Santos, Leighanne Zyril B.

January 29, 2019

BSA12KA1

PAS 36: IMPAIRMENT OF ASSETS

Objective:
 Ensure that assets are carried at no more than their recoverable amount
 Define how recoverable amount is determined
PAS 36 rules can be applied to:
 Property, Plant, and Equipment
 Investment Property at Cost
 Intangible Assets
 Good will
 Subsidiaries, Associates, and Joint Ventures at Cost
 Assets at Revalued Amounts
Impairment
− Asset is impaired when carrying amount exceeds it recoverable amount
 Carrying Amount – amount after deductions of accumulated depreciation/amortization,
or accumulated impairment loss
 Recoverable Amount – fair value less cost to sell or value in use
 Impairment Loss – the difference when carrying amount is higher than recoverable
amount
How to know if assets are impaired?
1. At the end of each reporting period, an entity has to asses if there is an indication of impairment,
whether external or internal. Test is only necessary if there are indications of impairment.
2. If an entity owns intangibles with indefinite useful life and those that are not yet available for use,
it is necessary to perform test annually even there is no indication of impairment.
3. A goodwill acquired in combination is also necessary to test annually for impairment.
Indications of Impairment
1. External Sources
 Decline in Market Value
 Significant Changes (Market, Technology, Legal, Economic)
 Increase in interest Rates
 Carrying amount > Market Capitalization
2. Internal Sources
 Obsolescence/Physical Damage
 Significant Changes (Restructuring,, Discontinuing)
 Internal Reporting Evidence
Recoverable Amount
− Difference of fair value cost to sell or value in use
− It is not necessary to compute both:
 Any of the two > Carrying amount = No impairment
 No basis of making reliable estimate of FV = Use value in use

a. Fair Value less Cost to Sell

 Fair Value
  Cost to Sell – “Cost of Disposal”; Costs accrued in putting the asset into a condition that
is suitable
b. Value in Use
− Present value of the future cash flows expected to be derived from an asset
 Aspects to take into account:
1. Estimation of Future Cash Flows
− Possible variations in the amount or timing
2. Time Value of Money
− For discounting cash flows into present value
− Uncertainty in the Price
3. Other factors
 Future Cash Flows
− Basis:
o Assumptions representing best estimate of the economic conditions
o Recent financial budgets and forecasts – maximum of 5years
(exclude future restructuring or improving asset performance)
o Extrapolating cash projection based on steady/declining growth rate
 Discount Rate
− Pre-tax rate: before income tax effects
− Reflects current market assessment of time value of money risk specific to
asset
− There should be no double counting
Best Method for Determining Discount Rate:
a. Market rate
b. When no market rate:
o Weighted average cost of capital
o Incremental borrowing rate
o Other market borrowing rates

Recognition of Impairment Loss

1. Cost Model
− Impairment loss is immediately debited to profit/loss
2. Revaluation Model
− Treated as revaluation surplus in other comprehensive income
− When no revaluation surplus, it is debited immediately to profit/loss
Cash Generating Unit (CGU)
− Smallest identifiable group of assets that generates cash inflows largely independent from other
assets
 Carrying Amount considered:
− Directly attributed assets
− Assets allocated on reasonable and consistent basis
Business Combinations
− Goodwill should be allocated to each based on benefits to which goodwill is monitored
 Testing of CGU with Goodwill:
− Test annually or when there is an indication
 − Testing: carrying amount of CGU + allocated goodwill > recoverable amount of
CGU as a whole
 Allocating Impairment Loss (CGU with Goodwill)
a. Reduce carrying amount of goodwill allocated to CGU
b. Reduce carrying amount of other assets of CGU pro rata
 Do not reduce carrying amount of an asset below the highest of:
− FV less cost to sell
− Value in use
− Zero
Corporate Assets
− Assets contributing to future cash flows of CGU under review and other CGU
 If allocation is possible:
− Test CGU including portion of allocated corporate asset
 Is allocation is impossible:
− Go direct bottom-up direction: allocating assets in a higher or group level
Reversal of Impairment Loss
− At the end of current period, an entity must assess whether there is an indication that impairment
loss no longer exists
− Necessary when asset may no longer be impaired in recognized amount, only when there is a
change in estimates used in determining assets recoverable amount in past periods
1. Individual Asset
− Reversal cannot be increased carrying amount higher than the original carrying
amount
− Recognized as impairment loss directly to profit/loss of revaluation increase
− Adjust depreciation that will reflect new estimates
2. Cash Generating Unit
− Reversal shall be allocated to the assets pro rate (except goodwill)
− Carrying amount should not exceed lower of its recoverable amount or carrying
amount without any impairment loss
3. Goodwill
− No reversal

PAS 37: PROVISION, CONTINGENT LIABILITY,

AND ASSET
Objective:
 To prescribe the criteria for recognition and measurement of provisions, contingent liability and
asset plus the disclosure for these items
Provision
− Liability of uncertain timing or uncertain amount
 Liability – a present obligation from past event (outflow)
a. Legal Obligation – rise from some contracts or law
b. Constructive Obligation – rise from some entities action
Recognition of Provision
1. It has present obligation whether legal or constructive.
 2. Outflow of economic benefits requires settlement of obligation must be probable.
3. There must be a reliable estimate of the outflow of economic benefits.
Note: If conditions are not met, contingent liability or nothing is recognized.
Can you avoid the obligation by your future actions?
1. Yes: Do not recognize a provision.
2. No: Recognize a provision.
Contingencies
a. Contingent Liability
- Possible obligation: its existence will be confirmed by some uncertain future events that
are not fully under company’s control
- Present obligation: possible outflow of economic benefits (not probable) or the amount
cannot be measured reliably
b. Contingent Asset
- Possible asset that arises from past events and inflow of economic benefits is probable
NOTE: Both are not recognized but their existence, nature, estimation of financial effects, indication of
uncertainties and some possibilities of reimbursement and disclosure must be disclosed.
How to measure a provision?
1. The best estimate of the expenditure to settle the present obligation.
2. Its estimate of outcome and financial effects are determined by judgement.
3. Some available evidence is also taken into consideration.
2 Ways of Measuring Provision:
1. Expected value
- Used when measurement involves a large population of items
- Provision = Weighted average of all possible outcomes by the probabilities
2. Individual most likely outcome
- Single obligation is being measured
- Provision = the most likely outcome
Accounting for Provision
Debit Credit
Recognition of Expense / Asset Liability – Provision
Provision
Unwinding the Discount Finance Cost Liability – Provision
Use of Provision Liability – Provision Cash / Bank (etc.)
Reimbursements Reimbursement Asset Expense
NOTE: Expense related to provision and its reimbursement is presented as a net amount.
Specific situation relates to provision:
1. Future operating losses
- No definition of liability because it has no past events, thus, no provision
- Future operating loss = Impairment of assets
2. Onerous contracts
- It is unfair contract
- Unavoidable costs > economic benefits of the contract (a lose contract)
- Provision = Amount of unavoidable cost
- Unavoidable Cost: net cost of fulfilling or penalty (which is lower)
 3. Restructuring
- Program planned and controlled by management that changes scope or manner of business.
 Conditions for recognition:
- Detailed plan
- Valid expectation

PAS 38: INTANGIBLE ASSETS

Objective:
 To specify the accounting treatment for intangible assets not dealt with in another standard
Intangible Assets
− Identifiable non-monetary assets without physical substance
− Controlled by an entity as a result of past event
− Has probable future economic benefits
Recognition
a. A future economic benefit attributable to the asset will flow
b. Cost can be reliably measured (Purchase Price & Directly Attributable Costs)
Internally Generated Intangible Assets
1. Development
- Application of research findings or other knowledge to a plan or design for the
production of new or substantial improvements before the start of commercial production
or use
 Criteria for proving the commercial and technical feasibility:
- Probable future economic benefits
- Intention to complete and use/sell it
- Resources adequate and available to complete and use/sell
- Ability to use or sell the assets
- Technical feasibility
- Expenditure reliably measurable
2. Research
- Original and planned investigation undertaken with the prospect of gaining new scientific
and technical knowledge and understanding
- You do not develop anything
- Cost is immediately expensed in P/L as incurred
3. Goodwill
- Can’t be recognized as an asset
4. Other Assets
- Can’t be capitalized because it fails to meet one or more recognition criteria
Initial Measurement
 Cost
- Directly attributed or allocated
- From the date of meeting the criteria
- No retrospective allocation

Subsequent Measurement
1. Cost Model
 - Cost - Accumulated Amortization - Accumulated Impairment Loss
2. Revaluation Model
- Fair Value - Subsequent Accumulated Amortization - Subsequent Accumulated
Impairment
Useful Life of Intangibles
1. Finite
- You know how many periods you can use the assets
- Assume residual value = zero, unless there is active buyer
- Revise amortization (end of accounting year)
2. Indefinite
- You don’t know how many periods you can use the assets
- Shouldn’t be amortized
- Review useful life (end of accounting year)
Account for Recognition
1. Increased Carrying Amount
- Credit to equity: Revaluation surplus
- Credit to income: If reverses previous decrease in profit or loss
2. Decreased Carrying Amount
- Debit to expenses
- Debit to equity: If reverses previous increase in revaluation surplus
Note: When asset is realized or used, transfer any revaluation surplus to retained earnings.
Derecognition from the Financial Statement
a. On disposal
b. No future economic benefits expected
 Gain or Loss
- Net disposal proceeds (Disposal – Cost of Disposal) – Carrying amount
- Included in P/L