Topic 31 - IAS 36 Impairment of Assets Objective of IAS 36 to ensure that an entity s assets are carried at no more than their recoverable amount. Impairment is a sudden diminution (above and beyond normal wear and tear) in the value of a non-current asset (tangible & intangible) over and above the normal wear and tear or reduction in value recognised by depreciation. Impairment Loss is measured by comparing the;- CARRYING AMOUNT v.s. RECOVERABLE AMOUNT Recoverable Amount is the higher of Recoverable Amount Value In Use Fair Value less Costs to Sell Carrying Amount = amount at which an asset is recognised in the statement of financial position after deducting accumulated depreciation and accumulated impairment losses. If carrying amount > recoverable amount asset is impaired and should be written down to its recoverable amount. If carrying amount < recoverable amount asset is NOT impaired 1
Fair Value less costs to sell (i.e. Disposal Value);- Price in an arms length binding sales contract If asset is traded on active market, fair value less costs to sell is the assets market price less disposal costs In absence of contract and active market, fair value less costs to sell is based on best info available to calculate estimate Trade in value is not seen as being at arms length as it includes an element of compensation re the subsequent purchase price Value In Use (value to the Business) Present Value of future cash flows expected to be derived from an asset. This involves 2 steps Step 1 -Estimate future cash flows from use of asset including ultimate disposal proceeds Step 2 Apply a suitable discount rate to those cash flows. Reporting entity should assess at each reporting date whether there is any indication that an asset may be impaired. Indicators of Impairment;- See external and internal indicators on page of Textbook Impairment tests must be carried out annually on any intangible asset with an indefinite useful life Goodwill must be tested annually for impairment. Accounting for Impairment Losses;- Normal Accounting Entry Dr. Statement of profit or loss X Cr. Asset X With the impairment loss UNLESS Asset is carried at a revalued amount then impairment loss is first offset against any remaining revaluation surplus for that asset. (Also, amount of loss offset against revaluation reserve is disclosed as deduction in Other Comprehensive Income. Any loss remaining is written off to statement of profit or loss 2
After recognising an impairment loss, asset should be depreciated based on new carrying amount over its remaining useful life Cash Generating Unit (CGU) In practice individual assets do not generate cash flows on their own. Cash flows usually belong to groups of assets called CGU s. A CGU is the smallest identifiable group of assets for which independent cashflows can be identified and measured. Example of a CGU A mining company owns a private railway to transport output from one of its mines. The railway has no market value and it is impossible to identify any separate cash inflows from the use of the railway itself. Therefore, if the mining company suspects an impairment in the value of the railway, it should treat the mine as a whole as a CGU. Example of a CGU For A business running a chain of restaurants it would be difficult to work out the cash flows relating to a single table in a restaurant but it should be possible to work out the cash flows relating to a single restaurant as a cash generating unit Special Points Purchased goodwill must be reviewed for impairment annually Goodwill acquired in a business combination must be allocated to each CGU in business. If allocation is not possible, the impairment review is carried out in 2 stages 1. Carry out an impairment review on each of the CGU (excluding the goodwill) 2. Then carry out an impairment review for the entity as a whole, including the goodwill CGU includes only assets which can be attributed directly to the generation of cash flows. Liabilities are not included unless recoverable amount of CGU cannot be determined without considering the liabilities. Impairment Loss for a CGU Calculated in the same manner as for individual assets. Problem: How is loss allocated to the various assets in a CGU? Impairment Loss for a CGU Answer IAS 36 states that loss should be allocated to reduce the carrying amount of the assets of the CGU in the following order;- 3
(1) Firstly to any assets in the CGU that are obviously damaged or destroyed (i.e. where recoverable amount is less than cost - impaired) (2) Then to the goodwill allocated to the cash generating unit (3) Then to the other assets of the CGU pro rata to their carrying amts BUT there is a limiting factor Entity shall not reduce the carrying amt of an asset below its recoverable amount. i.e. the higher of its fair value less costs to sell, it s value in use or zero. See Manual p Example 4
Reversing an Impairment Loss Entity should assess at each balance sheet date whether impairment losses recognised in previous periods no longer exist or have decreased. Impairment loss can be reversed only when there has been a change in the estimates used to determine the assets recoverable amount since the impairment loss was recognised. To reverse an impairment loss carrying value should be increased to its recoverable amount but with the following limiting factor- The increased carrying amount cannot exceed the carrying amount that would have been determined had no impairment loss been recognised. Impairment loss recognised in Statement of profit or loss UNLESS Asset is carried at revalued amount reversal treated as a revaluation increase (and reported in the same way as a revaluation in other comprehensive income for the period) Reversing an Impairment Loss for goodwill NOT allowed. Why?? Any reversal of an impairment loss to goodwill is likely to be caused by an increase in internally generated goodwill rather than a reversal of purchased goodwill. Internally generated goodwill must not be reported as an asset 5
Past Exam Questions Q1 April 2014 Q1 Aug 2013 Q1 April 2013 Q1 April 2012 Practice Questions Sandown 6
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