CHAPTER 30: IMPAIRMENT OF ASSET

Definition  Events and changes that leads to the

impairment of asset classified as
 Impairment
o External sources of information
o Is a fall in the market value of an asset
o Internal sources of information
so that the recoverable amount is
now less than the carrying amount in External Sources
the statement of financial position
a. Significant decrease or decline in the market
 Carrying amount
value of an asset
o The amount at which an asset is
 As a result of:
recognized in the statement of
o Passage of time
financial position
o Normal use
 After deducting accumulated
depreciation and accumulated o New competitor entering the
impairment loss market
b. Significant change in the
Basic Principle  Technological
 Market
 Relatively straightforward
 Legal
 An established principle that an asset shall not
be carried at above of its recoverable amount  Economic environment
o In which the asset is employed
 Writedown the carrying amount
o If the CA is not fully recoverable  It could be as simple as a change in
customer taste
 If CA > recoverable amount
c. Increase in the interest rate or market rate of
o Judged to have suffered impairment
return on investment
loss
 Which will most likely affect the
 Asset shall be reduced by the amount of the
discount rate used in calculating the
impairment loss
value in use
Accounting for Impairment d. The carrying amount of net assets of the
(three main accounting issues to consider) entity is more than the market capitalization
 CA > FV
a. Indication of possible impairment
 Market capitalization
b. Measurement of the recoverable amount
o The FV of net assets of the
c. Recognition of impairment loss
entity
Indication of possible impairment
Internal Sources
 An entity shall assess at each reporting date
a. Evidence of obsolescence or physical damage
o Whether there is any indication that
of an asset
an asset may be impaired
b. Significant change in the manner or extent in
 When such indication exists
which the asset is used with an adverse effect
o The entity shall estimate the
on the entity
recoverable amount of the asset
 For example
 However, irrespective of whether there is any
o Asset is
indication of impairment, an entity shall test
 Part of restructuring
annually:
 Held for sale
o An intangible asset with an indefinite
 Idle
useful life
c. Evidence that the economic performance if an
o An intangible asset not yet available
asset will be worse than those budgeted
for use
 Undiscounted net cash flows from the
 By comparing the CA with the
asset are significantly worse than
recoverable amount
those budgeted
The external and internal sources of information are  Level 2 inputs
not exhaustive. o Inputs that are observable either
directly or indirectly
 An entity may identify other
o Include
indications that an asset may be
 Quoted prices for similar
impaired
assets in an active market
Measurement of recoverable amount  Quoted prices for identical or
similar assets in a market that
 After establishing evidence that the asset has
is not active
been impaired
 Level 3 inputs
o Next step is to determine the
o Unobservable inputs for the asset
recoverable amount
 Usually developed by the
 Preparatory to the recognition
entity using the best available
of an impairment loss
information from the entity’s
 Recoverable amount of an asset
own data
o FV less cost of disposal or value in use
 Whichever is higher Active market and principal market

FV less cost of disposal  Active market

o Where transactions for the asset take
 FV of an Asset
place with sufficient regularity and
o Price that would be received to sell
volume
the asset in an orderly transaction  To provide pricing
between market participants at the information on an ongoing
measurement date basis
 Cost of disposal  Principal market
o Incremental cost directly attributable o Market with the greatest volume and
to the disposal of an asset or cash level of activity for the asset
generating unit
 Market participants
 Excluding finance cost and
o Buyers and sellers in the principal
income tax expense
market who are
o Includes
 Independent
 Legal cost
 unrelated parties
 Stamp duty and similar
 Knowledgeable
transaction tax
 Having a reasonable
 Cost of removing the asset
understanding of the
 Direct cost in bringing the
transaction
asset into condition for sale
 Willing
 Is equal to the
 Motivated but not
o Exit price
forced and compelled
o Selling price minus cost of disposal
Value in use
FV hierarchy
 Is measured as the present value or
 Level 1 inputs discounted value of future net cash flows
o Quoted prices in an active market for expected to be derived form an asset
identical assets o Inflows minus outflows
o Quoted price in an active market  Cash flows
 Provides the most reliable o Pretax cash flows
evidence of FV
o Pretax discount rate is applied in
 Shall be used without
determining the PV
adjustment
Calculation of value in use
(The following should be considered in determining value in use)  Shall not excess the carrying amount
 Cash flow projections shall be based on that would have been determined
reasonable and supportable assumptions o Had no impairment loss been
 Cash flow projections shall be based on the recognized for the asset in
most recent budgets on financial forecasts prior years
o Usually up to a maximum period of 5  Shall be recognized immediately as
years income in the income statement
 Unless a longer period can be o To the extent that it reverses
justified a previous revaluation
 Cash flow projections beyond the 5-year decrease and any excess
period shall be estimated by extrapolating the credited immediately to
5-year projections revaluation surplus
o Using a steady or declining growth Cash Generating Unit
rate each subsequent year
 Unless an increasing year can  Is the smallest identifiable group of assets that
be justified generate cash inflows from continuing use
that are largely independent of the cash
Composition of estimates of future cash flows inflows from other assets or group of assets
 Estimates of future cash flows include  Must be the smallest aggregation of assets
o Projections of cash inflows from the  Prohibited:
o Aggregation that is too high
continuing use of an asset
o Projection of cash outflows  If aggregation is done at entity level, there
necessarily included to generate the would be no impairment recognized
cash inflows from the continuing use  If aggregation done at the department or
of the asset product line level
o Net cash flows o Then some loss producing assets
 Received in the disposal of the would be written down to recoverable
asset at the end of the useful amount
life in an arm’s length  CGU accounted for at carrying amount
transaction  May be a
 Estimates of future cash flows do not include o Department
o Future cash flows relating to o Product line
restructuring to which the entity is not o Factory
yet committed  For which the output of
o Future assets of improving or product and input of:
enhancing the asse’s performance  Raw materials
o Cash inflows or outflows from  Labor
financing activities  Overhead can be
o Income tax identified
 Basic rule
Reversal of an impairment loss o Recoverable amount of an asset shall
 Impairment loss recognized for an asset in the be determined for the asset
prior years shall be reversed individually
o If there has been a change in the  However if not possible
estimate of the recoverable amount o The entity shall determine the
 If the recoverable amount of the asset that recoverable amount of the CGU to
has been previously been impaired turns out which the asset belongs to
to be higher than the current carrying amount  Most often the recoverable amount of the
o The CA shall be increased to new asset Is equal to the value in use
recoverable amount o Because there is no asset disposed
  Loss shall be allocated to the assets of the unit Corporate assets
in the following order
 are assets other than goodwill that contribute
o First, to the Goodwill, if any
to the future cash flows of both
o Then, to all other non current assets
o CGU under review
of the unit
o Other CGUs
 Pro rata based on their
 Are group or divisional assets such as
carrying amount
o Head office building
 Carrying amount of an asset shall not be
o EDP
reduced below the:
o Highest of fair value cost of disposal, o Equipment
value in use and zero o Research Center
 Assets that do not generate inflows
CGU with goodwill independently from other assets
 Its recoverable amount cannot be determined
 Goodwill
unless management has decided to dispose of
o Does not generate cash flows
the asset
independently from other assets or
 If there is an indication that a corporate asset
group assets
may be impaired
 As a consequence, if there is an indication
o The recoverable amount of the CGU
that goodwill is impaired
which the corporate asset belongs
o Recoverable amount is determined
 Is determined
for the CGU to which goodwill belongs
 Compared with the CA of the
Determination of impairment CGU

 CGU where the goodwill has been allocated

o Shall be tested for impairment at least
annually
 By comparing carrying
amount, including goodwill
with the recoverable amount
o If RA > CA
 Not impaired
o If CA > RA
 Impairment loss must be
recognized

Reversal of impairment loss on goodwill

 PAS 36 provides that an impairment loss

recognized for goodwill shall not be reversed
in a subsequent period

CA of CGU

 Liabilities are ignored in determining the CA of

the CGU
o Unless the recoverable amount of
CGU cannot be determined without
consideration of the liability
 Reason:
o Mandated to avoid double counting
o Estimates of future cash flows do not
include cash outflows that relate to
obligations that have been recognized
as liabilities for CGU (payables, provisions)