Financial Accounting. Impairment of Assets

Transcription

1 Financial Accounting Impairment of Assets

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3 CHAPTER 1 Goal and scope of IAS 36

4 Goal of IAS 36 To ensure that assets are not carried at amounts exceeding their recoverable amounts Assets recovered through use or sale Prudence to be considered To determine when an asset is impaired and when to reverse an impairment loss previously recognised To deal with CGUs To determine disclosure required for impairment losses and impaired assets 5

5 Scope of IAS 36 APPLIES TO: IAS 16 PP&E IAS 38 Intangible assets IAS 40 Investment property (measured at cost) IAS 27 Investments in subs IAS 28 Investments in assocs IAS 31 Interests in JCEs DOESN T APPLY TO: IAS 2 Inventories IAS 11 C/contracts IAS 12 D/Tax assets IAS 19 Employee benefits IAS 40 Inv. Property (measured at FV) IAS 41 Biological assets Deferred acq. costs IFRS 4 Insurance assets IFRS 5 NCAHFS IAS 39 Financial assets 6

6 CHAPTER 2 Important definitions in IAS 36

7 Recoverable amount The higher of an asset s (or CGU s) Fair value less costs to sell and Its value in use Value in use The PV of future cash flows expected to be derived from an asset or CGU (including FEB recovered through use and disposal at end of its useful life) Fair value less costs to sell The amount obtainable from the disposal of an asset or CGU in an arm s length transaction between knowledgeable willing parties, less the cost of disposal 8

8 Impairment loss Carrying Amount Recoverable amount The amount by which the carrying amount of an asset (or CGU) exceeds its recoverable amount 9

9 CGU The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash flows from other assets or groups of assets 10

10 CHAPTER 3 When should assets be tested for impairment?

11 Basic rule Identifying impaired assets/cgus is not easy Testing an asset/cgu for impairment can also be very costly Assets/CGUs therefore only tested for impairment if indicators exist of possible impairment Indicators to be assessed annually 12

12 Exceptions to the basic rule These assets are tested for impairment annually, regardless of materiality: Intangible assets with indefinite useful life (IAS 38) Intangible assets not yet available for use (IAS 38) E.g. development cost etc. Goodwill (IFRS 3) Assess annually, at same time every year 13

13 External indicators Significant decline in asset s market value during current period (more than expected or due to normal use) Significant changes with adverse effect on entity took place during the period (or expected to take place in near future) in the technological, market, economic or legal environment in which entity operates or to which products of the asset are dedicated Market interest rates (or other rates of ROI) have increased during the period and increases likely to affect discount % used to calculated asset s value in use, with material decrease in recoverable amount Entity s NAV > market capitalisation (R/s x # shares) 14

14 Internal indicators Evidence of obsolescence or physical damage to asset Significant changes took place/expected to take place i.r.o. manner in which asset is used Asset becomes idle, plans to discontinue or restructure the operations, plans to dispose of asset before expected date, reassessing the useful life as finite rather than indefinite Management information provides evidence that economic performance of asset is/will be worse than expected 15

15 If indicator exists Test asset for impairment Consider as part of impairment test: Useful life Depreciation method Residual value 16

16 CHAPTER 4 Calculating the recoverable amount of an asset

17 Recoverable amount The higher of: The fair value less costs to sell The value in use 18

18 Fair value less costs to sell Fair value (the true value that can be obtained by sale) The amount obtained from selling the asset in an arm s length transaction between knowledgeable willing parties Market value in an active market is the best indicator, if asset is not being sold Fair value not a forced sale, unless compelled to sell immediately Fair value is not entity-specific encompasses more! If no active market, look for similar transactions that are comparable, most recent transaction could indicate?? Costs to sell (incremental costs directly incurred to sell) Legal costs, stamp duty, transaction tax, cost of removing the asset, direct incremental cost to bring asset into condition for sale Excluding: costs already provided for, termination benefits and reorganisation costs When value in use is negligible as asset is mainly held for disposal, value in use is not calculated 19

19 Value in use Similar to NPV calculation! Step 1: Estimate the future cash inflows and outflows derived from continued use and eventual disposal of asset Step 2: Apply an appropriate discount rate to the above cash flows 20

20 Step 1: Cash flow projections RULE: Future cash flows must be estimated for asset in its current condition Must be based on reasonable and supportable assumptions Use management s best estimate of economic conditions that will exist over remainder of useful life of asset Must be based on most recent financial budgets / forecasts that have been approved for management Maximum of 5 years covered (unless > 5 years is justified) Exclude future cash inflows/outflows from restructuring/ improvement/enhancement not yet contractually agreed Cash flows exceeding budget/forecast periods, be based on extrapolations of budget/forecast with steady/declining growth rate (unless > rate is justified) Growth rate may not exceed long-term growth rate of products/industry/country 21

21 Step 1: Cash flow projections Cash flows must exclude: Cash flows from financing activities Cash flows relating to income tax Cash flows from use not to be obscured by tax practices Cash flows are thus pre-tax! 22

22 Step 2: Discount rate Discount rate will be pre-tax (as cash flows are pre-tax) Pre-tax current market rate Independent of entity s capital structure (i.e. WACC not preferable) Asset-specific, but not entity-specific! Rate must not reflect risks for which cash flows have been adjusted Cash flows adjusted for inflation (i.e. nominal) Rate accommodates effect of price increases due to inflation Cash flows not adjusted for inflation (i.e. real) Rate doesn t accommodate effect of inflation If asset-specific rate is not available Determine WACC, incremental borrowing rate, market borrowing rate Adjust for specific risks of projected cash flows 23

23 Value in use: specific issues Value in use when entity is committed to restructuring Where an entity is committed to restructuring, its estimates of future cash inflows and outflows for purposes of determining value in use shall reflect the cost savings and other benefits from restructuring resulting from the most recent budgets/forecasts approved for management 24

24 Value in use: specific issues Intangible asset (IA) with indefinite useful life Impairment test to be done annually = practical implications Entity may use detailed calculation of asset s preceding recoverable amount if all the following are met: If IA part of CGU: assets and liabilities in unit must have remained mostly unchanged since previous calculation of recoverable amount Preceding recoverable amount > CA of asset now tested for impairment by a wide margin Judging circumstances existing at previous recoverable amount calculation, likelihood that the asset s recoverable amount would now be less than its CA is remote 25

25 CHAPTER 5 Recognising an impairment loss on an asset

26 Result Impairment test done CA > Recoverable amount 27

27 Cost model CA = R1.2m RA = R1.0m Dr Impairment loss (P/L) 200k Cr Accumulated impairment (F/P) 200k NEGATIVE ASSET 28

28 Revaluation model RCA = R1.2m HCA = R1.0m RA = R900k Dr Revaluation surplus (OCI) (R x 72%) Dr Impairment loss (P/L) (R R ) Dr D/Tax (F/P) (R x 28%) Cr Accumulated impairment (F/P) 144k 100k 56k 300k Dr D/Tax (F/P) (R x 28%) 28k Cr Income tax expense (P/L) 28k 29

29 Important to note The revised CA (i.e. after the impairment loss) should be allocated to profit or loss (i.e. depreciated) over the remaining useful life of the asset after the impairment Revised carrying amount less residual value Remaining useful life at impairment date 30

30 CHAPTER 6 Recognising a reversal of an impairment loss

31 Principle The recoverable amount of an asset previously impaired is only reassessed for impairment should there be an indicator that these impairments may have reversed, wholly or partially 32

32 External indicators Significant increase in asset s market value during current period Significant changes with favourable effect on entity took place during the period (or expected to take place in near future) in the technological, market, economic or legal environment in which entity operates or to which products of the asset are dedicated Market interest rates (or other rates of ROI) have decreased during the period and decreases likely to affect discount % used to calculated asset s value in use, with material increase in recoverable amount 33

33 Internal indicators Significant changes (with favourable effect) took place/expected to take place i.r.o. manner in which asset is used Capital expenditure to improve/enhance asset s performance or restructure the operation to which asset belongs Management information provides evidence that economic performance of asset is/will be better than expected 34

34 If indicator exists Test asset for reversal of impairment Consider as part of reversal of impairment: Useful life Depreciation method Residual value 35

35 Treatment of a reversal Cost model: Dr Accumulated impairment (F/P) Cr Operating expenses (P/L) Revaluation model: Dr Accumulated impairment (F/P) Cr Operating expenses (P/L) (potentially) Cr Revaluation surplus (OCI) 36

36 Limitation on the reversal of impairment loss The impairment loss is only reversed to the extent that it does not exceed the CA (net of depreciation/amortisation) that would have been determined for the asset in prior years, if there had been no impairment loss 37

37 Goodwill An impairment loss recognised in respect of goodwill, can not subsequently be reversed 38

38 Unwinding of discount A reversal of an impairment loss previously recognised may not be recognised due to an increase in the value in use due to unwinding of discounting Example: Value in use: Pmt = R1 000 Pmt = R1 000 N = 5 N = 4 I/Yr = 10% I/Yr = 10% PV = R3 790 PV = R3 170 CA of asset R4 000 R3 790 /4 x 3 = R2 843 Due to unwinding! 39

39 CHAPTER 7 Unique principles relating to CGUs

40 Identification of a CGU Very subjective Based on professional judgement Cash flows received from parties outside the entity Internal cash flows only used if active market exists for output Gain arm s length estimates of transfer prices (w.r.t. active market) and use to estimate cash inflows/outflows Cash flows must be independent from cash flows of other assets or CGUs How does management monitor and control operations (product lines, businesses, locations)? How does management make decisions to continue to sell parts of entity s assets or operations? 41

41 Possibilities Goodwill? Company CGU 1 CGU 2 Asset 1 Asset 2 Asset 3 42

42 Recoverable amount of CGU Step 1: Determine the CA of the CGU Consider liabilities, goodwill, corporate assets Step 2: Determine the recoverable amount (RA) of the CGU Higher of: Value in use of CGU Fair value less costs to sell CGU Step 3: If CA > RA, CGU is impaired Step 4: Allocate impairment loss to CGU 43

43 Determining CA of a CGU CA includes: CA of assets that can be attributed directly or allocated on a reasonable and consistent basis (e.g. goodwill and corporate assets) and That will generate future cash inflows used in determining the value in use of the CGU CA excludes: CA of recognised liabilities, unless RA of CGU cannot be determined without it (see later) Assets that cannot be allocated on a reasonable basis (e.g. goodwill and corporate assets) Assets that will not produce the estimated future cash flows 44

44 Determining CA of a CGU Be sure to allocate all assets contributing to the RA of a CGU, to the CGU carefully! If not done, the CGU may appear to be free from impairment when, in fact, it is impaired Take care with goodwill and corporate assets (e.g. head office building) 45

45 Determining CA of a CGU Example: Land (used for mining) R200m Train tracks to diamond washer R40m Locomotive for transport R10m Provision for land restoration (R30m) CA of CGU R220m E.g. Value in use: R240m R30m = R210m E.g. Fair value less CTS: R230m R30m = R200m 46

46 Goodwill and CGUs Goodwill does not usually generate independent cash flows Goodwill sometimes contributes benefits to groups of CGUs Goodwill MUST be tested annually for impairment Thus find a CGU!! Principles Goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer s CGUs benefiting from the synergy of the business combination Each CGU to which goodwill is allocated, shall: Represent lowest level at which goodwill is monitored for internal management purposes, and Not be larger than a segment (per IFRS 8 guidance) 47

47 Goodwill and CGUs Goodwill will be tested for impairment at a level that reflects the way the entity manages its operations and with which the goodwill would naturally be associated (in line with IFRS 8) Chief decision-maker etc. Partial disposal of CGU Goodwill to be taken into account to determine gain or loss on disposal Goodwill to be allocated to disposed portion of CGU based on relative value of disposed portion of CGU ( relative value approach ) 48

48 CGUs without goodwill Example CA CGU 1 CGU 2 Total PP&E R R8 000 R Intangible asset R R R CA of CGU R R R RA CGU as a whole R R R Impairment loss CGU as a whole R R - R PP&E (R100/R300 x R30) R I/Asset (R200/R300 x R30) R BOTTOM UP APPROACH 49

49 CGUs with goodwill allocated To be tested annually due to inclusion of goodwill in the CGU and when indicator of possible impairment exists 50

50 CGUs with goodwill allocated Example CA CGU 1 CGU 2 Total Goodwill R R5 000 R PP&E R R8 000 R Intangible asset R R R CA of CGU R R R RA CGU as a whole R R R Impairment loss CGU as a whole R R - R Goodwill (in full) R PP&E (R80/R280 x R10) R2 857 I/Asset (R200/R280 x R10) R

51 CGU included in bigger CGU Example Goodwill (R ) can only be allocated at company level CA CGU 1 CGU 2 Company PP&E R R R Intangible asset R R R CA of CGU R R R RA CGU as a whole R R R Impairment loss CGU as a whole R R - R - PP&E (R100/R300 x R30) R I/Asset (R200/R300 x R30) R CA (company) (R R R gw) R RA (company) R Impairment loss (company) R Allocated to goodwill R No further impairment loss can be allocated to CGUs TOP DOWN APPROACH 52

52 Limitation on allocation of impairment loss to CGU When impairment loss is allocated to CGU, a reasonability test is to be done so that any individual asset in CGU is not reduced to below the highest of: Its fair value less costs to sell; Its value in use; and Nil If the allocation of an impairment loss results in the CA of an individual asset in the CGU being reduced below any of the limits above, the excess must be re-allocated to the other assets in the CGU on a pro-rata basis 53

53 Example of reasonability test Equipment R Machinery R Furniture R Goodwill R R Recoverable amount R Furniture (FV less CTS) = R Impairment loss (125 82) R Initial allocation: Goodwill: R R = R- Equipment: R R5 400 = R Machinery: R R5 040 = R Furniture: R R7 560 = R Over-impairment (R R = R3 560) reallocated: Equipment: (R30/(R30 + R28) x R3 560) = R1 841 Machinery: (R28/(R30 + R28) x R3 560) = R

54 Reversal of impairment loss allocated to a CGU Same principles as for individual assets Unique problems due to CGU Where the impairment loss of a CGU is reversed, the reversal must be allocated to the CAs of the assets in the unit, except for goodwill, as follows: Assets (except goodwill) are increased on a prorata basis based on their CAs in the unit, and Goodwill allocated to the unit is never reinstated (internally-generated goodwill not recognised per IAS 38 Intangible Assets) 55

55 Limitation test in a CGU When the reversal of an impairment loss for a CGU is allocated to the assets in the CGU, the CAs of the assets may not increase above the lower of: Its recoverable amount and The CA of the asset that would have been determined had no impairment loss been recognised in prior periods If the CA of an asset in the CGU does increase above the above amounts, the residual is allocated to the remaining assets (except for goodwill) on a pro-rata basis (based on its CA before the reversal of the impairment loss) 56

56 CHAPTER 8 Deferred tax implications of IAS 36 Impairment of Assets