IFRS 9 Financial Instruments
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for Accounting Professionals
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IAS 36 Impairment of assets
2011
IFRS WORKBOOKS
(1 million downloaded)
Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.
The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills.
Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any additional knowledge is required this is mentioned at the beginning of the section.
Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the European Union.
We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers) who led the projects and all friends at Bankir.Ru for hosting the books.
TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and edited the first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated
CONTENTS
1. Impairment of Assets - Introduction 3
2.Definitions 5
3. Bank accounting: Impairment 6
4. Identifying an Asset that may be Impaired 9
5. Measuring Recoverable Amount 11
6. Recording and Measuring an Impairment Loss 16
7. Cash-generating Units and Goodwill 18
8. Reversing an Impairment Loss 29
9. Reversing an Impairment Loss for an Individual Asset 30
10. Reversing an Impairment Loss for a Cash-generating Unit 33
11. IAS 36, Impairment – Frequently asked questions (from IFRS News) 34
12. Disclosure 48
13. MULTIPLE CHOICE QUESTIONS 52
14. Answers to Multiple Choice Questions 58
1. Impairment of Assets - Introduction
OVERVIEW
Aim
The aim of this workbook is to assist the individual in understanding Impairment of Assets according to IFRS 36.
Objective
The objective of IAS 36 is to prescribe the procedures to ensure that assets are carried at no more than their recoverable amount and what disclosures must be made.
An asset is described as impaired and the IAS 36 requires the recording of an impairment loss when its carrying amount exceeds the recoverable amount (amount to be recovered through use, or sale).
EXAMPLE-impaired asset
Your machine has a carrying value of $100.000 in your books. It has become obsolete in the market, and you will cease use of this machine.
Having no further use for the machine within the firm, you attempt to resell the machine. Your adviser tells you that the resale value would be only $25.000.
Your machine is overvalued in the books of account, as the $100.000 will not be recovered from either use, nor by resale. The asset is impaired.
Scope
IAS 36 is applied in accounting for the impairment of all assets, other than:
(i) inventories ( IAS 2 Inventories);
(ii) assets arising from construction contracts ( IAS 11 Construction Contracts);
(iii) deferred tax assets ( IAS 12 Income Taxes);
(iv) assets arising from employee benefits ( IAS 19 Employee Benefits);
(v) financial assets that are within the scope of IFRS 9 Financial Instruments)
(vi) investment property that is measured at fair value (IAS 40);
(vii) biological assets related to agricultural activity that are measured at fair value less costs to sell (IAS 41);
(viii) deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights under insurance contracts within the scope of IFRS 4 Insurance Contracts; and
(ix) non-current assets (or disposal groups) classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
IAS 36 applies to financial assets classified as:
i) subsidiaries,
ii) associates,
iii) joint ventures,
IAS 36 applies to assets that are carried at revalued amount (fair value) in accordance with other Standards, such as the revaluation model in IAS 16 Property, Plant and Equipment.
Impairment
Identifying whether a revalued asset may be impaired depends on the basis used to determine fair value:
(1) if the asset’s fair value is its market value, the only difference between the asset’s fair value, and its ‘fair value less costs to sell’, is the disposal cost.
The disposal cost can be:
(i) Insignificant – fair value = market value
(ii) Significant – fair value = market value less disposal cost.
(2) if fair value is not based on market value the fair value may be greater or less than its recoverable amount.
After revaluation, IAS 36 is applied to determine impairment.
2. Definitions
An active market is a market in which all the following conditions exist:
(i) the items traded within the market are homogeneous;
(ii) willing buyers and sellers can normally be found at any time;
and
(iii) prices are available to the public.
The agreement date for a business combination is the date of the agreement and in the case of publicly-listed undertakings, announced to the public.
In the case of a hostile takeover, the earliest date of the agreement is the date when a sufficient number of the acquiree’s owners have accepted the offer, for the acquirer to obtain control of the acquiree.
Carrying amount is the amount at which an asset is recorded, after deducting any accumulated depreciation, and accumulated impairment losses.
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows, which are independent of the cash inflows from other assets.
Corporate assets are assets other than goodwill that contribute to the cash flows of both the cash-generating unit under review, and other cash-generating units. They may be assets belonging to the group’s head office, or a central services unit, such as group research and development.
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.
Depreciable amount is the cost of an asset or valuation, less its residual value.
Depreciation (Amortisation) is the systematic allocation of the depreciable amount of an asset, over its useful life. In this workbook, the term depreciation is used to cover both depreciation and amortisation.
|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. (IFRS |
| |13) |
‘Fair value less costs to sell’ is fair value, less the costs of disposal.
An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
The recoverable amount of an asset, or a cash-generating unit, is the higher of its ‘fair value less costs to sell’, and its ‘value in use’.
Useful life is either:
i) the period of time over which an asset will be used; or
ii) the number of production units produced from the asset.
‘Value in use’ is the present value of the cash flows derived from an asset or cash-generating unit.
3. Bank accounting: Impairment
For most banks, the major concern about impairment relates to the banks’ financial assets. Valuation of financial assets is covered by IFRS 9 rather than IAS 36, but is summarised here:
Impairment and uncollectibility of financial assets
A bank shall assess at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets is impaired.
If any evidence of impairment exists, the bank shall apply IFRS 9 for
-financial assets carried at amortised cost
to determine the amount of any impairment loss.
A financial asset or a group of financial assets is impaired, and impairment losses are incurred, only if there is objective evidence of impairment as a result of an event that occurred after the initial recognition of the asset (a 'loss event') and that
loss event has an impact on the estimated future cash flows of the financial asset,
or group of financial assets, that can be reliably estimated.
Combined effect of several events may have caused the impairment. Losses expected as a result of future events, no matter how likely, are not recognised.
Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events:
i. significant financial difficulty of the issuer or obligor;
ii. a breach of contract, such as a default, or delinquency, in interest or principal payments;
iii. the lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;
iv. it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
v. the disappearance of an active market for that financial asset because of financial difficulties; or
vi. observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:
1. adverse changes in the payment status of borrowers in the group (an increased number of delayed payments or an increased number of credit card borrowers who have reached their credit limit and are paying the minimum monthly amount); or
2. national or local economic conditions that correlate with defaults on the assets in the group (an increase in the unemployment rate in the geographical area of the borrowers, a decrease in property prices secured by mortgages in the relevant area, a decrease in oil prices for loan assets to oil producers, or adverse changes in industry conditions that affect the borrowers in the group).
The disappearance of an active market because an issuer's financial instruments are no longer publicly traded is not evidence of impairment. A downgrade of an issuer's credit rating is not, of itself, evidence of impairment, although it may be evidence of impairment when considered with other available information.
A decline in the fair value of a financial asset below its cost or amortised cost is not necessarily evidence of impairment (for example, a decline in the fair value of an investment in a debt instrument that results from an increase in the risk-free interest rate).
Also, objective evidence of impairment for an investment in an equity instrument includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered. A significant, or prolonged, decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.
The observable data required to estimate the amount of an impairment loss on a financial asset may be limited, or no longer fully relevant to current circumstances. For example, this may be the case when a borrower is in financial difficulties and there are few available historical data relating to similar borrowers.
In such cases, a bank uses its judgement to estimate the amount of any impairment loss. Similarly, a bank uses its judgement to adjust observable data for a group of financial assets to reflect current circumstances. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.
Financial assets carried at amortised cost
If there is an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred,
the amount of the loss is measured as the difference between:
-the asset's carrying amount; and
-the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (the effective interest rate computed at initial recognition).
The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognised in profit or loss.
A bank first assesses whether objective evidence of impairment exists for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant.
If a bank determines that no objective evidence of impairment exists for an individually-assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.
Reversal of impairment losses
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised impairment loss shall be reversed either directly or by adjusting an allowance account.
The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal shall be recognised in profit or loss.
Financial assets carried at cost (for those using IAS 39)
If an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument,
the amount of the impairment loss is measured as the difference between:
- the carrying amount of the financial asset; and
- the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.
No reversal of impairment losses
Such impairment incurred on unquoted equity instrument losses shall not be reversed.
Available-for-sale financial assets (for those using IAS 39)
When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and the asset is impaired, the cumulative loss that had been recognised directly in equity shall be removed from equity and recognised in profit or loss even though the financial asset has not been derecognised.
The amount of the cumulative loss that is removed from equity and recognised in profit or loss shall be the difference between:
- the acquisition cost (net of any principal repayment and amortisation); and
-current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.
Reversal of impairment losses
Impairment losses recognised in profit or loss for an investment in an equity instrument classified as available for sale shall not be reversed through profit or loss.
If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognised in profit or loss.
Impairment for Banks – other assets
Banks involved in acquisitions will have to test any goodwill for impairment at least annually. The measurements applied are those listed in IAS 36, although more details are in the IFRS 3 workbook.
Revalued property, either investment property (see IAS 40 workbook) or used for banking operations (see IAS 16 workbook) will need to be regularly revalued to comply with those standards. If values fall in any period, impairment charges may result. Property held at cost is vulnerable to impairment charges if it has been bought when prices have been high.
Bank equipment that needs to be reviewed for impairment includes cash machines, computer and security systems. Significant changes in technology may cause the bank to replace the systems earlier than planned. This may result in the equipment being worth less than its carrying value in the bank’s books, requiring an impairment charge.
Intangible assets owned by the bank may have been acquired through acquisition (for example, client lists or the name of the bank acquired) or purchased as a franchise, such as the use of Visa or Mastercard as the bank’s credit cards. These assets will be amortised over the expected life of benefits generated. If the benefits are less than planned, the intangible asset may be impaired.
Impairment for Banks – financial statements of clients
In reviewing financial statements of clients, any impairments should be fully understood by the bank, or explained by the client. Impairments may indicate that a client is not depreciating assets correctly. It may also indicate that revaluations have been aggressive.
Where clients’ assets have been provided as collateral to the bank, either specifically or as part of total assets classified as collateral, the bank’s security may be reduced. In the event the value of the security is less than the carrying amount of the loan, the loan may be impaired.
4. Identifying an Asset that may be Impaired
These requirements apply equally to assets and cash-generating units.
At each reporting date, if an indication of impairment exists the recoverable amount of each asset should be estimated.
Even with no indication of impairment the following types of assets should always be tested:
i) Intangible asset with an indefinite useful life
ii) Intangible asset not yet available for use
The impairment test may be performed at any time during an annual period, provided it is performed at the same time every year.
Different intangible assets may be tested for impairment at different times.
i) Newly-acquired intangible assets are tested before the end of the current annual period.
ii) Goodwill, acquired in a business combination, is tested annually.
Assessing Impairment
In assessing whether there is impairment at least the following should be considered:
External sources of information
i) significant decline in market value.
ii) significant changes (technology, market, economy, law).
iii) interest rates, or other factors affecting the discount rate used in calculating an asset’s ‘value in use’.
iv) the carrying amount of the total net assets is more than the market capitalisation.
Internal sources of information
v) evidence of obsolescence or damage of an asset.
vi) significant changes in usage including:
1. the asset becoming idle,
2. plans to discontinue (or restructure) the operation,
3. plans to dispose of an asset early, and
4. reassessing the useful life of an asset, as finite rather than indefinite.
vii) evidence that indicates that the performance of an asset is or will be worse than expected.
viii) Other indications that an asset may be impaired include:
1 cash flows for acquiring or maintaining the asset are significantly higher than those budgeted;
2 net cash flows significantly worse than those budgeted;
3 net cash outflows projected over the assets life.
‘Held for sale’ assets are accounted for under IFRS 5 (see IFRS 5 workbook).
Materiality applies in identifying whether the recoverable amount of an asset needs to be estimated.
If interest rates, or other market rates, have risen during the period, no estimate is required of an asset’s recoverable amount in the following cases:
i) if the discount rate is not materially affected
ii) if the recoverable amount is not materially affected (for example, cash inflows rise and offset the interest rate rise)
.
Possible impairment indicates a need to review and adjust the depreciation method and residual value even if no impairment loss is recorded.
|Recognition of impairment on transition |
| |
|Issue |
| |
|Undertaking C will prepare its first IFRS financial statements for the year ending 31 December 2XX4.The date |
|of transition to IFRS will be 1 January 2XX3 and the opening IFRS balance sheet will be prepared as at that |
|date. |
|C has previously applied US GAAP and has tested its long-lived assets for impairment in accordance with SFAS |
|121. |
| |
|The US standard requires that assets are first tested for impairment by reference to undiscounted cash flows. |
| |
|There were indications that some assets might be impaired at 31 December 2XX2, but C did not record any |
|impairment in its US GAAP financial statements as a result of applying SFAS 121. |
| |
|What adjustments might be required for the opening IFRS balance sheet in respect of impairment of assets? |
| |
|Solution |
| |
|Undertaking C should test the long-lived assets for which there is evidence of impairment at the date of |
|transition, using the guidance in IAS 36. |
| |
|IAS 36 requires that assets are tested for impairment using discounted cash flows. When C applies IAS 36 it |
|might identify an impairment that did not exist under US GAAP. The impairment should be recognised on the |
|opening IFRS balance sheet, with a corresponding adjustment to reduce retained earnings. The disclosures |
|required by IAS 36 should be given in the first IFRS financial statements. |
5. Measuring Recoverable Amount
IAS 36 defines recoverable amount as the higher of an asset’s or cash-generating unit’s ‘fair value less costs to sell’ and its ‘value in use’.
EXAMPLE-value in use
Your machine has a carrying value of $300.000 in your books. Its output is a store card for which you have a contract, which will last 2 months. At the end of the contract, you will cease use of this machine. The machine will then be scrapped.
Before the contract started, you calculated the costs of the product. The work done by the machine cost $10 per unit. The contract is for 45.000 units, so the value in use of the machine is $450.000.
The net resale value of the machine is now $275.000. The recoverable amount is the higher of ‘fair value less costs to sell’ ($275.000) and its ‘value in use’
($450.000), so it is $450.000.
No impairment loss is needed.
It is not always necessary to determine both an asset’s ‘‘fair value less costs to sell’’ and its ‘‘value in use’’. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired.
It may be possible to determine ‘fair value less costs to sell’ even if an asset is not traded in an active market.
If there is no basis for making an estimate of the amount obtainable from a sale the ‘value in use’ may be used as the recoverable amount.
|EXAMPLE-Impairment of an acquired early-stage project |
| |
|Background |
| |
|Town Bank acquired the rights to a new credit card security system for shops. Town Bank capitalised the costs |
|for acquiring the rights as an intangible asset. Soon after acquisition of the rights, the results of the |
|trials show that the system is not secure. |
| |
|Management terminates development of the system. Town Bank’s technicians will use technology directly related |
|to the acquired intangible in developing one of Town Bank’s other systems. |
| |
|How should Town Bank amortise an intangible asset related to an acquired early-stage project when utilising |
|the results for development of a system other than the system for which the project was originally acquired? |
| |
|An intangible asset with a finite useful life shall be amortised on a systematic basis over its useful life. |
|Amortisation shall begin when the asset is available for use in the manner intended by management. |
| |
|An impairment loss shall be recognised on an intangible asset accounted for under the cost method, when the |
|recoverable amount of the intangible asset is less than its carrying amount. |
| |
|The recoverable amount of an asset is the higher of its fair value less cost to sell and its value in use. |
| |
|Solution |
|Town Bank should not start to amortise the intangible asset when it is acquired, as it is not ready for use. |
|The poor results of the trials indicate that the intangible asset may be impaired. |
| |
|Management must perform an impairment test on the intangible asset and may have to write it down to the higher|
|of the system’s fair value less cost to sell or the value in use of the directly related technology. |
|Amortisation of any remaining carrying value of the intangible asset should occur over the estimated |
|development period of Town Bank’s other system, as the intangible is linked to the technology being used in |
|the development of a new system. |
The ‘value in use’ of an asset held for disposal will consist mostly of the net disposal proceeds, as the cash flows from use of the asset, until its disposal, are likely to be negligible.
The recoverable amount is determined for an individual asset if it generates cash inflows independent of those from other assets.
If this is not the case, the recoverable amount is determined for the cash-generating unit to which the asset belongs, unless either:
(i) the asset’s ‘fair value less costs to sell’ is higher than its carrying amount; or
(ii) the asset’s ‘value in use’ is close to its ‘fair value less costs to sell’.
Recoverable Amount - Intangible Asset with Indefinite Useful Life
An intangible asset with an indefinite useful life is tested for impairment annually irrespective of whether there is an indication that it may be impaired.
The last calculation of the recoverable amount (from a previous period) may be used in the current period, provided all of the following criteria are met:
i) there has been no material change in the assets and liabilities making up that unit since the last calculation;
ii) the last calculation showed that the recoverable amount substantially exceeded the carrying amount. and
iii) it is likely the current recoverable amount is not less than the carrying amount.
‘Fair value less costs to sell’
The best evidence of an asset’s ‘fair value less costs to sell’ is a binding sale agreement less disposal costs.
In an active traded market, ‘fair value less costs to sell’ is the asset’s market price, less disposal costs.
Market price is usually the current bid price or, if unavailable, the price of the most recent transaction.
If there is no sale agreement or active market, ‘fair value less costs to sell’ is based on the best information available at the balance sheet date.
Such a disposal of the asset should be between knowledgeable, independent parties, net of disposal costs.
‘Fair value less costs to sell’ should not reflect a forced sale, unless management is compelled to sell immediately.
Examples of costs of disposal are:
❑ legal costs,
❑ stamp duty and similar transaction taxes,
❑ costs of removing the asset, and
❑ incremental costs to bring an asset into sale condition.
Examples of costs not recognised as disposal costs are:
❑ termination benefits (per IAS 19 Employee Benefits)
❑ costs associated with reorganising a business,
‘Value in use’
The ‘value in use’ is a calculation that reflects the expected present value of the future cash flows. It is a based on:
i) an estimate of the expected cash flows from the asset;
ii) risk-free rate of interest
iii) the risk premium
iv) other factors that could effect the cash flows and risk free rate
Estimates of Cash Flows
In measuring ‘value in use’ cash flow estimates should be based on:
i) management’s best estimate of the range of conditions that will exist over the remaining useful life of the asset.
ii) the most recent financial budgets/forecasts (maximum 5 years) excluding any cash flows from restructurings or improving the asset’s performance. Maintenance costs should be included.
iii) extrapolations - of a steadily increasing or declining growth rate
Unless justified, the growth rate must not exceed the long-term average growth rate for the products, industries, country of operation, or market.
Management may use projections based on budgets/forecasts over a period longer than five years if it is confident these projections are reliable.
Composition of Estimates of Cash Flows
Cash flows include:
i) cash inflows from the continuing use of the asset;
ii) cash outflows needed to generate the inflows including funds to prepare the asset for use or service it and
iii) net cash flows, if any, to be received (or paid) for the disposal of the asset.
As cash flows are estimated for the asset in its current condition, ‘value in use’ does not reflect:
i) outflows or related cost savings or benefits from a future restructuring to which management has not yet committed to; or
ii) outflows that will improve the asset’s performance, or the related inflows that are expected to arise from such outflows.
|Reduced selling price of recently acquired asset |
| |
|Issue |
| |
|Bank C bought (and capitalised as a fixed asset) an off-the-shelf computer system which cost £2m. |
| |
|Shortly afterwards the manufacturer dropped its price of the same system to £1.5m. Should C write down the |
|carrying value of the fixed asset? |
| |
|Solution |
| |
|Just because the manufacturer has dropped its prices for similar assets does not mean that C’s fixed asset is |
|impaired, as an asset is impaired under IAS 36, only when the asset’s recoverable amount (that is, the higher |
|of fair value less costs to sell and value in use) is below carrying amount. |
| |
|IAS 36 requires an undertaking to assess at each reporting date whether there is any indication that an asset |
|is impaired. |
| |
|One such indicator is if, during the period, the asset’s market value has declined significantly more than |
|would have been expected as a result of the passage of time or normal use. |
| |
|If, as in this case, there is any indicator of impairment, the undertaking should estimate the recoverable |
|amount of the asset and, if this is less than the asset’s carrying amount, the carrying amount should be |
|reduced to recoverable amount. |
| |
|The recoverable amount will not necessarily be below the carrying amount simply because the manufacturer has |
|dropped the price. |
| |
|This is because the value in use (present value of the future cash flows expected to be derived from using the|
|asset) may be above its carrying amount. |
| |
|However, the impairment test will have to be carried out to determine the recoverable amount and whether the |
|asset needs to be written down. |
IAS 37 Provisions contains guidance clarifying when an undertaking is committed to a restructuring.
Once the undertaking is committed to the restructuring, estimates of inflows and outflows,
i) reflect the likely savings from the restructuring; and
ii) its estimates of outflows for the restructuring are included as detailed in IAS 37
If outflows improve the asset’s performance the resultant inflows can also be included.
When a cash-generating unit consists of assets with different useful lives, the replacement of assets with shorter lives is considered part of the day-to-day servicing of the unit.
Estimates of cash flows do not include:
i) cash flows from financing activities; or
ii) income tax receipts, or payments.
As the discount rate is determined on a pre-tax basis, cash flows are also estimated on a pre-tax basis.
|Discount rate for value-in-use calculations |
| |
|Issue |
|Bank E is performing a value-in-use calculation to ascertain whether the carrying value of an asset is |
|impaired. It has difficulty in obtaining a pre-tax discount rate so considers grossing up the post-tax |
|discount rate by the tax rate to arrive at a pre-tax rate, or using post-tax cash flows and a post-tax rate. |
| |
|Will this give the same answer as using a pre-tax rate? |
| |
|Solution |
|IAS 36 requires a pre-tax discount rate to be applied to pre-tax cash flows to determine value in use. |
|Unfortunately, neither of the short-cuts proposed by E gives the right answer unless there is no deferred tax |
|and no growth in the cash flows. |
| |
|For example, an asset was purchased for £2,400 and is now two years old. |
|It has a carrying value of £1,920 and a tax base of £800. If the post-tax discount rate is 8% and the standard|
|rate of tax is 35%, grossing up the post-tax rate by 35% would give a pre-tax rate of 12.3%, while discounting|
|the post-tax cash flows at 8% gives a lower pre-tax rate. |
| |
|However, adjusting for the deferred tax movements using an iterative calculation shows that the actual pre-tax|
|rate is 14.5%.The use of a discount rate of 12.3% or less would result in a value in use significantly |
|different from that calculated using the more accurate rate of 14.5%. |
| |
|To obtain a pre-tax discount rate, the standard states that E should look for market discount rates for |
|similar assets. However, it is likely that most such rates will be post-tax. Therefore, the company should |
|consider performing an iterative calculation to arrive at the appropriate pre-tax rate. |
For estimates based on similar assets, adjustments may have to be made for a variety of factors such as inflation.
Foreign Currency Cash Flows
Cash flows are estimated in the currency in which they will be generated, and discounted using a rate appropriate for that currency. Translation of the present value is at spot rate on the date of the ‘value in use’ calculation.
Discount Rate
The discount rate is a pre-tax rate that reflects current market assessments of:
i) the risk-free borrowing rate;
ii) the risk premium;
iii) inflation;
iv) alternatively the weighted-average cost of capital may be used or the weighted-average cost of capital of a listed undertaking that has a portfolio of assets similar in terms of service and risks.
6. Recording and Measuring an Impairment Loss
Impairment is presented in the income statement as:
Impairment losses or impairment gains if presenting the income statement by nature of expense, or an expense within the function if presenting the income statement by function.
Impairment gains represent reversals of impairment losses (see below).
Impairment is presented in the balance sheet (SFP) as:
Accumulated impairment:
|Beginning of 2XX9 |Goodwill | |Identifiable | |Total |
| | | |assets | | |
|Historical cost (or valuation) |1,000 | |2,000 | |3,000 |
|Accumulated depreciation |0 | |(167) | |(167) |
|(2XX9) | | | | | |
|Carrying amount |1,000 | |1,833 | |2,833 |
|Accumulated impairment |(1,000) | |(473) | |(1,473) |
|Carrying amount after impairment |0 | |1,360 | |1,360 |
|loss | | | | | |
Accumulated impairment is never a positive number.
IFRS 3 Business Combinations workbook explains how to account for an impairment relating to acquisitions.
|EXAMPLE - Impairment of development costs prior to use |
| |
|Background |
| |
|Tamara Bank has capitalised franchise costs (paid to a foreign bank) as an intangible asset relating to a loan|
|scheme for high-cost loans to clients with poor credit ratings, which it is about to launch. |
| |
|Tamara Bank has just learned that legislation will be introduced to limit interest and bank charges and |
|believes the franchise value is severely diminished and an impairment charge must be recognised. |
| |
|Where should Tamara Bank classify impairment charges on intangible assets before such assets are available for|
|use? |
| |
|In an income statement in which expenses are classified by nature, impairment is shown as a separate line |
|item. By contrast, if expenses are classified by function, impairment is included in the function(s) to which |
|it relates. [IAS1]. |
| |
|Solution |
| |
|Tamara Bank should classify the impairment charge relating to the franchise as a component of business |
|development expense, if presenting the income statement by function. |
| |
|If presenting the income statement by nature of expense, Tamara Bank should classify the charge as an |
|impairment charge. |
In the following examples, I/B refers to Income Statement and Balance Sheet (SFP).
|EXAMPLE - impairment loss |
|Your head office had a carrying value of $20m. It has been revalued at $19m. The $1m shortfall is expensed |
|to the income statement. |
| |I/B |DR |CR |
|Accumulated impairment |B | |$1 |
|Impairment |I |$1 | |
|This records the revaluation of the head office in the first year | | | |
An impairment loss is recorded immediately in the income statement, unless the asset is carried at revalued amount in accordance with another Standard (e.g. in accordance with the revaluation model in IAS 16 Property, Plant and Equipment).
Any impairment loss of a revalued asset is treated as a revaluation reduction, in accordance with any other Standard that may apply.
|EXAMPLE carrying amount revaluation, then shortfall |
|Your head office had a carrying value of $10m. It has been revalued at $12m. The $2m surplus is credited |
|to the revaluation surplus reserve within equity |
| |I/B |DR |CR |
|Property, plant & equipment |B |$2 | |
|Equity - Revaluation Reserve |B | |$2 |
|This records the revaluation of the head office in the first year | | | |
|At the next valuation, it is revalued at $7m. $2m of the shortfall will be charged to the revaluation |
|reserve. The remaining $3m shortfall will be charged to the income statement as an impairment charge. |
| |I/B |DR |CR |
|Equity - Revaluation Reserve |B |$2 | |
|Impairment |I |$3 | |
|Property, plant & equipment |B | |$5 |
|This records the revaluation of the head office at the next valuation in| | | |
|the second year | | | |
An impairment loss on:
i) an asset carried at cost is recorded in the income statement.
ii) a revalued asset is recorded initially against any revaluation as a reduction with any remaining portion charged to expense in the income statement.
When the amount estimated for an impairment loss is greater than the carrying amount of the asset, a liability is recorded only if there is a liability that will need to be settled. (This would give the asset a negative carrying amount.)
After the recognition of an impairment loss, the depreciation charge for the asset is adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value, on a systematic basis over its remaining useful life.
|EXAMPLE-impairment loss-reduction of depreciation |
|Your head office had a cost of $60m. It is being depreciated over 20 years. It has been revalued at $40m. The |
|$20m shortfall has been charged to the Income Statement |
| |I/B |DR |CR |
|Accumulated impairment |B | |$20 |
|Impairment |I |$20 | |
|This records the revaluation of the head office | | | |
Depreciation = 5%, and is now decreased from $3m to $2m per year.
This is charged to the income statement each year.
| |I/B |DR |CR |
|Accumulated depreciation |B | |$2 |
|Depreciation |I |$2 | |
|Annual depreciation charge | | | |
If an impairment loss is recorded, any related deferred tax assets or liabilities are determined in accordance with IAS 12 Income Taxes.
7. Cash-generating Units and Goodwill
Identifying the Cash-generating Unit to Which an Asset
Belongs
If it is not possible to estimate the recoverable amount of the individual asset, the recoverable amount of the asset’s cash-generating unit should be estimated.
The recoverable amount of an individual asset cannot be determined if:
(i) the asset’s ‘value in use’ cannot be estimated to be close to its ‘fair value less costs to sell’; and
(ii) the asset does not generate cash inflows that are independent of those from other assets.
In such cases, ‘value in use’ and, therefore, recoverable amount, can be determined only for the asset’s cash-generating unit.
Identification of an asset’s cash-generating unit involves judgement.
If the recoverable amount cannot be determined for an individual asset the lowest aggregation of assets that generate independent cash inflows should be identified.
Cash inflows are inflows received from parties external to the undertaking.
EXAMPLE- cash-generating unit 1
A bank owns a clearing house to support its credit card activities. The clearing house could not be sold as it is integrated within the head office and it does not generate inflows that are independent of the cash inflows from the other assets of the bank. There is no market in which to sell the operation as competitors have their own clearing houses.
It is not possible to estimate the recoverable amount of the clearing house, as its ‘value in use’ cannot be determined, and is probably different from scrap value. Therefore, the bank estimates the recoverable amount of the cash-generating unit to which the clearing house belongs: the credit card activities as a whole.
EXAMPLE- cash-generating unit 2
A bank provides services to a town in each of five branches, including one housed in the town’s largest company. Assets are separately devoted to each branch and the cash flows from each branch can be identified separately.
The branch in the largest company operates at a loss. The bank does not have the option to close the branch as the company is a major client of its head office. The lowest level of identifiable cash inflows that are largely independent of the cash inflows from other assets are the cash inflows generated by the five branches together. The cash-generating unit for each branch is the group of the five town branches as a whole.
If the bank had the option to close any individual branch, the cash generating unit is an individual branch.
|Single market impairment accounting |
| |
|Background |
| |
|By way of a collaboration agreement, Global Bank acquired the rights to market a student loan scheme in the |
|Eastern Hemisphere. The acquired rights apply broadly to the entire territory. For unknown reasons, students |
|in Eastland prove far more likely to default on loans, causing Global Bank to withdraw the product from that |
|country. |
| |
|As loans in Eastland were not expected to be significant, loss of the territory, taken in isolation, does not |
|cause the overall net present value from loans to be less than its carrying value in the books of Global Bank.|
| |
| |
|How should Global Bank account for the rescission of a products’s marketing approval in a specific territory? |
| |
|An undertaking shall assess at each reporting date whether there is any indication that an asset may be |
|impaired. If any such indication exists, the undertaking shall estimate the recoverable amount of the asset |
|[IAS 36]. |
| |
|In assessing whether there is any indication that an asset may be impaired, an undertaking shall consider |
|significant changes with an adverse effect on the undertaking that have taken place during the period, or are |
|expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is |
|expected to be used. |
| |
|Solution |
| |
|The cash-generating unit for the acquired marketing right should be viewed as sales from the entire Eastern |
|Hemisphere. Accordingly, withdrawal from one territory does not cause the asset’s value in use to be less than|
|its carrying value and no impairment loss should be recognised. |
| |
|If Global Bank has capitalised any additional development costs (such as legal and registration fees |
|specifically for achieving approval in Eastland), these capitalised development costs must be written off with|
|the withdrawal of the product from the territory. |
| |
|However, Global Bank’s management should carefully consider whether the problems in one jurisdiction are |
|indicative of potential problems in other territories. If the issue cannot be isolated, a broader impairment |
|analysis should be performed, including the potential for more wide-ranging loan losses. |
If an active market exists for the output produced by an asset, that asset is identified as a cash-generating unit, even if the output is used internally.
If the cash inflows are affected by internal transfer pricing, management’s best estimates of external prices will be used for inflows and outflows.
This is because the asset could generate cash inflows independent of other assets.
Transfer prices are adjusted if they do not reflect the prices of external transactions.
Cash-generating units are identified consistently from period to period, for the same asset or types of assets, unless a change is justified.
Disclosures must be made for:
i) changes in cash-generating assets from the previous period;
ii) changes in types of assets aggregated for the asset’s cash-generating unit; and
iii) if an impairment loss is recorded (or reversed) for the cash-generating unit.
Recoverable Amount and Carrying Amount of a
Cash-generating Unit
The recoverable amount of a cash-generating unit is the higher of the unit’s ‘fair value less costs to sell’ and its ‘value in use’.
The carrying amount of a cash-generating unit:
i) includes the carrying amount of only those assets that will generate the cash inflows used in determining the unit’s ‘value in use’; and
ii) does not include any recorded liability, unless the recoverable amount of the unit cannot be determined without consideration of this liability.
When assets are grouped for recoverability assessments, it is important to include all assets that generate inflows.
Sometimes, assets contribute to the cash flows of a unit, but cannot be allocated to the unit on a reasonable and consistent basis.
Head office assets are examples of these types of assets.
It may be necessary to consider some recorded liabilities to determine the recoverable amount of a unit.
This may occur when a buyer assumes the liability resulting in cash saving to the undertaking. In this case, the ‘fair value less costs to sell’ of the unit is the selling price for the asset and the liability together, less the costs of disposal.
To perform a meaningful comparison between the carrying amount of the unit and its recoverable amount, the carrying amount of the liability is deducted in determining both the unit’s ‘value in use’ and its carrying amount.
For practical reasons, the recoverable amount of a unit is sometimes determined after consideration of assets that are not part of the unit (for example, receivables or other financial assets), or liabilities that have been recorded (for example, payables, pensions and other provisions).
In such cases, the carrying amount of the unit is increased by the carrying amount of those assets, and reduced by the carrying amount of those liabilities.
EXAMPLE-testing for impairment (amounts expressed in $000)
A bank operates a head office in a historical building. The bank must restore the site on completion of its banking operations.
The carrying amount of the provision for restoration costs is $500, which is equal to the present value of the restoration costs.
The bank is testing the building for impairment. The cash-generating unit for the bank is the head office as a whole. The bank has received various offers to buy the head office at a price of $800. This price reflects the fact that the buyer will assume the obligation to restore the building.
The ‘value in use’ of the head office is approximately $1,200, excluding restoration costs.
The carrying amount of the head office is $1,000.
The cash-generating unit’s ‘fair value less costs to sell’ is $800. This amount considers restoration costs that have already been provided for.
The ‘value in use’ for the cash-generating unit is determined after consideration of the restoration costs and is estimated to be $700 ($1,200 less $500).
The carrying amount of the cash-generating unit is $500, which is the carrying amount of the head office ($1,000) less the carrying amount of the provision for restoration costs ($500).
Therefore, the recoverable amount of the cash-generating unit exceeds its carrying amount so there is no impairment.
Goodwill
Goodwill is the premium paid to buy an asset or business. It is calculated as:
Purchase price minus the fair value of net assets acquired.
For impairment testing, goodwill acquired in a business combination will be allocated to each of the acquirer’s cash-generating units that benefit from the acquisition.
Each unit will:
i) represent the lowest level at which goodwill is identified for internal management
ii) not be larger than a segment , per IFRS 8 Operating Segments.
Goodwill acquired in a business combination represents a premium in anticipation of benefits from assets that are not capable of being individually identified.
Goodwill sometimes cannot be allocated to individual units, but only to groups of units.
Impairment tests are made at a level that reflects the way an undertaking manages its operations.
The initial allocation of goodwill acquired in a business combination must be completed before:
i) the end of the annual period in which the business combination is effected, or
ii) the end of the first annual period after the acquisition date.
If the initial accounting can be determined only by the end of the period in which the combination is effected (ie provisionally) the acquirer:
i) accounts for the combination, using those provisional values; and
ii) records any adjustments to those provisional values with actual values, within twelve months of the acquisition date.
It may not be possible to complete the initial allocation of the goodwill before the end of the annual period in which the combination is effected.
Disposal of an operation within a unit requires allocated goodwill associated with the operation disposed of must be:
i) included in the carrying amount of the operation, when determining the gain or loss on disposal; and
ii) measured on the basis of the relative values of the operation disposed of, and the part of the unit retained, unless the undertaking can show a better method.
If an undertaking reorganises its reporting structure and changes the composition of the units to which goodwill has been allocated, the goodwill is reallocated to the units affected using a relative value method.
EXAMPLE-sale of a unit – goodwill apportionment (amounts expressed in $millions)
A bank sells for $100 an operation, which was part of a cash-generating unit to which goodwill has been allocated. The goodwill allocated to the unit cannot be identified at a level lower than that unit, except arbitrarily.
The recoverable amount of the part of the cash-generating unit retained is $300. As the goodwill allocated to the unit cannot be identified, the goodwill associated with the operation disposed of is measured on the basis of the relative values of the operation disposed of and the part of the unit retained.
Therefore, 25% (100/400) of the goodwill allocated to the cash-generating unit is included in the carrying amount of the operation that is sold.
Testing Cash-generating Units with Goodwill for Impairment
Whenever there is an indication that the unit may be impaired, it should be tested for impairment.
|EXAMPLE-Impairment of assets - acquisitions |
| |
|Issue |
|Bank C acquired 100% of bank D in two stages. It acquired 30% in April 2002 and the remaining 70% in May 2004.|
|Bank D was therefore an associate of C from April 2002 to May 2004, when it became a subsidiary. |
| |
|C’s management undertook a purchase price allocation in April 2002 and identified the fair values of D’s |
|assets and liabilities at that date. Management used these to calculate the goodwill arising at the date of D |
|becoming an associate of C. |
| |
|C’s management undertook a similar purchase price allocation in May 2004 when C obtained control over D. The |
|assets of one of D’s cash generating units (CGUs) had a fair value of £2.1m at April 2002 and £2.9m at May |
|2004. |
| |
|C’s management treated the change in fair value of the CGU.s assets between April 2002 and May 2004 as a |
|revaluation in respect of the 30% interest it held prior to May 2004, as required by IFRS 3, Business |
|Combinations. |
| |
|C accounts for all tangible and intangible assets at cost less accumulated depreciation and impairment. |
| |
|Undertaking C is preparing its interim results for the period to June 2005 and has identified that the assets |
|of the CGU have become impaired as a result of events occurring during the second quarter of 2005. |
| |
|The recoverable amount of the CGU is £2.4m as at 30 June 2005. |
| |
|Should any part of the impairment be recognised against the revaluation reserve created during the step |
|acquisition of D? |
| |
|Solution |
| |
|No. IAS 36 requires an impairment loss to be recognised in the income statement unless the asset is carried at|
|a revalued amount in accordance with another standard, for example IAS 16, Property, Plant and Equipment. |
| |
|The assets of the CGU were acquired by the group in May 2004 when C obtained control over D. The cost of the |
|CGU.s assets was determined as £2.9m at May 2004 in accordance with IFRS 3. |
| |
|The subsequent measurement of these assets in the consolidated financial statements is at cost less |
|accumulated depreciation and impairment. The assets are not carried at revalued amount in accordance with IAS |
|16 or IAS 38, Intangible Assets. |
| |
|The recognition of a revaluation reserve of £240,000 (30% x (£2.9m - £2.1m)) in respect of the CGU as part of |
|the step acquisition accounting in May 2004 does not change the basis on which the CGU assets are carried in |
|the financial statements. |
| |
|The whole of the impairment charge of £0.5m (£2.9m - £2.4m) should be recognised in the income statement. |
If a unit includes an intangible asset that has an indefinite useful life or is not yet available for use, the unit must to be tested for impairment annually.
If the recoverable amount of the unit exceeds the carrying amount of the unit it is regarded as not impaired.
If the carrying amount of the unit exceeds the recoverable amount of the unit, the unit is impaired.
|EXAMPLE-impairment loss of goodwill |
|A unit has a carrying value of $10 m, of which goodwill = $2 m. |
|The unit is revalued at $8 m. The goodwill is totally impaired, and is written off. |
| |I/B |DR |CR |
|Goodwill |B | |$2 |
|Impairment-goodwill |I |$2 | |
|This records the impairment of goodwill | | | |
EXAMPLE- goodwill reallocation in a reorganisation
Goodwill of $4m had previously been allocated to cash-generating unit A. The goodwill allocated to A cannot be identified at a level lower than A, except arbitrarily.
A is to be divided and integrated into three other cash-generating units, B, C and M.
B is to have 50% of A’s net assets, C will have 40% of A’s net assets, and M will have 10%
Goodwill to reallocated to units B, C and M to reflect the share of net assets transferred:
B will have $2m (50% of $4m)
C will have $1,6m (40%)
M will have $0,4m (10%).
The excess of impairment over goodwill is allocated to other assets in the unit, pro rata to the carrying amount of each asset in the unit.
|EXAMPLE-impairment loss of goodwill less than the total impairment |
|Your unit has a carrying value of $10 m, of which goodwill = $2 m. |
|The unit is revalued at $7 m. The goodwill is totally impaired, and is written off. The $1 m excess |
|((10-2)-7=1) is allocated to the other assets of the unit, pro rata based on the carrying amount of each |
|asset in the unit. |
| |I/B |DR |CR |
|Goodwill |B | |$2 |
|Impairment-goodwill |I |$2 | |
|Impairment -property, plant and equipment |I |$1 | |
|Accumulated impairment - property, plant and equipment | | |$1 |
|This records the impairment of goodwill and other assets | | | |
Timing of Impairment Tests
The annual goodwill impairment test for a unit may be performed at any time during the period, provided the test is performed at the same time every year.
Different cash-generating units may be tested for impairment at different times.
If some of the goodwill allocated to a unit was acquired in a business combination during the current annual period, that unit is tested for impairment before the end of the current annual period.
The lowest level of cash-generating unit is tested before higher levels:
If the assets and goodwill are tested for impairment at the same time, the assets are tested before the goodwill.
Similarly, for cash-generating units constituting a group of units, test the individual units for impairment before the group.
The most-recent calculation may be used in the impairment test of a unit provided all of the following criteria are met:
i) the assets and liabilities making up the unit have not changed significantly since the calculation;
ii) the recoverable amount exceeds the carrying amount of the unit by a substantial margin; and
iii) the likelihood that a current recoverable amount determination would be less than the current carrying amount of the unit is remote.
EXAMPLE- most-recent calculation used in the impairment test
In 2XX5, you tested your unit for impairment. In 2XX6, you use the 2XX5 calculation, as:
(i) there has been no major change in the net assets;
(ii) the recoverable amount was $20 million, and the carrying value was $16 million;
(iii) current recoverable amount is almost certainly more than the current carrying amount of the unit
Corporate Assets
Corporate assets include group or divisional assets, such as the headquarters building, or a division of the undertaking, IT equipment, or a research centre.
The structure of an undertaking determines whether an asset meets IAS 36’s definition of corporate assets.
Corporate assets do not generate cash inflows independently of other assets so no value in use calculation can be made.
Their recoverable amount cannot be determined until disposal of an individual corporate asset.
If there is an indication that a corporate asset may be impaired, the recoverable amount is determined for the unit to which the corporate asset belongs and is this is compared with the carrying amount of this unit.
In testing a unit for impairment all the corporate assets that relate to the unit under review must be considered.
EXAMPLE- Corporate assets included in review
Your cash-generating unit has net assets of $450m, excluding net current assets. Your head office has a central research unit, of which $20m of assets relates to your unit. When testing for impairment, this $20m must be added to the $450m and compared with the recoverable amount.
If a part of the carrying amount of a corporate asset:
1. can be allocated to that unit:
compare the carrying amount of the unit, inclusive of the part of the corporate asset allocated, with its recoverable amount.
2. cannot be allocated
i) compare the carrying amount of the unit, excluding the corporate asset, with its recoverable amount;
ii) identify the smallest group of units that includes the unit under review, and to which a part of the corporate asset can be allocated; and
iii) compare the carrying amount of that group of units, including the part of the corporate asset allocated to that group of units, with the recoverable amount of the group of units.
Impairment Loss for a Cash-generating Unit
An impairment loss is recorded for a unit (the smallest group of units to which goodwill, or a corporate asset has been allocated) only if the recoverable amount of the unit is less than the carrying amount.
|EXAMPLE- Impairment testing and useful life |
| |
|Background |
| |
|Tiny Bank has a major operation that supports its store card (credit cards branded in the name of each store).|
|The operation has no alternative use. National Savings Bank launches a new store card with better features. |
| |
|Tiny Bank cannot afford to incorporate these enhanced features and expects revenues from its store cards to |
|drop quickly and significantly. |
| |
|Although positive margins are forecast to continue, management identifies this as an indicator of impairment. |
|Management may exit the market for store cards earlier than previously contemplated. (Tiny Bank had been |
|planning to build up the business and then to sell it.) |
| |
|How should Tiny Bank assess the impairment and useful lives of long-lived assets where impairment indicators |
|have been identified? |
| |
|An undertaking shall assess at each reporting date whether there is any indication that an asset (or assets) |
|may be impaired. If so, the undertaking shall estimate the recoverable amount of the asset. |
| |
|The recoverable amount is defined as the higher of an asset’s fair value less costs to sell and its value in |
|use. If either of these amounts exceeds the asset’s carrying amount, no impairment is indicated and the other |
|amount does not have to be calculated. |
| |
|If there is an indication that an asset may be impaired, this may indicate that the remaining useful life or |
|residual value needs to be reviewed and potentially adjusted, even if no impairment loss is recognised for the|
|assets. |
| |
|Solution |
| |
|Tiny Bank should evaluate the carrying value of the store card’s cash-generating unit (including the assets |
|being used in its operating unit) for impairment relative to its value in use resulting from revenue of the |
|store card. |
| |
|Given the margin achieved on the remaining revenue, the value in use may exceed the assets’ carrying value and|
|Tiny Bank may determine that no impairment is required. However, Tiny Bank should reduce the remaining useful |
|life to the revised period over which revenues are expected. |
It is allocated firstly to goodwill then, to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.
|EXAMPLE-allocating loss to goodwill, then to other assets pro-rata |
|Your unit’s assets are: |
|Goodwill $ 100m |
|Tangible assets $ 600m |
|Intangible assets $ 300m |
|Total $ 1.000m |
| |
|The recoverable amount is only $750m. The impairment loss will be: |
|Goodwill $ 100m |
|Tangible assets $ 100m |
|Intangible assets $ 50m |
|Total $ 250m |
| |I/B |DR |CR |
|Goodwill |B | |$0,1 |
|Impairment-goodwill |I |$0,1 | |
|This records the impairment of goodwill. | | | |
|Impairment -property, plant and equipment |I |$0,1 | |
|Accumulated impairment - property, plant and equipment |B | |$0,1 |
|This records the impairment of tangible assets | | | |
|Accumulated impairment - intangible assets |B | |$0,05 |
|Impairment - intangible assets |I |$0,05 | |
|This records the impairment of intangible assets | | | |
|Note: In this case, goodwill should be subject to the impairment loss | | | |
|first. However, the other intangible assets should be reviewed to ensure | | | |
|that their new carrying value ($250m) is realistic. If not, the impairment | | | |
|charge should be increased to intangibles and decreased to property, plant | | | |
|and equipment. | | | |
The carrying amount of an asset must not be reduced below the highest of:
i) fair value less costs to sell’ (if determinable);
ii) ‘value in use’ (if determinable); and
iii) zero.
If it is not practicable to estimate the recoverable amount of each individual asset of a unit, IAS 36 requires an arbitrary allocation of an impairment loss between the assets of that unit, other than goodwill.
Individual Assets
If the recoverable amount of an individual asset cannot be determined:
i) an impairment loss is recorded if its carrying amount is greater than the higher of:
‘fair value less costs to sell’, and its
recoverable amount after allocation.
ii) no impairment loss is recorded for the asset if the unit is not impaired. This applies even if the asset’s ‘fair value less costs to sell’ is less than its carrying amount.
|EXAMPLE-impairment test – cash-counting machine |
|A cash-counting machine has suffered physical damage but is still working, although not as well as before |
|it was damaged. The machine’s ‘fair value less costs to sell’ is less than its carrying amount. |
| |
|The machine does not generate independent cash inflows. The smallest identifiable group of assets that |
|includes the machine and generates cash inflows, is the branch, to which the machine belongs. The |
|recoverable amount of the branch shows that the branch taken as a whole is not impaired. |
| |
|Assumption 1: budgets/forecasts approved by management reflect no commitment of management to replace the |
|machine. |
| |
|The recoverable amount of the machine alone cannot be estimated, as the machine’s ‘value in use’: may |
|differ from its ‘fair value less costs to sell’; and can be determined only for the cash-generating unit |
|to which the machine belongs (the branch). |
|The branch is not impaired. Therefore, no impairment loss is recorded for the machine. |
| |
|Nevertheless, the undertaking may need to reassess the depreciation period or method for the machine. |
| |
|Assumption 2: budgets/forecasts approved by management reflect a commitment of management to replace the |
|machine, and sell it in the near future. Cash flows from continuing use of the machine, until its |
|disposal, are negligible. |
| |
|The machine’s ‘value in use’ is close to its ‘fair value less costs to sell’. The recoverable amount of |
|the machine can be determined, and no consideration is given to the unit to which the machine belongs (the|
|branch). |
| |
|As the machine’s ‘fair value less costs to sell’ is less than its carrying amount, an impairment loss is |
|recorded for the machine. |
A liability is recorded for any remaining impairment loss for a unit only if that liability will need to be settled.
8. Reversing an Impairment Loss
An impairment loss recorded in prior periods for assets other than goodwill may no longer exist, or may have reduced.
As a minimum the following indications should be considered:
External sources of information
i) if the asset’s market value has increased significantly during the period.
ii) if significant technological, market, economic or legal changes have or will take place.
iii) if interest rates, or other market rates of affecting asset’s recoverable amount materially have altered.
Internal sources of information
iv) if significant changes in use have, or will take place.
Changes include costs of improving the asset’s performance or restructuring the operation to which the asset belongs.
v) if evidence is available that indicates that the performance of the asset is, or will be, better than expected.
An impairment loss, recorded in prior periods, is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recorded.
To reverse an impairment loss, increase the carrying amount of the asset to its recoverable amount.
Examples of changes in estimates include:
i) a change in the basis for recoverable amount (e.g. whether recoverable amount is based on ‘fair value less costs to sell’ or ‘value in use’);
ii) if recoverable amount was based on ‘value in use’, a change in the amount, or timing of cash flows, or in the discount rate
iii) if recoverable amount was based on ‘fair value less costs to sell’, a change in estimate of the components of ‘fair value less costs to sell’.
|EXAMPLE- Reversals of impairment losses (cost model) |
| |
|Background |
| |
|Gemini Bank markets a combined creditcard, overdraft and mortgage product for which franchise costs (paid to a|
|foreign bank) have been capitalised. A competing product was launched on the market with a much lower price. |
| |
|Gemini Bank recorded an impairment of the capitalised intangible asset due to a reduction in the amounts it |
|estimated that it could recover as a result of this rival product. |
| |
|Subsequently, the competing product was removed from the market because of legal challenges. The market share |
|and forecast cash flows generated by Gemini Bank’s product significantly increased. |
| |
|How should Gemini Bank account for reversals of impairment losses for intangible assets accounted for under |
|the cost model? |
| |
|An impairment loss recognised in prior periods for an asset accounted for under the cost model is reversed if |
|there has been a change in the estimates used to determine the asset’s recoverable amount since the last |
|impairment loss was recognised. |
| |
|The carrying amount of the asset is increased to its recoverable amount, but shall not exceed its carrying |
|amount adjusted for amortisation or depreciation had no impairment loss been recognised for the asset in prior|
|years. |
| |
|That increase is a reversal of an impairment loss. A reversal of an impairment loss reflects an increase in |
|the estimated service potential of an asset, either from use or from sale, since the date when the bank last |
|recognised an impairment loss for that asset. |
|An undertaking must identify the change in estimate that causes the increase in estimated service potential. |
| |
|Solution |
| |
|The value in use calculation resulting in the impairment loss included an estimate of market share. An |
|identifiable change in estimate exists and the previously recorded impairment should be reversed. |
| |
|Gemini Bank should recalculate the value in use of the franchise fee. The revised carrying value of the |
|intangible asset cannot exceed the amount, net of amortisation, that would have been recognised if no |
|impairment charge had been recognised. |
| |
|Any changes in the carrying amount will result in an amendment to the charge for amortisation in future |
|periods. |
An asset’s ‘value in use’ may become greater than the asset’s carrying amount simply because the present value of cash inflows increases, as they become closer but the service potential of the asset has not increased.
An impairment loss is not reversed just because of the passage of time (sometimes called the ‘unwinding’ of the discount), even if the recoverable amount of the asset becomes higher than its carrying amount.
9. Reversing an Impairment Loss for an Individual Asset
On reversal of an impairment loss, the increased carrying amount must not exceed that which would have been determined had there been no previous impairment loss.
|EXAMPLE - Disposal of branches - reversal of past impairments |
| |
|Issue |
|Bank A owns and operates a group of bank branches. It classifies each branch as a separate cash generating |
|unit (CGU) for impairment testing purposes. |
| |
|Undertaking A has identified three branches within its branch system that it has decided to sell. The three |
|branches will be sold together as one disposal group. |
| |
|Two of the branches have been impaired in previous periods and have been written down to their recoverable |
|amount of 70 each. |
| |
|The recoverable amount of the third branch exceeds its carrying amount. Information regarding the three |
|branches is shown in Table 1. |
| |
|Table 1 |
|Branch / CGU |
|CGU 1 |
|CGU 2 |
|CGU 3 |
|Total |
| |
|Depreciated cost |
|100 |
|100 |
|100 |
|300 |
| |
|Recoverable amount |
|70 |
|70 |
|150 |
|290 |
| |
|Carrying value |
|70 |
|70 |
|100 |
|240 |
| |
| |
|The criteria in IFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations , have been met for the |
|disposal group to be classified as held for sale. |
| |
|Bank A is therefore considering whether the carrying amount of the disposal group (240) should be increased to|
|reflect the total recoverable amount of the disposal group (290)? |
| |
|Solution |
|In order to be classified as held for sale, Bank A should not increase the |
|carrying value of the disposal group above 240 at the date of meeting the IFRS 5 criteria. |
| |
|IFRS 5 requires that the carrying amount of all assets in the disposal group is measured in accordance with |
|applicable IFRSs immediately before classification as held for sale. |
| |
|This will be IAS 16, Property, Plant and Equipment, and IAS 36, Impairment of Assets. |
| |
|At this stage the impairment testing will still be on a normal IAS 36 basis, that is each CGU will be tested |
|separately. |
| |
|Assuming that there is no change in the recoverable amount of each separate CGU, the carrying amount of the |
|CGUs will be unchanged at 70, 70 and 100 respectively. |
| |
|IFRS 5 requires impairment testing of disposal groups to be performed on a disposal group basis after |
|classification as held for sale (rather than on an individual CGU basis). |
| |
|IFRS 5 also allows any reversal of impairment of the disposal group to include reversal of impairments |
|recorded under IAS 36 prior to classification as held for sale (excluding impairments recognised against |
|goodwill). |
| |
|However, the reversal of impairments permitted by IFRS 5 is only to the extent that the increase in fair value|
|less costs to sell arises after initial classification as held for sale. |
| |
|For example, if the total fair value less costs to sell of the three CGUs above increases from 290 to 320 |
|after classification as held for sale, then there has been an increase in the fair value less costs to sell of|
|the disposal group of 30 during this time. |
| |
|The carrying value of the disposal group will therefore be increased by 30 from 240 to 270. |
| |
|Any reversal is limited to the amount of impairment previously recognised, |
|in this case a total of 60. |
Any increase in the carrying amount above the reversal is a revaluation.
In accounting for such a revaluation, an undertaking applies the Standard applicable to the asset.
A reversal of an impairment loss is recorded immediately in the income statement, unless the asset is carried at revalued amount in accordance with another 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 Standard.
|EXAMPLE impairment, then reversal |
|Your head office had a carrying value of $20m. It has been revalued at $19m. The $1m shortfall is expensed |
|to the income statement. |
| |I/B |DR |CR |
|Accumulated impairment |B | |$1 |
|Impairment loss |I |$1 | |
|This records the impairment of the head office in the first year | | | |
|At the next valuation, it is revalued at $23m. $1m of the surplus will be credited to the income statement. |
|The remaining $3m surplus will be credited directly to the revaluation surplus reserve within equity, |
|without appearing on the income statement |
| |I/B |DR |CR |
|Property, plant & equipment |B |$3 | |
|Accumulated impairment |B |$1 | |
|Impairment gain |I | |$1 |
|Equity - Revaluation Reserve |B | |$3 |
|This records the revaluation of the head office in the second year | | | |
A reversal of an impairment loss on a revalued asset is credited directly to equity under the heading revaluation surplus.
To the extent that an impairment loss on the same revalued asset was previously recorded in the income statement, a reversal of that impairment loss is also recorded in the income statement.
After a reversal of an impairment loss is recorded, the depreciation charge for the asset is adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value, on a systematic basis over its remaining useful life.
|EXAMPLE-revaluation and revision of depreciation |
|Your head office had a carrying cost of $60m. |
|It is being depreciated over 20 years. It has been revalued at $80m. |
|Depreciation = 5%, and is now increased from $3m to $4m per year. |
|The depreciation is charged to the income statement each year. |
| |I/B |DR |CR |
|Accumulated depreciation |B | |$4 |
|Depreciation |I |$4 | |
|Annual depreciation charge | | | |
10. Reversing an Impairment Loss for a Cash-generating Unit
A reversal of an impairment loss for a cash-generating unit is allocated to the assets of the unit, except for goodwill, pro rata according to the carrying amounts of those assets.
These increases in carrying amounts are treated as reversals of impairment losses for individual assets.
In allocating a reversal of an impairment loss for a unit, the carrying amount of an asset must not be increased above the lower of:
(i) its recoverable amount (if determinable); and
(ii) the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recorded, 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.
|EXAMPLE- Reversal of goodwill impairment |
| |
|Issue |
| |
|Management of Bank C decided to restructure C’s business and began to actively seek buyers for a number of C’s|
|subsidiaries. |
| |
|These subsidiaries were appropriately classified as disposal groups held for sale in accordance with IFRS 5, |
|Non-current Assets Held for Sale and Discontinued Operations, in C’s 2XX5 financial statements. |
| |
|One of the subsidiaries classified as held for sale was Bank D. Bank D’s assets and liabilities were |
|remeasured as a disposal group and the carrying amounts reduced by 45,000 to its fair value less costs to |
|sell. |
| |
|This impairment was allocated entirely against the goodwill associated with D. |
| |
|During February 2XX6,C’s management revised its restructuring plan and decided not to dispose of D. IFRS 5 |
|requires that the assets within a disposal group that no longer qualifies to be classified as held for sale |
|should be re-measured to the lower of: |
| |
|i) its carrying amount before being classified as held for sale, |
|adjusted for subsequent depreciation or amortisation; and |
| |
|ii) its recoverable amount at the date of the subsequent decision not to sell. |
| |
|The value in use of D is greater than its fair value less costs to sell. C’s management must therefore |
|recognise a reversal of the remeasurement |
|recognised in 2XX5 under IFRS 5. |
| |
|Should the reversal of the 45,000 write-down be reversed against the goodwill associated with D? |
| |
|Solution |
| |
|D’s management should first review the assessment made in 2XX5 to classify the subsidiary as held for sale. |
|The IFRS 5 criteria that must be met in order to qualify for the held-for-sale classification are strict. |
| |
|D’s management should consider the possibility of an error in their original |
|assessment. If it is concluded that the classification of the subsidiary as held for sale in 2XX5 was an |
|error, the error should be corrected through a restatement of the comparatives in accordance with IAS 8. |
| |
|However, if it is concluded that the classification as held for sale in 2XX5 met the requirements of IFRS 5, |
|and no error was made, then the reversal of the 45,000 should not be made against goodwill. |
| |
|The write-down of 45,000 to fair value less cost to sell was recognised as an impairment loss entirely against|
|goodwill in accordance with IFRS 5. IFRS 5 requires that any subsequent reversal of impairment loss is |
|recognised by following the order of allocation set out in IAS 36 (see Impairment Loss for a Cash Generating |
|Unit above). |
| |
|The original impairment loss was recorded entirely against goodwill so none of the |
|impairment reversal can be recorded. |
An Impairment Loss for Goodwill Cannot be Reversed
An impairment loss recorded for goodwill must not be reversed in a later period.
|EXAMPLE-impairment loss of goodwill will not be reversed |
|Your unit has a carrying value of $10m, of which goodwill = $2m. |
|The unit is revalued at $7m. The goodwill is totally impaired, and is written off. |
| |
|In the next period, the unit is revalued at $15m. The impairment loss, recorded for goodwill, must not be |
|reversed. |
| |I/B |DR |CR |
|Goodwill |B | |$2 |
|Impairment-goodwill |I |$2 | |
|This records the impairment of goodwill. This elimination of goodwill cannot| | | |
|be reversed. | | | |
IAS 38 Intangible Assets prohibits the recognition of internally generated goodwill.
11. IAS 36, Impairment – Frequently asked questions (from IFRS News)
Part 1
Identifying cash generating units (CGU)
Question 1
What are the common factors of independence of cash flows in a CGU?
Answer 1
There are various factors, including how management monitors the undertaking’s operations – for example by product lines, businesses, individual locations, districts or regional areas – and how management makes decisions about continuing or disposing of the undertaking’s assets and operations.
Typical CGUs are:
• individual retail stores;
• an individual factory with a single production line where there is no external market for the product at an intermediate stage; and
• each route service that a transport business provides where the assets deployed to each route as well as the route’s cash flows can be separately identified.
Question 2
Should management consider the legal structure of the operations in identifying a CGU?
Answer 2
Management’s analysis may not reflect the legal structure through which the operations are conducted. Identification of CGUs is driven by the asset and the business and requires judgment.
Question 3
Where some or all output produced by an asset or by a group of assets is used internally, is that asset or group of assets identified as a CGU?
Answer 3
If there is an active external market for such output, that asset or group of assets is identified as a CGU. This is particularly relevant for vertically integrated operations where there is likely to be an active market for the product
.
Allocating corporate assets and goodwill to CGUs
Question 4
What must management do if a corporate asset cannot be allocated on a reasonable and consistent basis to a CGU?
Answer 4
A two-stage test is required:
1. Test the CGU without the corporate asset for impairment and book any charge arising; then
2. Test the smallest grouping of CGUs to which the corporate asset can be allocated on a reasonable and consistent basis, and record any charge arising.
|Example |
|A retailer has a number of regional warehouses that supply all stores in a region. Each store in the region is|
|a CGU. How does management choose a method to allocate a portion of the warehouse assets to each store? |
| |
|Solution |
|Management must identify a non-arbitrary, reasonable and consistent basis to allocate the warehouse costs to |
|each CGU. There are several potential methods of allocation – for example, based on volume or value of |
|deliveries to each |
|store, ratio of size of individual stores to the total floor space in the region, or ratio of workforce at |
|each store to regional workforce. |
| |
|However, management could argue that the regional warehouse costs cannot be allocated consistently. In this |
|case, they must use the two-stage method (see Question 4) and test each warehouse at a regional level by |
|grouping each region’s stores and warehouse together. |
Question 5
In what circumstances can management change the allocation of goodwill to CGUs for impairment testing?
Answer 5
A reallocation of goodwill is only permitted if there is a reorganisation or a restructuring of the business.
Question 6
The standard states that goodwill must be allocated to the lowest level at which the goodwill is monitored for internal management purposes. What does this mean?
Answer 6
The level at which management monitors goodwill for internal management purposes is the lowest level at which it reviews the success of an acquisition, by capturing and monitoring the benefits of the goodwill.
For example, if a subsidiary makes an acquisition, despite the fact that goodwill will only appear on a consolidated balance sheet level, it is the management team
that is held accountable for acquisitions that would monitor goodwill.
The requirement to allocate goodwill should not cause companies to allocate goodwill arbitrarily to CGUs or create a need for new systems for monitoring goodwill.
However, the level of allocation cannot be higher than the primary or secondary segment level, even if management monitors it at a higher level.
Question 7
Does the adoption of IFRS 8, Operating Segments, have any impact on the goodwill reallocation?
Answer 7
The adoption of IFRS 8 is a trigger for reallocation of goodwill where there is a change in the undertaking’s segments. The standard states that the level of allocation cannot be higher than a segment level.
Question 8
A company allocates all goodwill on previous acquisitions to acquired CGUs in line with local GAAP. Does the requirement to allocate goodwill to CGUs that are expected to benefit from the combination mean that the company will have to reallocate goodwill?
Answer 8
A reallocation of goodwill to the CGUs expected to benefit may be appropriate. The transition rules in IFRS 1 that freeze the carrying amount of goodwill do not preclude an undertaking from reallocating the goodwill brought forward.
Decision to dispose of an asset
Question 9
What are the implications for impairment testing when management decides to dispose of an asset?
Answer 9
The decision to dispose of a non-current asset or group of assets means that the carrying amount of the asset(s) is expected to be recovered principally through a sale transaction rather than continuing use. Management decides to dispose of
an asset or a business before it meets the held-for-sale criteria.
The decision to dispose of an asset is an indicator of impairment; an impairment test is therefore required before the requirements of IFRS 5 are applied.
Part 2
Frequency of impairment tests
Question 1
How frequently should an asset be tested for impairment?
Answer 1
The frequency depends on the nature of the assets being tested. The standard requires all assets to be tested when there is an indicator of impairment.
In addition, the following assets need to be tested annually even if no indicator of impairment exists: goodwill, indefinite-lived intangible assets and intangible
assets not yet ready for use.
Question 2
Should an undertaking perform the impairment test at interim balance sheet dates?
Answer 2
At each reporting date, including interim balance sheet dates, an undertaking is required to assess whether there has been any indication that an asset is impaired. If such an indicator exists, the asset must be tested for impairment.
Question 3
How does an undertaking identify impairment indicators?
Answer 3
Impairment indicators can be internal (specific to the undertaking), such as sales below budgeted levels, or external, such as increases in market interest rates.
Management should have an active process for considering factors affecting its business.
Each undertaking typically has systems of management reporting in place that will assist in this process – for example, a commentary on the results of the month from management, which will identify the significant events in the month in question.
|Example |
|A branch of a business in southern France, located close to a chemical factory, was largely destroyed in an |
|explosion. The insurance assessors are examining the damage, and management is confident that the full cost of|
|the rebuild plus compensation for loss of profits will be received. |
| |
|Is the asset impaired, given that it will be replaced? |
| |
|Solution |
|Yes, the asset is impaired, as it has been destroyed. The replacement will be a new asset; the costs of |
|construction are capitalised when it is built. Insurance proceeds for the rebuilding cost are credited to |
|income. |
| |
|The impairment loss is charged in the current period. Any insurance proceeds for the fixed asset and |
|compensation for loss of profit can only be recognised when the recovery from the insurers is virtually |
|certain. |
Question 4
Should management analyse the individual performance of individual assets or cash-generating units (CGUs), even when the company is profitable overall?
Answer 4
Management should consider the economic performance of the individual assets or CGUs to assess whether the asset or CGU is performing in line with expectations.
The fact that an undertaking is profitable as a whole does not mean that an individual asset or CGU is not impaired.
|Example |
|Undertaking A produces equipment and has for some time been the market leader. Its chief competitor, B, has |
|recently developed a new product that is widely acknowledged as being superior to that of A. |
| |
|Undertaking A’s management has not performed an impairment review of its plant on the grounds that annual |
|production and sales are ahead of budget. Should the undertaking perform an impairment test? |
| |
|Solution |
|Undertaking A should review its plant for impairment. The change in the market for its product is an indicator|
|of impairment, as it can have a significant impact on the value of the plant based on the economic benefit to |
|be obtained from its continued use. |
| |
|The fact that sales are ahead of budget is not sufficient to conclude that there is no impairment. Management |
|should assess the impact of this new competing product on demand for its existing product and on expected |
|future cash flows. |
Timing of impairment tests
Question 5
When should an undertaking conduct annual impairment tests on goodwill and other intangible assets with indefinite useful lives?
Answer 5
Annual impairment tests may be performed at any time during the financial year, provided that the testing is performed at the same time in subsequent periods. Different assets may be tested at different times of the year.
Question 6
What are the advantages and disadvantages of performing an impairment test before the year end?
Answer 6
The advantages are:
• the testing could be performed at a time when more resources are available to complete the tests;
• the annual impairment test process could be aligned with the budgeting process, which provides the data for value in use tests; and
• any potential impairments and related disclosures could be assessed before the year-end accounts preparation process.
However, the risk with performing a test before the year end is that the impairment test will need to be re-performed if there is a subsequent trigger event.
Question 7
How soon does goodwill acquired in a business combination need to be tested after an acquisition?
Answer 7
Goodwill should be tested for impairment in the year of acquisition. However, the standard also states that if the initial allocation of goodwill cannot be completed within the year of acquisition, that initial allocation should be completed before the end of the first financial year beginning after the acquisition date.
Goodwill should be tested once the allocation is completed within the imposed time limit. For example, if a December year-end undertaking makes an acquisition in January 2006, the maximum period allowed to complete the allocation of goodwill is December 2007.
|Clarification of Question 7 |
| |
|Question |
|How soon is goodwill acquired in a business combination be tested after an acquisition? |
| |
|Answer |
|Goodwill is tested for impairment in the year of acquisition. However, the standard also states that if the |
|initial allocation of goodwill cannot be completed within the year of acquisition, that initial allocation is |
|completed before the end of the first financial year beginning after the acquisition date. |
| |
|Goodwill is tested once the allocation is completed within the imposed time limit. For example, if a December |
|year-end undertaking makes an acquisition in January 2006, the maximum period allowed to complete the |
|allocation of goodwill is December 2007. |
|Some readers confused the purchase price allocation required by IFRS 3 with the goodwill allocation process |
|required by IAS 36. |
| |
|As a reminder, the sequence of events is as follows: |
| |
|IAS 36.96 requires the goodwill arising on a business combination in the current year to be tested for |
|impairment before the end of the current year. In our example above, the goodwill should ideally be tested by |
|the end of 2006. |
| |
|However, an undertaking cannot allocate goodwill to CGUs until it has completed its purchase accounting and |
|knows what the goodwill number is. This is recognised in IAS 36.85. |
| |
| |
|IFRS 3 allows an undertaking 12 months from the acquisition date to complete the purchase accounting. In our |
|example, the purchase accounting must be completed by January 2007. Now the undertaking knows the goodwill |
|number for allocation. |
| |
|IAS 36 requires the goodwill to be allocated to CGUs at the latest by the end of the period following that in |
|which the acquisition took place. In our example, the goodwill arising on a January 2006 acquisition may have |
|as long as until December 2007 before it has to be allocated and tested for impairment. |
Question 8
New goodwill arises from an acquisition that is allocated to a CGU (or group of CGUs) with pre-existing goodwill.
If this occurs subsequent to the annual goodwill impairment testing date, how does it affect the CGU (or group of CGUs) to which the additional goodwill has been allocated?
Answer 8
Such a CGU (or group of CGUs) is re-tested for impairment before the end of the current year, in addition to the annual goodwill impairment testing.
|Example |
|An acquisition takes place in January 2006; the allocation of goodwill arising from this acquisition was |
|completed in September 2006. |
| |
|The undertaking’s annual goodwill impairment testing is performed in March of each year. When should the |
|undertaking test goodwill for impairment? |
| |
|Solution |
|The CGU (or group of CGUs) with the new goodwill allocated is tested for impairment before the end of the |
|current period, December 2006. |
Part 3
IAS 36 defines recoverable amount as the higher of an asset’s value in use (VIU) and fair value less costs to sell (FVLCTS). Value in use and fair value less costs to sell can be difficult to determine in practice.
This part addresses how impairment is measured, including common assumptions that are used to calculate each measure. It also looks at the determination of carrying amount and recognition of impairment losses.
Measuring recoverable amount
An asset is impaired when its carrying amount will not be recovered from its continuing use or from its sale. The recoverable amount of an asset is compared to the carrying amount to determine if an asset is impaired. An asset’s recoverable amount is the higher of its VIU and its FVLCTS.
Question 1
Is it necessary to calculate both VIU and FVLCTS when performing an impairment review?
Answer 1
It is not always necessary to calculate both measures in an impairment review. For example, there is no need to calculate VIU if FVLCTS can be reliably estimated and is higher than the carrying amounts being reviewed.
Value in use
An asset’s or CGU’s VIU is the present value of the future cash flows expected to be derived from the use of the asset or CGU and from its disposal. The VIU calculation is not a fair value calculation or a proxy for fair value.
VIU is a prescribed form of cash flow model set down in IAS 36 so that impairment testing is comparable.
Question 2
What happens when the VIU was determined based on the most recent financial budgets/forecasts that had not been formally approved by management?
Answer 2
A non-approved business plan does not represent a reliable source of information, as it may be subject to change. Cash flow projections are based on the most recent financial budgets/forecasts approved by management to determine the VIU.
Question 3
Should the most recently approved forecast be used without adjustment when determining VIU?
Answer 3
Adjustments to the forecasts may be necessary when determining the VIU. Forecasts must be based on reasonable and supportable assumptions that represent management’s best estimate of the economic conditions over the asset’s remaining useful life. Greater weight is given to external evidence.
|Example |
|Management has recently approved a stretch forecast that shows production rising from 14,000 units to 20,000 |
|units over five years. Recent years have demonstrated a track record of undershooting stretch forecasts. |
| |
|Analysts covering the sector are assuming that production will only rise marginally over the next few years |
|due to forecast weaknesses in demand, together with oversupply in the market. Should the most recently |
|approved forecast be used without adjustment? |
| |
|Solution |
|The approved forecast appears to be neither reasonable nor supportable. The forecasts will need to be adjusted|
|based on the undertaking’s historic record of meeting projections and external evidence. |
Question 4
The most recently approved forecasts assume that there will be a restructuring programme in the next financial year; however, no announcement has been made about the restructuring, and management has not started to implement such a plan. What adjustments, if any, does management need to make for the purpose of a VIU calculation?
Answer 4
When preparing a VIU calculation, the costs and benefits of the restructuring programme are stripped out of the forecasts. The benefits (and costs) of a restructuring programme can only be taken into account when a provision for the programme is made in the financial statements.
This is only permissible when the undertaking is demonstrably committed to the restructuring – ie, through implementation of the restructuring or a formal announcement to those affected to raise a valid expectation of such plan.
Question 5
How does management assess when cash flow forecasts should terminate in order to assess VIU?
Answer 5
The general approach for a CGU that is a business with no predetermined or determinable lifespan is for the cash flow forecasts to include a terminal value. This, in effect, includes cash flows for an indefinite period. If the CGU has a finite life, the cash flow forecasts must not exceed this finite life.
Question 6
How is the appropriate pre-tax discount rate for a VIU calculation determined from a post-tax starting point?
Answer 6
The following two-step approach can be applied to derive iteratively the implicit pre-tax discount rate from post-tax data. This pre-tax rate is applied to the discounted cash flows that are the basis of the VIU:
Step 1
From pre-tax cash flow projections, the expected actual tax cash payments are calculated to arrive at post-tax cash flows. These post-tax cash flows are discounted at an appropriate post-tax discount rate derived using information observable on the capital markets.
Step 2
The pre-tax discount rate is derived by determining the rate required to be applied to the pre-tax cash flows to arrive at the result obtained in step 1 (ie, same methodology used for computing an internal rate of return).
Fair value less costs to sell
When there is neither a binding sale agreement nor an active market, FVLCTS may be estimated as the amount that the undertaking could obtain from disposal of the asset in an arm’s length transaction based on data from recent market transactions. Discounted cash flow techniques may be used in estimating the fair value of the asset.
Question 7
Can FVLCTS be determined reliably in the absence of a binding sale agreement or active market for an asset?
Answer 7
It is not necessary to have actual market transactions to support a FVLCTS calculation, as long as the projected cash flows and discount rate are consistent with the assumptions that market participants would make. If comparable transactions in similar assets or businesses are available, they are used as market evidence. If such benchmark or comparable market transactions do not exist, any possible external evidence (growth rates, discount rates, etc.) is used to support the cash flow projections. Based on this, it is almost always possible to determine FVLCTS.
Question 8
How is FVLCTS most reliably determined when it is based on a discounted cash flow technique?
Answer 8
Discounted cash flow techniques may be used incorporating assumptions that market participants would use in estimating the fair value of the asset. The key assumptions underpinning the cash flow analysis are benchmarked against market evidence.
Any differences in the assumptions in the cash flows used for the FVLCTS compared to those used in the VIU analysis are also considered for reasonableness; for example, restructuring or improvement-type capital expenditure that IAS 36 does not allow in the VIU calculation may be taken into account in the discounted cash flows to determine the FVLCTS.
Determination of carrying amounts
The comparison of the recoverable amount of an asset (ie, FVLCTS or VIU) with its carrying amount to determine whether there is an impairment charge should be made on a consistent basis. FVLCTS and VIU use different assumptions and data.
The carrying amounts are likely to differ for the comparison purposes with the recoverable amount (ie, FVLCTS or VIU).
Question 9
IAS 36 requires the recoverable amount, determined under FVLCTS or VIU (or both) to be compared to the carrying amount of the asset or CGU to determine if there is an impairment.
What is the ‘carrying amount’?
Answer 9
Carrying amount is the accounting book value of an asset or the book value of the relevant assets and liabilities of a CGU. Many CGUs are businesses and will include both fixed assets and intangible assets, as well as working capital assets and liabilities and any other assets or liabilities. Only assets within the scope of IAS 36 are included in the carrying amount. For example, equity securities accounted for as ‘available for sale’ would not be included in the carrying amount of a CGU because those investments have their separate cash flows. Carrying amount must include any allocations of corporate assets or goodwill.
Question 10
Are the carrying amounts under FVLCTS and VIU always the same?
Answer 10
No. The components of VIU and FVLCTS are different. When comparing the recoverable amount (that is FVLCTS or VIU) with the carrying amount to determine whether there is an impairment charge, that comparison should be made on a consistent basis. The elements in both sides of the comparison should be determined on a like-for-like basis.
Question 11
What categories of assets are included in the carrying amounts that are compared with the recoverable amount (ie, FVLCTS or VIU)?
Answer 11
Only operating assets are included in the carrying amounts because the recoverable amount (ie, FVLCTS or VIU) only includes operating cash flows for both calculations. Carrying amounts exclude financial assets, ‘investment properties’ and any other non-operating asset.
Question 12
Does the carrying amount of the CGU include any liabilities?
Answer 12
No. Liabilities are usually excluded from the carrying amounts (IAS 36.76(b)). Sometimes the recoverable amount of the CGU cannot be determined without consideration of a particular liability – for example, a decommissioning liability for a power station is included in the carrying amount.
Question 13
Should deferred tax liabilities be included in the carrying amount when the recoverable amount is based on VIU?
Answer 13
No. VIU is a pre-tax calculation, so deferred tax liabilities should be excluded from the carrying amount. On the contrary, FVLCTS is a post-tax calculation, so tax is considered and the carrying amount that is compared with FVLCTS includes the deferred tax liabilities.
Recognition of impairment losses
An impairment loss arising on a CGU is allocated first to goodwill allocated to the CGU, and second to the other non-monetary assets in proportion to their carrying amounts.
Question 14
An impairment charge has been recognised on a CGU to which goodwill has been allocated. Which assets in the CGU are written down first?
Answer 14
The goodwill is written off before other intangible and tangible fixed assets are impaired. However, no asset is written down below the higher of value in use, fair value less costs to sell or nil.
Question 15
Is it possible to have an impairment charge on a fixed asset in a CGU but not impair the goodwill attributed to the group of CGUs, which includes the CGU with the impaired fixed asset?
Answer 15
Yes. This results from step 1 of the following two-step approach:
Step 1
Individual assets and smaller CGU’s that are included in a bigger CGU are tested individually excluding goodwill when there are indicators of impairment. This step allows the writedown of those assets that were impaired before the goodwill impairment. Management records any impairment on the CGU assets before the group of CGUs plus attributed goodwill are tested for impairment.
Step 2
The bigger CGU that includes the individual assets and the smaller CGUs is tested for impairment. Management should compare the recoverable amount of the bigger CGU with its carrying amount that is reduced by the impairment loss already recognised in step 1. The second step may not result in the recognition of additional impairment.
Question 16
Management uses key assumptions to assess the recoverable amount (ie, VIU or FVLCTS) of a CGU to which significant goodwill has been allocated. Should information be disclosed in the financial statements on the key assumptions that management selected even if no impairment is recognised?
Answer 16
Yes. Management must disclose how the recoverable amount was estimated – ie, whether VIU or FVLCTS. If the VIU was used, the following information should be disclosed:
• description of each key assumption underlying the cash flow projections, and management’s approach to determine it;
• the period over which management has projected cash flows (when greater than five years, reasons why that longer period is justified);
• the growth rate used to extrapolate cash flows; and
• the discount rate applied to the cash flow projections.
If FVLCTS was used, the methodology used to determine it should be disclosed. When the FVLCTS is not determined based on market prices, the following information must also be disclosed:
• a description of each key assumption used and management’s approach to determining the key assumptions; and
• whether the assumptions are consistent with past experience or external data and if not, why not.
The information is therefore essentially the same as that required for VIU.
Question 17
Management uses key assumptions to assess the recoverable amount (ie, VIU or FVLCTS) of a CGU that includes a significant acquired brand with an indefinite useful life. Management projects significant growth for the business in excess of that predicted by markets analysts. Management concludes that no impairment charge should be recognised. What information should be disclosed in the financial statements on the key assumptions that management selected?
Answer 17
In addition to the information of the key assumptions to assess the recoverable amount, management should disclose the following information if a reasonably possible change in a key assumption underlying FVLCTS or VIU would cause an impairment to arise:
• the amount by which the CGU recoverable amount exceeds its carrying amount;
• the value assigned to the key assumption; and
• the amount by which the value assigned to the key assumption must change in order for the CGU recoverable amount to be equal to its carrying amount.
Part 4
This final part covers the minimum level of information that should be disclosed, and the additional disclosures required when there is significant goodwill or indefinite-lived intangible assets. It also explains the circumstances when sensitivity analysis are disclosed.
Many of the inputs to the impairment testing process will also feature in the critical accounting estimates and judgments disclosures required by IAS 1.
What information does management need to disclose?
Question 1
What general information is disclosed when there has been an impairment loss recognised or reversed on an asset or group of assets during a period?
Answer 1
Management must disclose the amount of losses recognised or reversed during the period for each class of asset. Separate disclosure is made of amounts recognised in profit or loss and amounts charged directly to equity.
Management must also specify the line items in the income statement to which impairment has been charged or reversed.
Question 2
Are there any additional disclosure requirements if the impairment loss or reversal is material?
Answer 2
The following additional disclosures are required for a material impairment loss or reversal for an individual asset (including goodwill) or a cash-generating unit (CGU):
• circumstances giving rise to the impairment or reversal;
• amount of impairment loss or reversal;
• nature and description of the asset or CGU;
• reportable segment to which the asset or CGU belongs; and
• whether recoverable amount is fair value less costs to sell or value in use;
– if fair value less costs to sell, how it was determined; and
– if value in use, the discount rates used in the current assessment and in the previous one.
Question 3
What information is disclosed for each reportable segment if an undertaking reports segment information in accordance with IFRS 8/IAS 14?
Answer 3
Management should disclose, for each reportable segment, the impairment losses and reversals recognised in profit and loss and equity during the period.
Question 4
What additional disclosures are required for each group of CGUs to which a significant amount of goodwill or indefinite-lived assets have been allocated?
Answer 4
The additional disclosures are:
• basis of determination of recoverable amount (ie, value in use or fair value less cost to sell);
• the carrying amount of goodwill/indefinite lived intangible assets allocated to the CGU/groups of CGUs;
• identification of the key assumptions in the calculation;
• discussion of management’s approach to determining each key assumption and whether it is based on past performance/external sources of information, and if not, why not;
• period of cash flow projections;
• the long-term growth rate assumption and justification where it exceeds the growth rate in the territory, market or sector; and
• the pre-tax discount rate used in the calculations.
Question 5
What is a ‘key assumption’?
Answer 5
Key assumptions are assumptions to which the recoverable amount of the CGU or group of CGUs is most sensitive. Key assumptions will usually include those underlying sales or income growth margins expected to be achieved and long-term growth assumptions.
Question 6
When does management disclose a sensitivity analysis and what are the disclosures?
Answer 6
In addition to those set out in Answer 4, the following disclosures are required if a reasonably possible change in a key assumption would lead to recoverable amount equalling carrying value:
• the headroom in the current calculation (by how much recoverable amount exceeds the carrying value);
• the value assigned to the key assumption(s); and
• by how much the key assumption(s) would have to change before recoverable amount equalled carrying value.
Question 7
What is meant by ‘reasonably possible’ change?
Answer 7
There is no definition in IAS 36 of ‘reasonably possible’. It is a matter of judgment in the circumstances that apply – the same percentage headroom might give rise to different judgments by different undertakings.
For example, an undertaking that has made assumptions that are aggressive by comparison to its peers and has only relatively marginal headroom (say 10%) would be more likely to suffer an impairment if the market moved only in line with the industry expectations than one with the same headroom but where the assumptions made in the cash flow forecasts were more conservative than the industry. See the example below.
|Example |
|Management has performed an impairment test. It has calculated for one group of CGUs with net assets |
|(including goodwill) of £400m a recoverable amount of £430m, giving headroom of £30m. |
| |
|The key assumptions are consistent with external data. The calculation is most sensitive to discount rates; |
|the current rate of 8.5% is 1.0% lower than the prior year due to a fall in the risk-free rate in the |
|territory in which the operation is based. |
| |
|A 0.6% increase in the discount rate would lead to an impairment. The risk-free rate in the territory where |
|the CGU is based was last as low as it is now in the 1950’s but shows no immediate sign of rising. |
| |
|Does the possibility of a change in the risk-free rate qualify as a ‘reasonably possible’ change? |
| |
|Solution |
|Yes, local risk-free interest rates have fallen sharply in the last year to historically low levels. The |
|history of movements in risk-free rates has shown that it goes through cycles. |
| |
|It seems reasonably possible that the rate would rise. An impairment would be triggered even if it returned to|
|the level of the previous year. The change in discount rate would therefore seem to be reasonably possible; |
|the sensitivity analysis disclosures should be made. |
Question 8
Some of the information that the standard requires to be disclosed could be regarded as comprising sufficient information to be a type of profit forecast. Such disclosure has been rare for listed companies.
What should management do if the types of information disclosed falls within the definition of a profit forecast under the local regulations?
Answer 8
There is no exemption under IAS 36 from making disclosures on the grounds that such information may or may not constitute a profit forecast. The information required by the standard must be provided. Local rules must be followed in order to determine what further actions management should take, if any.
|Example |
|Management has performed an impairment calculation on one poorly performing business and calculated that the |
|recoverable amount marginally exceeds carrying value. |
| |
|A reasonably possible change in the discount rate, sales growth rate or gross margin would trigger an |
|impairment, and the calculation is sensitive to all three assumptions. |
| |
|None of the undertaking’s competitors disclose their assumptions; management argues that to disclose as |
|required by IAS 36 would put the undertaking at a competitive disadvantage. |
| |
|Is there any exemption from disclosure on these grounds? |
| |
|Solution |
|No, such an exemption does not exist. The purpose of the sensitivity disclosures is to enable the reader of |
|the financial statements to understand the key assumptions that have been made in determining whether an asset|
|is impaired or not. |
| |
|Where the impairment decision is borderline, the assumptions made are a critical component in determining |
|whether an impairment has arisen or not. The standard therefore requires management to disclose these |
|judgments in the financial statements. |
Question 9
What disclosure does management provide if any portion of the goodwill acquired in a business combination during the period has not been allocated to a CGU at the reporting date?
Answer 9
Management discloses the amount of the unallocated goodwill together with the reasons why that amount remains unallocated.
12. Disclosure
An undertaking must disclose the following for each class of assets the amount of:
i) impairment losses recorded in the income statement, during the period, and the line items of the income statement in which those impairment losses are included.
ii) reversals of impairment losses recorded in the income statement during the period, and the line item(s) of the income statement in which those impairment losses are reversed.
iii) impairment losses on revalued assets, recorded directly in equity, during the period.
iv) reversals of impairment losses on revalued assets, recorded directly in equity, during the period.
A class of assets is a grouping of assets of similar nature, and use in an undertaking’s operations.
The information required in above may be presented with other information disclosed for the class of assets.
For example, this information may be included in a reconciliation of the carrying amount of property, plant and equipment, at the beginning and end of the period (as required by IAS 16 Property, Plant and Equipment).
An undertaking, that reports segment information (in accordance with IFRS 8 Operating Segments), must disclose the following, for each reportable segment based on an undertaking’s primary reporting format the amount of:
i) impairment losses recorded in the income statement, and directly in equity, during the period.
ii) reversals of impairment losses recorded in the income statement, and directly in equity, during the period.
An undertaking must disclose the following for each material impairment loss recorded (or reversed), during the period for an individual asset, including goodwill, (or a cash-generating unit):
(1) the events and circumstances that led to the recognition (or reversal) of the impairment loss.
(2) the amount of the impairment loss recorded (or reversed).
(3) for an individual asset:
i) the nature of the asset; and
ii) if the undertaking reports segment information (in accordance with IFRS 8), the reportable segment to which the asset belongs, based on the primary reporting format.
(4) for a cash-generating unit:
i) a description of the cash-generating unit (such as whether it is a product line, a plant, a business operation, a geographical area, or a reportable segment as defined in IFRS 8);
ii) the amount of the impairment loss recorded, or reversed, by class of assets and, (if the undertaking reports segment information in accordance with IFRS 8) by reportable segment, based on the primary reporting format; and
iii) if the aggregation of assets for identifying the cash generating unit has changed, since the previous estimate of the unit’s recoverable amount, a description of the current, and former way, of aggregating assets, and the reasons for changing the way the cash-generating unit is identified.
(5) whether the recoverable amount of the asset (cash-generating unit) is its ‘fair value less costs to sell’ or its ‘value in use’.
(6) if recoverable amount is ‘fair value less costs to sell’, the basis used to determine ‘fair value less costs to sell’ (such as whether fair value was determined by reference to an active market).
(7) if recoverable amount is ‘value in use’, the discount rate used in the current estimate and previous estimate of ‘value in use’.
An undertaking must disclose the following information for the aggregate impairment losses, and the aggregate reversals, recorded during the period for which no information is disclosed:
i) the main classes of assets affected by impairment losses, and the main classes of assets affected by reversals of impairment losses.
ii) the main events, and circumstances, that led to the recognition of these impairment losses, and reversals of impairment losses.
An undertaking is encouraged to disclose assumptions used to determine the recoverable amount of assets (cash-generating units) during the period.
An undertaking should disclose information about the estimates used to measure the recoverable amount of a unit, when goodwill (or an intangible asset with an indefinite useful life) is included in the carrying amount of that unit.
If any part of the goodwill acquired in a business combination during the period, has not been allocated to a cash-generating unit at the reporting date, the amount of the unallocated goodwill is disclosed, together with the reasons why that amount remains unallocated.
Estimates used to Measure Recoverable Amounts of Cash-generating Units Containing Goodwill, or Intangible Assets with Indefinite Useful Lives
If any cash-generating unit (or group of units) has a significant amount of goodwill, or intangible assets with indefinite useful lives, the following should be disclosed:
(1) carrying amount of goodwill, allocated to the unit or group of units.
(2) carrying amount of intangible assets with indefinite useful lives, allocated to the unit or group of units.
(3) basis on which the unit’s (or group of units) recoverable amount has been determined (‘value in use’ or ‘fair value less costs to sell’).
(4) if the unit’s (or group) of units recoverable amount is based on ‘value in use’:
i) description of each key assumption on which management has based its cash flow projections, for the period covered by the most recent forecasts.
Key assumptions are those to which the unit’s recoverable amount is most sensitive.
ii) description of management’s approach to determining the values assigned to each key assumption, whether those values reflect past experience and are consistent with external sources of information and experience.
iii) period over which management has projected cash flows, based on financial budgets/forecasts approved by management .
If a period greater than five years is used an explanation is required of why that longer period is necessary.
iv) growth rate used to extrapolate cash flow projections, beyond the period covered by the most recent budgets/forecasts.
A justification is required for using any growth rate that exceeds product, industry, country, norms.
v) discount rate applied to the cash flow projections.
(5) if the unit’s recoverable amount is based on ‘fair value less costs to sell’, the methodology used to determine ‘fair value less costs to sell’.
If ‘fair value less costs to sell’ is not determined using an observable market price for the unit the following information must also be disclosed:
i) description of each key assumption on which management has based its determination of ‘fair value, less costs to sell’. Key
ii) assumptions are those to which the unit’s (group of units’)
recoverable amount is most sensitive.
iii) a description of management’s approach to determining the value or values assigned to each key assumption, whether those values reflect past experience and are consistent with external sources of information and past experience, or external sources of information.
If fair value less costs to sell is determined using discounted cash flow projections, the disclosures required by (4) shall be given instead of those in (5)(i) and (ii).
(6) if possible changes in a key assumption that would cause the unit’s carrying amount to exceed its recoverable amount:
i) the amount by which the unit’s recoverable amount exceeds its carrying amount.
ii) the value assigned to the key assumption.
iii) the amount, by which the value assigned to the key assumption must change in order for the unit’s recoverable amount to be equal to its carrying amount.
Any goodwill, or intangible assets with indefinite useful lives that have been included in the minor units, for which the information, listed above has not been provided, the aggregate amounts and the units should be listed.
If these minor units hold a significant share of goodwill, or intangibles with indefinite lives, the following information should be provided:
(1) the aggregate carrying amount of goodwill, allocated to those units
(2) the aggregate carrying amount of intangible assets with indefinite useful lives, allocated to those units
(3) description of the key assumptions.
(4) description of management’s approach to determining the values assigned to the key assumptions and whether those values are consistent with external sources of information past experience and external sources of information.
(5) if possible changes in the key assumptions would cause the aggregate of the units’ carrying amounts to exceed the aggregate of their recoverable amounts:
i) amount by which the aggregate of the units’ recoverable amounts exceeds the aggregate of their carrying amounts.
ii) values assigned to the key assumptions.
iii) sensitivity of these assumptions: by how much would they need to change to reduce the recoverable amounts to the carrying amounts.
Sample Accounting Policy
(taken from Illustrative Corporate Financial Statements 2007, PWC)
Impairment of non-financial assets
Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
13. MULTIPLE CHOICE QUESTIONS
1. An asset is impaired if:
1.Its carrying amount equals the amount to be recovered through use (or sale) of the asset.
2. Its carrying amount exceeds the amount to be recovered through use (or sale) of the asset.
3. The amount to be recovered through use (or sale) of the asset exceeds its carrying amount.
2. After the revaluation requirements have been applied, it is:
1. Unlikely that the revalued asset is impaired.
2. Probable that the revalued asset is impaired.
3. The recoverable amount needs to be estimated.
3. Corporate assets are assets (other than goodwill) that contribute to the cash flows of both the cash-generating unit under review, and other cash-generating units.
1. Include goodwill.
2. Only contribute to the cash flows of the cash-generating unit.
3. Contribute to the cash flows of both the cash-generating unit, and other cash-generating units.
4. Costs of disposal are:
1. Incremental costs, directly attributable to the disposal of an asset, excluding finance costs and income tax expense.
2. Incremental costs, directly attributable to the disposal of an asset (or cash-generating unit), plus finance costs, but excluding income tax expense.
3. Incremental costs, directly attributable to the disposal of an asset (or cash-generating unit), plus finance costs and income tax expense.
5. If no indication of an impairment loss is present:
1. IAS 36 still requires an undertaking to make a formal estimate of recoverable amount.
2. IAS 36 does not require an undertaking to make a formal estimate of recoverable amount.
3. IAS 36 does not require an undertaking to make an assessment as to whether an asset may be impaired.
6. An intangible asset with an indefinite useful life, or an intangible asset not yet available for use:
1. Will not be impaired.
2. Should be tested annually, at different times of the year.
3. Should be tested annually, at the same time each year.
7. External sources of information indicating possible impairment include:
(i) An asset’s market value has declined significantly.
(ii) Significant changes have taken place in the technological environment.
(iii) Interest rates, or other market rates, have increased during the period.
(iv) The carrying amount of the net assets of the undertaking is more than its market capitalisation.
(v) A change in the group structure.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(iv)
5. (i)-(v)
8. Internal sources of information include:
(i) Cash out flows that are significantly higher, than those budgeted.
(ii) Operating profits that are significantly worse than those budgeted.
(iii) A decline in net cash flows.
(iv) Operating losses.
(v) Evidence of obsolescence, or damage of an asset.
(vi) Significant changes, to which an asset is used.
(vii) Evidence that indicates that the performance of an asset is worse than expected.
(viii) A lower cost of capital.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(iv)
5. (i)-(v)
6. (i)-(vii)
7. (i)-(viii)
9. If previous calculations show that an asset’s recoverable amount is significantly greater than its carrying amount:
1. Its value in use should be recalculated.
2. The undertaking need not re-estimate its recoverable amount, if no events have occurred that would eliminate that difference.
3. It should be tested for impairment.
10. If interest rates rise:
1. The discount rate must rise.
2. Cash flows automatically rise.
3. It may not have much effect for an asset with a long life.
11.‘‘Fair value less costs to sell’’ and its ‘‘value in use’’. If either of these amounts exceeds the asset’s carrying amount:
1.The asset is not impaired, and it is not necessary to estimate the other amount.
2. The other must be calculated
3. The asset is impaired.
12. The ‘value in use’ of an asset held for disposal will consist mostly of:
1. The cash flows from use of the asset.
2. The net disposal proceeds.
3. Depreciation charges.
13. The best evidence of an asset’s ‘fair value less costs to sell’ is:
1. A recent transaction.
2. An active market.
3. A binding sale agreement.
14. Costs of disposal: examples of such costs are:
i) Finance costs.
ii) Legal costs.
iii) Stamp duty and similar transaction taxes.
iv) Costs of removing the asset.
v) Direct incremental costs, to bring an asset into condition for its sale.
1 (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(v)
5. (ii)-(v)
15. The following is reflected in the calculation of an asset’s ‘value in use’:
(i) The cash flows to be derived from the asset.
(ii) Variations in the amount or timing of those cash flows.
(iii) The time value of money, represented by the risk-free rate of interest.
(iv) The price for bearing the uncertainty inherent in the asset.
(v) Seasonality.
(v) Other factors.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(v)
5. (i)-(iii)+(v)
16. Unless a longer period can be justified, cash flow projections based on budgets/forecasts must cover a maximum period of:
1. Three years.
2. Five years.
3. Ten years.
17. Estimates of cash flows must include:
(i) Projections of cash inflows, from the continuing use of the asset;
(ii) Projections of cash outflows to generate the inflows, from continuing use of the asset.
(iii) Net cash flows from the disposal of the asset.
(iv) Finance costs.
(v) Income taxes.
1. (i) – (iii)
2. (i)-(iv)
3. (ii)-(iii)
4. (i)-(v)
5.(i)-(v)
18. If the discount rate includes the impact of inflation, cash flows are expressed:
1. Excluding inflation.
2. Including inflation.
3. Excluding inflation (but include specific price increases, or reductions).
19. ‘Value in use’ does not reflect:
(i) outflows or related cost savings (for example reductions in staff costs) or benefits from a future restructuring, to which an undertaking is not yet committed; or
(ii) outflows that will improve the asset’s performance;
Value in use’ does not reflect: these as cash flows are estimated:
1. Using net present values.
2. In real terms.
3. For the asset in its current condition.
20. The estimate of net cash flows to be received or paid for the disposal of an asset is similar to an asset’s ‘fair value less costs to sell’, except that, in estimating those net cash flows:
(i) You use prices for similar assets (that have reached the end of their useful life).
(ii) You adjust prices for the impact of inflation.
(iii) You deduct finance payments.
(iv)You deduct tax payments.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
4. (i)-(iv)
21. The discount rate is a pre-tax rate that reflects current market assessments of:
(i) Foreign exchange rates.
(ii) The time value of money.
(iii) The risks specific to the asset.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
22. If an asset, carried at cost, is decreased by impairment, the decrease should be:
1. Capitalised.
2. Expensed.
3. An extraordinary item.
23.If an impairment loss is recognised,
1. The depreciation charge should be adjusted for future periods.
2. The residual value should be reviewed.
3. Both 1 &2.
4. Neither 1 nor 2.
24. For impairment testing a cash-generating unit is:
1. The lowest aggregation of assets that generate independent cash inflows.
2. Corporate assets.
3. Any unit that generates cash.
25. The recoverable amount of a cash-generating unit is:
1. The lower of the unit’s ‘fair value less costs to sell’ and its ‘value in use’.
2. The higher of the unit’s ‘fair value less costs to sell’ and its ‘value in use’.
3. The average of the unit’s ‘fair value less costs to sell’ and its ‘value in use’.
26. For impairment testing, goodwill is allocated to each cash-generating units:
1. That will benefit from the synergies of the combination.
2. If other assets of the acquiree are assigned to those units.
3. If other liabilities of the acquiree are assigned to those units.
4. If other net assets of the acquiree are assigned to those units.
27. Goodwill is tested for impairment:
1. At group level.
2. At the level at which goodwill is allocated in accordance with IAS 21 Foreign Exchange Rates
3. At a level that reflects the way an undertaking manages its operations.
28. If goodwill has been allocated to a unit, and the undertaking disposes of an operation within that unit, the goodwill associated with the operation disposed of must be:
(i) Included in the carrying amount of the operation, when determining the gain (or loss on disposal).
(ii) Measured on the basis of the relative values of the operation disposed of, and the part of the unit retained.
(iii) Discounted by the current market rate.
1. (i) – (ii)
2. (i)-(iii)
3. (ii)-(iii)
29. Your carrying value of your cash-generating unit =
Assets $10m + Goodwill $3m
Its ‘value in use’ = $11m
You should:
1. Do nothing.
2. Reduce the goodwill to $1m.
3. Reduce the goodwill to $2m, and the assets to $9m
30. The undertaking impairment tests:
1. The asset first, and records any impairment loss for that asset, before testing for impairment the unit containing the goodwill.
2. The unit containing the goodwill first, and records any impairment loss for that unit, before testing for impairment asset.
3. At the same time.
31. Corporate assets:
1. Cannot be impaired.
2. Cannot generate separate cash flows.
3. Carrying amounts can be fully attributed to a cash-generating unit.
32. Your asset is impaired:
(i) its ‘fair value less costs to sell’ = loss of $4k
(ii) its ‘value in use’ = $6k;
Which value do you use?
1. $6k
2. Loss of $4k
3. $1k (average of the two figures).
4. Zero.
33. The carrying amount of your head office is 2.000.
The value in use is 2.400.
The fair value, less cost to sell is 1.600.
Is it impaired?
34. Your asset is impaired:
(i) its ‘fair value less costs to sell’ = loss of $4k
(ii) its ‘value in use’ = loss of $2k
Which value do you use?
1 Loss of $2k
2. Loss of $4k
3. Loss of $3k (average of the two figures).
4. Zero.
14. Answers to Multiple Choice Questions
|Question |Answer |
| |2 |
| |1 |
| |3 |
| |1 |
| |2 |
| |3 |
| |4 |
| |6 |
| |2 |
| |3 |
| |1 |
| |2 |
| |3 |
| |5 |
| |5 |
| |2 |
| |1 |
| |2 |
| |3 |
| |1 |
| |3 |
| |2 |
| |3 |
| |1 |
| |2 |
| |1 |
| |3 |
| |1 |
| |2 |
| |1 |
| |2 |
| |1 |
| |No, as the |
| |value in use is|
| |higher than the|
| |carrying value.|
| |4 |
Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook:
Accounting Solutions
IFRS Issues and Solutions for the Pharmaceutical Industry (examples adapted)
Illustrative Corporate Consolidated Financial Statements 2007
IFRS News
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