IAS 36- Impairment

1 Nguyễn Đình Hoàng Uyên

 Objectives
2

After this chapter, you should be able to:

➢ Ensure that assets are carried no more than
their recoverable amount.

➢ Define how the recoverable amount is

determined
 3 ✓ PPE (IAS 16)
✓ Investment property at cost (IAS 40)
IAS 36 applies to: ✓ Intangible assets (IAS 38)
✓ Goodwill
✓ Subsidiaries, associates, and joint ventures at
cost, or equity method.
✓ Assets at revalued amounts

IAS 36 does not apply to:

✓ Inventories (IAS 2)
✓Construction contracts (IAS 11)
✓ Employee benefit (IAS 19)
✓ Deferred tax assets (IAS 12)
✓ Financial assets (IFRS 9)
✓ Non-current assets held-for-sale (IFRS 5)
✓ Agricultural assets at FV (IAS 41)
✓Investment property at FV (IAS 40)
 Related Standards
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 IFRS 3 Business combinations

 IAS 16 Property, plant and equipment
 IAS 17 Leases
 IFRS 10 Consolidated Financial Statements
 IAS 27 Equity method in separate financial statements
 IAS 28 Investments in associates
 IAS 31 Interests in joint ventures
 IAS 38 Intangible assets
 IAS 40 Investment property
 Contents
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1. Identification of impairment
2. Determining recoverable amount
3. Determining value in use
4. Measuring & recognizing impairment loss
5. Cash Generating Unit
6. Goodwill
7. Corporate asset
8. Reversing an impairment loss
1. Identification of Impairment - when?
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Carrying amount (CA)

(Accounting records)
> Recoverable amount (RA)
Higher (Fair value- cost to sell)
and
Value in use

CA – RA = Impairment loss
1. Identification of Impairment
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Example
Carrying Fair value Value in Recoverable Impairment
amount less costs use amount loss
to sell

Asset A 10.000 12.000 18.000

Asset B 11.000 9.000 13.000
Asset C 7.000 11.500 n/d
Asset D 8.500 6.500 7.000
Asset E 12.750 n/d 16.800
Asset F 10.000 14.000 12.000
Asset G 21.000 15.000 10.000
1. Identification of Impairment – When?
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Indication of impairment At the end of each reporting

period

Intangibles with indefinite useful life

Annual test for Impairment
Intangibles not yet available for use

Goodwill acquired in combination Annual test for Impairment

1. Identification of Impairment – When?
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External sources Internal sources

✓ Decline in market value ✓ Obsolescence / physical damage

✓ Significant changes ✓Significant changes
(Market, technology, legal, economic) (restructuring, discontinuing)
✓ Increase in interest rates ✓Internal reporting evidence
✓ CA> market capitalization
1. Identification of Impairment- What?
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If possible An individual asset EX: a building for rents

If not possible A cash generating unit EX: a textile factory

Not possible to estimate the recoverable amount of the individual

asset, because:
➢ fair value less costs to sell cannot be estimated to be
close to the asset’s value.
➢ value in use can not be determined, because of the
asset does not generate cash inflows that are largely
independent of those from other assets. [IAS 36.66, 67]

CGU is the smallest identifiable group of asets that

generates cash inflows largely independent from other
 Example
11
 A mining company owns a private railway
that it uses to transport output from one of
its mines. 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.
Consequently, if the mining company suspects
an impairment in the value of the railway, it
should treat the mine as a whole as a cash
generating unit, and measure the recoverable
amount of the mine as a whole.
 Example
12
A bus company 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 bus 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.
2. Determining recoverable amount.
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Higher of asset’s / CUG’s

Fair value less cost to sell Value in use

If FV less cost to sell

impossible to set
RA= Value in use
2. Determining Recoverable Amount - Note
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 If fair value less costs to sell or value in use is more than carrying
amount, it is not necessary to calculate the other amount. The
asset is not impaired. [IAS 36.19]

 If fair value less costs to sell cannot be determined, then

recoverable amount is value in use. [IAS 36.20]

 For assets to be disposed of, recoverable amount is fair value less

costs to sell. [IAS 36.21]
3. Determining Value in use (VIU)
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Value in use = Present value of the future cash flows expected to be derived
from an asset/CGU

Variation
uncertainty
Future cash flows Risk specific to asset
(reflect in Future cash flows or
discount rate, no double)
If future cash flows include risk, discount
Discount rate rate: risk-free rate of interest

[30-33]
 3. Determining Value in use Future cash flows
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Assumptions (useful life)
Recent budgets/ forecasts (5 years, longer
period can be justified)
Future cash flows Extrapolation (>5 years, using a steady or
declining growth rate)
• Cash inflows from continuing use
include • Necessary and directly attributable cash outflows (day-to-day
servicing and replacement cost [40]
•Net cash flows from disposal (=fair value less cost to sell)[39]

• Future restructuring (not yet committed)

Not include •Improving/ enhancing performance (not yet committed)
•Receivables/ Payables provisions or pensions
•Financial activities
•Income tax
future cash outflows for the restructuring ➔ Provisions for restructuring (IAS 37)
When committed the cost savings from restructuring ➔ future cash flows.
[47-49] Cash outflows form restricting ➔ future cash flows, if expenditure to
restructuring
 Determining cash flows
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 Two approaches:
1. Most likely cash flows from use and
disposal discounted using risk-adjusted
discount rate.
2. Probability-weighted cash flows from
use and disposal discounted using
remaining risk-adjusted discount rate.
Value in use Future cash flows
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Most likely cash flows

Determining cash flows
Expected value of cash flows

EX: Estimated cash flows with a 40% probability they will be $120
and a 60% probability they will be $80. Value in use?
 Method 1: ???
 Method 2: ???
3. Determining Value in use Discount rate
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Discount rate is pre- tax rate

Reflects current market assessmet

➢ rate implicit in current market transactions

for similar assets
1. Market rate ➢ Weighted average cost of capital (WACC)
(listed entity , similar asset)
2. When no market rate:
- WACC
- Incremental borrowing rate
- Other market borrowing rate [A17]

reflect in the discount rate(%)

Risk Or No double counting

reflect in the net cash flows

 3. Determining Value in use - EX
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1. Future cash flows 2. Discounting

Year Future cash flows Discount factor at 10% Present value

1 3.000
2 2.800
3 2.500
4 2.000
5 1.200
Total 11.500
4. Measuring & recognizing impairment loss
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Carrying Recoverable
Impairment loss
amount amount

Cost model Debit: P/L – Impairment loss

Credit: Asset (adjustment)

Revaluation model Debit: OCI (Revaluation surplus)

Or P/L (Impairment loss)
Credit: Asset

➢ impairment loss - the carrying amount < 0➔ not recognise

➢ Adjust depreciation for future periods to new carrying amount
➢ related deferred tax ➔ accordance with IAS 12
5. Cash Generating Unit (CGU) IAS 36.104, 105
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CGU is the smallest identifiable group of asets that

generates cash inflows largely independent from other
CGU shall be identified consistently

CA of CGU
(include GW) > RA of CGU

Impairment loss
CA of asset after adjustment for
be allocated
impairment loss: the highest of:
(a) its fair value less costs to sell (if
the assets of CGU determinable);
first, goodwill (b) its value in use (if determinable);
then, the other assets (pro (c) zero.
rata on carrying amount
6. Goodwill
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Testing of CGU with Goodwill

Testing annually or whenever there

Goodwill
is an indication of impairment
Allocation to CGUs
 Cases
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(a) Fair value less costs
to sell: 50; has suffered
CGU physical damage, is still
Fair value working ➔ must be
less costs to determined value in use
sell: 200 ➔ of CGU. Allocate
(1) CA: 100 impairment losses if any
no
impairment
(b) Fair value less costs
(2) CA: to sell: 50; has suffered
200 physical damage, a
commitment of
(3) management to
CA:300 replace it and sell it in
the near future ➔
GW: 50 value in use = FVLCTS
=50 ➔ recognize
impairment loss 150.

Fair value less costs to sell: 200; there may be

an indication of an impairment. ➔ must be determined
value in use of CGU. Allocate impairment losses if any
EX

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(a) Fair value less costs

Fair value CGU to sell: 50; has suffered
less costs to physical damage, is still
working ➔ must be
sell: 200 ➔
determined value in use
no (2) CA: of CGU. Allocate
impairment (1) CA: 100 200 impairment losses if any

GW: 50
(3)
CA:
300

Fair value less costs to sell: 200; there may be

an indication of an impairment. ➔ must be determined value
in use of CGU. Allocate impairment losses if any

CA of CGU: 650 [100+ 200+ 300+50]

Value in use of CGU: 400
Fair value of CGU: not identify
➔ Allocate impairment loss to assets in CGU.
Key CA of CGU: 650 [100+ 200+ 300+50]
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Value in use of CGU: 400
Fair value of CGU: not identify
➔Recoverable amount: 400
➔Impairment loss of CGU: 250

CA Pro rata Allocation CA FVLCTS Allocation CA

Impairment after Impairment
loss (draft) loss
(Draft)
GW 50 50 0 50 0
(1) 100 0 100 0 100
(2) 200 200/500 80 120 50 100 100

(3) 300 300/500 120 180 200 100 200

Total 250 250

7. Corporate assets
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RA of an individual corporate asset cannot be

determined ➔ RA is determined for the CGU or
group CGU units to which the corporate asset
belongs.

➢ Identify all the corporate assets that relate to

Building of a headquarters
Division of the entity
the cash-generating unit/ cash-generating
EDP equipment units
Research centre.
➢ CA of a corporate asset can be allocated
on a reasonable and consistent basis to that
CGU or that CGUs.
do not generate cash
inflows independently
➢ compare the CA of CGU/CGUs (including
CA of the corporate asset) with RA of
CGU/CGUs.
8. Reversing an impairment loss
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Is there any indication that impairment loss no longer exits?

External sources Internal sources

✓Increase in market value ✓Significant changes
✓Significant changes (restructuring, enhancement)
(Market, technology, legal, economic) ✓Internal reporting evidence
✓Decrease in interest rates
 8. Reversing an impairment loss
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shall be reversed if and only if when change in estimates to determine RA

the basis for recoverable amount.
the amount or timing of cash flows
the discount rate;
components of fair value less costs to sell

✓ ✓ x
Individual asset CGU Goodwill

- Increased CA <= original CA - Allocation to assets, pro rata

(net of depreciation) with CA. (No goodwill) No
- P/L, or revaluation increase CA of asset shall not be reversal
- depreciation: new CA increased above the lower of:
- [IAS 36. 117-120] RA & Original CA
Definitions
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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.
Value in use is the present value of the future cash flows expected
to be derived from an asset or a cash-generating unit.
Fair value less costs to sell is the amount obtainable from the sale
of an asset or a cash-generating unit in an arm’s-length transaction
between knowledgeable, willing parties less the costs of disposal.
A cash-generating unit is the smallest identifiable group of assets
for which independent cash flows can be identified and measured.
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