10

IMPAIRMENT
 Learning Outcomes

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 Introduction

 Impairment of an asset may be referred to as a loss or

reduction in the economic benefits that could be derived
from an asset.
 Over a period of time, an asset may face a situation where
the carrying amount may be larger than its recoverable
amount.
 Suggesting an indication of asset’s impairment.

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 Introduction (cont.)

 MFRS 136 Impairment of Assets that prescribes the

recognition, measurement and disclosure requirements for
impairment of most assets.

 MFRS 136 Impairment of Assets is based on IAS 36 that

specifies the procedures that an entity shall apply to ensure
their assets are carried at no more than their recoverable
amount.
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 MFRS 136

 MFRS 136 serves the purpose to prescribe the procedures

that an entity can apply to ensure that its assets are carried
at a value less than their recoverable amount.

 If an asset is carried at more than its recoverable amount;

whereby the carrying amount exceeds the amount to be
recovered through use or sale of the asset, the asset is
described as impaired and the entity needs to recognize it as
an impairment loss.
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 MFRS 136 (cont.)

 MFRS 136 is applied for the accounting for the impairment of

all assets, except:

– Inventories (MFRS 102 Inventories);

– Assets arising from construction contracts (MFRS 11

Construction Contracts)

– Deferred tax assets (MFRS 112 Income Taxes)

– Assets arising from employee benefits (MFRS 119

Employee Benefits)
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 MFRS 136 (cont.)

– Financial assets that are within the scope of MFRS 139

Financial Instruments: Recognition and Measurement;

– Investment property that is measured at fair value (MFRS

140 Investment Property);

– Biological assets related to agricultural activity that are

measured at fair value less costs to sell (MFRS 141

Agriculture);

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 MFRS 136 (cont.)

– Deferred acquisition costs, and intangible assets, arising

from an insurer’s contractual rights under insurance

contracts within the scope of MFRS 4 Insurance Contracts;

and

– Non-current assets (or disposal groups) classified as held

for sale in accordance with MFRS 5 Non-current Assets

Held for Sale and Discontinued Operations.

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 MFRS 136 (cont.)

MFRS 136 applies to financial assets that may be classified as:

 Subsidiaries, as defined in MFRS 127 Consolidated and

Separate Financial Statements;

 Associates, as defined in MFRS 128 Investments in

Associates; and

 Joint ventures, as defined in MFRS 131 Interests in Joint

Ventures.

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 MFRS 136 (cont.)

 For impairment of other financial assets, it is to be referred to

MFRS 139. The MFRS 136 does not apply to financial assets

within the scope of MFRS 139, investment property

measured at fair value in accordance with MFRS 140, or

biological assets related to agricultural activity measured at

fair value less costs to sell in accordance with MFRS 141.

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 MFRS 136 (cont.)

 MFRS 136 applies to assets that are carried at revalued

amount (such as at fair value) in accordance with other
MFRSs.

 For instance, the revaluation model in MFRS 116 Property,

Plant and Equipment. Hence, to identify whether a revalued
asset may be impaired, depends on the basis used to
determine its fair value.

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 Indications of Impairment

 All assets should be reviewed at the end of each reporting

period for any indication of impairment.
 According to IAS 36, there are some indicators that an asset
may need to be impaired, but the list is not exhaustive.
 There may be elements of external and internal sources that
may assist the entity, whether their assets need to be
impaired or not.

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 Indications of Impairment
(cont.)

External sources of information:

 There is a decline in the market value of the asset during the
year.
 An adverse change in technological, market, economic or
legal environments.
 Increases in the market interest rates.
 Carrying amount of an entity’s net assets exceeds its market
capitalization.

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 Indications of Impairment
(cont.)

Internal sources of information:

 There is evidence of obsolescence or physical damage of
asset. Such as damage due to natural disaster.
 There is an adverse change in the use of asset.
 Worse than expected economic performance of asset.

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 Assessment of Asset

 Assessment of an asset for impairment is normally performed

on an individual asset by identifying if the assets have
experience any factors that may indicate it to be impaired.
 The asset may be among the non-current assets held by the
company, such as machinery, equipment or even property.
 If there is an indication that an asset may be impaired, then
the recoverable amount need to be identified.

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 Goodwill and Intangible Assets

 Goodwill and some intangible assets are required for an

annual impairment test.

 Unlike the other assets, impairment review is made when

there is presence of impairment.

 Method, or residual value, may need to be reviewed or even

adjusted.

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 Goodwill and Intangible Assets
(cont.)

 The recoverable amount of the following types of intangible

assets should be computed annually:

– An intangible asset with an indefinite useful life.

– An intangible asset not yet available for use;

– Goodwill that is recognized from a business combination.

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 Goodwill and Intangible Assets
(cont.)

 When an asset had the indication to be impaired, it may

suggest that the asset’s expected useful life, depreciation

method or residual value may need to be reviewed or even

adjusted.

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 Impairment Review Process

 To identify the recoverable amount (RA)

– If the RA can be estimated easily, then it is possible to
determine if the carrying amount (CA) is larger than the
recoverable amount (RA), or not.
– If yes, the carrying amount need to be reduced to its
recoverable amount and an impairment loss is recognized.
– However, if the recoverable amount exceeds the carrying
amount, no impairment write down is necessary.

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 Recoverable Amount

 To determine the recoverable amount (RA) of an asset, we

need to identify the ‘fair value less cost of disposal’ or

FVLCD, and ‘value in use’ or VIU.

 This is because recoverable amount is the higher of FVLCD

or VIU of the asset.

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 Recoverable Amount (cont.)

 Fair value less costs of disposal, or previously better known

as fair value less costs to sell (FVLCS), is recognized from a

binding sale agreement (sale of an asset in an arm’s length

transaction), between knowledgeable and willing parties, less

any costs of disposal.

 For period beginning or after 1 January 2013, fair value is

determined in accordance with the MFRS 13 Fair value

measurement.
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 Value in Use

 Value in use, or VIU, is the present value of the future cash

flows expected to be derived from the asset, which is
normally called Cash Generating Unit (CGU) of the asset.
 A CGU is usually the smallest identifiable group of assets
that generate cash inflows that are largely independent of the
cash inflows from other asset or group of assets.
 Hence, the VIU may be identified by using two approaches;
cash flow projections or discount rate.

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 Value in Use (cont.)

Cash Flow Projection

 Cash flow projection is an estimate of the future cash flows
that the company expects to derive from the particular asset.
 It could also be the expectations about possible variation in
the amount or timing of those future cash flows.

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 Value in Use (cont.)

Discount rate
 Discount rate is used to reflect the current market
assessments of the time value of money and the risks
associated to the asset.
 It should also be noted that the discount rate should also
reflect the rate of return that investors would require if they
were to invest in an asset that would generate equal cash
flow as the asset that needed to be impaired.

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 Recognizing Impairment Loss

 HMD Company decided to review one of their properties that

may be subject to impairment. The cost incurred to build the

property during 2015 was RM1.2 million.

 The carrying amount in the financial statements for the year

ended 31 December 2017 was RM1.8 million.

 Fair value less costs to disposal at 31 December 2019 is

RM1 million.

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 Recognizing Impairment Loss
(cont.)

 While the value in use as at 31 December 2019 is

RM800,000.

 Therefore, the recoverable amount of the property at 31

December 2019 is RM1 million, which is the higher of the

fair value less costs to disposal than its value in use. RM1

million, is of course, less than the asset’s carrying value of

RM1.8 million. Thus, an impairment write-down is required.

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 Recognizing Impairment Loss
(cont.)

2015 Dr Property RM1,200,000

Cr Bank RM1,200,000
2017 Dr Property RM600,000
Cr Revaluation surplus RM600,000
2019 Dr Revaluation surplus RM600,000
Dr Impairment loss RM200,000
Cr Property RM800,000

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 Recognizing Impairment Loss
(cont.)

An extract from Statement of profit or loss for the year ended

31 December 2019
Gross profit RM XXX
Impairment loss (200,000)

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 No Impairment Loss

 If the fair value exceeds the carrying amount of the asset in the
financial statements, then it is not necessary to have the
impairment write-down. See example below.
 Example: ABG Limited owns a few equipment, and has been
reviewing one of the equipment for impairment. The net book
value (carrying amount) of the equipment is RM200,000 and the
fair value less costs to sell is RM210,000. Therefore, the
recoverable amount of this equipment is at least RM210,000.
Hence, no impairment write-down is required.
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 Impairment Write-down for
Tangible Assets

 If fair value less costs to disposal is less than carrying

amount in the financial statement, it is necessary to calculate
the asset’s value in use.
 When calculating an asset’s value in use, some things need
to be considered so that these elements will be reflected in
the asset’s value.

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 Impairment Write-down for
Tangible Assets (cont.)

Example:
 ABI Company has been reviewing one item among their pool
asset, which is a piece of machinery, to be tested for
impairment.
 The carrying amount as stated in the financial statement is
RM200,000, while the fair value less costs to disposal is
RM150,000.

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 Impairment Write-down for
Tangible Assets (cont.)

Example:
 The annual projected cash inflow from the machinery for the
next five years is RM40,000, and the disposal value at the
end of its useful life is RM20,000.
 The current borrowing cost to finance the purchase of this
machinery is at 7%.

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 Impairment Write-down for
Tangible Assets (cont.)

Value in use = (RM40,000 x annuity factor for 5 years at 7% or

Present Value of an ordinary annuity of RM1) +
(RM20,000 x PV factor for 5 years at 7%)

= (RM40,000 x 4.1) + (RM20,000 x 0.713)

= RM178,260

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 Impairment Write-down for
Tangible Assets (cont.)

Fair value less costs to disposal = RM150,000

Recoverable amount (higher of fair = RM178,260

value less costs to disposal and value
in use)

Carrying amount = RM200,000

Therefore, impairment write-down is = RM200,000 – RM178,260

= RM21,740

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 Impairment of Goodwill or
Intangible Assets

According to MFRS 136, irrespective of whether there is any

indication of impairment, an entity shall also:

 Test an intangible asset with an indefinite useful life or an

intangible asset not yet available for use, for impairment

annually by comparing its carrying amount with its

recoverable amount. This impairment test procedure can be

performed annually, at any time, provided it is carried out at

the same time annually.

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 Impairment of Goodwill or
Intangible Assets

 Different intangible assets may be tested for impairment at

different times. But, if it has been recognized during the

current accounting period, that intangible asset shall be

tested for impairment before the end of the current annual

period.

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 Impairment of Goodwill or
Intangible Assets (cont.)

 Test goodwill acquired in a business combination for

impairment annually.

– Goodwill is an intangible asset with a unique useful life.

Unlike other assets, goodwill represents the future

economic benefits that arise from other assets that could

not be individually identified and separately recognized.

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 Impairment of Goodwill or
Intangible Assets (cont.)

– Due to its unique characteristics, goodwill’s test for

impairment is not similar to other assets.

– Goodwill should be tested for impairment, annually at

least.

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 Allocating Goodwill to Cash-
generating Unit (CGU)

 As stated in the MFRS 136 para 80, goodwill acquired in a

business combination shall, from the acquisition date, be
allocated to each of the acquirer’s CGU, or groups of CGU,
that is expected to benefit from the business combination,
irrespective of whether other assets or liabilities of the sellers
(acquire) are assigned to those units or groups of units.

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 Allocating Goodwill to Cash-
generating Unit (CGU) (cont.)

Each unit or group of units to which the goodwill is allocated

shall:
 Represent the lowest level within the entity at which the
goodwill is monitored for internal management purposes; and
 Not larger than an operating segment (as per MFRS
Operating Segments), before aggregation.

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 Allocating Goodwill to Cash-
Generating Unit (CGU) (cont.)

 According to MFRS 138 para 90, the CGU to which goodwill

has been allocated shall be tested for annual impairment,
whenever there is indication for impairment.
 Compare the carrying amount of the unit, including the
goodwill, with the recoverable amount of the unit.

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 Allocating Goodwill to Cash-
generating Unit (CGU) (cont.)

 If the recoverable amount of the unit exceeds the carrying

amount of the unit, the goodwill allocated to that unit shall not
be impaired.
 If the carrying amount of the unit exceeds the recoverable
amount of the unit, the entity shall recognize the impairment
loss.

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 Allocating Goodwill to Cash-
generating Unit (CGU) (cont.)

 The impairment procedure is similar to an indefinite-life

intangible assets.
 Where the annual test impairment to which the goodwill has
been allocated, is performed at any time during the
accounting period, provided it is carried out at the same time
every year.

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 Allocating Goodwill to Cash-
generating Unit (CGU) (cont.)
 Any recent computation of the recoverable amount of the

CGU to which the goodwill is allocated in a preceding year,

may be used in the impairment test in the current period with

certain conditions to be met:

– Assets and liabilities that were consisted in the CGU have

not changed significantly,

– The last recoverable amount exceeded the CGU’s carrying

amount significantly.
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 Allocating Goodwill to Cash-
generating Unit (CGU) (cont.)

– Under the current events, it is remote that the current

recoverable amount is less than the CGU’s carrying

amount.

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 Recognizing a Cash-generating
Unit’s Impairment Loss

 An impairment loss need to be recognized for a CGU (the

smallest group of CGU to which goodwill or corporate

assets has been allocated); if the recoverable amount of

the unit (or group of units) is less than the carrying amount

of the unit (or group of units).

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 Recognizing a Cash-generating
Unit’s Impairment Loss (cont.)

 The impairment loss shall be allocated to reduce the

carrying amount of the assets of the unit (or group of units)

in the following order:

– To reduce the carrying amount of any goodwill allocated

to the cash-generating unit (or group of units); and

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 Recognizing a Cash-generating
Unit’s Impairment Loss (cont.)

– To the other assets of the unit (or group of units) pro

rata on the basis of the carrying amount of each asset

in the unit (or group of unit).

– These reductions in the carrying amounts is to be

treated as impairment losses on the individual assets

and to be recognized in the Statement of Profit or Loss.

However, no reversal of an impairment is allowed.

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 Recognizing a Cash-generating
Unit’s Impairment Loss (cont.)

 In 2015, IJ Corporation fully acquired the equity of SP

Limited for a total of RM500 million purchase

consideration. IJ Corp. then recorded a RM100 million of

goodwill with this acquisition since the fair value of SP

Limited’s net asset was RM400 million.

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 Recognizing a Cash-generating
Unit’s Impairment Loss (cont.)

 After the acquisition, SP Limited’s assets became the

smallest group of assets that managed to significantly

generate cash flows to the company, and works

independently from the rest of the other assets or group of

assets.

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 Recognizing a Cash-generating
Unit’s Impairment Loss (cont.)

 Therefore, SP Limited is considered a cash-generating unit

(CGU) to IJ Corp. As a CGU (SP Limited) includes a goodwill

within its carrying amount, therefore it must be tested annually

for impairment. Or more frequently, if there is an indication

that the goodwill might be impaired.

 At the end of 2018, SP Limited’s net assets have a book value

of RM380 million and a recoverable amount of RM350 million.

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 Recognizing a Cash-generating
Unit’s Impairment Loss (cont.)

To test for impairment: Compare the carrying amount and the recoverable amount of the CGU.
Determine carrying amount: (in RM millions)
Carrying amount of goodwill RM 100
Carrying amount of SP Limited’s net assets 380
Total carrying amount 480

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 Recognizing a Cash-generating
Unit’s Impairment Loss (cont.)

Measurement of impairment loss: (in RM millions)

CGU’s (SP Ltd) carrying amount RM 480

CGU’s recoverable amount 350
Impairment loss 130

Allocation of impairment loss: (in RM millions)

Goodwill Identifiable
Assets
Carrying amount RM 100 RM 380
Impairment loss (100 ) (30 )
Carrying amount after impairment loss 0 350

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 Recognizing a Cash-generating
Unit’s Impairment Loss (cont.)
Entry to record impairment loss: (in RM millions)
Debit Credit
Impairment loss 130
Goodwill 100
Assets 30

Note: The impairment loss of RM30 million is further allocated to SP Limited’s assets in
proportion to each asset’s carrying amount. The impairment loss is usually disclosed in the
statement of profit or loss, as a separate component under operating expenses.
An extract from Statement of profit or loss for the year ended
31 December 2018
Gross profit RM XXX
Impairment loss (130,000)

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 Reversal of an Impairment Loss

 An entity is required to assess assets at the end of each

reporting period for evidence that an impairment loss may
have declined or decreased.
 If that happens, the asset’s recoverable amount should be
identified and computed.
 The reversal of an impairment loss is recognized in the profit
or loss, unless it relates to a revalued asset.

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 Reversal of an Impairment Loss
(cont.)

Assuming that when HMD Company reviewed the property at 31

December 2018, a year later, it is found that the recoverable

amount of the property is RM1.5 million.

The reversal of an impairment loss in profit and loss should not

exceed the amount of the impairment loss that was initially charged

earlier. Hence, the extent to which profit or loss is increased is

restricted to RM200,000.
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 Reversal of an Impairment Loss
(cont.)

Dr Property RM500,000

Dr Reversal of Impairment loss RM200,000

Cr Revaluation surplus RM300,000

The increased in the carrying amount of an asset from the reversal of

an impairment loss should not exceed the amount at which the asset

would have been carried (net of depreciation), if there is no impairment

loss recognized in earlier years.

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 Disclosure

 According to MFRS 136 para 126; an entity should disclose the

following for each class of asset:

– The amount of impairment losses recognized in profit or loss during

the period and the line item(s) of the Statement of Comprehensive

Income in which those impairment losses are included.

– The amount of reversals of impairment losses recognized in profit or

loss during the period, and line item(s) of the Statement of

Comprehensive Income in which those impairment losses are

reversed.
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 Disclosure (cont.)

– The amount of impairment losses on revalued assets recognized

in other comprehensive income during the period.

– The amount of reversals of impairment losses on revalued assets

recognized in other comprehensive income during the period.

FINANCIAL ACCOUNTING AND REPORTING 2 (SECOND EDITION) All Rights Reserved

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 Disclosure (cont.)

 And further to para 129, for each reportable segment as

accordance to MFRS 8, shall disclose the following:

– The amount of impairment losses recognized in profit or loss and

in other comprehensive income during the period.

– The amount or reversals of impairment losses recognized in

profit or loss and in other comprehensive income during the

period.

FINANCIAL ACCOUNTING AND REPORTING 2 (SECOND EDITION) All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2019 10–61
 Disclosure (cont.)

 For each material impairment loss recognized, or reversed during

the period, it is required to disclose the following:

– Events and circumstances that had brought to the recognition on

impairment losses or its reversals;

– The amount of impairment loss.

FINANCIAL ACCOUNTING AND REPORTING 2 (SECOND EDITION) All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2019 10–62