IAS 36, Impairment of Assets

© 2023 Association of International Certified Professional Accountants. All rights reserved.

IAS 36 deals with impairments.

This is a very relevant topic in the ongoing climate of

economic uncertainty..
The value of assets may need to be reduced due to
adverse trading conditions.

105
Learning objectives
• Identify when an entity should test for
impairment.
• Recall how to test an asset or cash-
generating unit for impairment.
• Recall how to measure and recognize
impairment losses.
• Identify possible reversals of previously
recognized impairment losses and how to
measure and recognize such reversals.

106 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Learning objectives

 Identify when an entity should test for impairment.

 Recall how to test an asset or cash-generating unit
for impairment.
 Recall how to measure and recognize impairment
losses.
 Identify possible reversals of previously recognized
impairment losses and how to measure and
recognize such reversals.

106
The following are scoped out of IAS 36 and covered by
another standard
• Inventories
• Contract assets and assets arising from costs to obtain or fulfill a
contract under IFRS 15
• Deferred tax assets
• Assets arising from employee benefits
• Financial assets within the scope of IFRS 9
• Investment property measured at fair value
• Biological assets within the scope of IAS 41
• Noncurrent assets held for sale
• Some insurance assets
107 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Covered by other standards

Let’s think about what is scoped out of IAS 36 and covered by another
standard, as follows:
• Inventories
• Contract assets and assets arising from costs to obtain or fulfill a
contract under IFRS 15, Revenue From Contracts With Customers
• Deferred tax assets
• Assets arising from employee benefits
• Financial assets within the scope of IFRS 9, Financial Instruments
• Investment property measured at fair value
• Biological assets within the scope of IAS 41, Agriculture
• Noncurrent assets held for sale
• Some insurance assets

IAS 36 essentially applies to PPE, intangible assets, goodwill, investment

properties carried at cost, and financial assets classified as subsidiaries,
associates, and joint ventures.

107
IAS 36 ensures that assets
are not overvalued
An asset should not be carried
in the financial statements at
more than the highest amount
to be recovered through use or
sale.

108 © 2023 Association of International Certified Professional Accountants. All rights reserved.

IAS 36 ensures that assets are not overvalued

The main objective of IAS 36 is to ensure that assets are not
overvalued on the SOFP.

108
When should an asset (or group of assets) be tested for impairment?

Indication at reporting date? Annual impairment test

• Goodwill acquired in a
External Internal
business combination
• Unusual fall • Damage
• Intangible assets with an
in value • Changes to
indefinite useful life
• Regulatory useful life
changes
• Intangible assets that are
• Technological
not yet available for use
changes

109 © 2023 Association of International Certified Professional Accountants. All rights reserved.

When should an asset (or group of assets) be tested for impairment?

For most assets, we need to perform an impairment test only when there is an indication of
impairment.

This could include a significant fall in market value, such as that as a result of the wars and
pandemics or indeed the 2008financial crisis, when the bottom fell out of the property
market. This was a good external indicator that the property might be worth less to an entity
than it was before the crash. Similarly, if we drive a forklift truck into a wall, it is going to be
worth less to us afterward. Perhaps a more subtle indicator would be if we change how we
use an asset. If regulation dictates that we can no longer produce a product that we have a
machine for, perhaps due to environmental impact or technological changes result in
reduced sales of a product, our competitors may be ahead of us.

IAS 36 is clear that these suggestions are not exhaustive. Essentially, if you think there is an
indication that an asset has less value to you, other than from normal wear and tear, then
you should conduct an impairment review.
Other assets should be reviewed annually for impairment. For example, goodwill should be
reviewed annually for impairment in accordance with IFRS 3. Intangible assets with an
indefinite useful life, as we saw earlier, and intangibles that are not yet available for use and
therefore are not being amortized should also be reviewed annually for impairment.

109
Here are some general principles for the impairment test
Compare carrying value to recoverable amount

Carrying value Recoverable amount

Higher of

Fair value less costs of disposal Value in use

IFRS 13 Present value of
Price received in an the future cash
orderly transaction flows expected to
Less legal costs, for be derived from
example an asset

110 © 2023 Association of International Certified Professional Accountants. All rights reserved.

General principles for impairment test

An asset is impaired when its carrying amount exceeds its recoverable
amount, as follows:
 Carrying value — The value it is currently held at in the SOFP. Recoverable amount — The higher of its

 fair value less costs of disposal, which is net proceeds if sold or

 value in use (VIU).
 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).
 Costs of disposal — Include legal costs and other transaction taxes.

Ideally, FV less costs of disposal would be higher than the carrying value. This
way, you can conclude that the asset is not impaired, and you can avoid
calculating VIU, which can sometimes be complex. VIU involves identifying the
future cash flows associated with the asset (or group of assets) and
discounting them to present value. Let’s consider the example of an airport.
What is the useful life of an airport? Say 50 years? Can we project cash flows
for the next 50 years on reasonable and supportable assumptions? This could
be a difficult and time-consuming task, so it is worth assessing FV less costs of
disposal first.

110
How are impairment losses recognized?

If the carrying value is greater than the recoverable amount, an impairment

has occurred.

• Recognize immediately in statement of profit and loss

• Unless it reverses a previous upwards revaluation

111 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Recognizing impairment losses

If the carrying value is greater than the recoverable amount,
the asset is impaired and this needs to be accounted for
under IAS 36. The asset should be written down to its
recoverable amount. The account to debit depends on
whether the asset has been previously revalued. If it hasn’t,
then we would debit the statement of profit and loss. If the
asset has been previously revalued, we would debit OCI to
the extent possible and any excess will go to profit or loss.

Conceptual framework: Measurement

111
Discussion exercise — Impairment
Company B has a machine with a net book value of £80,000. The
development of new technology means that the machine has fallen
in value such that its fair value less costs of disposal is £29,000. The
accountant calculated a value in use of £33,000.

What impairment loss should the accountant recognize, and where

should it be recorded?

112 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Discussion exercise — Impairment

Company B has a machine with a net book value of

£80,000. The development of new technology means
that the machine has fallen in value such that its fair
value less costs of disposal is £29,000. The accountant
calculated a VIU of £33,000. What impairment loss
should the accountant recognize, and where should it be
recorded?

112
Discussion exercise solution — Impairment
• The recoverable amount is £33,000, as this amount is the higher
of the fair value less costs of disposal and value in use.

• The carrying value of the machine is £80,000.

• Therefore, an impairment loss of £47,000 should be recognized,

as follows:

Dr Impairment loss (P/L) £47,000

Cr Property, plant, and equipment £47,000

113 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Discussion exercise solution

• The recoverable amount is £33,000, as this amount is the higher of the fair value less costs of disposal and
VIU.
• The carrying value of the machine is £80,000.
• Therefore, an impairment loss of £47,000 should be recognized, as follows:
Dr Impairment loss (P/L) £47,000
Cr Property, plant, and equipment £47,000

113
Discussion exercise — Revaluation
Company C has a factory that is subject to a policy of revaluation
with a carrying value of £15 million. The revaluation surplus for the
factory is £3 million. It is determined that the factory is impaired due
to technological advancement with which it hasn’t kept pace. Its
recoverable amount is calculated to be £11 million.

What impairment loss should the accountant recognize, and where

should it be recorded?

114 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Discussion exercise—Revaluation
Company C has a factory that is subject to a policy of revaluation with a carrying value of £15 million. The
revaluation surplus for the factory is £3 million. It is determined that the factory is impaired due to technological
advancement that it hasn’t kept pace with. Its recoverable amount is calculated to be £11 million. What
impairment loss should the accountant recognize and where should it be recorded?

114
Discussion exercise solution — Revaluation
• The recoverable amount is £11 million.

• The carrying value of the factory is £15 million.

• Therefore, an impairment loss of £4 million must be recognized.

Dr Revaluation surplus £3 million

Dr Impairment loss (P/L) £1 million

Cr Property, plant, and equipment £4 million

115 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Discussion exercise solution

• The recoverable amount is £11 million.
• The carrying value of the factory is £15 million.
• Therefore, an impairment loss of £4 million must be recognized.

Dr Revaluation Surplus £3m

Dr Impairment loss (P/L) 1m
Cr Property, plant, and equipment £4m

115
Let’s look at calculating depreciation on impaired assets

Depreciation • New carrying amount

charge • Its estimated residual value (if any)
• Its estimated remaining useful life

116 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Let’s look at calculating depreciation on impaired assets

The depreciation charge on the impaired asset going
forward should be based on the carrying amount after
impairment, less any residual value, over the asset’s
remaining useful life, which may need to be reassessed.

116
Discussion question — Reversal of an impairment loss

Can an impairment loss be reversed?

If so, under what conditions?

117 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Discussion question — Reversal of an impairment loss

Can an impairment loss be reversed? If so, under what conditions?

Discussion exercise solution — Reversal of an impairment loss

 Impairment losses can generally be reversed (other than goodwill, which we will see shortly) but if, and
only if, there has been a change in the estimates used to determine the asset’s recoverable amount since
the last impairment loss was recognized.
 The asset cannot be valued at a higher amount than its value would have been if the impairment hadn’t
occurred — i.e., its depreciated carrying value had the impairment not taken place.
 The reversal will be credited immediately in profit and loss, to the extent the impairment went there. In
the case of a previously revalued asset, any amount in excess of the amount that went to profit or loss will
be credited to the revaluation surplus relating to that asset.

Comparison to U.S. GAAP

Reversals of impairment losses are prohibited under U.S. GAAP.

117
Discussion question solution — Reversal of an impairment loss
Can an impairment loss be reversed?

• Only if a change in the estimates used to determine the asset’s recoverable

amount since the last impairment loss was recognised

• Reversal recognized immediately in SPL/OCI and carrying value of asset

increased to new recoverable amount

• Not higher than the value it would have had if the impairment had never
occurred

Reversals of impairment losses are prohibited under U.S. GAAP.

118 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Discussion exercise solution — Reversal of an impairment loss

 Impairment losses can generally be reversed (other than
goodwill, which we will see shortly) but if, and only if, there has
been a change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was
recognized.
 The asset cannot be valued at a higher amount than its value
would have been if the impairment hadn’t occurred — i.e., its
depreciated carrying value had the impairment not taken place.
 The reversal will be credited immediately in profit and loss, to
the extent the impairment went there. In the case of a
previously revalued asset, any amount in excess of the amount
that went to profit or loss will be credited to the revaluation
surplus relating to that asset.

Comparison to U.S. GAAP

Reversals of impairment losses are prohibited under U.S. GAAP.

118
When the recoverable amount can’t be calculated
for an asset individually

Cash-generating unit (CGU)

• Product line? • Business? • Location?

119 © 2023 Association of International Certified Professional Accountants. All rights reserved.

When the recoverable amount can’t be calculated for an asset

individually.

As a basic rule, the recoverable amount of an asset should be

calculated for an asset individually. However, when this is not
possible, the impairment test must be performed on the cash-
generating unit to which the asset belongs.
A CGU is the smallest group of identifiable assets that generates
cash inflows that are largely independent of cash inflows from other
assets or groups of assets.

There is no “right” number of CGUs for an entity; this will depend on

the nature of the business and its operations. An entity’s CGUs are
likely to reflect the way in which management monitors and makes
decisions about the business. Unique intangible assets like brands
are often used to identify CGUs, as are major products or
geographical area.

119
Measuring the carrying value of cash-generating units

Other assets and

Acquired goodwill Corporate assets
liabilities

Must be allocated to a Exclude receivables Head office building,

CGU as no independent and for example
cash flows other financial assets
and liabilities
CGU is no larger than an
operating segment Unless practical

CGU tested annually for

impairment

120 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Acquired goodwill has no independent cash flows and therefore must be allocated to a CGU.
That CGU must then be tested for impairment annually. This CGU should represent the
lowest level within the entity at which goodwill is monitored for internal management
purposes and should not be larger than an operating segment as defined by IFRS 8, Operating
Segments. Essentially, the IASB doesn’t want a company claiming the whole company is a
CGU and therefore goodwill is never impaired!

It is important to compare amounts on a like-for-like basis; therefore, the carrying amount of

a CGU and the recoverable amount must be calculated on a consistent basis. The carrying
amount of a CGU should exclude receivables as well as other financial assets and liabilities,
such as payables and provisions, because these items generate independent cash flows.
Practically speaking, it may be difficult to calculate the recoverable amount of a CGU without
including assets or liabilities that are not part of the CGU, such as receivables. It is acceptable
to include these items as long as the carrying value of these assets and liabilities are also
taken into account when calculating the CGU’s carrying amount.

What about assets used by a number of CGUs? What may be considered a “reasonable and
consistent basis” to allocate assets of the head office between CGUs? There is no right
answer; however, these should be allocated to CGUs on a reasonable and consistent basis.
Where practical to do so, it will often be most appropriate to allocate shared assets by
reference to use (for example, the extent to which head office resources are used). In
practice, though, many entities will allocate corporate assets based on the respective carrying
values of the net assets allocated to the individual CGUs. Other ways of allocating may be
based on turnover or sales units. Other suggestions could be reasonable if they reflect how
the corporate asset contributes to the individual CGUs.

120
Calculating value in use for a CGU

Divide Identify Estimate future

entity into carrying pretax cash
CGUs amount of flows of CGU
CGU

Compare carrying
Identify appropriate
amount with value in
discount rate and apply
use and recognize
any impairment loss

121 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Calculating VIU for a CGU

Calculating VIU for a CGU:

Value in use is established by estimating future cash inflows and outflows

from the use and ultimate disposal of the asset and applying an
appropriate discount rate to those cash flows. Cash flow projections
should be based on reasonable and supportable assumptions, as well as
the most recent approved budgets or forecasts. Cash flows beyond the
budget period (for example, the airport mentioned earlier with a 50-year
life) may be based on the budgeted number of years, but then
extrapolated for subsequent years.

The discount rate should be a pretax rate reflecting current market

assessments of the time value of money and risks specific to the asset for
which the future cash flow estimates have not been adjusted.

121
Allocation and reversal of impairment losses in a CGU

Allocating Reversing
impairment losses impairment losses

• Goodwill • Prorate among

• Prorate among assets in CGU
remaining assets • Never reverse
impairment of
goodwill

122 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Allocation and reversal of impairment losses in a CGU

Where the carrying amount of a CGU exceeds its
recoverable amount, an impairment loss should be
recognized. This is allocated to goodwill first and then
prorated among other assets in the CGU. Assets, other than
goodwill, cannot have their carrying value reduced below
the highest of
• the fair value less costs to sell,
• the value in use; and
• zero.

The amount of the impairment loss that would otherwise

have been allocated to the asset should be allocated on a
pro rata basis to the other assets of the CGU.

122
Comparison to U.S. GAAP

IFRS U.S. GAAP

IFRS uses a one-step impairment test. U.S. GAAP requires a two-step impairment test
and measurement.

Changes in market interest rates Changes in market interest rates are not
can be impairment indicators. considered impairment indicators.

If criteria are met, the reversal of impairments, The reversal of impairments is prohibited.
other than of goodwill,
is permitted.

123 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Comparison to U.S. GAAP

The IFRS-based impairment model might lead to the recognition of impairments of long-lived assets held for use
earlier than would be required under U.S. GAAP. The following are the main differences between IFRS and U.S.
GAAP:
IFRS
• IFRS uses a one-step impairment test. The carrying amount of an asset is compared with the recoverable
amount.
• Changes in market interest rates can be impairment indicators.
• If criteria are met, the reversal of impairments, other than of goodwill, is permitted.
U.S. GAAP
• U.S. GAAP requires a two-step impairment test:
— Step 1 — The carrying amount is first compared with the undiscounted cash flows. If the carrying
amount is lower than the undiscounted cash flows, no impairment loss is recognized.
— Step 2 — If the carrying amount is higher than the undiscounted cash flows, an impairment loss is
measured as the difference between the carrying amount and fair value.
• Changes in market interest rates are not considered impairment indicators.
• The reversal of impairments is prohibited.

Refer participants to page 168-169 of Domino’s accounts and give them a chance to see how these rules are
applied in practice.

Case study
Refer participants to the exercise in their packs and allow them time to attempt (individually or in small groups)
before debriefing using the solution.

123