to sell’, a change in estimate of the components of ‘fair
value less costs to sell’.
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(ii)
Gemini Bank markets a combined creditcard, overdraft and
mortgage product for which franchise costs (paid to a foreign bank)
have been capitalised. A competing product was launched on the
market with a much lower price.
Gemini Bank recorded an impairment of the capitalised intangible
asset due to a reduction in the amounts it estimated that it could
recover as a result of this rival product.
Subsequently, the competing product was removed from the market
because of legal challenges. The market share and forecast cash
flows generated by Gemini Bank’s product significantly increased.
How should Gemini Bank account for reversals of impairment
losses for intangible assets accounted for under the cost model?
An impairment loss recognised in prior periods for an asset
accounted for under the cost model is reversed if there has been a
change in the estimates used to determine the asset’s recoverable
amount since the last impairment loss was recognised.
The carrying amount of the asset is increased to its recoverable
amount, but shall not exceed its carrying amount adjusted for
amortisation or depreciation had no impairment loss been
recognised for the asset in prior years.
That increase is a reversal of an impairment loss. A reversal of an
impairment loss reflects an increase in the estimated service
potential of an asset, either from use or from sale, since the date
when the bank last recognised an impairment loss for that asset.
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IAS 36 Impairment of assets
An undertaking must identify the change in estimate that causes the
increase in estimated service potential.
EXAMPLE - Disposal of branches - reversal of past
impairments
Solution
Issue
Bank A owns and operates a group of bank branches. It classifies
each branch as a separate cash generating unit (CGU) for
impairment testing purposes.
The value in use calculation resulting in the impairment loss
included an estimate of market share. An identifiable change in
estimate exists and the previously recorded impairment should be
reversed.
Gemini Bank should recalculate the value in use of the franchise
fee. The revised carrying value of the intangible asset cannot
exceed the amount, net of amortisation, that would have been
recognised if no impairment charge had been recognised.
Any changes in the carrying amount will result in an amendment to
the charge for amortisation in future periods.
An asset’s ‘value in use’ may become greater than the asset’s
carrying amount simply because the present value of cash inflows
increases, as they become closer but the service potential of the
asset has not increased.
An impairment loss is not reversed just because of the passage of
time (sometimes called the ‘unwinding’ of the discount), even if the
recoverable amount of the asset becomes higher than its carrying
amount.
9. Reversing an Impairment Loss for an Individual Asset
On reversal of an impairment loss, the increased carrying amount
must not exceed that which would have been determined had there
been no previous impairment loss.
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Undertaking A has identified three branches within its branch
system that it has decided to sell. The three branches will be sold
together as one disposal group.
Two of the branches have been impaired in previous periods and
have been written down to their recoverable amount of 70 each.
The recoverable amount of the third branch exceeds its carrying
amount. Information regarding the three branches is shown in Table
1.
CGU 1 CGU 2 CGU 3 Total
Table 1
Branch / CGU
Depreciated cost
100
100
100
300
Recoverable amount
70
70
150
290
Carrying value
70
70
100
240
The criteria in IFRS 5, Noncurrent Assets Held for Sale and
Discontinued Operations , have been met for the disposal group to
be classified as held for sale.
Bank A is therefore considering whether the carrying amount of the
disposal group (240) should be increased to reflect the total
recoverable amount of the disposal group (290)?
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IAS 36 Impairment of assets
Solution
In order to be classified as held for sale, Bank A should not
increase the
carrying value of the disposal group above 240 at the date of
meeting the IFRS 5 criteria.
IFRS 5 requires that the carrying amount of all assets in the
disposal group is measured in accordance with applicable IFRSs
immediately before classification as held for sale.
CGUs above increases from 290 to 320 after classification as held
for sale, then there has been an increase in the fair value less costs
to sell of the disposal group of 30 during this time.
The carrying value of the disposal group will therefore be increased
by 30 from 240 to 270.
This will be IAS 16, Property, Plant and Equipment, and IAS 36,
Impairment of Assets.
Any reversal is limited to the amount of impairment previously
recognised,
in this case a total of 60.
Any increase in the carrying amount above the reversal is a
revaluation.
At this stage the impairment testing will still be on a normal IAS 36
basis, that is each CGU will be tested separately.
In accounting for such a revaluation, an undertaking applies the
Standard applicable to the asset.
Assuming that there is no change in the recoverable amount of
each separate CGU, the carrying amount of the CGUs will be
unchanged at 70, 70 and 100 respectively.
A reversal of an impairment loss is recorded immediately in the
income statement, unless the asset is carried at revalued amount in
accordance with another Standard (for example, the revaluation
model in IAS 16 Property, Plant and Equipment).
IFRS 5 requires impairment testing of disposal groups to be
performed on a disposal group basis after classification as held for
sale (rather than on an individual CGU basis).
IFRS 5 also allows any reversal of impairment of the disposal group
to include reversal of impairments recorded under IAS 36 prior to
classification as held for sale (excluding impairments recognised
against goodwill).
However, the reversal of impairments permitted by IFRS 5 is only to
the extent that the increase in fair value less costs to sell arises
after initial classification as held for sale.
For example, if the total fair value less costs to sell of the three
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Any reversal of an impairment loss of a revalued asset is treated as
a revaluation increase in accordance with that other Standard.
EXAMPLE impairment, then reversal
Your head office had a carrying value of $20m. It has been
revalued at $19m. The $1m shortfall is expensed to the income
statement.
I/B
DR
CR
Accumulated impairment
B
$1
Impairment loss
I
$1
This records the impairment of the head office
in the first year
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IAS 36 Impairment of assets
At the next valuation, it is revalued at $23m. $1m of the surplus
will be credited to the income statement. The remaining $3m
surplus will be credited directly to the revaluation surplus reserve
within equity, without appearing on the income statement
I/B
DR
CR
Property, plant & equipment
B
$3
Accumulated impairment
B
$1
Impairment gain
I
$1
Equity - Revaluation Reserve
B
$3
This records the revaluation of the head office
in the second year
Accumulated depreciation
Depreciation
Annual depreciation charge
I/B
B
I
DR
CR
$4
$4
10. Reversing an Impairment Loss for a Cash-generating Unit
A reversal of an impairment loss for a cash-generating unit is
allocated to the assets of the unit, except for goodwill, pro rata
according to the carrying amounts of those assets.
A reversal of an impairment loss on a revalued asset is credited
directly to equity under the heading revaluation surplus.
These increases in carrying amounts are treated as reversals of
impairment losses for individual assets.
To the extent that an impairment loss on the same revalued asset
was previously recorded in the income statement, a reversal of that
impairment loss is also recorded in the income statement.
In allocating a reversal of an impairment loss for a unit, the carrying
amount of an asset must not be increased above the lower of:
(i) its recoverable amount (if determinable); and
After a reversal of an impairment loss is recorded, the depreciation
charge for the asset is adjusted in future periods to allocate the
asset’s revised carrying amount, less its residual value, on a
systematic basis over its remaining useful life.
EXAMPLE-revaluation and revision of depreciation
Your head office had a carrying cost of $60m.
It is being depreciated over 20 years. It has been revalued at $80m.
Depreciation = 5%, and is now increased from $3m to $4m per
year.
The depreciation is charged to the income statement each year.
(ii) the carrying amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been
recorded, in prior periods.
The amount of the reversal of the impairment loss that would
otherwise have been allocated to the asset is allocated pro rata to
the other assets of the unit, except for goodwill.
EXAMPLE- Reversal of goodwill impairment
Issue
Management of Bank C decided to restructure C’s business and
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32
IAS 36 Impairment of assets
began to actively seek buyers for a number of C’s subsidiaries.
Solution
These subsidiaries were appropriately classified as disposal groups
held for sale in accordance with IFRS 5, Non-current Assets Held
for Sale and Discontinued Operations, in C’s 2XX5 financial
statements.
D’s management should first review the assessment made in 2XX5
to classify the subsidiary as held for sale. The IFRS 5 criteria that
must be met in order to qualify for the held-for-sale classification
are strict.
One of the subsidiaries classified as held for sale was Bank D.
Bank D’s assets and liabilities were remeasured as a disposal
group and the carrying amounts reduced by 45,000 to its fair value
less costs to sell.
D’s management should consider the possibility of an error in their
original
assessment. If it is concluded that the classification of the
subsidiary as held for sale in 2XX5 was an error, the error should
be corrected through a restatement of the comparatives in
accordance with IAS 8.
This impairment was allocated entirely against the goodwill
associated with D.
During February 2XX6,C’s management revised its restructuring
plan and decided not to dispose of D. IFRS 5 requires that the
assets within a disposal group that no longer qualifies to be
classified as held for sale should be re-measured to the lower of:
i) its carrying amount before being classified as held for sale,
adjusted for subsequent depreciation or amortisation; and
ii) its recoverable amount at the date of the subsequent decision not
to sell.
The value in use of D is greater than its fair value less costs to sell.
C’s management must therefore recognise a reversal of the
remeasurement
recognised in 2XX5 under IFRS 5.
Should the reversal of the 45,000 write-down be reversed against
the goodwill associated with D?
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However, if it is concluded that the classification as held for sale in
2XX5 met the requirements of IFRS 5, and no error was made, then
the reversal of the 45,000 should not be made against goodwill.
The write-down of 45,000 to fair value less cost to sell was
recognised as an impairment loss entirely against goodwill in
accordance with IFRS 5. IFRS 5 requires that any subsequent
reversal of impairment loss is recognised by following the order of
allocation set out in IAS 36 (see Impairment Loss for a Cash
Generating Unit above).
The original impairment loss was recorded entirely against goodwill
so none of the
impairment reversal can be recorded.
An Impairment Loss for Goodwill Cannot be Reversed
An impairment loss recorded for goodwill must not be reversed in a
later period.
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IAS 36 Impairment of assets
EXAMPLE-impairment loss of goodwill will not be reversed
Your unit has a carrying value of $10m, of which goodwill = $2m.
The unit is revalued at $7m. The goodwill is totally impaired, and is
written off.
how management makes decisions about continuing or disposing of
the undertaking’s assets and operations.
In the next period, the unit is revalued at $15m. The impairment
loss, recorded for goodwill, must not be reversed.
• individual retail stores;
Goodwill
Impairment-goodwill
This records the impairment of goodwill. This
elimination of goodwill cannot be reversed.
I/B
B
I
DR
CR
$2
$2
IAS 38 Intangible Assets prohibits the recognition of internally
generated goodwill.
11. IAS 36, Impairment – Frequently asked questions (from
IFRS News)
Part 1
Identifying cash generating units (CGU)
Question 1
What are the common factors of independence of cash flows in a
CGU?
Answer 1
There are various factors, including how management monitors the
undertaking’s operations – for example by product lines,
businesses, individual locations, districts or regional areas – and
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Typical CGUs are:
• an individual factory with a single production line where there is no
external market for the product at an intermediate stage; and
• each route service that a transport business provides where the
assets deployed to each route as well as the route’s cash flows can
be separately identified.
Question 2
Should management consider the legal structure of the operations
in identifying a CGU?
Answer 2
Management’s analysis may not reflect the legal structure through
which the operations are conducted. Identification of CGUs is
driven by the asset and the business and requires judgment.
Question 3
Where some or all output produced by an asset or by a group of
assets is used internally, is that asset or group of assets identified
as a CGU?
Answer 3
If there is an active external market for such output, that asset or
group of assets is identified as a CGU. This is particularly relevant
for vertically integrated operations where there is likely to be an
active market for the product
.
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IAS 36 Impairment of assets
Allocating corporate assets and goodwill to CGUs
Question 4
What must management do if a corporate asset cannot be allocated
on a reasonable and consistent basis to a CGU?
Answer 4
A two-stage test is required:
1. Test the CGU without the corporate asset for impairment and
book any charge arising; then
2. Test the smallest grouping of CGUs to which the corporate asset
can be allocated on a reasonable and consistent basis, and record
any charge arising.
Example
A retailer has a number of regional warehouses that supply all
stores in a region. Each store in the region is a CGU. How does
management choose a method to allocate a portion of the
warehouse assets to each store?
Solution
Management must identify a non-arbitrary, reasonable and
consistent basis to allocate the warehouse costs to each CGU.
There are several potential methods of allocation – for example,
based on volume or value of deliveries to each
store, ratio of size of individual stores to the total floor space in the
region, or ratio of workforce at each store to regional workforce.
However, management could argue that the regional warehouse
costs cannot be allocated consistently. In this case, they must use
the two-stage method (see Question 4) and test each warehouse at
a regional level by grouping each region’s stores and warehouse
together.
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Question 5
In what circumstances can management change the allocation of
goodwill to CGUs for impairment testing?
Answer 5
A reallocation of goodwill is only permitted if there is a
reorganisation or a restructuring of the business.
Question 6
The standard states that goodwill must be allocated to the lowest
level at which the goodwill is monitored for internal management
purposes. What does this mean?
Answer 6
The level at which management monitors goodwill for internal
management purposes is the lowest level at which it reviews the
success of an acquisition, by capturing and monitoring the benefits
of the goodwill.
For example, if a subsidiary makes an acquisition, despite the fact
that goodwill will only appear on a consolidated balance sheet level,
it is the management team
that is held accountable for acquisitions that would monitor
goodwill.
The requirement to allocate goodwill should not cause companies
to allocate goodwill arbitrarily to CGUs or create a need for new
systems for monitoring goodwill.
However, the level of allocation cannot be higher than the primary
or secondary segment level, even if management monitors it at a
higher level.
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IAS 36 Impairment of assets
Question 7
Does the adoption of IFRS 8, Operating Segments, have any
impact on the goodwill reallocation?
Answer 7
The adoption of IFRS 8 is a trigger for reallocation of goodwill
where there is a change in the undertaking’s segments. The
standard states that the level of allocation cannot be higher than a
segment level.
Question 8
A company allocates all goodwill on previous acquisitions to
acquired CGUs in line with local GAAP. Does the requirement to
allocate goodwill to CGUs that are expected to benefit from the
combination mean that the company will have to reallocate
goodwill?
Answer 8
A reallocation of goodwill to the CGUs expected to benefit may be
appropriate. The transition rules in IFRS 1 that freeze the carrying
amount of goodwill do not preclude an undertaking from
reallocating the goodwill brought forward.
Decision to dispose of an asset
Question 9
What are the implications for impairment testing when management
decides to dispose of an asset?
Answer 9
The decision to dispose of a non-current asset or group of assets
means that the carrying amount of the asset(s) is expected to be
recovered principally through a sale transaction rather than
continuing use. Management decides to dispose of
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an asset or a business before it meets the held-for-sale criteria.
The decision to dispose of an asset is an indicator of impairment;
an impairment test is therefore required before the requirements of
IFRS 5 are applied.
Part 2
Frequency of impairment tests
Question 1
How frequently should an asset be tested for impairment?
Answer 1
The frequency depends on the nature of the assets being tested.
The standard requires all assets to be tested when there is an
indicator of impairment.
In addition, the following assets need to be tested annually even if
no indicator of impairment exists: goodwill, indefinite-lived intangible
assets and intangible
assets not yet ready for use.
Question 2
Should an undertaking perform the impairment test at interim
balance sheet dates?
Answer 2
At each reporting date, including interim balance sheet dates, an
undertaking is required to assess whether there has been any
indication that an asset is impaired. If such an indicator exists, the
asset must be tested for impairment.
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IAS 36 Impairment of assets
Question 3
How does an undertaking identify impairment indicators?
Answer 3
Impairment indicators can be internal (specific to the undertaking),
such as sales below budgeted levels, or external, such as
increases in market interest rates.
Management should have an active process for considering factors
affecting its business.
Each undertaking typically has systems of management reporting in
place that will assist in this process – for example, a commentary
on the results of the month from management, which will identify
the significant events in the month in question.
Example
A branch of a business in southern France, located close to a
chemical factory, was largely destroyed in an explosion. The
insurance assessors are examining the damage, and management
is confident that the full cost of the rebuild plus compensation for
loss of profits will be received.
Question 4
Should management analyse the individual performance of
individual assets or cash-generating units (CGUs), even when the
company is profitable overall?
Answer 4
Management should consider the economic performance of the
individual assets or CGUs to assess whether the asset or CGU is
performing in line with expectations.
The fact that an undertaking is profitable as a whole does not mean
that an individual asset or CGU is not impaired.
Example
Undertaking A produces equipment and has for some time been the
market leader. Its chief competitor, B, has recently developed a
new product that is widely acknowledged as being superior to that
of A.
Is the asset impaired, given that it will be replaced?
Undertaking A’s management has not performed an impairment
review of its plant on the grounds that annual production and sales
are ahead of budget. Should the undertaking perform an
impairment test?
Solution
Yes, the asset is impaired, as it has been destroyed. The
replacement will be a new asset; the costs of construction are
capitalised when it is built. Insurance proceeds for the rebuilding
cost are credited to income.
Solution
Undertaking A should review its plant for impairment. The change in
the market for its product is an indicator of impairment, as it can
have a significant impact on the value of the plant based on the
economic benefit to be obtained from its continued use.
The impairment loss is charged in the current period. Any insurance
proceeds for the fixed asset and compensation for loss of profit can
only be recognised when the recovery from the insurers is virtually
certain.
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The fact that sales are ahead of budget is not sufficient to conclude
that there is no impairment. Management should assess the impact
of this new competing product on demand for its existing product
and on expected future cash flows.
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IAS 36 Impairment of assets
Timing of impairment tests
Question 5
When should an undertaking conduct annual impairment tests on
goodwill and other intangible assets with indefinite useful lives?
Answer 5
Annual impairment tests may be performed at any time during the
financial year, provided that the testing is performed at the same
time in subsequent periods. Different assets may be tested at
different times of the year.
Question 6
What are the advantages and disadvantages of performing an
impairment test before the year end?
Answer 6
The advantages are:
• the testing could be performed at a time when more resources are
available to complete the tests;
• the annual impairment test process could be aligned with the
budgeting process, which provides the data for value in use tests;
and
• any potential impairments and related disclosures could be
assessed before the year-end accounts preparation process.
However, the risk with performing a test before the year end is that
the impairment test will need to be re-performed if there is a
subsequent trigger event.
Question 7
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How soon does goodwill acquired in a business combination need
to be tested after an acquisition?
Answer 7
Goodwill should be tested for impairment in the year of acquisition.
However, the standard also states that if the initial allocation of
goodwill cannot be completed within the year of acquisition, that
initial allocation should be completed before the end of the first
financial year beginning after the acquisition date.
Goodwill should be tested once the allocation is completed within
the imposed time limit. For example, if a December year-end
undertaking makes an acquisition in January 2006, the maximum
period allowed to complete the allocation of goodwill is December
2007.
Clarification of Question 7
Question
How soon is goodwill acquired in a business combination be tested
after an acquisition?
Answer
Goodwill is tested for impairment in the year of acquisition.
However, the standard also states that if the initial allocation of
goodwill cannot be completed within the year of acquisition, that
initial allocation is completed before the end of the first financial
year beginning after the acquisition date.
Goodwill is tested once the allocation is completed within the
imposed time limit. For example, if a December year-end
undertaking makes an acquisition in January 2006, the maximum
period allowed to complete the allocation of goodwill is December
2007.
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IAS 36 Impairment of assets
As a reminder, the sequence of events is as follows:
Answer 8
Such a CGU (or group of CGUs) is re-tested for impairment before
the end of the current year, in addition to the annual goodwill
impairment testing.
1. IAS 36.96 requires the goodwill arising on a business
combination in the current year to be tested for impairment
before the end of the current year. In our example above, the
goodwill should ideally be tested by the end of 2006.
Example
An acquisition takes place in January 2006; the allocation of
goodwill arising from this acquisition was completed in September
2006.
2. However, an undertaking cannot allocate goodwill to CGUs until
it has completed its purchase accounting and knows what the
goodwill number is. This is recognised in IAS 36.85.
The undertaking’s annual goodwill impairment testing is performed
in March of each year. When should the undertaking test goodwill
for impairment?
Some readers confused the purchase price allocation required by
IFRS 3 with the goodwill allocation process required by IAS 36.
3. IFRS 3 allows an undertaking 12 months from the acquisition
date to complete the purchase accounting. In our example, the
purchase accounting must be completed by January 2007. Now
the undertaking knows the goodwill number for allocation.
Solution
The CGU (or group of CGUs) with the new goodwill allocated is
tested for impairment before the end of the current period,
December 2006.
Part 3
4. IAS 36 requires the goodwill to be allocated to CGUs at the
latest by the end of the period following that in which the
acquisition took place. In our example, the goodwill arising on a
January 2006 acquisition may have as long as until December
2007 before it has to be allocated and tested for impairment.
Question 8
New goodwill arises from an acquisition that is allocated to a CGU
(or group of CGUs) with pre-existing goodwill.
IAS 36 defines recoverable amount as the higher of an asset’s
value in use (VIU) and fair value less costs to sell (FVLCTS). Value
in use and fair value less costs to sell can be difficult to determine
in practice.
This part addresses how impairment is measured, including
common assumptions that are used to calculate each measure. It
also looks at the determination of carrying amount and recognition
of impairment losses.
If this occurs subsequent to the annual goodwill impairment testing
date, how does it affect the CGU (or group of CGUs) to which the
additional goodwill has been allocated?
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IAS 36 Impairment of assets
Measuring recoverable amount
An asset is impaired when its carrying amount will not be recovered
from its continuing use or from its sale. The recoverable amount of
an asset is compared to the carrying amount to determine if an
asset is impaired. An asset’s recoverable amount is the higher of its
VIU and its FVLCTS.
Question 1
Is it necessary to calculate both VIU and FVLCTS when performing
an impairment review?
Answer 1
It is not always necessary to calculate both measures in an
impairment review. For example, there is no need to calculate VIU if
FVLCTS can be reliably estimated and is higher than the carrying
amounts being reviewed.
Value in use
An asset’s or CGU’s VIU is the present value of the future cash
flows expected to be derived from the use of the asset or CGU and
from its disposal. The VIU calculation is not a fair value calculation
or a proxy for fair value.
VIU is a prescribed form of cash flow model set down in IAS 36 so
that impairment testing is comparable.
Question 2
What happens when the VIU was determined based on the most
recent financial budgets/forecasts that had not been formally
approved by management?
A non-approved business plan does not represent a reliable source
of information, as it may be subject to change. Cash flow
projections are based on the most recent financial
budgets/forecasts approved by management to determine the VIU.
Question 3
Should the most recently approved forecast be used without
adjustment when determining VIU?
Answer 3
Adjustments to the forecasts may be necessary when determining
the VIU. Forecasts must be based on reasonable and supportable
assumptions that represent management’s best estimate of the
economic conditions over the asset’s remaining useful life. Greater
weight is given to external evidence.
Example
Management has recently approved a stretch forecast that shows
production rising from 14,000 units to 20,000 units over five years.
Recent years have demonstrated a track record of undershooting
stretch forecasts.
Analysts covering the sector are assuming that production will only
rise marginally over the next few years due to forecast weaknesses
in demand, together with oversupply in the market. Should the most
recently approved forecast be used without adjustment?
Solution
The approved forecast appears to be neither reasonable nor
supportable. The forecasts will need to be adjusted based on the
undertaking’s historic record of meeting projections and external
evidence.
Answer 2
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IAS 36 Impairment of assets
Question 4
The most recently approved forecasts assume that there will be a
restructuring programme in the next financial year; however, no
announcement has been made about the restructuring, and
management has not started to implement such a plan. What
adjustments, if any, does management need to make for the
purpose of a VIU calculation?
Answer 4
When preparing a VIU calculation, the costs and benefits of the
restructuring programme are stripped out of the forecasts. The
benefits (and costs) of a restructuring programme can only be taken
into account when a provision for the programme is made in the
financial statements.
This is only permissible when the undertaking is demonstrably
committed to the restructuring – ie, through implementation of the
restructuring or a formal announcement to those affected to raise a
valid expectation of such plan.
Answer 6
The following two-step approach can be applied to derive iteratively
the implicit pre-tax discount rate from post-tax data. This pre-tax
rate is applied to the discounted cash flows that are the basis of the
VIU:
Step 1
From pre-tax cash flow projections, the expected actual tax cash
payments are calculated to arrive at post-tax cash flows. These
post-tax cash flows are discounted at an appropriate post-tax
discount rate derived using information observable on the capital
markets.
Step 2
The pre-tax discount rate is derived by determining the rate
required to be applied to the pre-tax cash flows to arrive at the
result obtained in step 1 (ie, same methodology used for computing
an internal rate of return).
Fair value less costs to sell
Question 5
How does management assess when cash flow forecasts should
terminate in order to assess VIU?
Answer 5
The general approach for a CGU that is a business with no
predetermined or determinable lifespan is for the cash flow
forecasts to include a terminal value. This, in effect, includes cash
flows for an indefinite period. If the CGU has a finite life, the cash
flow forecasts must not exceed this finite life.
Question 6
How is the appropriate pre-tax discount rate for a VIU calculation
determined from a post-tax starting point?
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When there is neither a binding sale agreement nor an active
market, FVLCTS may be estimated as the amount that the
undertaking could obtain from disposal of the asset in an arm’s
length transaction based on data from recent market transactions.
Discounted cash flow techniques may be used in estimating the fair
value of the asset.
Question 7
Can FVLCTS be determined reliably in the absence of a binding
sale agreement or active market for an asset?
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IAS 36 Impairment of assets
Answer 7
It is not necessary to have actual market transactions to support a
FVLCTS calculation, as long as the projected cash flows and
discount rate are consistent with the assumptions that market
participants would make. If comparable transactions in similar
assets or businesses are available, they are used as market
evidence. If such benchmark or comparable market transactions do
not exist, any possible external evidence (growth rates, discount
rates, etc.) is used to support the cash flow projections. Based on
this, it is almost always possible to determine FVLCTS.
Question 8
How is FVLCTS most reliably determined when it is based on a
discounted cash flow technique?
Answer 8
Discounted cash flow techniques may be used incorporating
assumptions that market participants would use in estimating the
fair value of the asset. The key assumptions underpinning the cash
flow analysis are benchmarked against market evidence.
Any differences in the assumptions in the cash flows used for the
FVLCTS compared to those used in the VIU analysis are also
considered for reasonableness; for example, restructuring or
improvement-type capital expenditure that IAS 36 does not allow in
the VIU calculation may be taken into account in the discounted
cash flows to determine the FVLCTS.
Determination of carrying amounts
The comparison of the recoverable amount of an asset (ie, FVLCTS
or VIU) with its carrying amount to determine whether there is an
impairment charge should be made on a consistent basis. FVLCTS
and VIU use different assumptions and data.
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The carrying amounts are likely to differ for the comparison
purposes with the recoverable amount (ie, FVLCTS or VIU).
Question 9
IAS 36 requires the recoverable amount, determined under
FVLCTS or VIU (or both) to be compared to the carrying amount of
the asset or CGU to determine if there is an impairment.
What is the ‘carrying amount’?
Answer 9
Carrying amount is the accounting book value of an asset or the
book value of the relevant assets and liabilities of a CGU. Many
CGUs are businesses and will include both fixed assets and
intangible assets, as well as working capital assets and liabilities
and any other assets or liabilities. Only assets within the scope of
IAS 36 are included in the carrying amount. For example, equity
securities accounted for as ‘available for sale’ would not be
included in the carrying amount of a CGU because those
investments have their separate cash flows. Carrying amount must
include any allocations of corporate assets or goodwill.
Question 10
Are the carrying amounts under FVLCTS and VIU always the
same?
Answer 10
No. The components of VIU and FVLCTS are different. When
comparing the recoverable amount (that is FVLCTS or VIU) with the
carrying amount to determine whether there is an impairment
charge, that comparison should be made on a consistent basis. The
elements in both sides of the comparison should be determined on
a like-for-like basis.
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IAS 36 Impairment of assets
Question 11
What categories of assets are included in the carrying amounts that
are compared with the recoverable amount (ie, FVLCTS or VIU)?
Answer 11
Only operating assets are included in the carrying amounts
because the recoverable amount (ie, FVLCTS or VIU) only includes
operating cash flows for both calculations. Carrying amounts
exclude financial assets, ‘investment properties’ and any other nonoperating asset.
Question 12
Does the carrying amount of the CGU include any liabilities?
Answer 12
No. Liabilities are usually excluded from the carrying amounts (IAS
36.76(b)). Sometimes the recoverable amount of the CGU cannot
be determined without consideration of a particular liability – for
example, a decommissioning liability for a power station is included
in the carrying amount.
Question 13
Should deferred tax liabilities be included in the carrying amount
when the recoverable amount is based on VIU?
Answer 13
No. VIU is a pre-tax calculation, so deferred tax liabilities should be
excluded from the carrying amount. On the contrary, FVLCTS is a
post-tax calculation, so tax is considered and the carrying amount
that is compared with FVLCTS includes the deferred tax liabilities.
Recognition of impairment losses
An impairment loss arising on a CGU is allocated first to goodwill
allocated to the CGU, and second to the other non-monetary assets
in proportion to their carrying amounts.
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Question 14
An impairment charge has been recognised on a CGU to which
goodwill has been allocated. Which assets in the CGU are written
down first?
Answer 14
The goodwill is written off before other intangible and tangible fixed
assets are impaired. However, no asset is written down below the
higher of value in use, fair value less costs to sell or nil.
Question 15
Is it possible to have an impairment charge on a fixed asset in a
CGU but not impair the goodwill attributed to the group of CGUs,
which includes the CGU with the impaired fixed asset?
Answer 15
Yes. This results from step 1 of the following two-step approach:
Step 1
Individual assets and smaller CGU’s that are included in a bigger
CGU are tested individually excluding goodwill when there are
indicators of impairment. This step allows the writedown of those
assets that were impaired before the goodwill impairment.
Management records any impairment on the CGU assets before
the group of CGUs plus attributed goodwill are tested for
impairment.
Step 2
The bigger CGU that includes the individual assets and the smaller
CGUs is tested for impairment. Management should compare the
recoverable amount of the bigger CGU with its carrying amount that
is reduced by the impairment loss already recognised in step 1. The
second step may not result in the recognition of additional
impairment.
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IAS 36 Impairment of assets
Question 16
Management uses key assumptions to assess the recoverable
amount (ie, VIU or FVLCTS) of a CGU to which significant goodwill
has been allocated. Should information be disclosed in the financial
statements on the key assumptions that management selected
even if no impairment is recognised?
Answer 16
Yes. Management must disclose how the recoverable amount was
estimated – ie, whether VIU or FVLCTS. If the VIU was used, the
following information should be disclosed:
• description of each key assumption underlying the cash flow
projections, and management’s approach to determine it;
• the period over which management has projected cash flows
(when greater than five years, reasons why that longer period is
justified);
The information is therefore essentially the same as that required
for VIU.
Question 17
Management uses key assumptions to assess the recoverable
amount (ie, VIU or FVLCTS) of a CGU that includes a significant
acquired brand with an indefinite useful life. Management projects
significant growth for the business in excess of that predicted by
markets analysts. Management concludes that no impairment
charge should be recognised. What information should be disclosed
in the financial statements on the key assumptions that
management selected?
Answer 17
In addition to the information of the key assumptions to assess the
recoverable amount, management should disclose the following
information if a reasonably possible change in a key assumption
underlying FVLCTS or VIU would cause an impairment to arise:
• the amount by which the CGU recoverable amount exceeds its
carrying amount;
• the growth rate used to extrapolate cash flows; and
• the value assigned to the key assumption; and
• the discount rate applied to the cash flow projections.
If FVLCTS was used, the methodology used to determine it should
be disclosed. When the FVLCTS is not determined based on
market prices, the following information must also be disclosed:
• the amount by which the value assigned to the key assumption
must change in order for the CGU recoverable amount to be equal
to its carrying amount.
Part 4
• a description of each key assumption used and management’s
approach to determining the key assumptions; and
• whether the assumptions are consistent with past experience or
external data and if not, why not.
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This final part covers the minimum level of information that should
be disclosed, and the additional disclosures required when there is
significant goodwill or indefinite-lived intangible assets. It also
explains the circumstances when sensitivity analysis are disclosed.
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IAS 36 Impairment of assets
Many of the inputs to the impairment testing process will also
feature in the critical accounting estimates and judgments
disclosures required by IAS 1.

reportable segment to which the asset or CGU belongs; and

whether recoverable amount is fair value less costs to sell or
value in use;
 if fair value less costs to sell, how it was determined; and
 if value in use, the discount rates used in the current
assessment and in the previous one.
What information does management need to disclose?
Question 1
What general information is disclosed when there has been an
impairment loss recognised or reversed on an asset or group of
assets during a period?
Answer 1
Management must disclose the amount of losses recognised or
reversed during the period for each class of asset. Separate
disclosure is made of amounts recognised in profit or loss and
amounts charged directly to equity.
Management must also specify the line items in the income
statement to which impairment has been charged or reversed.
Question 2
Are there any additional disclosure requirements if the impairment
loss or reversal is material?
Answer 2
The following additional disclosures are required for a material
impairment loss or reversal for an individual asset (including
goodwill) or a cash-generating unit (CGU):

circumstances giving rise to the impairment or reversal;


amount of impairment loss or reversal;
nature and description of the asset or CGU;
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Question 3
What information is disclosed for each reportable segment if an
undertaking reports segment information in accordance with IFRS
8/IAS 14?
Answer 3
Management should disclose, for each reportable segment, the
impairment losses and reversals recognised in profit and loss and
equity during the period.
Question 4
What additional disclosures are required for each group of CGUs to
which a significant amount of goodwill or indefinite-lived assets
have been allocated?
Answer 4
The additional disclosures are:
 basis of determination of recoverable amount (ie, value in use or
fair value less cost to sell);

the carrying amount of goodwill/indefinite lived intangible assets
allocated to the CGU/groups of CGUs;

identification of the key assumptions in the calculation;
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IAS 36 Impairment of assets




discussion of management’s approach to determining each key
assumption and whether it is based on past
performance/external sources of information, and if not, why not;
period of cash flow projections;
the long-term growth rate assumption and justification where it
exceeds the growth rate in the territory, market or sector; and
the pre-tax discount rate used in the calculations.
Question 5
What is a ‘key assumption’?
Answer 5
Key assumptions are assumptions to which the recoverable amount
of the CGU or group of CGUs is most sensitive. Key assumptions
will usually include those underlying sales or income growth
margins expected to be achieved and long-term growth
assumptions.
Question 6
When does management disclose a sensitivity analysis and what
are the disclosures?
Answer 6
In addition to those set out in Answer 4, the following disclosures
are required if a reasonably possible change in a key assumption
would lead to recoverable amount equalling carrying value:

the headroom in the current calculation (by how much
recoverable amount exceeds the carrying value);
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
the value assigned to the key assumption(s); and

by how much the key assumption(s) would have to change
before recoverable amount equalled carrying value.
Question 7
What is meant by ‘reasonably possible’ change?
Answer 7
There is no definition in IAS 36 of ‘reasonably possible’. It is a
matter of judgment in the circumstances that apply – the same
percentage headroom might give rise to different judgments by
different undertakings.
For example, an undertaking that has made assumptions that are
aggressive by comparison to its peers and has only relatively
marginal headroom (say 10%) would be more likely to suffer an
impairment if the market moved only in line with the industry
expectations than one with the same headroom but where the
assumptions made in the cash flow forecasts were more
conservative than the industry. See the example below.
Example
Management has performed an impairment test. It has calculated
for one group of CGUs with net assets (including goodwill) of
£400m a recoverable amount of £430m, giving headroom of £30m.
The key assumptions are consistent with external data. The
calculation is most sensitive to discount rates; the current rate of
8.5% is 1.0% lower than the prior year due to a fall in the risk-free
rate in the territory in which the operation is based.
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IAS 36 Impairment of assets
A 0.6% increase in the discount rate would lead to an impairment.
The risk-free rate in the territory where the CGU is based was last
as low as it is now in the 1950’s but shows no immediate sign of
rising.
Does the possibility of a change in the risk-free rate qualify as a
‘reasonably possible’ change?
Solution
Yes, local risk-free interest rates have fallen sharply in the last year
to historically low levels. The history of movements in risk-free rates
has shown that it goes through cycles.
It seems reasonably possible that the rate would rise. An
impairment would be triggered even if it returned to the level of the
previous year. The change in discount rate would therefore seem to
be reasonably possible; the sensitivity analysis disclosures should
be made.
Question 8
Some of the information that the standard requires to be disclosed
could be regarded as comprising sufficient information to be a type
of profit forecast. Such disclosure has been rare for listed
companies.
What should management do if the types of information disclosed
falls within the definition of a profit forecast under the local
regulations?
Answer 8
There is no exemption under IAS 36 from making disclosures on
the grounds that such information may or may not constitute a profit
forecast. The information required by the standard must be
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provided. Local rules must be followed in order to determine what
further actions management should take, if any.
Example
Management has performed an impairment calculation on one
poorly performing business and calculated that the recoverable
amount marginally exceeds carrying value.
A reasonably possible change in the discount rate, sales growth
rate or gross margin would trigger an impairment, and the
calculation is sensitive to all three assumptions.
None of the undertaking’s competitors disclose their assumptions;
management argues that to disclose as required by IAS 36 would
put the undertaking at a competitive disadvantage.
Is there any exemption from disclosure on these grounds?
Solution
No, such an exemption does not exist. The purpose of the
sensitivity disclosures is to enable the reader of the financial
statements to understand the key assumptions that have been
made in determining whether an asset is impaired or not.
Where the impairment decision is borderline, the assumptions
made are a critical component in determining whether an
impairment has arisen or not. The standard therefore requires
management to disclose these judgments in the financial
statements.
Question 9
What disclosure does management provide if any portion of the
goodwill acquired in a business combination during the period has
not been allocated to a CGU at the reporting date?
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IAS 36 Impairment of assets
Answer 9
Management discloses the amount of the unallocated goodwill
together with the reasons why that amount remains unallocated.
beginning and end of the period (as required by IAS 16 Property,
Plant and Equipment).
12. Disclosure
An undertaking, that reports segment information (in accordance
with IFRS 8 Operating Segments), must disclose the following, for
each reportable segment based on an undertaking’s primary
reporting format the amount of:
An undertaking must disclose the following for each class of assets
the amount of:
(i)
impairment losses recorded in the income statement, and
directly in equity, during the period.
(ii)
reversals of impairment losses recorded in the income
statement, and directly in equity, during the period.
(i)
(ii)
(iii)
impairment losses recorded in the income statement, during
the period, and the line items of the income statement in
which those impairment losses are included.
reversals of impairment losses recorded in the income
statement during the period, and the line item(s) of the
income statement in which those impairment losses are
reversed.
impairment losses on revalued assets, recorded directly in
equity, during the period.
An undertaking must disclose the following for each material
impairment loss recorded (or reversed), during the period for an
individual asset, including goodwill, (or a cash-generating unit):
(1) the events and circumstances that led to the recognition (or
reversal) of the impairment loss.
(2) the amount of the impairment loss recorded (or reversed).
(iv)
reversals of impairment losses on revalued assets, recorded
directly in equity, during the period.
A class of assets is a grouping of assets of similar nature, and use
in an undertaking’s operations.
The information required in above may be presented with other
information disclosed for the class of assets.
For example, this information may be included in a reconciliation of
the carrying amount of property, plant and equipment, at the
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(3) for an individual asset:
(i)
the nature of the asset; and
(ii)
if the undertaking reports segment information (in
accordance with IFRS 8), the reportable segment to
which the asset belongs, based on the primary
reporting format.
(4) for a cash-generating unit:
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IAS 36 Impairment of assets
(i)
a description of the cash-generating unit (such as
whether it is a product line, a plant, a business
operation, a geographical area, or a reportable
segment as defined in IFRS 8);
(ii)
the amount of the impairment loss recorded, or
reversed, by class of assets and, (if the undertaking
reports segment information in accordance with IFRS
8) by reportable segment, based on the primary
reporting format; and
(iii)
if the aggregation of assets for identifying the cash
generating unit has changed, since the previous
estimate of the unit’s recoverable amount, a
description of the current, and former way, of
aggregating assets, and the reasons for changing the
way the cash-generating unit is identified.
(5) whether the recoverable amount of the asset (cash-generating
unit) is its ‘fair value less costs to sell’ or its ‘value in use’.
(6) if recoverable amount is ‘fair value less costs to sell’, the basis
used to determine ‘fair value less costs to sell’ (such as whether fair
value was determined by reference to an active market).
(7) if recoverable amount is ‘value in use’, the discount rate used in
the current estimate and previous estimate of ‘value in use’.
An undertaking must disclose the following information for the
aggregate impairment losses, and the aggregate reversals,
recorded during the period for which no information is disclosed:
(i)
the main classes of assets affected by impairment losses,
and the main classes of assets affected by reversals of
impairment losses.
(ii)
the main events, and circumstances, that led to the
recognition of these impairment losses, and reversals of
impairment losses.
An undertaking is encouraged to disclose assumptions used to
determine the recoverable amount of assets (cash-generating units)
during the period.
An undertaking should disclose information about the estimates
used to measure the recoverable amount of a unit, when goodwill
(or an intangible asset with an indefinite useful life) is included in
the carrying amount of that unit.
If any part of the goodwill acquired in a business combination
during the period, has not been allocated to a cash-generating unit
at the reporting date, the amount of the unallocated goodwill is
disclosed, together with the reasons why that amount remains
unallocated.
Estimates used to Measure Recoverable Amounts of Cashgenerating Units Containing Goodwill, or Intangible Assets
with Indefinite Useful Lives
If any cash-generating unit (or group of units) has a significant
amount of goodwill, or intangible assets with indefinite useful lives,
the following should be disclosed:
(1) carrying amount of goodwill, allocated to the unit or group of
units.
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IAS 36 Impairment of assets
(2) carrying amount of intangible assets with indefinite useful lives,
allocated to the unit or group of units.
(3) basis on which the unit’s (or group of units) recoverable amount
has been determined (‘value in use’ or ‘fair value less costs to sell’).
(4) if the unit’s (or group) of units recoverable amount is based on
‘value in use’:
(5) if the unit’s recoverable amount is based on ‘fair value less costs
to sell’, the methodology used to determine ‘fair value less costs to
sell’.
If ‘fair value less costs to sell’ is not determined using an
observable market price for the unit the following information must
also be disclosed:
(i)
(i)
description of each key assumption on which
management has based its cash flow projections, for the
period covered by the most recent forecasts.
Key assumptions are those to which the unit’s
recoverable amount is most sensitive.
(ii)
(iii)
(ii)
description of management’s approach to determining the
values assigned to each key assumption, whether those
values reflect past experience and are consistent with
external sources of information and experience.
(iii)
period over which management has projected cash flows,
based on financial budgets/forecasts approved by
management .
If a period greater than five years is used an explanation
is required of why that longer period is necessary.
(iv)
(v)
growth rate used to extrapolate cash flow projections,
beyond the period covered by the most recent
budgets/forecasts.
A justification is required for using any growth rate that
exceeds product, industry, country, norms.
description of each key assumption on which
management has based its determination of ‘fair value,
less costs to sell’. Key
assumptions are those to which the unit’s (group of units’)
recoverable amount is most sensitive.
a description of management’s approach to determining
the value or values assigned to each key assumption,
whether those values reflect past experience and are
consistent with external sources of information and past
experience, or external sources of information.
If fair value less costs to sell is determined using discounted cash
flow projections, the disclosures required by (4) shall be given
instead of those in (5)(i) and (ii).
(6) if possible changes in a key assumption that would cause the
unit’s carrying amount to exceed its recoverable amount:
(i)
the amount by which the unit’s recoverable amount
exceeds its carrying amount.
(ii)
the value assigned to the key assumption.
discount rate applied to the cash flow projections.
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IAS 36 Impairment of assets
(iii)
the amount, by which the value assigned to the key
assumption must change in order for the unit’s
recoverable amount to be equal to its carrying amount.
Any goodwill, or intangible assets with indefinite useful lives that
have been included in the minor units, for which the information,
listed above has not been provided, the aggregate amounts and the
units should be listed.
If these minor units hold a significant share of goodwill, or
intangibles with indefinite lives, the following information should be
provided:
(1) the aggregate carrying amount of goodwill, allocated to those
units
(2) the aggregate carrying amount of intangible assets with
indefinite useful lives, allocated to those units
(3) description of the key assumptions.
(4) description of management’s approach to determining the
values assigned to the key assumptions and whether those values
are consistent with external sources of information past experience
and external sources of information.
(5) if possible changes in the key assumptions would cause the
aggregate of the units’ carrying amounts to exceed the aggregate of
their recoverable amounts:
(i)
(ii)
values assigned to the key assumptions.
(iii)
sensitivity of these assumptions: by how much would
they need to change to reduce the recoverable amounts
to the carrying amounts.
Sample Accounting Policy
(taken from Illustrative Corporate Financial Statements 2007,
PWC)
Impairment of non-financial assets
Assets that have an indefinite useful life, for example goodwill, are
not subject to amortisation and are tested annually for impairment.
Assets that are subject to amortisation are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which the
asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value less costs
to sell and value in use.
For the purposes of assessing impairment, assets are grouped at
the lowest levels for which there are separately identifiable cash
flows (cash-generating units). Non-financial assets other than
goodwill that suffered an impairment are reviewed for possible
reversal of the impairment at each reporting date.
amount by which the aggregate of the units’ recoverable
amounts exceeds the aggregate of their carrying
amounts.
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IAS 36 Impairment of assets
13. MULTIPLE CHOICE QUESTIONS
1. An asset is impaired if:
1.Its carrying amount equals the amount to be recovered
through use (or sale) of the asset.
2. Its carrying amount exceeds the amount to be recovered
through use (or sale) of the asset.
3. The amount to be recovered through use (or sale) of the
asset exceeds its carrying amount.
2. After the revaluation requirements have been applied, it is:
1. Unlikely that the revalued asset is impaired.
2. Probable that the revalued asset is impaired.
3. The recoverable amount needs to be estimated.
3. Corporate assets are assets (other than goodwill) that
contribute to the cash flows of both the cash-generating unit
under review, and other cash-generating units.
1. Include goodwill.
2. Only contribute to the cash flows of the cash-generating
unit.
3. Contribute to the cash flows of both the cash-generating
unit, and other cash-generating units.
3. Incremental costs, directly attributable to the disposal of
an asset (or cash-generating unit), plus finance costs
and income tax expense.
5. If no indication of an impairment loss is present:
1. IAS 36 still requires an undertaking to make a formal
estimate of recoverable amount.
2. IAS 36 does not require an undertaking to make a formal
estimate of recoverable amount.
3. IAS 36 does not require an undertaking to make an
assessment as to whether an asset may be impaired.
6. An intangible asset with an indefinite useful life, or an
intangible asset not yet available for use:
1. Will not be impaired.
2. Should be tested annually, at different times of the year.
3. Should be tested annually, at the same time each year.
4. Costs of disposal are:
1. Incremental costs, directly attributable to the disposal of
an asset, excluding finance costs and income tax
expense.
2. Incremental costs, directly attributable to the disposal of
an asset (or cash-generating unit), plus finance costs,
but excluding income tax expense.
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IAS 36 Impairment of assets
7. External sources of information indicating possible
impairment include:
(i) An asset’s market value has declined significantly.
(ii) Significant changes have taken place in the technological
environment.
(iii) Interest rates, or other market rates, have increased during
the period.
(iv) The carrying amount of the net assets of the undertaking is
more than its market capitalisation.
(v) A change in the group structure.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(iv)
5. (i)-(v)
8. Internal sources of information include:
(i) Cash out flows that are significantly higher, than those
budgeted.
(ii) Operating profits that are significantly worse than those
budgeted.
(iii) A decline in net cash flows.
(iv) Operating losses.
(v) Evidence of obsolescence, or damage of an asset.
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(vi) Significant changes, to which an asset is used.
(vii) Evidence that indicates that the performance of an asset is
worse than expected.
(viii) A lower cost of capital.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(iv)
5. (i)-(v)
6. (i)-(vii)
7. (i)-(viii)
9. If previous calculations show that an asset’s recoverable
amount is significantly greater than its carrying amount:
1. Its value in use should be recalculated.
2. The undertaking need not re-estimate its recoverable
amount, if no events have occurred that would
eliminate that difference.
3. It should be tested for impairment.
10. If interest rates rise:
1. The discount rate must rise.
2. Cash flows automatically rise.
3. It may not have much effect for an asset with a long life.
11.‘‘Fair value less costs to sell’’ and its ‘‘value in use’’. If
either of these amounts exceeds the asset’s carrying amount:
1.The asset is not impaired, and it is not necessary to
estimate the other amount.
2. The other must be calculated
3. The asset is impaired.
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IAS 36 Impairment of assets
12. The ‘value in use’ of an asset held for disposal will consist
mostly of:
1. The cash flows from use of the asset.
2. The net disposal proceeds.
3. Depreciation charges.
(iv) The price for bearing the uncertainty inherent in the asset.
13. The best evidence of an asset’s ‘fair value less costs to
sell’ is:
1. A recent transaction.
2. An active market.
3. A binding sale agreement.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(v)
5. (i)-(iii)+(v)
14. Costs of disposal: examples of such costs are:
(i)
Finance costs.
(ii)
Legal costs.
(iii)
Stamp duty and similar transaction taxes.
(iv)
Costs of removing the asset.
(v)
Direct incremental costs, to bring an asset into
condition for its sale.
1 (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(v)
5. (ii)-(v)
15. The following is reflected in the calculation of an asset’s
‘value in use’:
(i) The cash flows to be derived from the asset.
(ii) Variations in the amount or timing of those cash flows.
(iii) The time value of money, represented by the risk-free rate of
interest.
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(v) Seasonality.
(v) Other factors.
16. Unless a longer period can be justified, cash flow
projections based on budgets/forecasts must cover a
maximum period of:
1. Three years.
2. Five years.
3. Ten years.
17. Estimates of cash flows must include:
(i) Projections of cash inflows, from the continuing use of the asset;
(ii) Projections of cash outflows to generate the inflows, from
continuing use of the asset.
(iii) Net cash flows from the disposal of the asset.
(iv) Finance costs.
(v) Income taxes.
1. (i) – (iii)
2. (i)-(iv)
3. (ii)-(iii)
4. (i)-(v)
5.(i)-(v)
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IAS 36 Impairment of assets
18. If the discount rate includes the impact of inflation, cash
flows are expressed:
1. Excluding inflation.
2. Including inflation.
3. Excluding inflation (but include specific price increases,
or reductions).
19. ‘Value in use’ does not reflect:
(i) outflows or related cost savings (for example reductions in staff
costs) or benefits from a future restructuring, to which an
undertaking is not yet committed; or
(ii) outflows that will improve the asset’s performance;
Value in use’ does not reflect: these as cash flows are estimated:
1. Using net present values.
2. In real terms.
3. For the asset in its current condition.
20. The estimate of net cash flows to be received or paid for
the disposal of an asset is similar to an asset’s ‘fair value less
costs to sell’, except that, in estimating those net cash flows:
(i) You use prices for similar assets (that have reached the end of
their useful life).
(ii) You adjust prices for the impact of inflation.
(iii) You deduct finance payments.
3. (ii)-(iii)
4. (i)-(iv)
21. The discount rate is a pre-tax rate that reflects current
market assessments of:
(i) Foreign exchange rates.
(ii) The time value of money.
(iii) The risks specific to the asset.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
22. If an asset, carried at cost, is decreased by impairment, the
decrease should be:
1. Capitalised.
2. Expensed.
3. An extraordinary item.
23.If an impairment loss is recognised,
1. The depreciation charge should be adjusted for future
periods.
2. The residual value should be reviewed.
3. Both 1 &2.
4. Neither 1 nor 2.
24. For impairment testing a cash-generating unit is:
1. The lowest aggregation of assets that generate
independent cash inflows.
2. Corporate assets.
3. Any unit that generates cash.
(iv)You deduct tax payments.
1. (i) – (ii)
2. (i)-(iii)
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IAS 36 Impairment of assets
25. The recoverable amount of a cash-generating unit is:
1. The lower of the unit’s ‘fair value less costs to sell’ and its
‘value in use’.
2. The higher of the unit’s ‘fair value less costs to sell’ and
its ‘value in use’.
3. The average of the unit’s ‘fair value less costs to sell’
and its ‘value in use’.
26. For impairment testing, goodwill is allocated to each cashgenerating units:
1. That will benefit from the synergies of the
combination.
2. If other assets of the acquiree are assigned to those
units.
3. If other liabilities of the acquiree are assigned to those
units.
4. If other net assets of the acquiree are assigned to
those units.
27. Goodwill is tested for impairment:
1. At group level.
2. At the level at which goodwill is allocated in accordance
with IAS 21 Foreign Exchange Rates
3. At a level that reflects the way an undertaking manages
its operations.
28. If goodwill has been allocated to a unit, and the
undertaking disposes of an operation within that unit, the
goodwill associated with the operation disposed of must be:
(i) Included in the carrying amount of the operation, when
determining the gain (or loss on disposal).
(ii) Measured on the basis of the relative values of the operation
disposed of, and the part of the unit retained.
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(iii) Discounted by the current market rate.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
29. Your carrying value of your cash-generating unit =
Assets $10m +
Goodwill $3m
Its ‘value in use’ = $11m
You should:
1. Do nothing.
2. Reduce the goodwill to $1m.
3. Reduce the goodwill to $2m, and the assets to $9m
30. The undertaking impairment tests:
1. The asset first, and records any impairment loss for that
asset, before testing for impairment the unit containing
the goodwill.
2. The unit containing the goodwill first, and records any
impairment loss for that unit, before testing for
impairment asset.
3. At the same time.
31. Corporate assets:
1. Cannot be impaired.
2. Cannot generate separate cash flows.
3. Carrying amounts can be fully attributed to a cashgenerating unit.
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32. Your asset is impaired:
4.
Zero.
(i) its ‘fair value less costs to sell’ = loss of
$4k
(ii) its ‘value in use’ = $6k;
Which value do you use?
1. $6k
2. Loss of $4k
3. $1k (average of the two figures).
4. Zero.
33. The carrying amount of your head
office is 2.000.
The value in use is 2.400.
The fair value, less cost to sell is
1.600.
Is it impaired?
34. Your asset is impaired:
(i) its ‘fair value less costs to sell’ = loss of
$4k
(ii) its ‘value in use’ = loss of $2k
Which value do you use?
1 Loss of $2k
2.
Loss of $4k
3. Loss of $3k (average of the two
figures).
14. Answers to Multiple Choice
Questions
Question
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
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Answer
2
1
3
1
2
3
4
6
2
3
1
2
3
5
5
2
1
2
3
1
3
2
3
1
2
26.
27.
28.
29.
30.
31.
32.
33.
34.
1
3
1
2
1
2
1
No, as
the
value in
use is
higher
than
the
carrying
value.
4
Note: Material from the following
PricewaterhouseCoopers publications has been
used in this workbook:
Accounting Solutions
IFRS Issues and Solutions for the Pharmaceutical
Industry (examples adapted)
Illustrative Corporate Consolidated Financial
Statements 2007
IFRS News