The IFRS for SMEs
1
Topic 2.3
Section 13 Inventories
Section 16 Investment Property
Sec 17 Property, Plant & Equipment
Section 18 Intangible Assets
Section 27 Impairment of Assets
© 2011 IFRS Foundation
2
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The accounting requirements applicable to small and medium-sized entities
(SMEs) are set out in the International Financial Reporting Standard (IFRS)
for SMEs, which was issued by the IASB in July 2009.
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© 2011 IFRS Foundation
The IFRS for SMEs
Scope of
Sections 13 and 16–18
© 2011 IFRS Foundation
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Section 13 – scope
Inventories are assets:
– held for sale in the ordinary course of
business (finished goods);
– in the process of production for such sale
(work in process); or
– in the form of materials or supplies to be
consumed in the production process or in
the rendering of services (raw materials &
consumables).
• Section 13 specifies accounting +
reporting for inventories
© 2011 IFRS Foundation
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Section 13 – scope exclusions
5
• Section 13 applies to all inventories,
except
– work in progress arising under construction
contracts
– financial instruments
– biological assets related to agricultural
activity and agricultural produce at the
point of harvest
© 2011 IFRS Foundation
Section 17 – definition of PP&E
Property, plant and equipment (PP&E) are
tangible assets:
• held for
– use in the production or supply of goods
or services,
– for rental to others, or
– for administrative purposes;
• & are expected to be used in +1 period.
© 2011 IFRS Foundation
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Section 17 – scope
7
• Section 17 specifies accounting &
reporting for:
– property, plant and equipment; and
– investment property whose fair value
cannot be measured reliably without
undue cost or effort on an ongoing basis.
© 2011 IFRS Foundation
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Section 16 – scope
Investment property is land or a building
(or part of a building, or both) held by the
owner or by the lessee under a finance
lease to earn rentals or for capital
appreciation or both.
• Section 16 specifies accounting &
reporting for:
– investment property whose fair value can
be determined reliably without undue cost
or effort on an ongoing basis
© 2011 IFRS Foundation
Section 18 – definition intangible asset
9
Intangible = identifiable non-monetary
asset without physical substance
Identifiable when:
– separable, ie can be separated from the
entity & sold, transferred, licensed, rented
or exchanged, either individually or
together with a related contract, asset or
liability, or
– arises from contractual or legal rights
© 2011 IFRS Foundation
Section 18 – scope
10
• Section 18 specifies accounting &
reporting for intangible assets, excluding
– goodwill
– financial assets
– mineral rights & mineral reserves, such as
oil, natural gas and similar
non-regenerative resources
© 2011 IFRS Foundation
Sections 13 & 16–18 – scope examples
11
In scope of S13, S16, S17 or S18?
• Ex 1*: A trades in property (ie it buys
property to sell it at a profit near-term)
• Ex 2*: B trades in transferable taxi
licences
• Ex 3*: C produces wine from grapes
harvested from its vineyards in a 3-year
production cycle
* see example with the same number in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Sections 13 & 16–18 –examples continued
12
In scope of S13, S16, S17 or S18?
• Ex 4*: D holds lubricants that are
consumed by its machine in producing
goods
• Ex 6*: E maintains its plant using:
– a bespoke long-life cleaning machine; &
– a set of low-value common tools acquired
from a local hardware store.
* see example with the same number in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Sections 13 & 16–18 –examples continued
13
In scope of S13, S16, S17 or S18?
• Ex 9*: F operate a hotel from a building it
owns
– it rents out hotel rooms for short-stays
– guest services included in the room rate =
breakfast and television
– services charged for separately = other
meals, room bar, gymnasium facilities &
guided tours
* see example 9 in Module 16 of the IFRS Foundation training material
© 2011 IFRS Foundation
Sections 13 & 16–18 –examples continued 14
In scope of S13, S16, S17 or S18?
• Ex 3*: G buys a building to earn rentals
under an operating lease from its
subsidiary. The sub sells its products
from the building
• Ex 7*: H owns
– a herd of cattle—breeding stock of its
agricultural activities
– a tractor used to transport feed to the
herd
* see example with the same number in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation
Sections 13 & 16–18 –examples continued
15
In scope of S13, S16, S17 or S18?
• Ex 1: I owns digital films and audio
recordings which it licenses to its customers
• Ex 12: In accounting for the acquisition of
the net assets and operations of a
competitor J recognised future economic
benefits arising from assets that are not
individually identified as an asset (goodwill)
© 2011 IFRS Foundation
Examples of classification judgements
16
– when unclear what purpose of acquiring
property is (inventories, IP or PP&E?)
– when property owner provide ancillary
services to the occupants of a property (IP
or PP&E?)
– mixed use property (IP or PP&E?)
– when is undue cost or effort necessary to
measure the fair value of an IP on an
ongoing basis (IP or PP&E?)
© 2011 IFRS Foundation
The IFRS for SMEs
17
Section 13 Inventories
and
Paragraphs 27.2–27.4 (impairment of
inventories)
© 2011 IFRS Foundation
Section 13 – measurement
18
• Inventories in the scope of Section 13 are
measured at the lower of:
– cost; and
– estimated selling price less costs to
complete and sell (SP-CTC&S).
© 2011 IFRS Foundation
Section 13 – measurement exemptions
19
• Section 13 does not apply to the
measurement of inventories of
– producers of agricultural and forest
products, agricultural produce after
harvest, and minerals and mineral
products, or
– commodity brokers and dealers
when measured at fair value less costs to
sell through profit or loss
© 2011 IFRS Foundation
Section 13 – measurement examples
20
Are these inventories measured in
accordance with Section 13?
• Ex 7*: A commodity broker-trader
acquires wheat in anticipation of selling
it in the short-term. The broker-trader
measures such inventories at fair value
less costs to sell
• Ex 8*: Same as Ex 7 except the
broker-trader measures inventories at
cost
* see example with the same number in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – cost
21
• Cost = costs of purchase + costs of
conversion + other costs incurred in
bringing the inventories to their present
location and condition
© 2011 IFRS Foundation
Section 13 – cost of purchase
22
• Cost of purchase = purchase price + import
duties + other taxes (non-refundable in nature)
+ other direct costs
– costs of purchase is after deducting trade
discounts, rebates etc
– if purchase arrangement effectively contains an
unstated financing element, eg a difference
between the purchase price for normal credit terms
and the deferred settlement amount, the difference
is recognised as interest expense over the period of
the financing (ie it is not added to the cost of the
inventories)
© 2011 IFRS Foundation
Section 13 – examples cost of purchase 23
• Ex 13*: A buys a good priced at CU500
per unit from Z. Z awards A a 20%
discount on orders of +100 units and
10% discount when A buys +999 units in
1 year. The discounts apply to all units
acquired in a year.
A buys as follows: 800 units on 1/1/20X1
and 200 units on 24/12/20X1.
On 31/12/20X1, 150 units were unsold (ie
inventories of A).
* see example 13 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – examples cost of purchase 24
•
Ex 13 continued:
A measures the cost of the inventories in 20X1 at
CU350,000 [ie 1,000 units × (CU500 list price less
30%(CU500) volume discount)], because all units
purchased in the year get the full 30% discount.
• A recognises:
– expense (cost of sales) of CU297,500 [ie 850
units sold × (CU500 list price less 30%(CU500)
volume discount)] in profit or loss in 20X1
– asset (inventories) of CU52,500 [ie 150 units
unsold × (CU500 less 30%(CU500) discount)] at
31/12/20X1.
© 2011 IFRS Foundation
Section 13 – examples cost of purchase 25
• Ex 17*: A buys inventory for
CU2,000,000 on 2-year interest-free
credit. Appropriate discount rate = 10%
per year.
The cost of the inventory is CU1,652,893
(ie the present value of the future
payment).
Calculation: CU2,000,000 future payment ÷
(1.1)2.
* see example 17 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – cost of conversion
26
• Cost of conversion = direct costs +
indirect costs (allocated production
overheads)
– allocated production overheads = fixed
production overheads + variable
production overheads
© 2011 IFRS Foundation
Section 13 – examples conversion costs27
• Ex 18*: A makes concrete blocks in
reusable moulds. Blocks dry in a drying
room for 2 weeks. Dried blocks & raw
mat’s stored in separate rooms.
A front-end loader (man 1) adds materials to
the mixing machine operated by man 2.
Casual labourers remove blocks from
moulds. Man 3 supervises the factory. Man
4 does admin, finance and sales.
A operates from rented premises (fixed
payments).
* see example 18 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – examples conversion cost
• Ex 18 continued:
28
Costs of conversion include
– direct costs: casual labour.
– production overheads: factory rent (incl.
raw mat’s area & drying room but excl.
finished goods room); staff cost of man
1,2 & 3; depreciation of equipment (front
end loader, mixing machine and moulds).
© 2011 IFRS Foundation
Section 13 – allocate production overheads 29
• Allocate fixed production overheads on
– normal capacity if low or normal
production
– actual production (units) if abnormally
high production (so that inventory is not
measured above cost)
– note: unallocated overheads are
expensed when incurred
• Allocate variable production overheads
on actual production
© 2011 IFRS Foundation
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Section 13 – example FP overheads
• Ex 20*: Fixed production (FP) overheads
= CU900,000. 200,000 units produced.
Normal capacity = 250,000 units.
Allocation rate: CU900,000 ÷ 250,000 units
normal capacity = CU3.6 per unit produced.
Allocate to inventories: CU3.6 × 200,000
units = CU720,000.
Unallocated overheads of CU180,000 are
expense (ie CU900,000 less CU720,000 in
inventory).
* see example 20 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – example FP overheads
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• Ex 21*: Same as Ex 20 except 300,000
units produced. Normal capacity =
250,000 units.
Allocation rate: CU900,000 ÷ 300,000 units
actual production = CU3 per unit produced.
Allocate to inventories: CU3 × 300,000
units = CU900,000
* see example 21 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
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Section 13 – example wastage
• Ex 27*: Total costs of a production run =
CU100,000 (including a cost of normal
wastage of CU2,000). The weakening of
operating controls while the ownermanager was in hospital caused the
wastage of raw materials to increased to
CU7,000 per production run.
The abnormal wastage cost of CU5,000
(CU7,000 – CU2,000) is not included in the
cost of inventory but recognised as an
expense.
* see example 27 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – joint and by-products
33
• Production process results in more than one
product being produced simultaneously
– joint product, or
– main product and by-product.
• Allocate joint costs on a rational and
consistent basis
• If by-product is immaterial
– measure by-product at selling price less costs
to complete and sell (SP-CTC&S)
– deduct this amount from the cost of the main
product.
© 2011 IFRS Foundation
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Section 13 – example by-product
• Ex 22*: A production process costs
CU100,000 (including allocated
overheads). It mixes base chemicals to
produce:
– 5,000 litres of product A (sales value =
CU250,000); and
– 1,000 litres of by-product C (sales value =
CU2,000).
Cost per litre of A = CU19.60 (ie
CU100,000 less CU2,000 SP of C) ÷ 5,000
litres = CU19.60.
* see example 22 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – example joint product
35
• Ex 23*: Same as in Ex 22 except, instead
of by-product ‘C’ there is a joint product
‘B’. Total costs = CU300,000 to produce:
– 5,000 litres of A (sales value =
CU250,000); and
– 4,000 litres of B (sales value =
CU400,000).
Allocate joint process costs on relative
sales values.
* see example 23 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – example joint product continued 36
• Ex 23 continued:
Cost per litre of A = CU23.08 & B = CU46.15.
Calculation A: CU250,000 SP of A ÷ CU650,000
combined SP of A & B × CU300,000 costs =
CU115,385 cost of 5,000 litres of A. CU115,385
÷ 5,000 litres = CU23.08.
Calculation B: CU400,000 SP of B ÷ CU650,000
combined SP of A & B × CU300,000 costs =
CU184,615 cost of 4,000 litres of B. CU184,615
÷ 4,000 litres = CU46.15.
© 2011 IFRS Foundation
Section 13 – other costs
37
• Include other costs in the cost of
inventories only to the extent that they
are incurred in bringing the inventories to
their present location and condition.
• Ex 25*: A manufactures individually
packaged pens.
The cost of the inventory includes the cost of
manufacturing the pens and the individual
packaging in which they are presented for
sale.
* see example 25 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 13 – cost formulas
38
• Specific identification of costs if
– goods not ordinarily interchangeable or
– segregated for specific projects
• Other inventories
– FIFO or
– weighted average (WA)
• Can use other ways if approximates cost
– standard cost
– retail method
– most recent purchase price
© 2011 IFRS Foundation
Section 27 – impairment of inventories 39
• Assess at each reporting date whether
any inventories are impaired, by
– comparing the carrying amount (CA) of
each item of inventory with its selling price
less costs to complete and sell (SPCTC&S)
– if CA > SP-CTC&S reduce CA to SPCTC&S
– that reduction = impairment loss
– impairment loss = expense in profit or loss
© 2011 IFRS Foundation
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Section 27 – examples impairment
• Ex 1: At reporting date
– CA (cost) of raw materials = 100
– replacement cost = 80
– est. selling price of finished good = 200
– est. costs to convert the raw material into
finished good = 60
– est. costs to sell the finished good = 30
• Ex 2: Same as Ex 1 except est. SP = 180
© 2011 IFRS Foundation
Section 27 – impairment exception
• Inventory is assessed for impairment item
by item
– only if it is impracticable to determine SPCTC&S item-by-item may items of inventory:
–relating to the same product line that have
similar purposes or end uses; and
–that are produced and marketed in the same
geographical area
–be grouped for the purpose of assessing
impairment.
© 2011 IFRS Foundation
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Section 27 – examples impairment
• Ex 3: A has 3 items of inventory
(finished goods) that qualify for
impairment testing as a group
– CA (cost) 90 + 100 + 130 = 320
– est. SP-CTC&S for the 3 items = 330
42
• Ex 4: Same as Ex 3 except
– items do not qualify for impairment testing
as a group; and
– est. SP-CTC&S = 110 each.
© 2011 IFRS Foundation
Section 27 – reversal of impairment
43
• Reverse the impairment when:
–circumstances that caused inventories to
be impaired no longer exist; or
–there is clear evidence of an increase in
SP-CTC&S because of changed economic
circumstances
• Amount of reversal is limited to the
amount of the original impairment loss
–ie CA cannot be > cost
© 2011 IFRS Foundation
Section 27 – example reverse impairment 44
• Ex 5: At 31/12/20X1
– because of a decline in economic
circumstances recognised an impairment loss
on an item of inventory of 30 (ie cost = 100 &
SP-CTC&S = 70)
At 31/12/20X2
– because of an improvement in economic
circumstance the SP-CTC&S of that item is
120
© 2011 IFRS Foundation
Section 13 – measurement judgements
• For cost, examples include
– determining normal capacity
– separating normal & abnormal wastage
– allocating joint cost to joint products
–if no market for joint products at
separation
–if multiple joint products and exit joint
production at different stages
• For the impairment
– estimating SP-CTC&S
© 2011 IFRS Foundation
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Section 13 – derecognition
46
• Expense inventory when
– impaired
– derecognised (ie when sold)
• Allocate inventory to another asset
– eg inventory used as a component of selfconstructed PP&E.
© 2011 IFRS Foundation
Section 13 – disclosure
47
• Disclose
– accounting policies for measuring
inventories
– carrying amount of inventories analysed by
class
– amount expensed in the period
– impairment losses recognised or reversed
– amount pledged as security for liabilities
© 2011 IFRS Foundation
The IFRS for SMEs
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Section 17
Property, Plant and Equipment
(including investment property whose fair
value cannot be measured reliably on an
ongoing basis)
© 2011 IFRS Foundation
Section 17 – recognition
Recognise the cost of an item of PP&E
as an asset if:
– probable future benefits inflows; and
– cost can be measured reliably.
© 2011 IFRS Foundation
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Section 17 – measurement
50
• Initial measurement of PP&E = cost
– cost = purchase price + direct cost for PP&E
become capable of operating as intended +
initial estimate of obligation to dismantle/remove
– cash price equivalent at the recognition date
–if payment deferred beyond normal credit
terms, cost = present value of future payments
• Subsequent measurement = cost less
depreciation and impairment losses
© 2011 IFRS Foundation
Section 17 – replacing parts
51
• Parts that require replacement at regular
intervals (eg roof and furnace’s lining)
– add cost of replacement to the carrying
amount of the item if the replacement adds
benefits
– if consumption pattern different, depreciate
component separately over its useful life
– derecognise the parts replaced.
• Day-to-day servicing costs = expense
© 2011 IFRS Foundation
Section 17 – exchange of assets
52
• Cost of PP&E acquired in exchange for a
non-monetary asset = fair value unless
the transaction lacks commercial
substance
– if fair value cannot be measured reliably,
cost = carrying amount of the asset given
up
© 2011 IFRS Foundation
Section 17 – cost
53
• Cost of PP&E comprises:
– purchase price (incl. fees, duties &
purchase taxes after deducting trade
discounts & rebates)
– costs directly attributable to bring the PP&E
to location & condition necessary for it to
be capable of operating as intended by
management:
– site prep. costs, delivery & handling,
installation & assembly, & testing
functions.
– initial estimate of dismantling & removing
costs and site restoration.
© 2011 IFRS Foundation
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Section 17 – example cost
• Ex 15*: Costs before ready for use as
intended:
– purchase price = 600 (incl 50 refundable
purch tax)
– costs 120 to get equip to site and to install
– in 10 yrs must restore land (PV to restore =
100)
– costs 135 to modify equip to operate as
intended
– costs 10 to train staff to operate equip.
– costs 37 for testing and final modifications
23 = operating loss after ready for use.
* Adapted from example 15 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation
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Section 17 – depreciation
• To allocate depreciable amount over
items useful life use judgement to
estimate
– useful life
– residual value
– depreciation method (eg straight-line,
diminishing balance, units of production)
• Re-evaluate estimates if change indicator
– change is a change in accounting
estimate
© 2011 IFRS Foundation
Section 17 – depreciation continued
56
• Depreciation begins when the PP&E is
available for use
– ie when it is in the location and condition
necessary for it to be capable of operating
in the manner intended by management
• Depreciation stops when the PP&E is
derecognised
© 2011 IFRS Foundation
Section 17 – example depreciation
57
• Ex 20*: On 1/1/20X1 buy machine for
CU100,000. Initial estimates &
judgements:
– useful life = 10 yrs & residual value = 0
– straight-line depreciation is appropriate
At 31/12/20X5 year-end reassess:
– useful life = 24 yrs (from the date of acq)
and residual value = CU20,000
– straight-line depreciation is appropriate
* adapted from example 20 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 17 – derecognition
58
• Derecognise PP&E on disposal or when
no further benefits are expected from its
use or disposal
• Gain or loss = net disposal proceeds (if
any) less carrying amount
– show gain or loss in profit or loss (except
for some sale & leasebacks)
– gain is not revenue
© 2011 IFRS Foundation
Section 17 – example derecognition
59
• Ex 35*: On 1/11/20X5 sold building for
3,500. Carrying amount = 2,000. Selling
costs = 350 commission & 10 legal fees.
On 1/11/20X5 recognise gain of CU1,140
in profit or loss
[calculation: 3,500 less (2,000 + 350 + 10)]
* see example 35 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 17 – disclosures
• Disclose for each class of PP&E
– measurement bases
– depreciation methods
– useful lives or depreciation rates
– gross carrying amount & accumulated
depreciation (incl. impairment losses) at
beginning & end of period
– reconciliation of carrying amount at
beginning & end of the reporting period
showing specified items (comparatives
not required)
© 2011 IFRS Foundation
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Section 17 – other disclosures
61
• Also disclose
– existence and carrying amounts of PP&E
when entity has restricted title or PP&E is
pledged as security for liabilities
– amount of contractual commitments for
the acquisition of PP&E
© 2011 IFRS Foundation
The IFRS for SMEs
62
Section 18
Intangible Assets other than Goodwill
© 2011 IFRS Foundation
63
Section 18 – recognition
Recognise the cost of intangible as asset if:
– probable future benefits inflows, and
– cost can be measured reliably
– the asset does not result from
expenditure incurred internally on an
intangible item
– cannot recognise R&D costs; internally
generated brands, logos, publishing
titles, customer lists; expenditure to open
new facilities or launch new products;
training activities; advertising;
relocating or reorganising costs.
© 2011 IFRS Foundation
Section 18 – recognise this brand?
64
• Ex 1: A developed a brand that allows it
to charge a premium for its products.
A maintains & enhances its brand by
sponsoring local events & advertising.
• Ex 2: Same as Ex 1 except A bought
brand from a competitor in a separate
acquisition.
© 2011 IFRS Foundation
Section 18 – intangibles in business
65
com
• Intangible asset acquired in a bus com
– is normally recognised as a separate asset
–fair value can be measured reliably
– however, not recognised when arises from
legal/contractual rights & fair value cannot
be measured reliably because the asset
either:
–is not separable from goodwill; or
–is separable but no history or evidence of
exchange transactions for similar assets,
and otherwise estimating fair value would
be dependent on immeasurable variables.
© 2011 IFRS Foundation
Section 18 – initial measurement
66
• Initial measurement of intangible = cost
– if separately acquired, cost = purchase
price + directly attrib. cost of preparing for
intended use
– if acquired in a business combination, cost
= at acquisition fair value
– if acquired in government grant, cost = fair
value at the date the grant is received or
receivable
Internally generated intangibles are not
recognised & therefore are not measured
© 2011 IFRS Foundation
Section 18 – example business com
67
Ex 3: A buys B when B’s intangibles were:
CA
FV
Customer list
0
50
In process R&D project
0
80
100
150
0
300
Licence to operate
Brand (trademark & brand name)
A incurred 200 to complete in-process
R&D project & decides to develop the
related product commercially.
© 2011 IFRS Foundation
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Section 18 – judgements about cost
• Judgements in measuring cost include:
– deferred payment—determining the
discount rate
– exchange transaction—estimating fair
value if no active market for asset
received or asset given up
– acquired in a business combination—
estimating fair value if no active markets
& judging if fair value can be measured
reliably (for recognition)
– acquired by government grant—
estimating fair value of if no active
market
© 2011 IFRS Foundation
Section 18 – subsequent measurement 69
• After initial recognition measure intangibles
at cost less amortisation & impairment
losses
• Similar to PP&E but
– all intangibles considered to have finite useful
life
– useful life not > the contractual/legal right
– useful life includes renewal periods only if
evidence to support likely renewal without
significant cost
– useful life = 10 yrs if cannot estimate reliably
– residual value is 0, except in specified
circumstances
© 2011 IFRS Foundation
Section 18 – estimating useful life
• Ex 4: A acquires a customer list.
Expects to benefit from list for 1–3 yrs.
• Ex 5: B acquires a 5-yr airline route
authority (ARA) that is renewable every
5 yrs at no cost
– renewal is routine if specified rules &
regulations are complied with
– B is compliant & expects to fly the route
indefinitely
– an analysis of demand and cash flows
supports those assumptions
© 2011 IFRS Foundation
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Section 18 – derecognition
71
• Derecognise intangibles on disposal or
when no further benefits are expected
from its use or disposal
• Gain or loss = net disposal proceeds (if
any) less carrying amount
– show gain or loss in profit or loss (except
for some sale & leasebacks)
– gain is not revenue
© 2011 IFRS Foundation
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Section 18 – disclosures
• Disclose for each class of intangible
– line item in income statement (or SOCI or
SOI&RE) in which amortisation is
included
– amortisation methods
– useful lives or amortisation rates
– gross carrying amount & accumulated
amortisation (incl. impairment losses) at
beginning & end of period
– reconciliation of carrying amount at
beginning & end of the reporting period
showing specified items (comparatives
not required)
© 2011 IFRS Foundation
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Section 18 – other disclosures
– R&D expenditure expensed in the period
– existence & carrying amounts of intangible
with restricted title or pledged as security
for liability
– amount of contractual commitments for the
acquisition of intangibles
– (i) description, (ii) carrying amount and (iii)
remaining amortisation period of individual
intangible asset that is material to the
entity’s financial statements
– if acquired as government grant & initially
recognised at fair value―the fair value
initially recognised & the carrying amount
© 2011 IFRS Foundation
The IFRS for SMEs
Section 27
Impairment of Assets
© 2011 IFRS Foundation
74
Section 27 – scope
75
• Section 27 specifies accounting and
reporting of impairment losses of all assets
except:
– deferred tax assets
– assets arising from employee benefits
– financial assets in scope of Sections 11 & 12
– assets measured at fair value
© 2011 IFRS Foundation
Section 27 – general principles
• Assets except inventories:
76
– at reporting date assess whether there is
any indication that an asset may be impaired
– if any such indication exists, estimate the
recoverable amount (RA) of the asset
– impair if carrying amount (CA) > RA
– recognise impairment loss in profit or loss
• Note: if impairment indicated
– review the remaining useful life, the
depreciation (amortisation) method or the
residual value for the asset even if no
impairment loss found
© 2011 IFRS Foundation
77
Section 27 – impairment testing level
• Impairment test at level of
– individual asset (if possible)
– otherwise cash-generating unit (CGU)
– eg when need to calculate value in use
and the individual assets do not
generate cash flows by themselves
A CGU is the smallest identifiable group of
assets that generates cash inflows that are
largely independent of the cash inflows
from other assets or groups of assets.
© 2011 IFRS Foundation
Section 27 – impairment indicators
78
• Consider, as a minimum:
• External sources of information in a period
– asset’s market value declined significantly
> expected
– significant changes in the technological,
market, economic or legal environment
– market rates increased (eg effect on
discount rate)
– CA of the net assets > estimated fair
value of the entity
© 2011 IFRS Foundation
C
Section
continued
27 – impairment indicators
79
• Internal sources of information
– obsolete or physical damaged asset
– significant changes in the extent or
manner in which, an asset is (or is
expected to be) used
– eg idle assets, plans to discontinue or
restructure operation, plans to dispose
before expected, and reassessing the
useful life of an asset as finite rather than
indefinite.
– internal reporting indicates that the
economic performance of an asset is, or
will be, worse than expected (eg operating
results & cash flows)
© 2011 IFRS Foundation
Section 27 – recoverable amount
80
• Recoverable amount = higher of value in
use (VIU) & fair value less costs to sell
(FV-CTS)
– if either VIU or FV-CTS > CA then no
need to determine the other
– if no reason to believe VIU > FV-CTS,
then FV-CTS may be used as RA
© 2011 IFRS Foundation
Section 27 – estimating FV-CTS
81
• FV-CTS = amount obtainable from the sale
of an asset in an arm’s length transaction
between knowledgeable, willing parties, less
the costs of disposal
– best evidence is a price in a binding sale
agreement in an arm’s length transaction
or a market price in an active market
– if not available, estimate using best
information available considering the
outcome of recent transactions for similar
assets within the same industry
© 2011 IFRS Foundation
Section 27 – estimating VIU
82
• VIU = present value of the future net cash
flows expected to be derived from an asset.
• Steps to calculate VIU:
– estimate future cash flows (in & out) from
continuing use of the asset & its ultimate
disposal, and
– apply appropriate discount rate to future
cash flows
© 2011 IFRS Foundation
83
Section 27 – estimating VIU
• Reflect in calculation of VIU:
– est. future cash flows (FCFs) entity
expects
– expectations about possible variations in
the amount or timing of those FCFs
– time value of money (current market riskfree rate of interest)
– price for uncertainty inherent in the asset
– other factors (eg illiquidity) that market
participants would adjust for
Avoid double-counting in FCFs & discount
rate
© 2011 IFRS Foundation
84
Section 27 – est. VIU cash flows
• Estimates of FCFs include:
– cash inflows from the continuing use
– cash outflows necessary to generate cash
inflows (directly attributed or allocated on
reasonable & consistent basis)
– net cash flows, if any, expected from
disposal at end of useful life
• May:
– use recent budgets/forecasts to est. cash
flows
– extrapolate beyond forecast period using
steady or declining growth rate, unless
another is justified
© 2011 IFRS Foundation
Section 27 – est. VIU cash flows continued
85
• Est. FCFs for asset in current condition
• Est. FCFs don’t include in/outflows from:
– a future restructuring to which an entity is
not yet committed, or
– improving or enhancing the asset’s
performance.
• Est. FCFs also don’t include:
– cash in/outflows from financing activities,
and
– income tax receipts/payments.
© 2011 IFRS Foundation
Section 27 – est. VIU discount rate
86
• Discount rate/s is a pre-tax rate/s that
reflect/s current market assessments of:
– the time value of money (ie current
market risk-free rate of interest); and
– the risks specific to the asset for which
the future cash flow estimates have not
been adjusted (ie avoid double-counting).
© 2011 IFRS Foundation
Section 27 – cash generating unit (CGU) 87
• Allocate impairment loss:
– 1st to any goodwill allocated to the CGU
– 2nd to other assets pro rata on the basis
CA of each asset in CGU
– however, cannot reduce the CA of any
asset below the highest of 0, FV-CTS &
VIU (if determinable)
–reallocate to other assets of CGU
© 2011 IFRS Foundation
Section 27 – example CGU impairment 88
• Ex 1: At 31/12/20X1 CA of a CGU’s
assets = 210 (ie 150 taxis, 50 taxi licence
& 10 goodwill)
Impairment indicated & RA = 170.
Fair value of taxis = 140.
Impairment loss = 40 (ie 210 CA less 170
RA)
1st allocate 10 loss to goodwill
2nd allocate remaining 30 loss, ie 22.5 to
taxis & 7.5 to licence (pro rata on CA)
3rd reallocate 12.5 loss from taxis to licence
© 2011 IFRS Foundation
Section 27 – goodwill
89
• On acquisition date goodwill is allocated to
each cash-generating unit that is expected
to benefit from the synergies of the business
combination
• CA of partly-owned CGU is notionally
adjusted for the NCI’s share of goodwill
before being compared with its RA
© 2011 IFRS Foundation
Section 27 – example goodwill
• Ex 2: Goodwill of CU40 on A’s
acquisition of 75% of B’s shares on
1/1/20X1.
90
To reflect synergies the group allocated
the goodwill 10 to A’s CGU and 30 to B’s
CGU.
• For impairment testing purposes only B’s
goodwill is notionally grossed up to 40 (ie
additional goodwill for NCI = 10).
© 2011 IFRS Foundation
Section 27 – goodwill continued
91
• If goodwill cannot be allocated to CGU/s on
a non-arbitrary basis, then for the purposes
of testing goodwill for impairment, the entity
determines the recoverable amount of
either:
– the acquired entity in its entirety (if
goodwill relates to an acquired entity that
has not been integrated).
– the entire group of entities, excluding any
entities that have not been integrated (if
the goodwill relates to an acquired entity
that has been integrated).
© 2011 IFRS Foundation
Section 27 – reversing impairment loss 92
• General principles:
– at reporting date assess whether there is
any indication that impairment has
reversed
– if any such indication exists, estimate RA
– reverse impairment in profit or loss if CA <
RA, but
–reversal cannot increase the CA above
the CA that would have been determined
(net of amortisation or depreciation) had
no impairment loss been recognised in
prior years.
–goodwill impairment cannot be reversed
© 2011 IFRS Foundation
Section 27 – example reverse impairm’t
93
• Ex 3: Facts from Ex 1. At 31/12/20X2 CA
of CGU = 120 (ie 100 taxis & 20 licence)
Impairment reversal indicated & RA
estimated = 150
Potential impairment reversal = 30 (ie 150 RA
less 120 CA) but limited to 20 (as follows)
1st allocate to assets pro rata on CAs, ie 5 to
licence & 25 to taxis
2nd limit amt allocated to taxis to 7 (if no
impairment in 20X1, CA at 20X2 = 107)
© 2011 IFRS Foundation
Section 27 – example reversal continued
94
• Ex 3 continued:
3rd reallocate 18 reversal from taxis to
licence
Total reversal provisionally allocated to
licence = 23 (ie 5 + 18)
4th limit amt allocated to licences to 13 (if no
impairment in 20X1, CA at 20X2 = 33)
5th as there are no other assets to reallocate
the unallocated 10 (ie 23 less 13) reversal
to, limit the total impairment reversal to 20
(ie 7 for taxis and 13 for licence)
© 2011 IFRS Foundation
Section 27 – after reversal
• After reversing impairment loss
– adjust the depreciation/amortisation
charge for the asset in future periods to
allocate the asset’s revised CA, less its
residual value (if any), on a systematic
basis over its remaining useful life.
© 2011 IFRS Foundation
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96
Section 27 – impairment disclosures
• Disclose separately for each of―(a)
inventories; (b) PP&E; (c) goodwill; (d)
intangibles other than goodwill; (e)
investments in associates; (f) investments in
joint ventures:
– amount of impairment losses recognised
in profit or loss & line item(s) in the
income statement (or SOCI or SOI&RE)
in which included.
– same for reversals of impairment losses
© 2011 IFRS Foundation