MODULE 4: Impairment of Assets

 RELATED STANDARDS: PAS36 –Impairment of Assets and IFRS 13 – Fair Value Measurement

 Definition of Terms
Carrying amount – The amount at which an asset is recognized after deducting any accumulated depreciation
(amortization) and accumulated impairment losses thereon.
Cash-generating unit – 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.
Corporate assets – Assets other than goodwill that contribute to the future cash flows of both the cash-generating
unit under review and other cash-generating units.
Costs of disposal – Incremental costs directly attributable to the disposal of an asset or cash-generating unit,
excluding finance costs and income tax expense.
Depreciable amount – The cost of an asset, or other amount substituted for cost in the financial statements, less
its residual value.
Depreciation (Amortization)– The systematic allocation of the depreciable amount of an asset over its useful life.
Fair value – The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
Impairment loss – The amount by which the carrying amount of an asset or a cash-generating unit exceeds its
recoverable amount.
Recoverable amount – The higher of its fair value less costs of disposal and its value in use.
Useful life – It is either: (a) the period of time over which an asset is expected to be used by the entity; or
(b) the number of production or similar units expected to be obtained from the asset by the entity.
Value in use – The present value of the future cash flows expected to be derived from an asset or cash-generating
unit.

 Scope
 PAS36 applies to all assets except:
 Inventories (PAS2)
 Assets arising from construction contracts (IFRS 15/PAS11)
 Deferred tax assets (IAS 12)
 Assets arising from employee benefits ( PAS19)
 Financial assets (IFRS 9)
 Investment property carried at fair value (IAS 40)
 Agricultural assets carried at fair value (IAS 41)
 Insurance contract assets (IFRS 4)
 Non-current assets held for sale (IFRS 5)
 Therefore, PAS36 applies to (among other assets):
 PPE
 Investment property carried at cost
 Intangible assets, including goodwill
 Investments in subsidiaries, associates, and joint ventures carried at cost
 Assets carried at revalued amounts under PAS16 and PAS38
 Identifying an asset that may be impaired
 At the end of each reporting period, an entity is required to assess whether there is any indication that an
asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount).
 PAS36 has a list of external and internal indicators of impairment.
 If there is an indication that an asset may be impaired, then the asset's recoverable amount must be cal-
culated.
 The recoverable amounts of the following types of intangible assets are measured annually whether or
not there is any indication that it may be impaired.
 Indications of impairment
 External sources:
 Market value declines
 Negative changes in technology, markets, economy, or laws
 Increases in market interest rates
 Net assets of the company higher than market capitalization
 Internal sources:
 Obsolescence or physical damage
 Asset is idle, part of a restructuring or held for disposal
 Worse economic performance than expected

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 For investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the
carrying amount of the investee's assets, or a dividend exceeds the total comprehensive income of
the investee
 These lists are not intended to be exhaustive.
 Determining recoverable amount
 If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to
calculate the other amount. The asset is not impaired.
 If fair value less costs of disposal cannot be determined, then recoverable amount is value in use.
 For assets to be disposed of, recoverable amount is fair value less costs of disposal.
 Fair value less costs of disposal
 Fair value is determined in accordance with IFRS 13 Fair Value Measurement
 Costs of disposal are the direct added costs only (not existing costs or overhead).
 Value in use
 The calculation of value in use should reflect the following elements:
 An estimate of the future cash flows the entity expects to derive 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
 Other factors, such as illiquidity, that market participants would reflect in pricing the future cash
flows the entity expects to derive from the asset
 Cash flow projections should be based on reasonable and supportable assumptions, the most recent
budgets and forecasts, and extrapolation for periods beyond budgeted projections.
 PAS36 presumes that budgets and forecasts should not go beyond five years; for periods after five
years, extrapolate from the earlier budgets. Management should assess the reasonableness of its as-
sumptions by examining the causes of differences between past cash flow projections and actual cash
flows.
 Cash flow projections should relate to the asset in its current condition – future restructurings to
which the entity is not committed and expenditures to improve or enhance the asset's performance
should not be anticipated.
 Estimates of future cash flows should not include cash inflows or outflows from financing activities, or
income tax receipts or payments.
 Discount rate used in measuring value in use
 The discount rate used should be the pre-tax rate that reflects current market assessments of the
time value of money and the risks specific to the asset.
 The discount rate should not reflect risks for which future cash flows have been adjusted and should
equal the rate of return that investors would require if they were to choose an investment that would
generate cash flows equivalent to those expected from the asset.
 For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity
would pay in a current market transaction to borrow money to buy that specific asset or portfolio.
 If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the
time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow
risk.
 The following would normally be considered:
a. Entity's own weighted average cost of capital
b. Entity's incremental borrowing rate
c. Other market borrowing rates.
 Recognition of an impairment loss
 An impairment loss is recognized whenever recoverable amount is below carrying amount.
 The impairment loss is recognized as an expense (unless it relates to a revalued asset where the impair-
ment loss is treated as a revaluation decrease).
 Adjust depreciation for future periods.
 Cash-generating units
 Recoverable amount should be determined for the individual asset, if possible.
 If it is not possible to determine the recoverable amount (fair value less costs of disposal and value in use)
for the individual asset, then determine recoverable amount for the asset's cash-generating unit (CGU).
 The CGU is the smallest identifiable group of assets that generates cash inflows that are largely indepen-
dent of the cash inflows from other assets or groups of assets.

 Impairment of goodwill
 Goodwill should be tested for impairment annually.

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 To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or
groups of CGU, that are expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
 A CGU to which goodwill has been allocated shall be tested for impairment at least annually by comparing
the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit:
 The impairment loss for CGU is allocated to reduce the carrying amount of the assets of the unit (group of
units) in the following order:
 First, reduce the carrying amount of any goodwill allocated to the CGU
 Then, reduce the carrying amounts of the other assets of the CGU pro rata on the basis
 The carrying amount of an asset in the CGU should not be reduced below the highest of:
 its fair value less costs of disposal
 its value in use
 zero
 If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other
assets of the unit CGU.
 Reversal of an impairment loss
 Same approach as for the identification of impaired assets: assess at each balance sheet date whether
there is an indication that an impairment loss may have decreased. If so, calculate recoverable amount.
 No reversal for unwinding of discount.
 The increased carrying amount due to reversal should not be more than what the depreciated historical
cost would have been if the impairment had not been recognized.
 Reversal of an impairment loss is recognized in the profit or loss unless it relates to a revalued asset.
 Adjust depreciation for future periods.
 Reversal of an impairment loss for goodwill is prohibited.
 Disclosure
 Disclosure by class of assets:
 Impairment losses recognized in profit or loss
 Impairment losses reversed in profit or loss
 Which line item(s) of the statement of comprehensive income
 Impairment losses on revalued assets recognized in other comprehensive income
 Impairment losses on revalued assets reversed in other comprehensive income
 Disclosure by reportable segment:
 impairment losses recognized
 impairment losses reversed
 If an individual impairment loss (reversal) is material disclose:
 events and circumstances resulting in the impairment loss
 amount of the loss or reversal
 individual asset: nature and segment to which it relates
 cash generating unit: description, amount of impairment loss (reversal) by class of assets and
segment
 if recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy
(from IFRS 13 Fair Value Measurement) within which the fair value measurement is categorized, the
valuation techniques used to measure fair value less costs of disposal and the key assumptions used
in the measurement of fair value measurements categorized within 'Level 2' and 'Level 3' of the fair
value hierarchy
 if recoverable amount has been determined on the basis of value in use, or on the basis of fair value less
costs of disposal using a present value technique, disclose the discount rate
 If impairment losses recognized (reversed) are material in aggregate to the financial statements as a
whole, disclose:
 main classes of assets affected
 main events and circumstances
 Disclose detailed information about the estimates used to measure recoverable amounts of cash generat-
ing units containing goodwill or intangible assets with indefinite useful lives.
 Difference between Full IFRS and IFRS for SMEs
Full IFRS IFRS for SMEs
An impairment loss must be recognized immediately in It does not permit the application of
profit or loss, unless the asset is carried at revalued revaluation models and therefore all
amount. Any impairment loss of a revalued asset must impairment losses are immediately
be treated as a revaluation decrease. recognized in profit or loss.

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