TAX IMPLICATIONS RELATED TO THE IMPLEMENTATION OF MFRS 136/ FRS 136: IMPAIRMENT OF ASSETS

Transcription

1 The Malaysian Institute of Certified Public Accountants TAX IMPLICATIONS RELATED TO THE IMPLEMENTATION OF MFRS 136/ FRS 136: IMPAIRMENT OF ASSETS Prepared by: Joint Tax Working Group on FRS

2 Contents Page No. 1 Introduction Background of MFRS 136/ FRS Rationale Scope of MFRS 136/ FRS Definition of essential terms Effective date 2 Scope of the comments 4 3 Key changes under MFRS 136/ FRS Frequency of impairment testing Measurement of value in use Recognition of cash-generating unit (CGU) Allocation of goodwill to cash-generating unit Timing of impairment tests for goodwill Reversal of impairment loss 6 4 The MFRS/ FRS regime accounting implications 6 5 Tax treatment for implementation of MFRS 136/ FRS Impairment loss Property, plant and equipment Intangible assets Goodwill Deferred property development expenditure Investments 5.2 Reversal of impairment loss Proposal in adopting MFRS 136/ FRS

3 1. INTRODUCTION 1.1 BACKGROUND OF MFRS 136/ FRS Rationale To improve the quality of, and seek international convergence on, the accounting for business combinations and the subsequent accounting for goodwill and intangible assets acquired in business combinations. To ensure that the assets are carried at no more than their recoverable amount Scope of MFRS 136/ FRS 136 MFRS 136/ FRS 136 shall be applied in accounting for the impairment of all assets, other than the following: Inventories MFRS 102/ FRS 102 Inventories Assets arising from construction contracts MFRS 111/ FRS 111 Construction Contracts (c) Deferred tax assets MFRS 112/ FRS 112 Income Taxes (d) Assets arising from employee benefits MFRS 119/ FRS 119 Employee Benefits (e) Financial assets MFRS 139/ FRS 139 Financial Instruments: Recognition and Measurement (f) (g) (h) Investment property that is measured at fair value Biological assets related to agricultural activity that are measured at fair value less estimated point-of-sale costs Deferred acquisition costs, and intangible assets, arising from an insurer s contractual rights under insurance contracts MFRS 140/ FRS 140 Investment Property MFRS 141/ MASB ED 50 Agriculture MFRS 4/ FRS 4 Insurance Contracts 1

4 (i) Non-current assets (or disposal groups) classified as held for sale MFRS 5/ FRS 5 Noncurrent Assets Held for Sale and Discontinued Operations Hence, MFRS 136/ FRS 136 shall be applied in accounting for the impairment of all assets as follows: Property, plant and equipment (eg. land, building, machinery, ships, aircraft, motor vehicles, furniture and fixtures, office equipment, etc.) used in the business operations and not held for sale Intangible assets (eg. Intellectual proprietary rights, patents, licences, franchises, brand names, prototypes, exploration and mining rights, R&D costs, etc.) MFRS 116/ FRS 116 Property, Plant and Equipment MFRS 138/ FRS 138 Intangible Assets (c) Goodwill MFRS 3/ FRS 3 Business Combinations (d) Deferred property development expenditure IC Interpretation 15 Agreements for the Construction of Real Estate (e) Financial assets classified as: (i) Investments in subsidiaries (ii) Investments in associates MFRS 12/ FRS 12 Consolidated and Separate Financial Statements MFRS 128/ FRS 128 Investments in Associates 2

5 (iii) Interests in joint ventures MFRS 131/ FRS 131 Interests in Joint Ventures Definition of essential items Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. Cash-generating unit (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. A CGU can be identified based on the enterprise s operations, such as by product lines or classes of product lines, by business segments, by locations, districts, regions, a branch, a division, etc. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cashgenerating units. Fair value less costs to sell is the amount obtainable from the sale of an asset or cash-generating unit in an arms-length transaction between knowledgeable, willing parties, less the costs of disposal. Impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. Recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit Effective date MFRS 136 is effective for annual periods beginning on or after 31 March However, the effective date and issuance date that contained in MFRS 136 is those of the IASB s and is inapplicable in the new MFRS framework since MFRS 1: First-time Adoption of Malaysia Financial Reporting Standards requirements 1 will be applied on 1 January MFRS 1 requires period information to be restated as if the requirements of MFRSs effective for annual period beginning on or after 1 January 2012 have always been applied, except for certain exceptions and exemptions. This means that, in preparing its first MFRS financial statements, the first-time adopter of MFRS shall refer to 3

6 FRS 136 is effective for annual periods beginning on or after 1 January Earlier application is encouraged. 2. SCOPE OF THE COMMENTS The scope of the comments is confined to changes in the interpretation to the MFRS/ FRS regime that give rise to tax implications. 3. KEY CHANGES UNDER MFRS 136/ FRS FREQUENCY OF IMPAIRMENT TESTING MFRS 136/ FRS 136 requires the recoverable amount of an asset to be measured whenever there is an indication that the asset may be impaired The recoverable amount of an intangible asset with an indefinite useful life to be measured annually The recoverable amount of an intangible asset not yet available for use to be measured annually Goodwill acquired in a business combination to be tested for impairment annually. 3.2 MEASUREMENT OF VALUE IN USE The elements that are reflected in the calculation of an asset s value in use are as follows: (c) (d) (e) An estimate of the future cash flows which is expected to be derived from the asset; Expectations about possible variations in the amount or timing of those future cash flows; The time value of money, represented by the current market risk-free rate of interest; The price for bearing the uncertainty inherent in the asset; and Other factors, such as illiquidity MFRS 136/ FRS 136 requires the management to prepare the cash flow projections used to measure value in use based on the following: Assess the reasonableness of the assumptions by examining the causes of differences between past cash flow projections and actual cash flows. Ensure that the assumptions are consistent with past actual outcomes. the provisions contained in MFRS 1 on matters relating to transition and effective dates instead of those contained in respective MFRSs. 4

7 3.2.3 MFRS 136/ FRS 136 requires the cash flow projections used to measure value in use to be based on the most recent financial budgets / forecasts approved by management but exclude any estimated cash inflows or outflows which are expected to arise from: Future restructurings to which the entity is not yet committed; or Improving or enhancing the asset s performance. 3.3 RECOGNITION OF CASH-GENERATING UNIT (CGU) An asset or a group of assets which produced an output in an active market should be identified as a CGU When an entity estimates future cash flows to determine the value in use of a CGU using the output, management s best estimate of future market prices for the output should be used MFRS 136/ FRS 136 requires that if the cash inflows generated by any asset or CGU are affected by internal transfer pricing, an entity should use management s best estimate of future prices that could be achieved in arm s length transactions. 3.4 ALLOCATION OF GOODWILL TO CASH-GENERATING UNIT MFRS 136/ FRS 136 requires goodwill acquired in a business combination to be tested for impairment as part of impairment testing for the CGU Bottom-up / top-down approach is used for impairment testing by allocating its carrying amount to each of the acquirer s CGU on a reasonable and consistent basis Each CGU to which the goodwill is allocated should represent the lowest level within the entity at which the goodwill is monitored for internal management purposes and not be larger than an operating segment as defined in MFRS 8/ FRS 8 Operating Segments If the initial allocation of goodwill acquired in a business combination cannot be completed before the end of the annual period, it should be completed before the end of the first annual period beginning after the acquisition date When an entity disposes of an operation within a CGU to which goodwill has been allocated, the goodwill should be included in the carrying amount of the operation when determining the gain or loss on disposal and measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained When an entity reorganises its reporting structure in a manner that changes the composition of CGUs which goodwill has been allocated, the goodwill should be reallocated to the units affected by using a relative value approach, or other method where it is more appropriate. 5

8 3.5 TIMING OF IMPAIRMENT TESTS FOR GOODWILL MFRS 136/ FRS 136 allows the annual impairment test for CGU to which goodwill has been allocated to be performed at any time during an annual reporting period, provided it is conducted at the same time every year MFRS 136/ FRS 136 permits different CGUs to be tested for impairment at different times MFRS 136/ FRS 136 requires the CGU to be tested for impairment before the end of the current period if the goodwill allocated to a CGU was acquired in a business combination during the current annual period MFRS 136/ FRS136 also permits the most recent detailed calculation made in a preceding period of the recoverable amount of a CGU to be used in the impairment test in the current period, provided specific criteria are met. 3.6 REVERSAL OF IMPAIRMENT LOSS MFRS 136/ FRS 136 requires that an impairment loss recognised in prior years for an asset other than goodwill should be reversed if there has been a change in the estimates used to determine recoverable amount An impairment loss is reversed only to the extent that it does not increase the carrying amount of an asset above the carrying amount that would have been determined MFRS 136/ FRS 136 prohibits the recognition of reversals of impairment losses for goodwill. 4. THE MFRS/ FRS REGIME ACCOUNTING IMPLICATIONS 4.1 MFRS 136/ FRS 136 requires that when an asset may be impaired, the recoverable amount of the asset should be estimated and if the carrying amount of the asset exceeds its recoverable amount, an impairment loss should be recognised as an expense in the income statement immediately, unless the asset is carried at revalued amount which should be treated as revaluation decrease. 4.2 If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount. 4.3 After the recognition of an impairment loss, the depreciation / amortization charged for the asset should be adjusted in future periods to allocate the asset s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining life. 6

9 5. TAX TREATMENT FOR IMPLEMENTATION OF MFRS 136/ FRS Impairment loss An impairment loss of an asset which is recognised as an expense in the income statement is not eligible for tax deduction as it is capital in nature. Specifically, the effects of impairment loss on assets which are covered by MRFS 136/ FRS 136 are: Property, plant and equipment - Land is not eligible for capital allowances (CA), Investment Tax Allowance (ITA) or Reinvestment allowance (RA). Buildings and plant which are eligible for CA, ITA or RA may be allowed the claim based on the qualifying expenditure incurred. Any impairment loss has no effect on the qualifying expenditure Intangible assets - Certain intangible assets, e.g. proprietary rights and R & D costs may be eligible for tax deduction based on the actual expenditure incurred if they fulfill the deduction rules under Section 33(1) of the Income Tax Act 196 and / or PU Order. Expenditure in respect of exploration and mining rights may be eligible for mining allowances (Schedule 2 of the Income Tax Act 196) or tax deduction based on the qualifying eligible cost (Schedule 4 Expenditure on Prospecting Operations) incurred. Any impairment loss has no effect on the deductible expenditure or qualifying expenditure Goodwill - Goodwill would be treated as capital in nature for tax purposes and thus is neither tax deductible nor eligible for CA claim. Any impairment loss has no effect on the deductible expenditure Deferred property development expenditure - Deferred property development expenditure is eligible for tax deduction when the project is completed or over the stage of completion (IFRIC 15 Agreements For The Construction Of Real Estate) based on the allowable cost incurred. Any impairment loss or any provisions, including provision for impairment loss would not be deductible for tax purposes Investments - Investments are not eligible for deduction except by taxpayers engaged in the business of dealing in investments. For such companies, impairment losses may be allowed for tax deduction where the valuation amount is within the meaning allowed under Section 35(3) of the Income Tax Act, 196. In addition, where deduction is allowed, the deductible expenditure is based on the cost incurred. Any impairment loss has no effect on the deductible expenditure.

10 Example 1: RM Cost of asset 15,000 Less: Accumulated depreciation (9,000) Carrying amount 6,000 RM Net selling price (fair value less costs to sell) 3,000 Expected value in use 4,200 Carrying amount 6,000 Recoverable amount (higher of net selling price and 4,200 Impairment loss * 1,800 * to be recognised as an expense in the Income Non-deductible expense 5.2 Reversal of impairment loss Subsequently, if there is any reversal of impairment loss which has been recognised in a prior year in the income statement, the reversal of impairment loss would not be taxable if no deduction had been claimed previously. Example 2: Same as for Example 1 above but assuming that the estimated recoverable amount has increased to RM5,000 in the next year due to an unexpected increase in the asset s market value. MFRS 136/ FRS 136 would require an impairment loss to be reversed as follows. RM Carrying amount 6,000 Recoverable amount 5,000 Impairment loss 1,000 Less: Impairment loss which had been recognised (1,800) Reversal of impairment loss * 800 * to be recognised in the Income Statement Not taxable no deduction had been claimed previously 5.3 Proposal in adopting MFRS 136/ FRS 136 In conclusion, the existing tax treatment/adjustments will continue to be applied on the implementation of MFRS 136/ FRS