IMPAIRMENT of ASSETS

IAS 36
 Scope of IAS 36
IAS 36 is applied in the accounting for the impairment
of all assets, except:
• Inventories
• Contract assets in accordance with IFRS15
• Deferred tax assets
• Assets from employee benefits
• Financial assets in scope of IFRS9
• Investment property measured at FV
• Non-current assets classified as held for sale
(IFRS5)
• Biological assets related to agriculture activity
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 Scope of IAS 36
IAS 36 applies mainly to:
• Tangible and intangible assets
• Investment in subsidiaries
• Joint arrangements
• Associates

3
 Reflects 2 ways in
which CA be

DEFINITIONS recovered:
1) Sell the Asset
2) Use the asset

• A cash-generating unit (CGU) is 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 are assets other than goodwill that contribute to the future
cash flows of both the cash-generating unit (CGU) under review and other
cash-generating units (CGUs) (e.g. a corporate headquarters).
• The recoverable amount of an asset or a CGU is the higher of its fair value
less costs of disposal and its value in use.
• Fair value less costs of disposal is the fair value (as in IFRS 13) of an
asset or cash-generating unit, less the costs of disposal.
• Costs of disposal are incremental costs directly attributable to the
disposal of an asset or cash-generating unit, excluding finance costs
and income tax expense.
• Value in use is the present value of the future cash flows expected to be
derived from an asset or CGU.
• An impairment loss is the amount by which the carrying amount of an asset
or a cash-generating unit exceeds its recoverable amount
IDENTIFICATION OF AN ASSET
THAT MAY BE IMPAIRED
•
• Must test for impairment if there is an
• impairment INDICATOR

• What do we do if there is an impairment

indicator??
• Calculate the recoverable amount (RA) of the asset and
compare this to its carrying amount (CA) to see if the asset is
impaired
• 3 EXCEPTIONS to above principle – MUST be tested every year
regardless if there is an impairment indicator or not
1. Goodwill 5
2. Intangible asset with an indefinite/infinite useful life
3. Intangible asset not yet ready for use
The impairment test may happen anytime of the year (but
must be more or less the same time every year)
 Identification of Impairment
(continued)

• Impairment indicators: • Impairment indicators

(continued):
• External sources of information:
• Sharp decrease in the asset’s • Internal sources of
market value information
• Unfavourable changes in • Obsolescence or
physical damage to the
technological, market, economical asset
or regulatory environment • Unfavourable changes
• Sharp increase in interest rates in the extent to which
that could increase the discount the asset is used
rate • Economical
performance of the
• Carrying amount of net assets is asset is worse than
higher than the market expected
capitalisation
 NB! Fair Value

What is “Fair value less is measure in

terms of IFRS
13

costs to sell”
✓ Fair value less costs to sell:
– Best indicator = selling price in a binding sales agreement
– If the above is not available, use market price (if active
market exists)
– If the above is not available, can use the outcome of
recent transactions for similar assets
– It must not reflect a forced sale
✓Costs of disposal is e.g. legal costs, transfer costs, costs of
removal of the asset, testing of asset
 EXAMPLE 1
At 31 December 2019, Quantum ltd owns a machine with a carrying
amount of N$106 666 for which there is an active market. The
machine can at this stage be disposed of to a knowledgeable willing
buyer for N$108 500.
the machine initially cost N$200 000 and is depreciated on a straight
line basis over 7,5 years. A total of 3,5 years of the useful life of the
machine has already expired as at 31 December 2019.Any broker
involved in such a transaction will charge N$2 000 and cost to
dismantle and remove asset will be N$3 000. No provision for this cost
of N$3 000 had been recognized in terms of IAS 37. Before considering
the recoverable amount of the asset , the asset was serviced to ensure
that it is in a good working condition. The technician charges
amounted to N$1 500.
Required: calculate Fair Value less costs to dispose.
 Solution
Selling price (FV) 108 500
Less: brokerage (2 000)
Cost of service (1 500)
Cost of dismantling (3 000)
FVLCTS 102 000
 What is “Value In Use”?
• Value in use is the value the company will get from using the asset in
its CURRENT CONDITION
• It is all FUTURE CASH FLOWS (net) that will flow to the entity through
the use of the asset in its CURRENT condition, DISCOUNTED at a
BEFORE TAX risk free interest rate to its NET PRESENT VALUE (NPV).
• Following elements are considered in the calculation:
• Future cash flows from using the asset
• Time value of money, represented by the risk-free interest rate
(discounting)
• Include Proceeds on sale of asset at the end of its useful life (FV
in calculator)
• Future cost savings/other benefits when the entity is committed to
restructuring
• Above factors can be incorporated in the calculation by adjusting the
cash flows or the discount rate
 What is “Value In Use”?
Considerations with regards to FUTURE CASH FLOWS Done according to
managements BEST estimates
• Rely more on external sources of information
• Projections based on RECENT FINANCIAL BUDGET/DATA (max 5 years in
future) (longer must be justified)
• Periods LONGER than 5 years
• Add growth rate to each previous year’s estimate (“extrapolation”)
• Growth rate must be stable (stays the same) or decreasing every year (IAS
36.33('c)) unless increasing growth rate can be justified
• Growth rate must not be higher than average long-term growth rate of the
industry
• Future cash flows EXCLUDE the following:
• Exclude future restructuring costs (BUT EXCEPTION - Expected
savings/benefits from restructuring ARE included IF the entity is committed to
restructuring)
• Exclude Future costs to improve the performance of the asset (e.g. future
upgrading AND future benefits expected from this)
• Exclude Finance costs (interest) and Taxation and Depreciation
• Since we use pre-tax cash flows, we also discount with a pre-tax discount rate
• Appendix A in IAS 36 provides more guidance on determination on VIU
Simple example: value in use
• Co A has plant used to manufacture DVD players
• Co A expects to produce 1 000 DVD players per annum
for 8 years
• Each DVD player is sold for N$3 000
• Production costs amount to N$1 200 per DVD player
• The plant can be sold at the end of its useful life for
N$30 000
• Discount rate = 10% per annum
• Required: calculate the plant’s value in use
 Solution
Net cash inflow per annum =
1 000 X (N$3 000 – N$1 200) = 1 800 000
1 800 000 PMT
(because cash flow repeats every year)
30 000 FV
8n
10 i
Comp PV = R9 616 862 = value in use
 Value in use…
✓ Value in use (continued) – 2 important catches:
– Restructuring (e.g. retrenchment of staff that operates
1 machinery & resulting staff costs saving
• Exclude: costs for future restructurings (e.g. retrenchment
packages) or improvement of the asset’s performance
• However, include cost savings or other benefits due to
restructuring if the entity is committed to restructuring
– Improvement of asset’s performance (e.g. upgrade):
2 • Benefits due to improvement of the asset’s performance
are however included only upon actually incurring the cost
of improvement
 Previous slide continued…
Therefore, to summarise:
• Costs still to be incurred in future:
Cost Benefits
Restructuring  ✓
Improvement of asset  

• Costs already incurred:

Cost Benefits
Restructuring N/A ✓
Improvement of asset N/A ✓

✓ = include in future cash flow estimates

 = exclude from future cash flow estimates
 Recognition & measurement:
impairment loss
• Carrying amount > Recoverable amount →
recognise impairment loss
• Recognise in p/l, except to the extent that it
reverses a previous revaluation surplus →
recognise in OCI (↓ revaluation surplus)
• Write off depreciation over remaining
useful life
 Recognition & measurement:
impairment loss
Example:
Machine X has a carrying amount of N$150 000,a
FVLCTS of N$120 000 and a value in use of N$125 000.
solution depends on whether the Cost model or the
Revaluation model was applied.
• Cost model:
DR Impairment loss 25 000
CR Accumulated impairment 25 000
• Revaluation model:
The question does not show an existing
revaluation surplus hence solution as above.
Reversal of impairment losses:
individual asset
• Consider at year-end whether there is an
indicator that a previous impairment loss should
be reversed
– These indicators are the opposite of the
impairment indicators already discussed
• Limitation i.r.o. the cost model: reversal may not
cause the CA of an asset to be higher than the
historical CA!
✓DA Example 18.5,18.6 and 28.7 (self study)
 Cash Generating Unit (CGU)?

What does this mean?? When must a CGU be identified?

• When the entity CANNOT allocate the CASH FLOWS used to
calculate the value in use to an INDIVIDUAL asset:
• The entity must identify the SMALLEST CGU to which the
cash flows can be allocated.
Therefore – What is a CGU?
• The smallest group of assets that INDEPENDENTLY
generate cash flows. E.g. a lecturing hall at a university.
Cash-generating units (CGUs)…

✓Effect of IAS 36: begin impairment test at the individual

asset level. If not possible, look at a larger group of assets,
then an even larger group, etc.
• This is not necessarily the rule, but the rules of IAS 36
effectively have this result.
• Recoverable amount of CGU is determined similarly as for
an individual asset
• Carrying amount of CGU equals the carrying amounts of all
assets attributable to the CGU, but not liabilities
 CASH GENERATING UNITS

HOW ARE IMPAIRMENT LOSSES OF INDIVIDUAL ASSETS WITHIN A

CGU DETERMINED?
• When an individual asset CANNOT generate cash flows on its
own (e.g. the projector in the lecture room), we do not know what its
value in use is!
• Therefore we rather calculate the value in use for the CGU as a WHOLE.
• Follow these steps:
1. Calculate the CA of the CGU as a whole by adding the CA of all assets,
but not liabilities, together.
2. Compare this with the recoverable amount of the CGU as a whole.
3. Any resulting impairment loss is ALLOCATED to the individual assets
within the CGU on a pro rata basis proportionately in relation to the
individual CAs of the assets within the CGU
After the CGU’s impairment loss has been allocated to individual assets, NO
individual asset may be carried at an amount below the HIGHEST of:
• Individual asset’s fair value less costs to sell; OR
• Individual asset’s value in use (if available; mostly unknown as already
discussed); OR
• Nil.
 Cash-generating units
(CGUs)…
• Goodwill can also not generate cash flows on its
own (it relates to synergy, reputation, etc. of the
subsidiary)
• Therefore we calculate the impairment loss of
goodwill by allocating it to the CGU to which it
relates, and then test the CGU for impairment
• Remember that the above of course only relates
to consolidated statements or where there was
some other type of business combination
Goodwill: when it can be allocated
to a CGU

• When goodwill can reasonably be allocated to a CGU

(most cases), we calculate the impairment loss by
taking the following steps:
1) Allocate goodwill to the CGU (normally pro rata according
to CA of the CGU relative to the CAs of other CGUs)
2) Compare the CGU’s CA (including goodwill) with its RA
3) If an impairment loss arises, allocate this first to goodwill
(i.e. write off goodwill first)
4) Any remaining impairment loss is allocated to individual
assets within the CGU on a pro rata basis
NB!
 Goodwill: when it cannot be
allocated to a CGU
• When goodwill cannot reasonably be allocated to a
CGU (extreme cases), we calculate the impairment
loss by taking the following steps:

1) Compare the CGU’s CA (excluding goodwill) with its RA

2) Any resulting impairment loss is allocated to individual
assets within the CGU on a pro rata basis
3) Then do an impairment test for the company as a whole
(all CGUs together)
4) If an impairment loss arises, allocate this first to goodwill
(i.e. write off goodwill first)
5) Any remaining impairment loss is allocated to the CGUs on
a pro rata basis
 CGUs and goodwill…
▪ Limitation at cost model:

After the CGU’s impairment loss has been allocated to

individual assets, no individual asset may be carried at
an amount below the highest of: NB!

1) Individual asset’s FV less costs to sell

2) Individual asset’s value in use (if available; mostly unknown
as already discussed)
3) Nil

• Where goodwill has been allocated to a CGU, the CGU

must be tested for impairment every year (not only when
there is an indicator)
 EXAMPLE 2
• Basil Ltd manufactures and sells herbs and spices. The assets used
in the business qualify as a CGU.
• Carrying amounts of assets 31 Dec 20.14
• Equipment N$30 000
• Machinery N$28 000
• Furniture N$42 000
• Goodwill N$25 000
• Recoverable Amount
• Fair Value less Costs of disposal 70 000
• N$38 000 of FVLCD applies to furniture (there is an active
market)
• Value in use N$82 000
• REQUIRED
• What is the impairment loss?
• Allocate the impairment loss to assets
 SOLUTION

1. Impairment Loss (Carrying amount less recoverable amount)

• CA = $125 000
• RA = Higher of FV- CD OR VIU = Therefore $82 000
• Impairment Loss = $43 000
• How do you allocate LOSS?
1. First to Goodwill
2. Then Pro-rata to rest of assets
CA after Imp
Old CA Calculation of loss Impairment Loss Loss FV-CD
Goodwill $25 000 $25 000 -
$18000*30/100=$5
Equipment $30 000 400
$18000*28/100=$5
Machinery $ 28 000 040
$18000*42/100=$7
Furniture $ 42 000 560 ????
$125 000 -$ 43 000
 SOLUTION

2. Allocation
• Specific Rule: After the CGU’s impairment loss has been
allocated to individual assets, NO individual asset may be
carried at an amount below the highest of:
• Individual asset’s FV less costs to sell
• Individual asset’s value in use (if available; mostly unknown
as already discussed)
• Nil
• As the impairment loss of furniture results in CA of $34 440
(which is less than higher of $38 000 and nil, the amount of $3
560 ($38 000 – $34 440) must be re-allocated to other two
assets pro-rata

CA after Imp
Old CA Calc's Impairment Loss Loss FV-CD

Equipment $30 000(30/58x3560) -$ 1 841 $22 759Not avail

Machinery $ 28 000(28/58x3560) -$1 719 $21 241Not avail

$ 58 000 -$ 3 560 $44 000

 Corporate assets
• Examples of corporate assets = headquarters building,
electronic data processing (EDP) equipment, research
centre
1. If corporate assets can be allocated to CGUs, compare
each CGU’s carrying amount with its recoverable
amount
→ allocate the impairment losses between
corporate assets & other assets in the CGU pro rata
according to their carrying amounts
 Corporate assets…
2. If corporate assets cannot be allocated to CGUs, first
do an impairment test for individual CGUs & allocate
the impairment loss to individual assets pro rata in
relation to carrying amounts
→ then do impairment test for the larger group of
CGUs to which corporate asset can in fact be
allocated
 CGUs and goodwill…
• If non-controlling interest (NCI) is involved:
– As covered in Group Statements → one of two methods to
measure non-controlling interest (NCI), namely:
• (1) at their proportionate share of the subsidiary’s net assets
(“PROPORTIONAL METHOD”); or
• (2) at fair value (“FULL GOODWILL METHOD”)
• Depending on which method is used, we must do the following
with goodwill to calculate the impairment loss:
1) Proportional method: because goodwill relates to the parent only, we
must add the NCI portion of goodwill to the carrying amount of goodwill to
get a complete picture of the CA of the CGU (called “grossing up the
goodwill”)
2) Fair value method: because goodwill relates to all shareholders (parent +
NCI), we do not gross up goodwill compared to method 1 above
NB!
 Goodwill and NCI: example

✓DA Example 18.18 – proportional method

– Given information:
• The fair value of the total identifiable net assets of the
subsidiary is $1 500.
• The parent acquires an 80% interest in these items for
$1 600.
• The RA of the total subsidiary is $1 450
• NCI is measured in accordance with the proportional
method

32
 Solution to Example A
Description $
Goodwill calculation:
Consideration transferred 1 600
Less: 80% of net assets (1 500 x 80%, i.e. R300 NCI) (1 200)
Goodwill 400

Impairment loss calculation (consolidated):

Net assets of subsidiary 1 500
Plus: goodwill (400 ÷ 80%) → “GROSSING UP” 500
2 000
Less: Recoverable amount (1 450)
Impairment loss 550

Impairment loss allocated as follows:

Goodwill not recognised (500 – 400) – DO NOTHING 100
Goodwill recognised – WRITE OFF GOODWILL IN FULL 400
Other assets – ALLOCATE PRO RATA TO THESE ASSETS 50
 Goodwill and NCI: example

✓DA Example 18.17 – fair value method

– Given information:
• The fair value of the total identifiable net assets of the
subsidiary is $1 500.
• The parent acquires an 80% interest in these items for
$1 600.
• The RA of the total subsidiary is $1 450
• NCI is measured in accordance with the fair value
method. The fair value of the NCI is $350.

34
 Solution to Example
Description $
Goodwill calculation:
As calculated in example A 400
Plus: Fair value adjustment to NCI (350 – 300) 50
Goodwill (higher due to full goodwill method) 450

Impairment loss calculation (consolidated):

Net assets of subsidiary 1 500
Plus: goodwill → DO NOT “GROSS UP” 450
1 950
Less: Recoverable amount (1 450)
Impairment loss 500

Impairment loss allocated as follows:

Goodwill not recognised N/A
Goodwill recognised – WRITE OFF GOODWILL IN FULL 450
Other assets – ALLOCATE PRO RATA TO THESE ASSETS 5035
 Reversal of impairment
losses i.r.o. CGUs
par 122-125
• Can NEVER reverse against goodwill, only
other assets
• Reversal may not cause the carrying amount
of the CGU to be higher than the historical
CA!
✓DA Example 18.19 (self study)
 Disclosure
par 126 -137

• Impairment loss expense (profit/loss)

• Impairment loss debited to revaluation
reserve (via OCI)
• Reversal of impairment (profit/loss)
• Reversal of impairment credited to
revaluation reserve (via OCI)
• Reasons for reversal of impairments
• Details of FV less cost to sell and value in
use
 Conclusion
• Work through DA’s comprehensive example
and questions with solutions in Accounting
Standards
– You are welcome to come and ask me if there is
anything you don’t understand!