FAR Impairments
Definition of IAS 36
Impairment of Assets
Impairment loss:
The amount by which the carrying amount of an asset or a cgu exceeds its recoverable amount.
Purpose of an impairment test
to ensure that assets are not overstated
Where assets are recorded at fair value, ...
there is no need to test for recoverability of the carrying amount of the asset
The only assets that need to be tested at the end of the reporting period are those ...
where there is any indication that an asset may be impaired
there are some assets for which an impairment test must be undertaken every year (3)
1. Intangible assets with indefinite useful lives
2. Intangible assets not yet available for use
3. Goodwill acquired in a business combination.
Reasons for testing yearly on impairments:
1. Carrying amount is considered to be uncertain
2. No subject to annual amortisation, so no ongoing reduction in the carrying amount
3. relates to the concept of depreciation
IAS 36 requires management to consider ... that might indicate the possibility of ...
internal and external sources of evidence, impairment
Four sources of information relating to the external environment in which the entity operates:
1. Asset's value
2. Entity's environment / markt
3. Interest share
4. Market capitalisation
Three sources of information relating to the internal environment in which the entity operates:
1. Physical damage
2. Change use within the entity
3. Economic performance of the Asset
Recoverable amount definition
The higher of its fair value less costs of disposal, and its value in use
Fair value definition
The price that would be received to sell an asset at the measurement date
Cost of disposal definition
Incremental costs directly attributable to the disposal of an asset or cash generating unit, excluding finance costs and income tax expense
Value in use definition
The present value of the future cash flows expected to be obtained from an asset
IAS Impairment of Assets notes that fair value differs from value in use because of factors that are likely to be specific to the entity:
1. Additional valuederived form the grouping of assets
2. Synergies between the asset being measured and other assets
3. Legal rights specific to the current owner of the asset
4. Tax (dis) advantages specific to the current owner of the asset
Determining future cash flows (7)
1. Management's best estimate
2. Most recent financial budgets and forecasts
3. Growth rate should be realistic
4. Assets must be estimated in the current condition
5. Possible events won't be taken into consideration
6. Finance activities and income tax are not included
7. Cash flows from disposal will take specific future price increase into account
Determing the discount rate (2)
1. Reflect the time value of money
2. Reflecht the risks specific to the asset
Where an asset is measured using the cost model...
an impairment loss is recognised immediately in p&l
Where an asset is measured using the revaluation model...
any impairment loss is treated as a revaluation increase
Regardless of whether the cost model or the revaluation model is used, once the impairment loss is recognised, any subsequent depreciation/amortisation is based on ...
the new recoverable amount
If it is not possible to estimate the recoverable amount for an individual assets...
then the impairment test is applied to a cash generating unit
A cash-generating unit is...
the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Identification of a CGU is done by (5)
1. Consider how management monitors the operations
2. Consider how management makes decisions about continuing or disposing assets and operations
3. If an active market exists for the output of a group of assets, this will be a CGU
4. If the output of a group is used internally, but can be sold externally, the value of this CGU can be determined
5. CGU should be identified consistently from period to period
the carrying amount of a cash-generating unit does not include...
the carrying amount of any recognised liability
IAS 36 states that the impairment loss should be allocated to reduce the carrying amount of the assets of the unit by ...
allocating the impairment loss pro rata based on the carrying amount of each asset in the unit
If any corporate assets can be allocated on a reasonable and consistent basis to cash generating units, ...
then this should be done
If some corporate assets cannot be allocated across the cash-generating units, the entity (3)
1. Compares the carrying amount of each unit being tested with its recoverable amount and recognises any impairment loss by allocting the loss acress the assets of the unit
2. Identifies the smallest CGU that includes the unit under review and to which a portion of the unallocated coporate asset can be allocated
3. Compares the carrying amount of the larger cash-generating unit, including the portion of the corporate asset, with is allocated amount. Impairment loss is then allocated across the assets of the larger CGU
Goodwill is recognised only when it is ...
acquired in a business combination
It is not possible to determine ..., or to identify ... that relates specifically to ...
a fair value less costs of disposal for goodwill, a set of cash flows, goodwill
When deciding which units should have goodwill allocated to them, consideration should be given to ...
how internal management monitors the goodwill
the goodwill should be allocated to ...
the lowest level at which management monitors the goodwill
If the recoverable amount of goodwill exceeds the carrying amount, there is ... In particular, there is no ...
no impairment loss, impairment of goodwill
it is impossible to distinguish purchased goodwill from other assets that might increase the recoverable amount (3)
1. Internally generated goodwill
2. Unrecognised identifiable net assets
3. Excess value over carrying amount of recognised assets
IAS 36 requires an entity to assess at ... whether there are indications that an impairment loss recognised in previous periods may not exist or may have decreased
the end of each reporting period
Where the recoverable amount is greater than the carrying amount of an individual asset (other than goodwill), the reversal of a previous impairment loss requires
adjusting the carrying amount of the asset to recoverable amount
If the reversal of the impairment loss relates to a cash-generating unit, the reversal of the impairment loss is ...
allocated pro rata to the assets of the unit, except for goodwill, with the carrying amounts of those assets