Mastering impairment testing and principles: Extract MASTERING IMPAIRMENT TESTING AND PRINCIPLES EXTRACT

Transcription

1 Mastering impairment testing and principles: Extract MASTERING IMPAIRMENT TESTING AND PRINCIPLES EXTRACT CPA Australia Ltd

2 Contents Course overview 1 Learning objectives 1 Knowledge assessment 1 Symbols 1 1. Principles of impairment 3 Scope of IAS 36 3 Key features of the Standard 3 2. Impairment indicators 5 Indicators of impairment 5 External sources of information 5 Internal sources of information 5 Intangible assets 6 Fair value less costs of disposal 7 Disposal costs 8 Assets held at fair value 8 Value in use 9 Value in use for not-for-profit entities 9 Who can use depreciated replacement cost 11 What is depreciated replacement cost 11 Measurement and impairment issues 12 Cash flow forecasts 12 Terminal values 13 Present value calculations 13 Application of the traditional approach 13 Expected cash flow approach 14 Discount rate 14 Weighted average cost of capital calculations Impairment losses 16 Allocation of impairment losses Cash-generating units and corporate assets 25 Identifying cash-generating units 25 Goodwill 25 Testing cash-generating units with goodwill 26 Corporate assets 29 Reversals of impairment losses 30 IFRIC Interpretation Case study Homeapp 34 Background 34 Assets/liabilities included in carrying value, excluding head office assets 34 Cash flow forecasts 35 2 CPA Australia Ltd 2014

3 Cash flow forecast assumptions 35 Discount factor 35 Overhead allocation Self-assessment 37 Glossary 38 Disclosure checklist 39 IAS 36 Impairment of Assets 39 Suggested answers 44 Activities 44 Self-assessment 58 CPA Australia Ltd

4 1. principles of ImpaIrment The purpose of IAS 36 is to determine whether any of the assets carried by an entity are being held at too high a value. The result of the impairment testing is not to revalue assets upwards; it will be to book an impairment loss, reverse a previously recognised impairment loss, or to do nothing. IAS 36 considers how the economic benefits of an asset are realised by a business: through use; through sale. IAS 36 attempts to measure what an entity can recover from an asset (where there is an indicator of impairment): including synergistic effects. SCoPe of IaS 36 IAS 36 applies in accounting for the impairment of all assets other than: Inventories (see IAS 2 Inventories). Assets arising from construction contracts (see IAS 11 Construction Contracts). Deferred tax assets (see IAS 12 Income Taxes). Assets arising from employee benefits (see IAS 19 Employee Benefits). Financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement. Investment property that is measured at fair value (see IAS 40 Investment Property). Biological assets related to agricultural activity that are measured at fair value less estimated point-of-sale costs (see IAS 41 Agriculture). Deferred acquisition costs and intangible assets arising from an insurer s contractual rights under insurance contracts within the scope of IFRS 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. 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. While IAS 36 does not apply to financial assets within the scope of IAS 39/IFRS 7, it does apply to investments in: Subsidiaries, as defined in IFRS 10 Consolidated Financial Statements. Associates, as defined in IAS 28 Investments in Associates and Joint Ventures. Joint ventures, as defined in IFRS 11 Joint Arrangements. IAS 36 is a measurement standard and is therefore applicable for all entities preparing financial statements. WarnInG KeY features of the StanDarD Some of the key features of the Standard are: Impairment indicators should be considered on at least an annual basis. The recoverable amount of an asset should be estimated whenever there is an indication that the asset may be impaired. 4 CPA Australia Ltd 2014

5 An impairment loss must be recognised whenever the carrying amount of an asset exceeds its recoverable amount. An impairment loss should be recognised in the statement of profit or loss for assets carried at cost and treated as a revaluation decrease or assets carried at fair value. Recoverable amount is determined as the higher of fair value less costs of disposal and value in use. Recoverable amount should be estimated for an individual asset. If it is not possible to do so, then an entity is required to determine recoverable amount for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. Where impairment losses are recognised or reversed, detailed information must be disclosed by class of asset and reportable segment. Note that the Basis for Conclusions for IAS 36, which is available from the IASB website, provides some important explanations as to the reasons for some of the Standard s requirements. further InformatIon CPA Australia Ltd

6 2. Impairment indicators IAS 36 requires that where an indication of impairment is present for an asset, the recoverable amount must first be estimated at the individual asset level. Entities must assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity must estimate the recoverable amount for impairment of the asset. In addition, an entity must also determine annually the recoverable amount of: an intangible asset with an indefinite useful life; an intangible asset not yet available for use; goodwill acquired in a business combination. Indicators of impairment IAS 36 provides the following examples of impairment indicators. The examples are not exhaustive and an entity may identify other indicators of impairment during the impairment testing. External sources of information There are observable indications that the asset s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use. The fall in market value of a ship may reflect overcapacity in the industry that could affect profitability and hence the entity s ability to recover the ship s carrying value. Significant changes with an adverse effect on the entity have taken place during the year, or will take place in the future, in the technological, market, economic or legal environment in which the entity operates. Software no longer being supported by the external supplier due to technological advances. Computer hardware that has become obsolete due to technological changes. A competitor produces a viable alternative to the entity s product. Market interest rates or other market rates of return have increased and those increases are likely to affect the discount rate used in calculating an asset s value in use and therefore decrease the recoverable amount. The carrying amount of the net assets of the entity is more than its market capitalisation. (This implies that investors do not believe that it will earn the rate of return on its assets that the market demands and therefore it is appropriate that an impairment review is performed.) Internal sources of information Evidence is available of obsolescence or physical damage of an asset. A building damaged by flood or fire. A building that is closed due to identification of structural problems. An asset that has had its useful life revised due to weaknesses identified. 6 CPA Australia Ltd 2014

7 Significant changes with an adverse effect on the entity have occurred, or are expected to take place in the near future. An asset becoming idle. Plans to dispose of an asset. Evidence from internal reporting indicates that the economic performance of an asset is worse than expected; that is, actual performance is lower than budgeted performance. tip When considering impairment indicators, entities should remember the following: The indicators included in IAS 36 are not intended to be exhaustive. Materiality. In taking materiality into account it may be that previous assessments of recoverable amount have concluded that the recoverable amount of the asset is significantly greater than its carrying amount. Accordingly, factors that indicate existence of a slight impairment may not be sufficient to eliminate the difference previously identified and as such the entity would not need to re-estimate the asset s recoverable amount. IntanGIBle assets The requirement to test intangible assets not yet available for use on an annual basis will be particularly relevant where an entity is developing software or conducting research and development and as at balance date the item has been completed but is not ready for use. The testing shall be conducted irrespective of any indication of impairment. The requirement to test for impairment by the end of the period in which the asset is first recognised only applies to those intangibles assets that are not available for use or do not have a finite useful life (IAS 36.10(a)) For example, where a piece of software is completed and recognised in the financial report in May, if it has an indefinite useful life or is not available for use, it must be tested for impairment prior to year end; that is, prior to 30 June. CPA Australia Ltd