last updated: 3/30/2020

IAS 36 example: Simple impairment test of a CGU based on value in use

Below are calculations accompanying the example available on IFRScommunity.com under direct link below:

https://ifrscommunity.com/knowledge-base/value-in-use-impairment/#link-ias_36_example_simple_impairment_test_of

date of impairment test: 31 Dec 20X0

Calculation of recoverable amount of the CGU (value in use)

1,971 Present value of cash flows for years 20X1 to 20X5 (the part "*(1+WACC)^0,5" in the formula
10,000 Present value of terminal year
11,970 Total recoverable amount

Calculation of carrying amount of the CGU:

3,760 Goodwill
7,230 Property, plant and equipment
1,320 Intangible assets
400 Other assets
12,710 Total carrying amount

Impairment loss equation:

(740) Excess of carrying amount over recoverable amount -> impairment loss

Cash flow projections

1 2 3 4 5
20X1 20X2 20X3 20X4 20X5 terminal year
Forecast Forecast Forecast Forecast Forecast

Revenue 3,000 3,100 3,150 3,150 3,200 3,200

EBITDA 1,000 1,033 1,050 1,050 1,067 1,067

Depreciation 570 570 570 570 570 570
Operating income 430 463 480 480 497 497
Capital expenditures 530 530 530 530 530 570

Tax at nominal rate of

19% 82 88 91 91 94 94
Reduction in tax 27 29 30 30 31 31
Tax after tax credit 54 59 61 61 63 63

Cash flow generated by

the CGU before tax 470 503 520 520 537 497

Cash flow generated by

the CGU post-tax 416 445 459 459 474 434

discount factor @ YE 0.9 0.9 0.9 0.8 0.8

393.9 399.6 391.3 371.0 362.8 1,918.7

discount factor @ HY 1.0 0.9 0.9 0.8 0.8

404.6 410.4 401.9 381.0 372.6 1,970.5

other inputs
5.48% post-tax WACC
2.00% PGR (perpetuity growth rate) - estimated growth rate beyond period covered by cash flow pr

calculation of pre-tax WACC for disclosure purposes

6.01% approximate pre-tax WACC calculated using excel goalseek function so that the recoverable
12,311 pre-tax recoverable amount
er direct link below:

mple_simple_impairment_test_of_CGU_based_on_value_in_use

"*(1+WACC)^0,5" in the formula places the cash flow in the middle of each year instead of the end of the year)

airment loss

this is the terminal year - cash flow projection beyond the period covered by the forecast, it usually is equal or close to the

This is notional tax depreciation needed for value in use purposes only (to calculate income tax charge). Notional, i.e. with

Strictly speaking, this should include only replacements of existing assets after the end of their useful life. It may be differe

Tax is calculated as a % of operating income. Temporary differences should be ignored as they are already included in defe
The entity from this example operates in a region with high unemployment rate and gets its tax charge reduced by a third
nd period covered by cash flow projections

function so that the recoverable amount based on pre-tax cash flows is the same as the recoverable amount calculated on a post-tax b
of the year)

, it usually is equal or close to the last year covered by the forecast

me tax charge). Notional, i.e. with the assumption that carrying value of CGU and it's tax base are equal on day 1.

their useful life. It may be different from the depreciation charge e.g. due to changes in technology.

s they are already included in deferred tax. Interest in impairment tests is ignored in cash flow projections, as cost of capital is reflected
its tax charge reduced by a third
amount calculated on a post-tax basis
ost of capital is reflected in WACC calculation.