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Impairment
Impairment
IMPAIRMENT OF ASSETS
Objective of PAS 36
The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its
assets are carried at no more than their recoverable amount. An asset is carried at more than its
recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the
asset. If this is the case, the asset is described as impaired and the Standard requires the entity to
recognize an impairment loss. The Standard also specifies when an entity should reverse an impairment
loss and prescribes disclosures.
Definitions
The agreement date for a business combination is the date that a substantive agreement between the combining
parties is reached and, in the case of publicly listed entities, announced to the public. In the case of a hostile takeover,
the earliest date that a substantive agreement between the combining parties is reached is the date that a sufficient
number of the acquirees owners have accepted the acquirer s offer for the acquirer to obtain control of the acquiree.
Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation
(amortization) and accumulated impairment losses thereon.
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.
Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-generating
unit under review and other cash-generating units.
Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit,
excluding finance costs and income tax expense.
Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its
residual value.
Depreciation (Amortization) is the systematic allocation of the depreciable amount of an asset over its useful life.
Fair value less costs to sell is the amount obtainable from the sale of an asset or cash-generating unit in an arm s
length transaction between knowledgeable, willing parties, less the costs of disposal.
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.
(a) The period of time over which an asset is expected to be used by the entity; or
(b) The number of production or similar units expected to be obtained from the asset by the entity.
Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
2
The recoverable amounts of the following types of intangible assets should be measured annually
whether or not there is any indication that it may be impaired. In some cases, the most recent detailed
calculation of recoverable amount made in a preceding period may be used in the impairment test for that
asset in the current period:
An intangible asset with an indefinite useful life.
An intangible asset not yet available for use.
Goodwill acquired in a business combination.
Indicators of Impairment
The lists are not intended to be exhaustive. Also, must consider materiality. Further, an indication that an
asset may be impaired may indicate that the asset's useful life, depreciation method, or residual value may
need to be reviewed and adjusted.
Value in Use
The calculation of value in use should reflect the following elements:
a. An estimate of the future cash flows the entity expects to derive from the asset in an arm's length
transaction;
b. Expectations about possible variations in the amount or timing of those future cash flows;
c. The time value of money, represented by the current market risk-free rate of interest;
d. The price for bearing the uncertainty inherent in the asset; and
e. Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows
the entity expects to derive from the asset.
a. Cash flow projections should be based on reasonable and supportable assumptions, the most
recent budgets and forecasts, and extrapolation for periods beyond budgeted projections. presumes
that budgets and forecasts should not go beyond five years; for periods after five years, extrapolate
from the earlier budgets. Management should assess the reasonableness of its assumptions by
examining the causes of differences between past cash flow projections and actual cash flows.
b. Cash flow projections should relate to the asset in its current condition future restructurings to
which the entity is not committed and expenditures to improve or enhance the asset's performance
should not be anticipated.
c. Estimates of future cash flows should not include cash inflows or outflows from financing activities,
or income tax receipts or payments.
Discount Rate
a. In measuring value in use, the discount rate used should be the pre-tax rate that reflects current
market assessments of the time value of money and the risks specific to the asset.
b. The discount rate should not reflect risks for which future cash flows have been adjusted and
should equal the rate of return that investors would require if they were to choose an investment
that would generate cash flows equivalent to those expected from the asset.
c. For impairment of an individual asset or portfolio of assets, the discount rate is the rate the
company would pay in a current market transaction to borrow money to buy that specific asset or
portfolio.
d. If a market-determined asset-specific rate is not available, a surrogate must be used that reflects
the time value of money over the asset's life as well as country risk, currency risk, price risk, and
cash flow risk. The following would normally be considered:
The enterprise's own weighted average cost of capital
The enterprise's incremental borrowing rate
Other market borrowing rates.
a. An impairment loss should be recognized whenever recoverable amount is below carrying amount.
b. The impairment loss is an expense in the income statement (unless it relates to a revalued
asset where the value changes are recognized directly in equity).
c. Adjust depreciation or amortization charges for future periods.
Cash-Generating Units
Impairment of Goodwill
c. A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least
annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable
amount of the unit:
If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the
goodwill allocated to that unit is not impaired.
If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must
recognize an impairment loss.
d. The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of
units) in the following order:
First, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of
units); and
Then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the
basis.
e. The carrying amount of an asset should not be reduced below the highest of:
Its fair value less costs to sell (if determinable);
Its value in use (if determinable); and
Zero.
a. Same approach as for the identification of impaired assets: assess at each balance sheet date
whether there is an indication that an impairment loss may have decreased. If so, calculate
recoverable amount.
b. No reversal for unwinding of discount.
c. The increased carrying amount due to reversal should not be more than what the depreciated
historical cost would have been if the impairment had not been recognized.
d. Reversal of an impairment loss is recognized as income in the income statement.
e. Adjust depreciation for future periods.
f. Reversal of an impairment loss for goodwill is prohibited.
Disclosures
Other disclosures:
If impairment losses recognized (reversed) are material in aggregate to the financial statements as a whole,
disclose:
Disclose detailed information about the estimates used to measure recoverable amounts of cash generating
units containing goodwill or intangible assets with indefinite useful lives.
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