IAS 36 - IMPAIRMENT OF ASSETS

Objectives:

To prescribe the requirements to account for and report impairment of most non-financial assets

The Standard specifies when an entity needs to perform an impairment test, how to perform it,
the recognition of any impairment losses and the related disclosures.

Scope:

All other assets are covered by this standard except the following;

1. Inventories (IAS 2)

2. Assets arising from construction contracts (IAS 11)

3. Biological assets arising from agriculture (IAS 41)

4. Assets classified as held for sale (IFRS 5)

5. Deferred tax assets (IAS 12)

6. Financial Instruments (IFRS 9)

7. Assets from insurance contracts (IFRS 4)

8. Employee benefit assets (IAS 19)

8. Investment property measured using the fair value model.

The guiding principle in IAS 36 is that assets should not be carried in the books at values above
their recoverable amounts.

If the carrying amount of an asset is greater than its recoverable amount then the asset is said to
be impaired and should be written down to its recoverable amount.

IAS 36 prescribes the timing requirements for performing quantitative impairment testing as well
as potential indicators of impairment that may trigger impairment testing for some assets or
groups of assets (CGUs).

Definitions of Key Terms:

Carrying Amount
This is the amount at which an asset is recognised in the books/SOFP after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses thereon.

Recoverable Amount

The HIGHER of an asset or CGU’s fair value less costs of disposal and its value in use.

Fair value less costs of disposal

Is the market price of an asset less any estimated costs to sell the asset

Value in use

Is the present value of the future cash flows expected to be derived from the continued use of
asset or cash generating unit (CGU)

Cash generating unit (CGU)

Is the smallest identifiable group of assets that generate cash flows that are largely independent
of the cash flows from other assets or groups of assets

Corporate assets

Are assets other than goodwill that contribute to the future cash flows of both the CGU under
impairment review and other CGUs.

The distinctive feature of corporate assets is that they do not generate cash inflows independently
of other assets or groups of assets and their carrying amounts cannot be fully attributed to the
CGU under review, e.g a company Head Office Building.

Goodwill and corporate assets by definition do not generate cash inflows on their own and
therefore, must be allocated to a CGU or groups of CGUs for impairment testing purposes.

Use reasonable and consistent bases to allocate the carrying amount of corporate asset to the
CGU under review.

Indicators of Impairment

IAS 36 provides a non-exhaustive list of external and internal indicators for possible
impairment of assets.

Internal Indicators:

 Physical damage of the asset

 Available evidence of obsolescence of the asset
  Significant negative changes have occurred or are expected to occur in the extent the
asset is expected to be used egs plans to dispose the asset before the previously expected
date, the asset is to become idle etc
 Loss of key employees
 Evidence is available from internal reporting that indicates that the economic
performance of an asset is or will be worse than expected.
 There is a reduction in the asset’s remaining useful life.

External Indicators:

 Carrying amount of the net assets of the entity is more than its market capitalisation
 Market interest rates or other market rates of return on investments have increased ,
which in turn increase the discount rate used in calculating an asset’s value-in -use
hence a reduced asset value
 Significant negative changes have occurred or are expected in the asset’s
technological, market, economic or legal environment which significantly reduce its
recoverable amount.
 Observable indicators of significant unexpected decline in market value

Determining whether an asset is impaired

Carrying Amount compared with Recoverable Amount

HIGHER OF

Fair value less costs to sell and Value in use

 If carrying amount > Recoverable amount, the asset is impaired.

 If carrying amount < Recoverable amount, the asset in not impaired.

The impairment loss is normally recognised immediately in P&L. However, if there is a

revaluation surplus in respect of an asset, an impairment loss is recognised in respect of that asset
to the extent covered by that surplus., thus it is treated in the same way as a downward
revaluation. The part of the impairment not covered by the surplus is recognised in P&L.

IAS 36 requires that the following assets should be tested for impairment annually even if there
are no any indications that the assets may be impaired;

 Goodwill acquired in a business combination

  Intangible assets with an indefinite useful life
 Intangible assets not yet available for use

NOTE: All other assets that fall into this standard are tested for impairment only when there are
any indications that the assets may be impaired.

IAS 36 prescribes the levels of review for impairment.

(a) Individual Asset Level

 This is where the entity estimates the recoverable amount of an individual asset.

(b) Cash Generating Unit Level

 This is when the entity determines the recoverable amount of the CGU to which an asset
belongs.
 Goodwill and corporate assets can be allocated to CGU for the purpose of applying IAS
36.

EXAMPLE 1: Impairment for an Individual Asset.

A machine was acquired on 1 January 2006 at a cost of $50 000 and has a useful economic life
of 10 years. At 31 December 2009, an impairment review was performed on the machine. The
fair value of the machine is $26 000 and selling costs are estimated to be $2 000.

Th e expected future cash inflows from the continued use of the machine are $5000 per annum
for the next 6 years. The current cost of capital is 10%. An annuity factor for this rate over this
period is 4,356.

Calculate any impairment loss, if any, on the machine as at 31 December 2009.

SOLUTION

Carrying amount of machine @ 31 December 2009:

Cost minus Accumulated Depreciation to date

$50 000 – ($50 000/10 years)* 4 years

$50 000- $20 000

$30 000

Recoverable amount of machine: HIGHER of Fair value less cost to sale AND Value-in –use.

Fair value less cost to sale = $26 000 - $2 000

 = $24 000

Value-in-use = Annual cash inflow * Annuity Factor

= $5 000 * 4,356

= $21 780

Recoverable amount = higher of $24 000 and $21 780

= $24 000

As the carrying amount of the machine ($30 000) is greater than its recoverable amount ($24
000), the machine is impaired.

Impairment loss = $30 000 - $24 000

= $6 000

Journal for impairment of machine:

DR Profit/Loss $6 000

CR Machinery $6 000

Going forward, the machine will be recorded @ $24 000 in the SOFP and depreciated at $4 000
annually ($24 000/6 years).

EXAMLE 2: Individual Assets

Comptec Ltd, a company that arose out of a business combination two years ago, had the
following assets with respective carrying values as at 31 December 2020, its reporting date.

Goodwill 700

Motor Vehicles 1300

Computer Equipment 1000

Package ‘X’ 500

Package ‘X’ is a computer software programme recently developed by the company. The
programme is still under pilot testing prior to its full commercialisation. Due to the high success
rates of other software programmes the company developed in the past, the management of
Comptec Ltd are highly optimistic about the commercial viability of package ‘X’.

Comptec Ltd operates in a high-tech industry, as such its management are of the view that some
of the company’s computer equipment maybe obsolete.

No events or circumstances have occurred during the company’s financial year ending 31
December 2020 that might suggest that the company’s motor vehicles are not carried in the
books at their realistic values.

Required:

Basing on the provisions of IAS 36, advise Comptec Ltd management whether or not they should
carry out impairment reviews on some of its assets as at 31 December 2020. (8)

SOLUTION

Goodwill

It is stated that Comptec Ltd arose out of a business combination hence the goodwill was
acquired as a result of business combination. IAS 36 requires goodwill acquired in a business
combination to be assessed for impairment annually irrespective of whether there are any
indications of possibility of impairment. Management of Comptec Ltd should therefore carry out
an impairment review on goodwill at its reporting date so as to comply with the provisions of
IAS 36.

Motor Vehicles

It is stated that no events or circumstances have occurred during the company’s financial year
that might indicate that the company’s motor vehicles are not carried at their realistic values.
This implies that management did not encounter any possible indicators of impairment on motor
vehicles hence as at 31 December 2020, it is not necessary to test the motor vehicles for
impairment. IAS 36 states that, other than for those assets specified to be tested for impairment
annually, all other assets need to be tested for impairment only if there are some indicators that
suggest that the assets may be impaired.

Computer Equipment

It is stated that Comptec Ltd operates in a high-tech industry, this means that technological
changes greatly impact on the market values of the company’s assets hence some of the
computer equipment are considered to be obsolete. Management of Comptec should test
computer equipment for any impairment as at the reporting date. This is in accordance to IAS 36
that requires entities to carry out impairment reviews on its assets if there are any indications that
the assets may be impaired.

Package ‘X’ is an intangible asset for Comptec Ltd not yet available for use. IAS 36 requires
intangible assets not yet available for use to be tested annually irrespective of whether there are
any factors that suggest that the assets may be impaired hence management of Comptec should
carry out an impairment review on Package ‘X’ as at the reporting date.

EXAMPLE 3

Telepath owned a 100% subsidiary, Tilda, which is treated as a cash generating unit. On 31
March 2012, there was a gas explosion that caused some damage to Tilda’s plant.

The assets of Tilda immediately before the accident had the following carrying values:

Goodwill 1 800

Patent 1 200

Factory Building 4 000

Plant 3 500

Receivables and Cash 1 500

TOTAL 12 000

As a result of the accident, the recoverable amount of Tilda has been assessed as $6 700.

The explosion destroyed (to the point of no further use) an item of plant that had a carrying
amount of $500.

Tilda has an open offer from a competitor of $1 000 for its patent.

The receivables and cash are already stated at their fair values less costs to sell (net realisable
values).

Required:

Calculate the carrying amounts of the assets of Tilda as at 31 March 2012 after accounting for
any impairment losses involved. (8 marks)

SOLUTION:

Asset Ranking Before Impairment After

Goodwill (2) 1 800 (1 800) --

Patent (1) 1 200 (200) 1 000

Factory Building (3) 4 000 (2 800) 1 200

Plant (1) 3 500 (500) 3 000

Receivables and cash 1 500 -- 1 500

TOTAL 12 000 (5 300) 6 700

Impairment loss = $12 000 – $6 700

= $5 300

Allocation of Impairment loss:

1. Specific assets explicitly impaired

2. Goodwill

3. Pro-rata to remaining assets

NOTE:

No single asset in the CGU should be reduced below its recoverable amount.