IAS 36 Impairment of Assets

Transcription

1 IAS 36 Impairment of Assets Prepared by Haroon Tabraze, ACCA Haroon Tabraze, ACCA, has prepared this series of handouts for the sole purpose of facilitating his students. This handout is only a summary and not the unabridged IAS. You can find more IAS related handouts / summaries / notes on the World Wide Web at the following web-site: You need to join the International_Accounting_Standards group to download these

2 An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. When the some of the following conditions are present then the entity is required to make a formal estimate of recoverable amount: 1) External sources of Information 2) Internal sources of Information Market value of assets has significantly declined as compared to its normal use. Technological, market, economic or legal changes have taken place with adverse impact on the entity. The discount rate used to calculate the value of the asset has decreased due to increase in interest rates. This will not be applicable when the discount rates are not affected by increase in interest rates Or when previous analysis has showed that a material decrease in recoverable amount is unlikely (i.e. revenues are adjusted when interest rate rise). The carrying amount of net assets is more than the entity s market capitalization. Obsolescence or physical damage to the asset. Changes in the asset s use (discontinuance, Restructuring, disposal of asset). Evidence that the economic Cash needs of acquiring/ operating/ maintaining performance of the asset is worse the asset are higher than budgeted. than expected. Actual net cash flows or operating profit flowing from the asset is lower than budgeted. Operating losses or net cash outflows for the asset when current period figures are aggregated with budgeted figures for the future. When none of the indications are present, then there is no need to make an estimate of impairment of asset. When asset is impaired, it s remaining useful life, depreciation method, and residual value is also reviewed again. Prepared by Haroon Tabraze Dated May 14, 2000 Page 2 of 6

3 Measurement of recoverable amount: Recoverable amount is the higher of the assets : (for individual assets as well as for cash generating units): Net selling price (NSP). (individually or for CGU Cash Generating Unit) NSP is the amount obtainable from sale of asset in arm s length transaction. Usually it is the price in binding sale agreement. When no binding agreement and asset is sold in active market, than the market price less cost of disposal (including legal, professional charges stamp duty, but not including termination costs). When no binding agreement or active market is present NSP is the best estimate reflecting past similar transactions. Usually taken when asset is held for disposal. When net selling price is not determinable than Value in use. (individually or for CGU) Present value of future cash flows expected to arise from continuing use of asset in its current condition. Applying appropriate discount rates. Projections on reasonable assumptions. Projections based on most recent financial budgets, (covering maximum of 5 years, unless justified). Projections beyond the budget by extrapolation, using a steady or declining growth rate (not above the country or industry s growth rate due to competition). When either of the net selling price or value in use is higher than the carrying value than it is not necessary to calculate the other. Prepared by Haroon Tabraze Dated May 14, 2000 Page 3 of 6

4 Estimation of future cash flows Discount rate should be pre-tax rate that reflects the current market assessment of the time value of money and the risks specific to the asset. (Risks for which future cash flows are adjusted are not to be included). When such a rate is not available from market then entity use their estimates (CAPM, incremental borrowing rate, and other markets borrowing rate) and adjust it for time value of money for the period of assets useful life and related risks. Future cash flows should not include Future restructuring that is not committed (cost savings). Future capital expenditure to improve performance of asset. Cash inflows or outflows from financing activities. Income tax receipt and payments. Future cash flows should includes: Projection of inflows from continuing use of the asset. Outflows to prepare the asset for use. Net cash flow for the disposal (in arm s length transaction). Based on estimate of similar assets that are at the end of their lives now, and adjusted for effect of inflation. Directly attributable future overheads. If future restructuring is committed than future cost savings are included IAS 37. Future capital expenditure to maintain the asset. Impairment loss is recognized as an expense, unless the asset is carried at revalued amount and it is recognized directly against it to the extent that the impairment loss does not exceed the amount of revaluation surplus. When the impairment loss is greater than the carrying value of the asset, a liability is recognized only when some other IAS requires. After impairment, the depreciation charge is adjusted for future periods of its useful life. Cash generating units: Recoverable amount is estimated on individual assets. When identification of individual amount is not possible than it is to be estimated on the cash generating unit. Cash generating unit is the smallest identifiable group of assets that generates cash flows. Prepared by Haroon Tabraze Dated May 14, 2000 Page 4 of 6

5 The value of the recoverable amount cannot be determined when: 1) Asset s value in use cannot be estimated close to its NSP. 2) Asset does not generate independent cash flows. When active market exists for the output produced by the asset or group of assets (even when used as input) then the asset or the group of assets is the CGU. The management s estimate for the future market value of the output should be used to determine the future cash inflow from the CGU. CGU should be identified consistently from period to period Change in CGU to which asset belongs is to be disclosed. The carrying value of CGU includes only values of directly attributable assets Does not include any recognized liability. (Unless the buyer as to taken over the liability). If there is an indication that the goodwill is impaired than recoverable amount is determined for the CGU to which goodwill belongs. When goodwill relating to the CGU is recognized than bottom-up test has to be performed When goodwill cannot be allocated to the CGU then top-down test has also to be performed. Identify whether the carrying amount of goodwill can be allocated to the CGU. Then, compare the recoverable amount of CGU with carrying value (including carrying amount of goodwill). Identify the smallest CGU to which goodwill can be allocated. Then, compare the recoverable amount of larger CGU with its carrying value. Impairment loss of CGU should be allocated in the following order: 1) To the goodwill allocated to CGU, if any. 2) Then to other assets in the CGU on prorata basis based on carrying value of each individual asset. Carrying amount should not become less than the highest of : Net selling price Value in use Zero If it does become less, then allocate it again to other assets on prorata basis. Prepared by Haroon Tabraze Dated May 14, 2000 Page 5 of 6

6 Corporate assets: Corporate assets include head office assets, which do not generate separate cash inflow. If the carrying value of corporate asset can be allocated to CGU then apply bottom-up test only, when carrying value cannot be allocated to CGU then both bottom-up and top-down tests are to be performed. Reversal of Impairment loss: Entity to assess at each balance sheet date. Same sources of information as above (internal, external). When indications are present that the asset is no longer impaired or impairing has decreased, than it s remaining useful life, depreciation method, and residual value is also reviewed again. Reversal of impairment to be recognized in income statement, unless the asset is carried at revalued amount. An impairment loss recognized for an asset in prior years should be reversed only when there has been a change in estimates used. (Change in basis of recoverable amount, value in use, or future cash flows). Value in use may become greater than PV of future cash flows with passage of time. This will not give rise to reversal. 1) Reversal should not result in carrying value to become greater than the carrying value net of amortization. 2) Reversal of impairment on CGU should be first on all assets (other than goodwill) on prorata basis. 3) If impairment was caused by specific external event that is not expected to recur and subsequent events have occurred to reverse it, then only goodwill should be reversed. Disclosure: 1) For each class of asset, amount of impairment loss recognized in the income statement and line item of the income statement in which impairment loss is shown 2) The amount of reversals recognized in the income statement with line items. 3) Amount of impairment loss and any reversal directly recognized in equity. 4) If impairment loss for individual asset or CGU is material, then events and circumstances, amount of loss recognized or reversed, nature of asset and reportable segment to which it belongs should be disclosed. 5) Description of CGU, amount of loss recognized or reversed will be disclosed 6) Whether the recoverable amount of CGU is NSP or value in use 7) If recoverable amount is NSP, then basis used to determine NSP. If recoverable amount is value in use than discount rates used. Prepared by Haroon Tabraze Dated May 14, 2000 Page 6 of 6