Chapter 10 Impairment of Assets (Pas 36)
Chapter 10 Impairment of Assets (Pas 36)
Chapter 10 Impairment of Assets (Pas 36)
Learning Objectives
• State the core principle of PAS 36.
• Account for the impairment of individual assets and cash-generating units.
• Account for the reversal of impairment.
Scope
PAS 36 applies in the accounting for the impairment of the following noncurrent asset:
1. Property, plant and equipment
2. Investment property measure under the cost model
3. Intangible assets
4. Investment in associates, joint venture, and subsidiaries
Core Principle
If the carrying amount of an asset is greater than its recoverable amount, the asset is impaired. The
excess is impairment loss.
Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx
Recoverable amount is the amount to be recovered through use or sale of an asset. It is the higher of an
asset’s:
a. Fair value less costs of disposal, and
b. Value in use
Value in use is the present value of the future cash flows expected to be derived from an asset or cash-
generating unit.
Illustrative Problem
On December 31, 2021, Entity A Determines that its building is impaired. The following information is
gathered:
building 1,000,000
accumulated depreciation 300,000
fair value less cost of disposal 600,000
value in use 580,000
An entity shall assess at the end of each reporting period whether there is any indication that an asset may
be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
If there is no indication that an asset may be impaired, an entity is not required to estimate the
recoverable amount of the asset.
Indications of impairment
The following assets are required to be tested for impairment at least annually, whether or not there are
indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
Measuring recoverable amount
• Recoverable amount is the higher of the asset’s fair value less costs of disposal and value in use.
• However, if there is no reason to believe that an asset’s value in use materially exceeds its fair value
less costs of disposal, the asset’s fair value less costs of disposal may be used as its recoverable
amount. This will often be the case for an asset that is held for disposal.
Value in use
Value in use is the present value of the future cash flows expected to be derived from an asset or cash-
generating unit.
• Any residual value of the asset and disposal costs should be included in estimating future cash
inflows and outflows.
• Cash flow projections shall cover a maximum period of 5 years.
• Projections beyond 5 years are extrapolated.
• The discount rate to be used shall be a pre-tax rate
When making estimates of future cash flows for purposes of computing value in use:
Exclude cash flows arising from: Include cash flows arising from:
1. Future restructurings not yet committed 1. Revenues to be derived from the
2. Improving or enhancing the asset’s continuing use of the asset
performance 2. Day-to-day costs of using the asset
3. Income taxes 3. Any residual value of the asset and
4. Financing activities disposal costs
Impairment loss is recognized in profit or loss, unless the asset is carried at revalued amount, in which
case revaluation surplus is decreased first and any excess is recognized in profit or loss. The decrease in
the revaluation surplus is recognized in other comprehensive income.
After the recognition of an impairment loss, the depreciation (amortization) charge for the asset shall be
adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any),
on a systematic basis over its remaining useful life.
Illustrative Problem: Cost of Disposal
On December 31, 2021, ABC co. identified that its machinery with a carrying amount of P1,000,000 and
remaining useful life of 5 years has been impaired. In estimating the recoverable amount, ABC
determined that the fair value of the asset is P800,000. The following cost were also estimated:
ABC does not have any reason to believe that the value in use of asset materially exceeds fair value less
cost of disposal. The remaining useful life of the machinery is unchanged. ABC uses the straight-line
method of the depreciation.
Requirements:
a. Compute the impairment loss
b. Compute for the revised annual depreciation expense after impairment testing.
Solution:
On December 31, 20x1, MASSIVE HEAVY Co. identified that its building with a carrying amount of
₱2,400,000 has been impaired. In estimating the recoverable amount, MASSIVE has determined that the
fair value less costs of disposal of the asset is ₱1,600,000.
Solution:
The adjusted future cash outflows are computed as follows:
Future costs not yet
Costs of day-to-day Adjusted cash out
Year Unadjusted cash outflows committed & Costs of
servicing flows
improvement
Year Cash in flows Adjusted cash out flows Net cash flows
(a) (b) (c) = (a) - (b)
1,992,576
Solution:
Recoverable amount (FVLCS – higher) ₱2,800,000
Carrying amount (3,200,000)
Excess over carrying amount (400,000)
Offset to revaluation surplus 320,000
Excess charged as Impairment loss (₱ 80,000)
Illustrative Problem: Intangible Asset with indefinite useful life
INSUPERABLE UNSURPASSABLE Co. determined that its trademark is impaired. INSUPERABLE
cannot estimate reliably the trademark’s fair value less costs of disposal. However, the following
information has been determined:
When there is a series of indefinite cash flows, the present value is determined by simply dividing the
cash flows by the discount rate.
Cash-generating unit (CGU) 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.
Assets whose recoverable amount can be determined reliably are tested for impairment individually.
Assets whose recoverable amount cannot be determined reliably (e.g., assets that do not generate their
own cash flows) are included in a CGU. The CGU is the one tested for impairment.
For purposes of impairment testing, goodwill acquired in a business combination shall be allocated to
each of the acquirer’s CGU in the year of business combination.
Illustrative Problem: Allocation of Goodwill
At the end of 20x1, ABC Co. acquires Alpha Corp. for P10,000,000 Alpha has manufacturing plants in
three countries. Data at the end of 20x1 is shown below:
Fair Value of Identifiable Assets
Activities in Country #1 1,000,000
Activities in Country #2 3,000,000
Activities in Country #23 4,000,000
Total fair value of identifiable assets 8,000,000
Illustration Problem:
INSTIGATE PROVOKE Co. determined that one of its cash-generating units is impaired. Information on
the assets of the CGU is shown below:
It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value less costs of disposal is
₱2,400,000.
Requirement:
a. How much is the impairment loss?
b. How much is the carrying amount of the building after the impairment testing?
Allocation of Impairment
Assets Carrying amount Fraction Loss
Inventory N/A N/A -
Investment property 1,600,000 1,600/4,000 480,000
Building 2,400,000 2,400/4,000 720,000
4,000,000 4,000/4,000 1,200,000
The increased carrying amount of an asset other than goodwill due to a reversal of an impairment loss
should not exceed the carrying amount that would have been determined (net of amortization or
depreciation) had no impairment loss been recognized for the asset in prior years.
Any increase in excess of this amount would be a revaluation and would be accounted for under the
appropriate Standard (e.g. PAS 16 for an item of property, plant and equipment).
b CA on date of reversal
On January 1, 20x1, FALLACIOUS MISLEADING Co. acquired a building for ₱4,000,000. The asset is
depreciated using the straight-line method over an estimated useful life of 10 years.
On January 1, 20x6, the building was estimated to have a recoverable amount of ₱1,600,000.
Consequently, impairment loss was recognized on that date. There was no change in the estimated
useful life.
On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and a
remaining useful life of 3 years. The building is measured under the revaluation model.
Requirements:
The carrying amount of the building on January 1, 20x9 had no impairment loss been
recognized previously is computed as follows:
Historical cost ₱4,000,000
Depreciation from 20x1 to 20x8 (4M x 8/10) ( 3,200,000)
Carrying amount on January 1, 20x9 (assuming no IL) ₱ 800,000
Video Reference:
https://www.youtube.com/watch?v=QDxjMZp8X4U
https://www.youtube.com/watch?v=SM8wSmpoNWA
https://www.youtube.com/watch?v=hj9GGHDRHk0