MFRS 136

Impairment of Assets

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Learning Objectives

1. Applicable Standard and Scope

2. General Approach in Assessing Impairment
3. Identifying Any Indication of Impairment
4. Measuring Recoverable Amount
5. Recognising an Impairment Loss
6. Cash-generating Units
7. Reversing an Impairment Loss
8. Disclosure

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 1. Applicable Standard and Scope
• MFRS 136/ IAS 36 Impairment of Assets aims at prescribing the procedures for
an entity to apply to ensure that the entity’s assets are carried at no more than their
recoverable amount
• EXCEPTIONS to MFRS 136
1. inventories (MFRS 102)
2. assets arising from construction contracts (MFRS15)
3. deferred tax assets (MFRS 112)
4. assets arising from employee benefits (MFRS 119)
5. financial assets that are within the scope of MFRS 139
6. investment property that is measured at fair value (MFRS 140)
7. biological assets related to agricultural activity that are measured at fair value less
estimated point-of-sale costs (MFRS 141/IAS 41 Agriculture)
8. deferred acquisition costs, and intangible assets, arising from an insurer’s contractual
rights under insurance contracts within the scope of MFRS 4 Insurance Contracts
9. non-current assets (or disposal groups) classified as held for sale in accordance with
MFRS 5
However, IAS 36 still applies to financial assets classified as
1. subsidiaries, as defined in MFRS 127 Consolidated and Separate
Financial Statements
2. associates, as defined in MFRS 128 Investments in Associates JVs
3. joint ventures, as defined in MFRS 128
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2. General Approach in Assessing
• IAS 36 requires that impairment loss is recognised when an asset’s carrying
amount is higher than its recoverable amount.
• An impairment loss is the amount by which the carrying amount of an asset (or
a cash-generating unit) exceeds its recoverable amount.
– Carrying amount is the amount at which an asset is recognised after
deducting any accumulated depreciation (amortisation) and accumulated
impairment losses thereon.
– The recoverable amount of an asset is the higher of
• its fair value less costs of disposal Recovered through sale
• its value in use. Recovered through use

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2. General Approach in Assessing

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 3. Identifying any Impairment Indication
• At each reporting date, an entity is required to assess whether there is
any indication that an asset may be impaired.
– If any such indication exists, the entity will then estimate the
recoverable amount of the asset.
• For specific kinds of intangible assets and goodwill, no matter whether
there is any indication of impairment,
– an entity is still required to estimate their recoverable amounts and
compare the amounts with their carrying amounts.
Such annual impairment test is required for the following
assets:
1. an intangible asset not yet available for use
2. an intangible asset with an indefinite useful life
3. goodwill acquired in a business combination

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3. Identifying any Impairment Indication
• In assessing whether there is any indication that an asset may be impaired, an
entity is required to consider, as a minimum, the following indications:
External sources of information
a) an asset’s market value declined significantly more than would be
expected
b) significant changes with an adverse effect on the entity in the
technological, market, economic or legal environment
c) market interest rates or other rates increased that likely affects the
discount rate used in calculating an asset’s value in use
d) the carrying amount of the net assets of the entity is more than its market
capitalisation
Internal sources of information
a) evidence is available of obsolescence or physical damage of an asset
b) significant changes with an adverse effect on the entity in which, an asset
is used or is expected to be used.
c) evidence is available from internal reporting that indicates that the
economic performance of an asset is, or will be, worse than expected.
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4. Measuring Recoverable Amount

• Estimating the value in use of an asset Value in Use

involves the following steps: Basis for Estimates of
a) estimating the future cash inflows and Future Cash Flows
outflows to be derived Composition of Estimates
• from continuing use of the asset, and of Future Cash Flows

• from its ultimate disposal; and Foreign Currency Future

Cash Flows
b) applying the appropriate discount rate
to those future cash flows. Discount Rates

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4. Measuring Recoverable Amount

Some restrictions on the basis for Value in Use

cash flow projections as follows: Basis for Estimates of
1. based on reasonable and supportable Future Cash Flows
assumptions that represent management’s
best estimate of the range of economic conditions that will exist over the
remaining useful life of the asset. Greater weight given to external evidence.
2. based on most recent financial budgets/forecasts approved by management.
3. Not include future cash flows expected to arise from future restructurings
4. based on these budgets/forecasts can only cover a maximum period of five
years, unless a longer period can be justified.
5. beyond the period covered by the most recent budgets/forecasts can only
use a steady or declining growth rate for subsequent years, unless an
increasing rate can be justified.
6. The growth rate used for the extrapolated projections cannot exceed the
long-term average growth rate for the products, industries, or country or
countries in which the entity operates, or for the market in which the asset is
used, unless a higher rate can be justified. 9
4. Measuring Recoverable Amount

• IAS 36 requires the estimates of future Value in Use

cash flows to include:
1. projections of cash inflows from the
continuing use of the asset; Composition of Estimates
2. projections of cash outflows that are of Future Cash Flows
necessarily incurred to generate the cash
inflows from continuing use of the asset
(including cash outflows to prepare the
asset for use) and can be directly attributed,
or allocated on a reasonable and consistent
basis, to the asset; and
3. net cash flows, if any, to be received (or
paid) for the disposal of the asset at the end
of its useful life.

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4. Measuring Recoverable Amount
Value in Use

Foreign Currency Future

Cash Flows

• Future cash flows are estimated in the currency in which they will be
generated and then discounted using a discount rate appropriate for
that currency.
• An entity translates the present value using the spot exchange rate at
the date of the value in use calculation.

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4. Measuring Recoverable Amount

• In calculating the present value of Value in Use

estimated future cash flows, a pre-tax
discount rate should be used and it should
reflect current market assessments of:
1. the time value of money; and
2. the risks specific to the asset for which the
future cash flow estimates have not been
adjusted.
Discount Rates
• Such discount rate required by IAS 36 is
the return that investors would require if
they were to choose an investment that This rate is estimated from
either:
would generate cash flows of amounts,
timing and risk profile equivalent to those • the rate implicit in current
market transactions for
that the entity expects to derive from the
similar assets or
asset.
• the WACC of a listed entity
that has a similar asset
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4. Measuring Recoverable Amount

• IAS 36 requires an intangible asset with an indefinite

useful life to be tested for impairment annually by
comparing its carrying amount with its recoverable
amount, irrespective of whether there is any indication
that it may be impaired.
• IAS 36 offers an alternative to the entity holding such
intangible asset.

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5. Recognising an Impairment Loss
Example
Melody Beauty Shop performed an impairment review on some assets
on . While the freehold land was stated at fair value with a revaluation
surplus of $5,000, other assets were stated at cost less accumulated
depreciation or amortization.
The result of the impairment review is summarised below:

Fair value less Value Carrying

costs of disposal in use amount
Freehold land, at fair value $ 21,200 $ 22,000 $ 30,000
Intangible asset, at 820 650 900
amortised cost
Machinery, at depreciated 2,100 1,800 3,000
cost

Ascertain the impairment loss and prepare the required journal entries.

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5. Recognising an Impairment Loss
Example
By using the information on hand, the assets of Melody Beauty Shop should have
the following impairment losses:
Recoverable Carrying Impairment
amount amount loss
Freehold land, at fair value $ 22,000 $ 30,000 $ 8,000
Intangible asset, at amortised cost 820 900 N/A
Machinery, at depreciated cost 2,100 3,000 900

While there was a revaluation surplus of $5,000 for freehold land, part of the
impairment loss for the freehold land can be recognised in the revaluation surplus.
Then, the journal entries for the recognition of impairment losses should be:
Dr Revaluation surplus $ 5,000
Profit or loss ($8,000 - $5,000) 3,000
Cr Freehold land $ 8,000
To recognise the impairment loss on freehold land.
Dr Profit or loss 900
Cr Machinery $ 900
To recognise the impairment loss on machinery. 15
6. Cash-generating Units
defined as 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.
• The recoverable amount of an individual asset cannot be determined if:
1. the asset’s value in use cannot be estimated to be close to its fair value less cos
disposal; and
2. the asset does not generate cash inflows that are largely independent of those f
other assets.
• In such cases, value in use and, therefore, recoverable amount, can be determined o
for the asset’s cash-generating unit.

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6. Cash-generating Units
Example

• Ocean Care Entertainment Park has leased a site from the government
to establish an entertainment park since 1980 and has agreed to
restore the site and remove all the facilities before it vacates and
returns the site to the government.
• An unamortised provision for the restoration costs is $200 million.
• Since the opening of a similar new park in the region in 2007, Ocean
Care has operated the park at a loss.
• It has to test impairment of the park.
• A proposal from a potential buyer offers $900 million to purchase the
park.
• The park as a cash-generating unit should have a value in use
excluding restoration costs of $900 million.
• Given that the carrying amount of the park’s assets is $1 billion at the
end of 2007, should Ocean Care recognise any impairment loss?

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6. Cash-generating Units
Example

• To determine whether any impairment loss should be recognised, the

park’s recoverable amount, i.e. the higher of its fair value less costs of
disposal and value in use should be compared with its carrying amount.
• Then, the following calculation can be ascertained from the information:
– The park’s fair value less costs of disposal is $900 million and the
restoration costs can be considered as inclusive.
– The value in use for the park as a cash-generating unit should be
determined by including the restoration costs of $200 million and it would
be $700 million ($900 million - $200 million).
– The carrying amount of the park as a cash-generating unit should have a
carrying amount of $800 million ($1 billion – $200 million) after reduced by
the restoration cost of $200 million.
• In consequence, the recoverable amount of the cash-generating unit
should be $900 (i.e. the fair value less costs of disposal, which is
higher) and it should exceed the unit’s carrying amount of $800 million.
• No impairment loss should be recognised.
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6. Cash-generating Units

Corporate Assets ➢ are assets other than goodwill that contribute to

the future cash flows of both
• the CGU under review and
• other CGUs.
• Examples include:
• Building of a headquarter
• EDP Equipment
• Research centre
• In testing a CGU for impairment
– an entity shall identify all the corporate
assets that relate to the CGU under
review.
– The allocation approach of the corporate
assets is also amended ……

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6. Cash-generating Units

Corporate Assets

Can be allocated on ➢ such portion shall be included as part of the carrying

a reasonable and amount of the CGU for impairment test
consistent basis
Cannot be allocated ➢ The entity shall:
on a reasonable and 1) compare the carrying amount of the CGU (excluding the
consistent basis corporate asset) with its recoverable amount
• recognise any impairment loss first
2) identify the smallest group of CGUs that includes the CGU
Firstly, test under review and to which a portion of the carrying amount
smaller CGU of the corporate asset can be allocated on a reasonable and
consistent basis; and
3) compare the carrying amount of that group of CGUs,
Then, test larger including the portion of the carrying amount of the corporate
CGU containing asset allocated to that group of CGUs, with the recoverable
amount of the group of CGUs.
the goodwill
• Any impairment loss shall be recognised.
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6. Cash-generating Units

• An impairment loss
– is recognised for a CGU
• if, and only if, the recoverable amount of the CGU
(group of CGUs) is less than the carrying amount of the
CGU (group of CGUs).
– is allocated to reduce the carrying amount of the
assets of the CGU (group of CGUs) in the following
order:
a) first, to reduce the carrying amount of any goodwill Goodwill
allocated to the CGU (group of CGUs); and first
b) then, to the other assets of the CGU (group of CGUs)
pro rata on the basis of the carrying amount of each Other on
asset in the CGU (group of CGUs). pro rata
These reductions in carrying amounts shall be treated
as impairment losses on individual assets

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6. Cash-generating Units

• In allocating an impairment loss for a CGU, an entity shall not reduce

the carrying amount of an asset below the highest of:
a) its fair value less costs of disposal (if determinable);
b) its value in use (if determinable); and
c) zero.
• The amount of the impairment loss that would otherwise have been
allocated to the asset shall be allocated pro rata to the other assets of
the CGU (group of CGUs).

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6. Cash-generating Units
Example
• Bear Bull performed an impairment review on the CGU X, which has the
following assets on hand:
Carrying amount
Goodwill $ 1,000
Property, plant and equipment, at depreciated cost 3,000
Intangible assets, at amortised cost 2,000
Investment property, at depreciated cost 2,500
Financial assets, at fair value 1,070
Inventory, at cost 500
Trade receivables 1,300

Total 11,370

• After an impairment review, Bear Bull found that the recoverable amount of
CGU X is $8,000 and of the investment property is $2,000
• Calculate the impairment loss and allocate to the individual asset.

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6. Cash-generating Units
Example

Carrying Carrying
amount after Allocated amount after
impairment loss impairment loss impairment loss

Goodwill $ 1,000 $ (1,000) $ 0

Property, plant and equipment 3,000 (1,122) 1,878
Intangible assets 2,000 (2,870) 1,252
Investment property ($2,500 – $500) 2,000 - 2,000
Financial assets 1,070 - 1,070
Inventory 500 - 500
Trade receivables 1,300 - 1,300

Total 10,870 (2,870) 8,000

• Firstly, the impairment loss reduces any amount of goodwill

• Then, the residual loss is allocated to other non-current assets pro
rata based on the carrying amounts of those non-current asset.
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7. Reversing an Impairment Loss

• IAS 36 requires an entity to consider at least the following external and

internal sources of information in assessing whether there is any
indication that an impairment loss recognised in prior periods for an
asset (other than goodwill) or cash-generating unit may no longer exist
or may have decreased.
1. External sources of information
a. the asset’s market value has increased significantly during the period.
b. significant changes with a favourable effect on the entity have taken place during
the period in the technological, market, economic or legal environment
c. market interest rates decreased during the period, and those decreases are likely
to affect the discount rate used
2. Internal sources of information
a. significant changes with a favourable effect on the entity have taken place during
the period in the extent to which, or manner in which, the asset is used or is
expected to be used.
b. evidence is available from internal reporting that indicates that the economic
performance of the asset is, or will be, better than expected.
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7. Reversing an Impairment Loss

• An impairment loss recognised in prior periods

for an asset (other than goodwill) can be
reversed if, and only if, there has been a change
in the estimates used to determine the asset’s
recoverable amount since the last impairment
loss was recognised.
• In other words, if there is no such change, no
recognised impairment loss can be reversed.
• If there is such change, the carrying amount of
the asset will be increased to its recoverable
amount, subject to a limitation
• That increase is a reversal of an impairment loss.

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7. Reversing an Impairment Loss

Reversing an Impairment Loss for an Individual Asset

• The increased carrying amount of an asset (other than
goodwill) attributable to a reversal of an impairment loss
cannot exceed the carrying amount that would have been
determined (net of amortisation or depreciation) had no
impairment loss been recognised for the asset in prior years.
• A reversal of an impairment loss for an asset (other than
goodwill) is recognised immediately in profit or loss,
– unless the asset is carried at revalued amount in accordance
with another accounting standard (for example, the revaluation
model in IAS 16 Property, Plant and Equipment).
– Any reversal of an impairment loss of a revalued asset is treated
as a revaluation increase in accordance with that other
accounting standard.

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7. Reversing an Impairment Loss

Reversing an Impairment Loss for a Cash-generating Unit

• A reversal of an impairment loss for a CGU is allocated to the
assets of the unit, except for goodwill, pro rata with the
carrying amounts of those assets.
• These increases in carrying amounts is treated as reversals
of impairment losses for individual assets and recognised .
• In allocating such reversal of an impairment loss for a cash-
generating unit, the carrying amount of an asset cannot be
increased above the lower of:
1 its recoverable amount (if determinable); and
2. the carrying amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been
recognised for the asset in prior periods.
• The amount of the reversal of the impairment loss that would
otherwise have been allocated to the asset is allocated pro
rata to the other assets of the unit, except for goodwill.
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8. Disclosure

• More extensive disclosure required

• Main additional disclosure requirements include:
– Extensive information for each CGU (or group of CGUs) for which the
carrying amount of goodwill or intangible assets with indefinite useful lives
allocated, including
• Key assumptions used and the management approach to measure the
recoverable amounts (aligned with revised IAS 1)
• Period for cash flow projection, growth rate, discount rate ……
• Certain other information when a reasonably possible change in a key
assumption would cause the carrying amount of CGUs to exceed its
recoverable amount

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