IAS 36
IMPAIRMENT
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Arba Minch University, Department of Accounting and Finance
Learning Objectives
Up on completion of this topic, you will be able to:
• Define the recoverable amount of an asset
• Define impairment losses
• Give examples of, and be able to identify,
circumstances that may indicate that an
impairment of an asset has occurred
• Describe what is meant by a cash-generating
unit (CGU).
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Learning Objectives…
State the basis on which imp. losses should be allocated, and
Allocate a given impairment loss to the assets of a CGU.
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DETERMINATION OF IMPAIRMENT
Impairment is determined by:
Comparing the carrying amount of the asset with its
recoverable amount.
Recoverable amount (The higher of its)
- fair value less costs to sell and
- value in use (VU)
There is an established principle that assets should not be
carried at above their recoverable amount.
An entity should write down the carrying value of an asset to
its recoverable amount (if CA is not recoverable in full).
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SCOPE
This Standard shall be applied in accounting for the impairment
of all assets, other than:
Inventories (see IAS 2 Inventories);
Investment property that is measured at fair value (see IAS
40 Investment Property);
Biological assets related to agricultural activity within the
scope of IAS 41
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
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SCOPE…
Financial assets that are within the scope of IFRS 9 Financial
Instruments;
Contract assets and assets arising from costs to obtain or
fulfill a contract (IFRS 15 Revenue from Customers);…
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SCOPE…
The Standard does apply to
Property, plant, and equipment
Investment property carried at cost
Intangible assets and goodwill
Subsidiaries, associates, and joint ventures
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DEFINITIONS OF TERMS
Impairment
A fall in the value of an asset (recoverable amount is less than
carrying value).
Carrying amount (CA)
The net value of the asset (after deducting accumulated
depreciation & any impairment losses).
If value of the asset is higher than its realistic value (RA) ', the
asset is judged to have suffered an impairment loss.
It will be reduced in value, by the amount of the imp. loss and
the amount should be written off against profit immediately
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THE THREE ACCOUNTING ISSUES
How is it possible to identify when an imp. loss may have
occurred?
How should the RA of the asset be measured?
How should an 'impairment loss' be reported in the
accounts?
1. Identifying a Potentially Impaired Asset
Assess at the end of each reporting period whether there are
any indications of impairment to any assets.
The concept of materiality applies, & only material
impairment needs to be identified.
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THE THREE ACCOUNTING ISSUES…
Suggestions by the standard are based largely on common
sense
Source of Information
External Sources Of Information
A fall in the asset's market value that is more significant than
would normally be expected.
A significant change in the technological, market, legal or
economic environment of the business.
An increase in market interest rates or market rates of return
on investments likely to affect the discount rate.
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THE THREE ACCOUNTING ISSUES…
The carrying amount of the entity's net assets being more
than its market capitalization.
Internal Sources Of Information
Obsolete or physically damaged asset
Significant changes in the extent or manner in which, an asset
is used (idle assets, plans to dispose, discontinue…
Internal reporting indicates that the economic performance
of an asset is, or will be, worse than expected
Exceptions:(must always be tested for impairment annually
with no indication of imp. )
An intangible asset with an indefinite useful life ( 10 yrs renewable
Brand right). 11
THE THREE ACCOUNTING ISSUES…
2. Measuring the Recoverable Amount of the Asset
The RA should be the higher value of:
The asset's fair value less costs to sell; and
Its value in use. (IAS 36)
Fair value less costs to sell is the amount net of selling costs
that could be obtained from the sale of the asset
If there is an active market in the asset, the net selling price
should be based on:
the market value, or on
the price of recent transactions in similar assets.
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THE THREE ACCOUNTING ISSUES…
If there is no active market in the assets it might be possible
to estimate a net selling price using
best estimates of what 'knowledgeable, willing parties'
might pay in an arm's length transaction.
Net selling price cannot be reduced, by including within
selling costs any
restructuring or reorganization expenses, or
costs that have already been recognized in the accounts as
liabilities.
Value in Use (VU)
The VU is the PV of estimated future cash flows including its
estimated net disposal value (if any) at the end of its UL. 13
THE THREE ACCOUNTING ISSUES…
3. Recognition & Measurement Of An Impairment Loss
The Rule for Assets at Historical Cost:
If the RA is lower than the CA , the CA should be reduced by
the d/ce which should be charged as an expense in p&l.
The Rule for Assets Held At a Revalued Amount (Such as PPE):
The impairment loss is to be treated as a revaluation decrease
under the relevant IAS.
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THE THREE ACCOUNTING ISSUES…
In practice this means:
If there is a revaluation surplus held in respect of the asset,
the imp. loss should be charged to revaluation surplus.
Any excess should be charged to profit or loss.
Cash Generating Units (CGUs)
When it is not possible to calculate the RA of a single asset,
then that of its CGU should be measured instead.
A CGU is the smallest identifiable group of assets that
can generate cash flows from continuing use and
are mainly independent of the cash flows from other assets or
groups of assets.
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THE THREE ACCOUNTING ISSUES…
Use of Cash-Generating Unit
As a basic rule, the recoverable amount of an asset should be
calculated for the asset individually.
when it is not possible to estimate value for an individual
asset, we use CGU
Impairment Testing Levels
Inventories (other standards)
Principle: test inventory for impairment item by item
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THE THREE ACCOUNTING ISSUES…
Exception (a rule): impairment test a group of items when:
it is impracticable to determine net realizable value (NRV)
item by item; and
the inventories relate to the same product line
Items have similar purposes or end uses and are produced
and marketed in the same geographical area
Other Non-Financial Assets
Principle—test for impairment at the individual asset level
(i.e. item-by-item)
Application guidance is necessary for cash-generating units
and corporate assets & exception is permitted for goodwill
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THE THREE ACCOUNTING ISSUES…
IFRS for SMEs (cash-generating units)
Test individual assets for impairment (Section 27 and IAS 36).
If not possible, then determine the recoverable amount of the
CGU to which it relates (Section 27 and IAS 36)
Goodwill
G/will is tested for impairment at the lowest level at which it
is monitored for internal management purposes provided
that level is not larger than an operating segment as
defined in IFRS 8 (before aggregation).
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THE THREE ACCOUNTING ISSUES…
The recoverable amount of an individual asset cannot be
determined if:
its VU cannot be estimated to be close to its fair value less
costs of disposal
― E.g. when the future cash flows from continuing use of the
asset cannot be estimated to be negligible); and
the asset does not generate cash inflows that are largely
independent of those from other assets.
In such cases, VU and, therefore, recoverable amount, can be
determined only for the asset’s CGU.
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THE THREE ACCOUNTING ISSUES…
When an impairment loss is recognized for a CGU, the loss
should be allocated b/n the assets in the unit in the ff order.
First, to any assets that are obviously damaged or
destroyed
Next, to the g/will allocated to the cash generating unit
Then to all other assets in the CGU, on a pro rata basis
In allocating an impairment loss, the carrying amount of an
asset should not be reduced below the highest of:
Its fair value less costs to sell
Its value in use (if determinable)
Zero
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THE THREE ACCOUNTING ISSUES…
Case1
A manufacturing entity owns several vehicles. The vehicles
are several years old and could only be sold for scrap value.
They do not generate cash independently from the entity.
Required
How will the recoverable value of the vehicles be determined?
Solution
The entity cannot estimate the recoverable amount of the
vehicles because their VU cannot be determined separately,
and it will be d/t from the scrap value. Therefore, the entity
would incorporate the vehicles into the cash-generating unit
to which they belong and estimate the recoverable amount of21
that cash-generating unit.
THE THREE ACCOUNTING ISSUES…
Case 2
A corporation is reviewing one of its plants for impairment.
The carrying value of its net assets is ETB20 million.
Management has produced two computations for the value-
in-use of the plant.
The first value (ETB18 million) excludes the benefit to be
derived from a future reorganization, but the second value
(ETB22 million) includes the benefits to be derived from the
future reorganization. There is not an active market for the
sale of the plant.
Required
Explain whether the plant is impaired. 22
THE THREE ACCOUNTING ISSUES…
Solution
The benefit of the future reorganization should not be taken
into account in calculating value-in-use.
Therefore, the net assets of the plant will be impaired by
ETB2 million because the value-in-use (ETB18 million) is lower
than the carrying value (ETB20 million). The value-in-use can
be used as the recoverable amount as there is no active
market for the sale of the plant.
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THE THREE ACCOUNTING ISSUES…
Case 3
A sugar Corporation owns and operates a large waste
recycling plant and a private railway which transports the
processed waste in containers from the plant to the main
public rail network. The private railway could be sold only for
scrap value and it does not generate cash inflows from
continuing use which are largely independent of the cash
inflows of the plant as a whole.
Required
Determine which asset or group of assets represents a CGU.
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THE THREE ACCOUNTING ISSUES…
Solution
It is not possible to estimate the recoverable amount of the
private railway because its value in use cannot be determined
and is probably different from scrap value. The scrap value of
the railway is below its carrying amount. The corporation
therefore estimates the recoverable amount of the CGU
(which includes both the plant and the private railway).
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THE THREE ACCOUNTING ISSUES…
Case 3: Allocation of Impairment Loss
A corporation’s cash-generating unit comprises the following:
ETB m
Building 30
Plant and equipment 6
Goodwill 10
Current assets 20
Total 66
Following a recession, an impairment review has estimated
the RA. Of CGU to be ETB 50m.
How do we allocate the impairment loss? 26
THE THREE ACCOUNTING ISSUES…
The loss will be applied first against the goodwill and then
against the tangible non-current assets on a pro-rata basis.
CA Impairment-loss Carrying amount
Post- impairment
ETBm ETB ETB
Building 30 (5) 25
Plant and equipment 6 (1) 5
Goodwill 10 (10) –
Current Assets 20 – 20
Total 66 (16) 50
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THE THREE ACCOUNTING ISSUES…
Case 4: Reversal of Impairment Loss
A cash generating unit comprising a factory, plant and
equipment etc and associated purchased goodwill (the
standard states no reversal for good will) becomes impaired
because the product it makes is overtaken by a
technologically more advanced product produced by a
competitor. The recoverable amount of the cash generating
unit falls to ETB 60m, resulting in an impairment loss of
ETB80m, allocated as follows.
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THE THREE ACCOUNTING ISSUES…
CA-Before CA-After
Good will 40 -
Patent ( no Market Value) 20 –
Tangible-non-current(MVETB60m)80 60
Total 140 60
After three years, the entity makes a technological breakthrough of
its own, and the recoverable amount of the cash generating unit
increases to ETB90m. The carrying amount of the tangible non-
current assets had the impairment not occurred would have been
ETB70m.
Calculate the reversal of the impairment loss.
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THE THREE ACCOUNTING ISSUES…
The reversal of the impairment loss is recognized to the
extent that it increases the carrying amount of the tangible
non-current assets to what it would have been had the
impairment not taken place, i.e. a reversal of the impairment
loss of ETB10m is recognized and the tangible non-current
assets written back to ETB70m. Reversal of the impairment is
not recognized in relation to the goodwill and patent because
the effect of the external event that caused the original
impairment has not reversed – the original product is still
overtaken by a more advanced model.
The increase in the carrying value of the asset can only be up
to what the carrying amount would have been if the
impairment had not occurred. 30
THE THREE ACCOUNTING ISSUES…
Case 5
Plant X belongs to a given corporation M. X makes all its
activities through the corporation. Pricing, marketing,
advertising and human resources policies (except for hiring
X’s cashiers and other staffs) are decided by the corporation.
The corporation also owns five other plants in the same city
as X (although in different neighbor hoods) and 20 other
plants in other cities. All plants are managed in the same way
as X.
What is the cash-generating unit for X (X’s cash-generating
unit)?
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THE THREE ACCOUNTING ISSUES…
Analysis
In identifying X’s cash-generating unit, an entity considers
whether, for example:
Internal management reporting is organized to measure
performance on a plant-by-plant basis; and
The business is run on a plant-by-plant basis on a region/city
basis.
All M’s plants are in different neighbor hoods and probably
have different customer bases. So, although X is managed at a
corporate level, X generates cash inflows that are largely
independent of those of M’s other plants. Therefore it is likely
that X is a cash generating unit. 32
THE THREE ACCOUNTING ISSUES…
Case 6
A Sugar Corporation owns a private railway that it uses to
transport sugar from one of its plants. The railway now has no
market value other than as scrap, and it is impossible to
identify any separate cash inflows with the use of the railway
itself.
How do you identify a cash-generating unit(CGU)?
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THE THREE ACCOUNTING ISSUES…
Analysis
If the corporation suspects an impairment in the value of the
railway, it should treat the plant as a whole as a cash
generating unit, and measure the recoverable amount of the
plant as a whole.
It is not possible to estimate the recoverable amount of the
private railway because its value in use cannot be determined
and is probably different from scrap value. Therefore, the
entity estimates the recoverable amount of the cash-
generating unit to which the private railway belongs, i.e. the
plant as a whole.
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THE THREE ACCOUNTING ISSUES…
Case7
A Corporation with a bus service wing has an arrangement
with a town's authorities to run a bus service on four routes in
the town. Separately identifiable assets are allocated to each
of the bus routes, and cash inflows and outflows can be
attributed to each individual route. Three routes are running
at a profit and one is running at a loss. The company suspects
that there is an impairment of assets on the loss making
route. However, the company will be unable to close the loss-
making route, because it is under an obligation to operate all
four routes, as part of its contract with the local authority.
How do you identify a cash-generating unit?
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THE THREE ACCOUNTING ISSUES…
Analysis
Consequently, the corporation should treat all four bus routes
together as a cash generating unit, and calculate the
recoverable amount for the unit as a whole.
Because the corporation does not have the option to curtail
any one bus route, the lowest level of identifiable cash
inflows that are largely independent of the cash inflows from
other assets or groups of assets is the cash inflows generated
by the five routes together. The cash-generating unit for each
route is the bus service as a whole (no independent cash
generation).
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DISCLOSURE REQUIREMENTS
For each class of asset an entity shall disclose
Impairment losses recognized in the income statement
Impairment losses reversed in the income statement
The line item in the income statement in which the
impairment losses are included
If an individual impairment loss or reversal is material, then
this information should be disclosed:
The events and circumstances leading to the impairment loss
The amount of the loss
If it relates to an individual asset, the nature of the asset and
the segment to which it relates
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DISCLOSURE REQUIREMENTS…
For a cash-generating unit, the description of the amount of
the impairment loss or reversal by class of assets
If the recoverable amount is fair value less costs to sell, the
basis for determining fair value must be disclosed.
If the recoverable amount is the value-in-use, the discount
rate should be disclosed……
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SIMILARITIES AND DIFFERENCES
BETWEEN IFRS AND US GAAP…
Similarities
long-lived assets are not tested annually, but rather when
there are similarly defined indicators of impairment in both
cases.
Both Standards Require
goodwill and intangible assets with indefinite useful lives to
be tested at least annually for impairment and
more frequently if impairment indicators are present.
Both require that the impaired asset be written down and an
impairment loss recognized.
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SIMILARITIES AND DIFFERENCES
BETWEEN IFRS AND US GAAP…
DIFFERENCES
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SIMILARITIES AND DIFFERENCES
BETWEEN IFRS AND US GAAP..
US GAAP IFRS
Differences
Method of Two-step approach requires that One-step approach
determinin a recoverability test be requires that impairment
g performed first (carrying amount loss calculation be
impairment of the asset is compared with the performed if impairment
— long- sum of future undiscounted cash indicators exist.
lived assets flows generated through use and
eventual disposition).
Imp-loss- The amount by which the The amount by which the
calculation- carrying amount of the asset carrying amount of the
long-lived exceeds its fair value, as asset exceeds its
assets calculated in accordance with recoverable amount.
ASC 820, Fair Value
Measurement.
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SIMILARITIES AND DIFFERENCES
BETWEEN IFRS AND US GAAP…
Assignme Goodwill is assigned to a reporting Goodwill is allocated to a
nt of unit, which is defined as an cash-generating unit (CGU)
goodwill operating segment or one level or group of CGUs,
below an operating segment Operating Segments.
(component).
Method Companies have the option to Qualitative assessment is
of qualitatively assess whether it is not permitted. One-step
determini more likely than not that the fair approach requires that an
ng value of a reporting unit is less impairment test be done at
impairme than its carrying amount. the CGU level.
nt G/will
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SIMILARITIES AND DIFFERENCES
BETWEEN IFRS AND US GAAP…
Method of Companies have the option to Qualitative assessment
determining qualitatively assess whether it is is not permitted. One-
impairment more likely than not that an step approach requires
— indefinite-lived intangible asset is that an impairment
indefinite- impaired. If a quantitative test is test be done at the
lived performed, the quantitative CGU level by
intangibles impairment test for an indefinite- comparing the CGU’s
lived intangible asset requires a carrying amount,
comparison of the fair value of the including goodwill,
asset with its carrying amount. If with its recoverable
the carrying amount of an amount
intangible asset exceeds its fair
value, a company should recognize
an impairment loss in an amount
equal to that excess.
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SIMILARITIES AND DIFFERENCES
BETWEEN IFRS AND US GAAP…
Imp-loss The amount by which Impairment loss on the CGU is
calculatio the carrying amount of allocated first to reduce goodwill
n-goodwill goodwill exceeds the to zero, then, subject to certain
implied fair value of the limitations, the carrying amount
goodwill within its of other assets in the CGU are
reporting unit. reduced pro rata, based on the
carrying amount of each asset.
Reversal Prohibited for all assets Prohibited for goodwill. Other
of loss to be held and used. assets must be reviewed at the
end of each reporting period for
reversal indicators. If appropriate,
loss should be reversed up to the
newly estimated recoverable
amount, not to exceed the initial
carrying amount adjusted for 44
depreciation.
SIMILARITIES AND DIFFERENCES
BETWEEN IFRS AND US GAAP…
Level of Indefinite-lived intangible assets If the indefinite-lived
assessm separately recognized should be intangible asset does not
ent — assessed for impairment generate cash inflows
indefinit individually unless they operate in that are largely
e-lived concert with other indefinite-lived independent of those
intangibl intangible assets as a single asset from other assets or
e assets (i.e., the indefinite-lived groups of assets, then the
intangible assets are essentially indefinite-lived intangible
inseparable). Indefinite-lived asset should be tested for
intangible assets may not be impairment as part of the
combined with other assets (e.g., CGU to which it belongs,
finite-lived intangible assets or unless certain conditions
goodwill) for purposes of an are met.
impairment test.
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