Draft Discussion Paper for Comments

The Malaysian Institute of

Certified Public Accountants

TAX IMPLICATIONS
RELATED TO THE
IMPLEMENTATION OF
MFRS 136/ FRS 136:
IMPAIRMENT OF ASSETS

Prepared by:
Joint Tax Working Group on FRS
 Draft Discussion Paper for Comments

Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

Contents

Page
No.
1 Introduction 1
1.1 Background of MFRS 136/ FRS 136
1.1.1. Rationale 1
1.1.2. Scope of MFRS 136/ FRS 136 1
1.1.3. Definition of essential terms 3
1.1.4. Effective date 3

2 Scope of the comments 4

3 Key changes under MFRS 136/ FRS 136 4

3.1 Frequency of impairment testing 4
3.2 Measurement of value in use 4
3.3 Recognition of cash-generating unit (CGU) 5
3.4 Allocation of goodwill to cash-generating unit 5
3.5 Timing of impairment tests for goodwill 6
3.6 Reversal of impairment loss 6

4 The MFRS/ FRS regime – accounting implications 6

5 Tax treatment for implementation of MFRS 136/ FRS 136 7

5.1 Impairment loss
5.1.1 Property, plant and equipment 7
5.1.2 Intangible assets 7
5.1.3 Goodwill 7
5.1.4 Deferred property development expenditure 7
5.1.5 Investments 7
5.2 Reversal of impairment loss 8
5.3 Proposal in adopting MFRS 136/ FRS 136 8
 Draft Discussion Paper for Comments

Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

1. INTRODUCTION

1.1 BACKGROUND OF MFRS 136/ FRS 136

1.1.1 Rationale

(a) To improve the quality of, and seek international convergence on, the
accounting for business combinations and the subsequent accounting
for goodwill and intangible assets acquired in business combinations.

(b) To ensure that the assets are carried at no more than their
recoverable amount.

1.1.2 Scope of MFRS 136/ FRS 136

(a) MFRS 136/ FRS 136 shall be applied in accounting for the impairment
of all assets, other than the following:

(a) Inventories MFRS 102/ FRS 102

Inventories
(b) Assets arising from MFRS 111/ FRS 111
construction contracts Construction Contracts

(c) Deferred tax assets MFRS 112/ FRS 112

Income Taxes

(d) Assets arising from employee MFRS 119/ FRS 119

benefits Employee Benefits

(e) Financial assets MFRS 139/ FRS 139

Financial Instruments:
Recognition and
Measurement

(f) Investment property that is MFRS 140/ FRS 140

measured at fair value Investment Property

(g) Biological assets related to MFRS 141/ MASB ED 50

agricultural activity that are Agriculture
measured at fair value less
estimated point-of-sale costs

(h) Deferred acquisition costs, and MFRS 4/ FRS 4

intangible assets, arising from Insurance Contracts
an insurer’s contractual rights
under insurance contracts

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Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

(i) Non-current assets (or disposal MFRS 5/ FRS 5 Non-

groups) classified as held for current Assets Held for
sale Sale and Discontinued
Operations

(b) Hence, MFRS 136/ FRS 136 shall be applied in accounting for the
impairment of all assets as follows:

(a) Property, plant and equipment MFRS 116/ FRS 116

(eg. land, building, machinery, Property, Plant and
ships, aircraft, motor vehicles, Equipment
furniture and fixtures, office
equipment, etc.) used in the
business operations and not
held for sale

(b) Intangible assets MFRS 138/ FRS 138

(eg. Intellectual proprietary Intangible Assets
rights, patents, licences,
franchises, brand names,
prototypes, exploration and
mining rights, R&D costs, etc.)

(c) Goodwill MFRS 3/ FRS 3

Business Combinations

(d) Deferred property development IC Interpretation 15

expenditure Agreements for the
Construction of Real
Estate

(e) Financial assets classified as:

(i) Investments in subsidiaries MFRS 127/ FRS 127

Consolidated and
Separate Financial
Statements
(ii) Investments in associates
MFRS 128/ FRS 128
Investments in
Associates

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Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

(iii) Interests in joint ventures MFRS 131/ FRS 131

Interests in Joint
Ventures

1.1.3 Definition of essential items

Carrying amount is the amount at which an asset is recognised after

deducting any accumulated depreciation (amortisation) and accumulated
impairment losses thereon.

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. A CGU can be identified based on the
enterprise’s operations, such as by product lines or classes of product lines,
by business segments, by locations, districts, regions, a branch, a division,
etc.

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.

Fair value less costs to sell is the amount obtainable from the sale of an asset
or cash-generating unit in an arms-length transaction between
knowledgeable, willing parties, less the costs of disposal.

Impairment loss is the amount by which the carrying amount of an asset or a

cash-generating unit exceeds its recoverable amount.

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.

Value in use is the present value of the future cash flows expected to be
derived from an asset or cash-generating unit.

1.1.4 Effective date

MFRS 136 is effective for annual periods beginning on or after 31 March

2004. However, the effective date and issuance date that contained in MFRS
136 is those of the IASB’s and is inapplicable in the new MFRS framework
since MFRS 1: First-time Adoption of Malaysia Financial Reporting Standards
requirements1 will be applied on 1 January 2012.

1
MFRS 1 requires period information to be restated as if the requirements of MFRSs effective for annual period
beginning on or after 1 January 2012 have always been applied, except for certain exceptions and exemptions.
This means that, in preparing its first MFRS financial statements, the first-time adopter of MFRS shall refer to

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Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

FRS 136 is effective for annual periods beginning on or after 1 January 2006.
Earlier application is encouraged.

2. SCOPE OF THE COMMENTS

The scope of the comments is confined to changes in the interpretation to the MFRS/
FRS regime that give rise to tax implications.

3. KEY CHANGES UNDER MFRS 136/ FRS 136

3.1 FREQUENCY OF IMPAIRMENT TESTING

3.1.1 MFRS 136/ FRS 136 requires the recoverable amount of an asset to be
measured whenever there is an indication that the asset may be impaired.

3.1.2 The recoverable amount of an intangible asset with an indefinite useful life to
be measured annually.

3.1.3 The recoverable amount of an intangible asset not yet available for use to be
measured annually.

3.1.4 Goodwill acquired in a business combination to be tested for impairment

annually.

3.2 MEASUREMENT OF VALUE IN USE

3.2.1 The elements that are reflected in the calculation of an asset’s value in use
are as follows:

(a) An estimate of the future cash flows which is expected to be derived

from the asset;
(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.

3.2.2 MFRS 136/ FRS 136 requires the management to prepare the cash flow
projections used to measure value in use based on the following:

(a) Assess the reasonableness of the assumptions by examining the

causes of differences between past cash flow projections and actual
cash flows.
(b) Ensure that the assumptions are consistent with past actual outcomes.

the provisions contained in MFRS 1 on matters relating to transition and effective dates instead of those
contained in respective MFRSs.

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Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

3.2.3 MFRS 136/ FRS 136 requires the cash flow projections used to measure
value in use to be based on the most recent financial budgets / forecasts
approved by management but exclude any estimated cash inflows or outflows
which are expected to arise from:

(a) Future restructurings to which the entity is not yet committed; or

(b) Improving or enhancing the asset’s performance.

3.3 RECOGNITION OF CASH-GENERATING UNIT (CGU)

3.3.1 An asset or a group of assets which produced an output in an active market

should be identified as a CGU.

3.3.2 When an entity estimates future cash flows to determine the value in use of a
CGU using the output, management’s best estimate of future market prices
for the output should be used.

3.3.3 MFRS 136/ FRS 136 requires that if the cash inflows generated by any asset
or CGU are affected by internal transfer pricing, an entity should use
management’s best estimate of future prices that could be achieved in arm’s
length transactions.

3.4 ALLOCATION OF GOODWILL TO CASH-GENERATING UNIT

3.4.1 MFRS 136/ FRS 136 requires goodwill acquired in a business combination to
be tested for impairment as part of impairment testing for the CGU.

3.4.2 Bottom-up / top-down approach is used for impairment testing by allocating

its carrying amount to each of the acquirer’s CGU on a reasonable and
consistent basis.

3.4.3 Each CGU to which the goodwill is allocated should represent the lowest
level within the entity at which the goodwill is monitored for internal
management purposes and not be larger than an operating segment as
defined in MFRS 8/ FRS 8 Operating Segments.

3.4.4 If the initial allocation of goodwill acquired in a business combination cannot

be completed before the end of the annual period, it should be completed
before the end of the first annual period beginning after the acquisition date.

3.4.5 When an entity disposes of an operation within a CGU to which goodwill has
been allocated, the goodwill should be included in the carrying amount of the
operation when determining the gain or loss on disposal and measured on
the basis of the relative values of the operation disposed of and the portion of
the CGU retained.

3.4.6 When an entity reorganises its reporting structure in a manner that changes
the composition of CGUs which goodwill has been allocated, the goodwill
should be reallocated to the units affected by using a relative value approach,
or other method where it is more appropriate.

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Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

3.5 TIMING OF IMPAIRMENT TESTS FOR GOODWILL

3.5.1 MFRS 136/ FRS 136 allows the annual impairment test for CGU to which
goodwill has been allocated to be performed at any time during an annual
reporting period, provided it is conducted at the same time every year.

3.5.2 MFRS 136/ FRS 136 permits different CGUs to be tested for impairment at
different times.

3.5.3 MFRS 136/ FRS 136 requires the CGU to be tested for impairment before the
end of the current period if the goodwill allocated to a CGU was acquired in a
business combination during the current annual period.

3.5.4 MFRS 136/ FRS136 also permits the most recent detailed calculation made
in a preceding period of the recoverable amount of a CGU to be used in the
impairment test in the current period, provided specific criteria are met.

3.6 REVERSAL OF IMPAIRMENT LOSS

3.6.1 MFRS 136/ FRS 136 requires that an impairment loss recognised in prior
years for an asset other than goodwill should be reversed if there has been a
change in the estimates used to determine recoverable amount.

3.6.2 An impairment loss is reversed only to the extent that it does not increase the
carrying amount of an asset above the carrying amount that would have been
determined.

3.6.3 MFRS 136/ FRS 136 prohibits the recognition of reversals of impairment
losses for goodwill.

4. THE MFRS/ FRS REGIME – ACCOUNTING IMPLICATIONS

4.1 MFRS 136/ FRS 136 requires that when an asset may be impaired, the
recoverable amount of the asset should be estimated and if the carrying
amount of the asset exceeds its recoverable amount, an impairment loss
should be recognised as an expense in the income statement immediately,
unless the asset is carried at revalued amount which should be treated as
revaluation decrease.

4.2 If the recoverable amount of an asset is less than its carrying amount, the
carrying amount of the asset should be reduced to its recoverable amount.

4.3 After the recognition of an impairment loss, the depreciation / amortization

charged for the asset should 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 life.

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Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

5. TAX TREATMENT FOR IMPLEMENTATION OF MFRS 136/ FRS 136

5.1 Impairment loss

An impairment loss of an asset which is recognised as an expense in the income
statement is not eligible for tax deduction as it is capital in nature.

Specifically, the effects of impairment loss on assets which are covered by MRFS
136/ FRS 136 are:

5.1.1 Property, plant and equipment - Land is not eligible for capital allowances
(CA), Investment Tax Allowance (ITA) or Reinvestment allowance (RA).
Buildings and plant which are eligible for CA, ITA or RA may be allowed the
claim based on the qualifying expenditure incurred. Any impairment loss has
no effect on the qualifying expenditure.

5.1.2 Intangible assets - Certain intangible assets, e.g. proprietary rights and R &
D costs may be eligible for tax deduction based on the actual expenditure
incurred if they fulfill the deduction rules under Section 33(1) of the Income
Tax Act 1967 and / or PU Order. Expenditure in respect of exploration and
mining rights may be eligible for mining allowances (Schedule 2 of the
Income Tax Act 1967) or tax deduction based on the qualifying eligible cost
(Schedule 4 – Expenditure on Prospecting Operations) incurred. Any
impairment loss has no effect on the deductible expenditure or qualifying
expenditure.

5.1.3 Goodwill - Goodwill would be treated as capital in nature for tax purposes
and thus is neither tax deductible nor eligible for CA claim. Any impairment
loss has no effect on the deductible expenditure.

5.1.4 Deferred property development expenditure - Deferred property

development expenditure is eligible for tax deduction when the project is
completed or over the stage of completion (IFRIC 15 Agreements For The
Construction Of Real Estate) based on the allowable cost incurred. Any
impairment loss or any provisions, including provision for impairment loss
would not be deductible for tax purposes.

5.1.5 Investments - Investments are not eligible for deduction except by taxpayers
engaged in the business of dealing in investments. For such companies,
impairment losses may be allowed for tax deduction where the valuation
amount is within the meaning allowed under Section 35(3) of the Income Tax
Act, 1967. In addition, where deduction is allowed, the deductible expenditure
is based on the cost incurred. Any impairment loss has no effect on the
deductible expenditure.

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Tax Implications Related to the Implementation of

MFRS 136/ FRS 136: Impairment of Assets

Example 1:

RM
Cost of asset 15,000
Less: Accumulated depreciation (9,000)
Carrying amount 6,000

RM
Net selling price (fair value less costs to sell) 3,000
Expected value in use 4,200

Carrying amount 6,000

Recoverable amount (higher of net selling price and 4,200
value in use)loss *
Impairment 1,800
* to be recognised as an expense in the Income
Non-deductible expense

5.2 Reversal of impairment loss

Subsequently, if there is any reversal of impairment loss which has been recognised
in a prior year in the income statement, the reversal of impairment loss would not be
taxable if no deduction had been claimed previously.

Example 2:

Same as for Example 1 above but assuming that the estimated recoverable
amount has increased to RM5,000 in the next year due to an unexpected
increase in the asset’s market value. MFRS 136/ FRS 136 would require
an impairment loss to be reversed as follows.

RM
Carrying amount 6,000
Recoverable amount 5,000
Impairment loss 1,000
Less: Impairment loss which had been recognised (1,800)
previously
Reversal of impairment loss * 800
* to be recognised in the Income Statement – Not taxable
no deduction had been claimed previously

5.3 Proposal in adopting MFRS 136/ FRS 136

In conclusion, the existing tax treatment/adjustments will continue to be applied on

the implementation of MFRS 136/ FRS 136.