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IAS 36

IMPAIRMENT

1
This material is the property of Department of Accounting
and Finance, CoBE, AAU. Permission must be obtained from

Learning Objectives
Up on completion of this topic, you will
be able to:
Define the recoverable amount of an
asset
Define impairment losses
Give examples of, and be able to
identify, circumstances that may
indicate that an impairment of an asset
has occurred
Describe what is meant by a cash-

Learning Objectives

State the basis on which imp. losses should be


allocated, and
Allocate a given impairment loss to the assets of
a CGU.

DETERMINATION OF
IMPAIRMENT

Impairment is determined by:


Comparing the carrying amount of the asset with its
recoverable amount.
Recoverable amount (The higher of its)
- fair value less costs to sell and
- value in use (VU)
There is an established principle that assets should
not be carried at above their recoverable amount.
An entity should write down the carrying value of an
asset to its recoverable amount (if CA is not
recoverable in full).
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SCOPE
This Standard shall be applied in accounting
for the impairment of all assets, other than:
Inventories (see IAS 2 Inventories);
Investment property that is measured at fair
value (see IAS 40 Investment Property);
Biological assets related to agricultural activity
within the scope of IAS 41
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
5

SCOPE

Financial assets that are within the scope of IFRS


9 Financial Instruments;
Contract assets and assets arising from costs to
obtain or fulfill a contract (IFRS 15 Revenue from
Customers);

SCOPE
The Standard does apply to
Property, plant, and equipment
Investment property carried at cost
Intangible assets and goodwill
Subsidiaries, associates, and joint ventures

DEFINITIONS OF TERMS
Impairment
A fall in the value of an asset (recoverable amount is
less than carrying value).
Carrying amount (CA)
The net value of the asset (after deducting accumulated
depreciation & any impairment losses).
If value of the asset is higher than its realistic value (RA)
', the asset is judged to have suffered an impairment
loss.
It will be reduced in value, by the amount of the imp.
loss and the amount should be written off against
profit immediately
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THE THREE ACCOUNTING


ISSUES
How is it possible to identify when an imp.
loss may have occurred?
How should the RA of the asset be measured?
How should an 'impairment loss' be reported
in the accounts?
1. Identifying a Potentially Impaired Asset
Assess at the end of each reporting period whether
there are any indications of impairment to any
assets.
The concept of materiality applies, & only material
impairment needs to be identified.

THE THREE ACCOUNTING


ISSUES
Suggestions by the standard are based largely on
common sense
Source of Information
External Sources Of Information
A fall in the asset's market value that is more
significant than would normally be expected.
A significant change in the technological, market,
legal or economic environment of the business.
An increase in market interest rates or market
rates of return on investments likely to affect the
discount rate.

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THE THREE ACCOUNTING


ISSUES
The carrying amount of the entity's net assets being
more than its market capitalization.
Internal Sources Of Information
Obsolete or physically damaged asset
Significant changes in the extent or manner in which, an
asset is used (idle assets, plans to dispose, discontinue
Internal
reporting indicates that the economic
performance of an asset is, or will be, worse than
expected
Exceptions:(must always be tested for impairment
annually with no indication of imp. )

An intangible asset with an indefinite useful life ( 10 yrs


renewable Brand right).
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Goodwill acquired in a business combination

THE THREE ACCOUNTING


ISSUES
2. Measuring the Recoverable Amount of the Asset
The RA should be the higher value of:
The asset's fair value less costs to sell; and
Its value in use. (IAS 36)
Fair value less costs to sell is the amount net of selling
costs that could be obtained from the sale of the asset
If there is an active market in the asset, the net
selling price should be based on:

the market value, or on


the price of recent transactions in similar assets.

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THE THREE ACCOUNTING


ISSUES
If there is no active market in the assets it might be
possible to estimate a net selling price using
best estimates of what 'knowledgeable, willing
parties' might pay in an arm's length transaction.
Net selling price cannot be reduced, by including
within selling costs any
restructuring or reorganization expenses, or
costs that have already been recognized in the
accounts as liabilities.
Value in Use (VU)
The VU is the PV of estimated future cash flows
including its estimated net disposal value (if any) at
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the end of its UL.

THE THREE ACCOUNTING


ISSUES
3.

Recognition & Measurement Of An


Impairment Loss
The Rule for Assets at Historical Cost:
If the RA is lower than the CA , the CA should be
reduced by the d/ce which should be charged as
an expense in p&l.
The Rule for Assets Held At a Revalued
Amount (Such as PPE):
The impairment loss is to be treated as a
revaluation decrease under the relevant IAS.
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THE THREE ACCOUNTING


ISSUES
In practice this means:
If there is a revaluation surplus held in respect of the
asset, the imp. loss should be charged to revaluation
surplus.
Any excess should be charged to profit or loss.
Cash Generating Units (CGUs)
When it is not possible to calculate the RA of a single
asset, then that of its CGU should be measured instead.
A CGU is the smallest identifiable group of assets that
can generate cash flows from continuing use and
are mainly independent of the cash flows from other
assets or groups of assets.
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THE THREE ACCOUNTING


ISSUES
Use of Cash-Generating Unit
As a basic rule, the recoverable amount of an
asset should be calculated for the asset
individually.
when it is not possible to estimate value for an
individual asset, we use CGU
Impairment Testing Levels
Inventories (other standards)
Principle: test inventory for impairment item by
item
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THE THREE ACCOUNTING


ISSUES
Exception (a rule): impairment test a group of items
when:
it is impracticable to determine net realizable value (NRV)
item by item; and
the inventories relate to the same product line
Items have similar purposes or end uses and are
produced and marketed in the same geographical area
Other Non-Financial Assets
Principletest for impairment at the individual asset level
(i.e. item-by-item)
Application guidance is necessary for cash-generating units
and corporate assets & exception is permitted for goodwill

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THE THREE ACCOUNTING


ISSUES
IFRS for SMEs (cash-generating units)
Test individual assets for impairment (Section 27 and
IAS 36).
If not possible, then determine the recoverable amount
of the CGU to which it relates (Section 27 and IAS 36)
Goodwill
G/will is tested for impairment at the lowest level at
which it is monitored for internal management
purposes provided
that level is not larger than an operating segment as
defined in IFRS 8 (before aggregation).
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THE THREE ACCOUNTING


ISSUES
The recoverable amount of an individual asset
cannot be determined if:
its VU cannot be estimated to be close to its fair
value less costs of disposal
E.g.
when the future cash flows from continuing
use of the asset cannot be estimated to be
negligible); and

the asset does not generate cash inflows that are


largely independent of those from other assets.
In such cases, VU
and, therefore, recoverable
amount, can be determined only for the assets CGU.

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THE THREE ACCOUNTING


ISSUES
When an impairment loss is recognized for a CGU, the
loss should be allocated b/n the assets in the unit in the
ff order.
First, to any assets that are obviously damaged or
destroyed
Next, to the g/will allocated to the cash generating unit
Then to all other assets in the CGU, on a pro rata basis
In allocating an impairment loss, the carrying amount of
an asset should not be reduced below the highest of:
Its fair value less costs to sell
Its value in use (if determinable)
Zero

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THE THREE ACCOUNTING


ISSUES
Case1
A manufacturing entity owns several vehicles. The vehicles
are several years old and could only be sold for scrap
value. They do not generate cash independently from the
entity.
Required
How will the recoverable value of the vehicles be determined?
Solution
The entity cannot estimate the recoverable amount of the
vehicles because their VU cannot be determined
separately, and it will be d/t from the scrap value.
Therefore, the entity would incorporate the vehicles into
the cash-generating unit to which they belong and estimate
the recoverable amount of that cash-generating unit.
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THE THREE ACCOUNTING


ISSUES
Case 2
A corporation is reviewing one of its plants for
impairment. The carrying value of its net assets is
ETB20 million. Management has produced two
computations for the value-in-use of the plant.
The first value (ETB18 million) excludes the benefit
to be derived from a future reorganization, but the
second value (ETB22 million) includes the benefits
to be derived from the future reorganization. There
is not an active market for the sale of the plant.
Required
Explain whether the plant is impaired.
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THE THREE ACCOUNTING


ISSUES
Solution
The benefit of the future reorganization should
not be taken into account in calculating value-inuse.
Therefore, the net assets of the plant will be
impaired by ETB2 million because the value-inuse (ETB18 million) is lower than the carrying
value (ETB20 million). The value-in-use can be
used as the recoverable amount as there is no
active market for the sale of the plant.
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THE THREE ACCOUNTING


ISSUES
Case 3
A sugar Corporation owns and operates a large waste
recycling plant and a private railway which transports
the processed waste in containers from the plant to
the main public rail network. The private railway
could be sold only for scrap value and it does not
generate cash inflows from continuing use which are
largely independent of the cash inflows of the plant
as a whole.
Required
Determine which asset or group of assets represents
a CGU.
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THE THREE ACCOUNTING


ISSUES
Solution
It is not possible to estimate the recoverable
amount of the private railway because its value in
use cannot be determined and is probably
different from scrap value. The scrap value of the
railway is below its carrying amount. The
corporation therefore estimates the recoverable
amount of the CGU (which includes both the plant
and the private railway).

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THE THREE ACCOUNTING


ISSUES
Case 3: Allocation of Impairment Loss
A corporations cash-generating unit comprises the
following:
ETB m
Building
30
Plant and equipment
6
Goodwill
10
Current assets
20
Total
66
Following a recession, an impairment review has
estimated the RA. Of CGU to be ETB 50m.
How do we allocate the impairment loss?
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THE THREE ACCOUNTING


ISSUES

The loss will be applied first against the goodwill and then against
the tangible non-current assets on a pro-rata basis.
CA
Impairment-loss Carrying amount
Post- impairment
ETBm
ETB
ETB

Building
Plant and equipment
Goodwill
Current Assets
Total
50

30
6
10
20

(5)
(1)
(10)

66

25
5

20
(16)

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THE THREE ACCOUNTING


ISSUES
Case 4: Reversal of Impairment Loss
A cash generating unit comprising a factory, plant
and equipment etc and associated purchased
goodwill (the standard states no reversal for
good will) becomes impaired because the
product it makes is overtaken by a technologically
more advanced product produced by a
competitor. The recoverable amount of the cash
generating unit falls to ETB 60m, resulting in an
impairment loss of ETB80m, allocated as follows.

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THE THREE ACCOUNTING


ISSUES
CA-Before
Good will
20

CA-After
40

Patent ( no Market Value)

Tangible-non-current(MVETB60m)80
60
Total
140
60
After three years, the entity makes a technological breakthrough
of its own, and the recoverable amount of the cash generating
unit increases to ETB90m. The carrying amount of the tangible
non-current assets had the impairment not occurred would have
been ETB70m.
Calculate the reversal of the impairment loss.
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THE THREE ACCOUNTING


ISSUES

The reversal of the impairment loss is recognized to the


extent that it increases the carrying amount of the
tangible non-current assets to what it would have been
had the impairment not taken place, i.e. a reversal of the
impairment loss of ETB10m is recognized and the
tangible non-current assets written back to ETB70m.
Reversal of the impairment is not recognized in relation
to the goodwill and patent because the effect of the
external event that caused the original impairment has
not reversed the original product is still overtaken by a
more advanced model.
The increase in the carrying value of the asset can
only be up to what the carrying amount would
have been if the impairment had not occurred.
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THE THREE ACCOUNTING


ISSUES
Case 5
Plant X belongs to a given corporation M. X makes all
its activities through the corporation. Pricing,
marketing, advertising and human resources policies
(except for hiring Xs cashiers and other staffs) are
decided by the corporation. The corporation also
owns five other plants in the same city as X
(although in different neighbor hoods) and 20 other
plants in other cities. All plants are managed in the
same way as X.
What is the cash-generating unit for X (Xs
cash-generating unit)?
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THE THREE ACCOUNTING


ISSUES
Analysis
In identifying Xs cash-generating unit, an entity
considers whether, for example:
Internal
management reporting is organized to
measure performance on a plant-by-plant basis; and
The business is run on a plant-by-plant basis on a
region/city basis.
All Ms
plants are in different neighbor hoods and
probably have different customer bases. So, although X
is managed at a corporate level, X generates cash
inflows that are largely independent of those of Ms
other plants. Therefore it is likely that X is a cash
generating unit.

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THE THREE ACCOUNTING


ISSUES
Case 6
A Sugar Corporation owns a private railway that it
uses to transport sugar from one of its plants. The
railway now has no market value other than as
scrap, and it is impossible to identify any
separate cash inflows with the use of the railway
itself.
How do you identify a cash-generating
unit(CGU)?

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THE THREE ACCOUNTING


ISSUES
Analysis
If the corporation suspects an impairment in the
value of the railway, it should treat the plant as a
whole as a cash generating unit, and measure the
recoverable amount of the plant as a whole.
It is not possible to estimate the recoverable amount
of the private railway because its value in use
cannot be determined and is probably different from
scrap value. Therefore, the entity estimates the
recoverable amount of the cash-generating unit to
which the private railway belongs, i.e. the plant as a
whole.
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THE THREE ACCOUNTING


ISSUES
Case7
A
Corporation with a bus service wing has an
arrangement with a town's authorities to run a bus
service on four routes in the town. Separately identifiable
assets are allocated to each of the bus routes, and cash
inflows and outflows can be attributed to each individual
route. Three routes are running at a profit and one is
running at a loss. The company suspects that there is an
impairment of assets on the loss making route. However,
the company will be unable to close the loss-making
route, because it is under an obligation to operate all
four routes, as part of its contract with the local authority.
How do you identify a cash-generating unit?
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THE THREE ACCOUNTING


ISSUES
Analysis
Consequently, the corporation should treat all four bus
routes together as a cash generating unit, and calculate
the recoverable amount for the unit as a whole.
Because the corporation does not have the option to
curtail any one bus route, the lowest level of
identifiable cash inflows that are largely independent of
the cash inflows from other assets or groups of assets is
the cash inflows generated by the five routes together.
The cash-generating unit for each route is the bus
service as a whole (no independent cash generation).

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DISCLOSURE REQUIREMENTS

For each class of asset an entity shall disclose


Impairment losses recognized in the income statement
Impairment losses reversed in the income statement
The line item in the income statement in which the
impairment losses are included
If an individual impairment loss or reversal is
material, then this information should be disclosed:
The events and circumstances leading to the impairment
loss
The amount of the loss
If it relates to an individual asset, the nature of the asset
and the segment to which it relates
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DISCLOSURE REQUIREMENTS

For a cash-generating unit, the description of the


amount of the impairment loss or reversal by
class of assets
If the recoverable amount is fair value less costs
to sell, the basis for determining fair value must
be disclosed.
If the recoverable amount is the value-in-use, the
discount rate should be disclosed

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SIMILARITIES AND
DIFFERENCES BETWEEN
IFRS AND US GAAP
Similarities
long-lived assets are not tested annually, but rather
when there are similarly defined indicators of
impairment in both cases.
Both Standards Require
goodwill and intangible assets with indefinite useful
lives to be tested at least annually for impairment
and
more frequently if impairment indicators are present.
Both require that the impaired asset be written down
and an impairment loss recognized.
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SIMILARITIES AND
DIFFERENCES BETWEEN
IFRS AND US GAAP

DIFFERENCES

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SIMILARITIES AND
DIFFERENCES BETWEEN
IFRS AND US GAAP..
US GAAP
Differences
Method
Two-step approach requires
of
that a recoverability test
determini be
performed
first
ng
(carrying amount of the
impairme asset is compared with the
nt
sum
of
future
longundiscounted cash flows
lived
generated through use and
assets
eventual disposition).

IFRS

Imp-losscalculatio
n-longlived
assets

The amount by which


the carrying amount
of the asset exceeds
its
recoverable
amount.

The amount by which the


carrying amount of the
asset exceeds its fair
value, as calculated in
accordance with ASC 820,
Fair Value Measurement.

One-step
approach
requires
that
impairment
loss
calculation
be
performed
if
impairment indicators
exist.

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SIMILARITIES AND
DIFFERENCES BETWEEN
IFRS AND US GAAP
Assignm Goodwill is assigned to a
ent
of reporting unit, which is
goodwill defined as an operating
segment or one level below
an
operating
segment
(component).

Goodwill is allocated
to a cash-generating
unit (CGU) or group of
CGUs,
Operating
Segments.

Method
of
determi
ning
impairm
ent
G/will

Qualitative
assessment
is
not
permitted.
One-step
approach requires that
an impairment test be
done at the CGU level.

Companies have the option


to
qualitatively
assess
whether it is more likely
than not that the fair value
of a reporting unit is less
than its carrying amount.

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SIMILARITIES AND
DIFFERENCES BETWEEN
IFRS AND US GAAP
Method of
determini
ng
impairme
nt

indefinitelived
intangible
s

Companies have the option


to
qualitatively
assess
whether it is more likely
than not that an indefinitelived intangible asset is
impaired. If a quantitative
test is performed, the
quantitative
impairment
test for an indefinite-lived
intangible asset requires a
comparison of the fair value
of the asset with its
carrying amount. If the
carrying amount of an
intangible asset exceeds its
fair value, a company
should
recognize
an
impairment loss in an

Qualitative
assessment is not
permitted.
Onestep
approach
requires that an
impairment
test
be done at the
CGU
level
by
comparing
the
CGUs
carrying
amount, including
goodwill, with its
recoverable
amount
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SIMILARITIES AND
DIFFERENCES BETWEEN
IFRS AND US GAAP
Imp-loss
calculati
ongoodwill

The amount by
which the carrying
amount of goodwill
exceeds
the
implied fair value
of
the
goodwill
within its reporting
unit.

Impairment loss on the


CGU is allocated first to
reduce goodwill to zero,
then, subject to certain
limitations, the carrying
amount of other assets in
the CGU are reduced pro
rata, based on the carrying
amount of each asset.

Reversal Prohibited for all Prohibited


for
goodwill.
of loss
assets to be held Other assets must be
and used.
reviewed at the end of
each reporting period for
reversal
indicators.
If
appropriate, loss should be
reversed up to the newly

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SIMILARITIES AND
DIFFERENCES BETWEEN
IFRS AND US GAAP
Level
of
assess
ment

indefin
itelived
intangi
ble
assets

Indefinite-lived
intangible
assets
separately
recognized
should
be
assessed for impairment
individually unless they
operate in concert with
other
indefinite-lived
intangible assets as a
single asset (i.e., the
indefinite-lived
intangible
assets
are
essentially
inseparable).
Indefinitelived intangible assets may
not be combined with other
assets (e.g., finite-lived
intangible
assets
or
goodwill) for purposes of

If the indefinite-lived
intangible asset does
not generate cash
inflows
that
are
largely independent
of those from other
assets or groups of
assets,
then
the
indefinite-lived
intangible
asset
should be tested for
impairment as part
of the CGU to which
it belongs, unless
certain
conditions
are met.

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