r ment of Assets sanpairment of Assets: Inger 477 Chapter 23 Impairment of Assets Related standard: PAS 36 Impairment of Assets Jearning Objectives 1, State the core principle of PAS 36, 2. Account for the impairment of individual assets and cash- generating units 3,_Account for the reversal of impairment. Scope PAS 36 applies in the accounting for the impairment of the following noncurrent assets: a, Property, plant, and equipment b. Investment property measured under the cost model «Intangible assets d. Investments in associates, joint ventures and subsidiaries. Core principle The carrying amount of an asset shall not exceed its recoverable amount. If the carrying amount of an asset exceeds its recoverable amount, the asset is impaired. The excess shall be written-off as impairment loss. * If carrying amount is greater than recoverable amount, the asset is impaired. The excess is impairment loss. +8 * Ifcarrying amount is equal to or less than recoverable amount, the asset is not impaired. No accounting problem, &© > Carrying amount is “the amount at which an asset is recognized after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon.” (PAS 36.6)Chapter 23 478 ee (a » Recoverable amount is the amount expected to be recovered from the sale or use of an asset. It is the higher of anasset’s a. Fair value less costs of disposal, and b. Value in use. > Fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (PAS 36.6) © 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.” (PAS36.5) « Value in use is “the present value of’ the future cash flows expected to be derived from an asset or cash-generating unit.” (PAS 36.6) Illustration: On December 31, 20x1, Entity A determines that its building is impaired. The following information is gathered: Building 1,000,000 Accumulated depreciation "300,000 Fair value less costs of disposal (FVLCD) 600,000 Value in use (VIL) 580,000 > The impairment loss is computed as follows: Recoverable amount (higher of FVLCD and VIU) 600,000 Less; Carrying amount (1,000,000 - 300,000) (700,000) Impairment loss (100,000) Identifying an asset that may be impaired An entity assesses at the end of each reporting period whether there is an indication that an asset may be impaired. > If such an indication exists, the entity estimates the recoverable amount of the asset. > If no such indication exists, the entity need not estimate the recoverable amount of the asset.snpairment of Assets es an Indications of impairment Anentity shall consider the following indications of impairment: 1, External sources of information: a, Significant decline in the asset’ b. Significant changes in techn legal environment that ad amount of an asset. c Increase in market interest rates that adversely affect the discount rate used in calculating an asset’s value in use, and consequently, its recoverable amount. d. The carrying amount of the entity's net assets exceeds its market capitalization, S (market) value. ‘ological, market, economic, or versely affect the recoverable IL_ Internal sources of information: & Obsolescence or physical damage of an asset. £ Significant changes in the expected use of an asset that adversely affect its recoverable amount (eg., the asset becomes idle, plan to discontinue or restructure the operation to which an asset belongs, plan to dispose of the asset earlier than expected, and reassessment of an asset's useful life from indefinite to finite). 8 Indications that the economic performance of an asset is, or | will be, worse than expected (e.g., the maintenance costs of the asset are significantly higher than expected; or the cash inflows from the asset are significantly lower than expected). An indication that an asset may be impaired may signify that the remaining useful life, the depreciation or amortization method, or the residual value of the asset needs to be reviewed and adjusted even if no impairment loss is recognized for the sot,480 ee Required testing for impairment The following assets are required least annually even if there are no indication: ‘a. Intangible asset with indefinite useful life b. Intangible asset not yet available for use Goodwill acquired in a business combination to be tested for impairment at s for impairment: ‘These assets may be tested for impairment at any time during the annual period provided it is performed at the same time every year, Concurrent testing is not required for dissimilar assets. If these assets are recognized during the year, they must be tested for impairment before the end of that year. Goodwill is tested for impairment in relation to the cash- generating unit to which it has been allocated (we will discuss this momentarily). Measuring recoverable amount Recoverable amount is the higher of an asset's FVLCD and VIU. PAS 36 provides the following guidance when measuring an asset's recoverable amount: It is not always necessary to determine both the FVLCD and VIU. If one of them exceeds the asset's carrying amount, the asset is not impaired, and the other amount need not be computed. * If it isnot possible to determine the FVLCD, the VIU is used as the recoverable amount. If there is no reason to believe that the VIU exceeds the FVLCD, the FVLCD is used as the recoverable amount. This is normally the case if the asset is held for disposal. Fair value less costs of disposal (FVLCD) ‘An entity uses PERS 13 Fair Value Measurement when measuring an asset's fair value. AM eur mole oc)iyprirment of Assets 481 ue $$ Costs of disposal, except those that have been recognized ys liabilities, are deducted in measuring fair value less costs of sposal. Examples of such costs are: as Legal costs, stamp duty and similar transaction taxes p, Costs of removing the asset ¢. Direct costs of bringing an asset into the condition for its sale ‘Termination benefits and costs associated with reducing or reorganizing a business following the disposal of an asset are not regarded as costs of disposal. value in use (VIU) VIU is the present value of the future net cash flows expected to be derived from the continuing use of an asset and from its disposal at the end of its useful life. VIU is computed using the gees steps: Estimate the future cash inflows and outflows expected to be derived from continuing use of the asset and from its final disposal. _ 2. Apply an appropriate discount rate to those future cash flows. Estimates of future cash flows * Cash flow projections are based on management’s best estimates. When making the estimates, management gives greater weight to external evidence. * Cash flow projections are based on the most recent financial | _ budgets/forecasts approved by management. * Cash flow projections are based on the asset’s current condition and exclude and include the following: Filade cash flows arising from: | Include cash flows arising from: 1. Future restructurings not yet | 1. Revenues to be derived from committed the continuing use of the - Improving or enhancing the asset asset's performance 2. Day-to-day costs of using the Income taxes asset Financing activities 3. Any residual value of the asset and disposal costsoe a 482 Chapter 23 Cash flow projections cover a maximum period of 5 years, unless a longer period can be justified. Projections beyond the 5-year period are extrapolated using a steady or declining growth rate (e.g, 2er or negative), unless an increasing rate can be justified. » “To avoid double-counting, estimates of future cash flows do not include: a. Cash inflows from assets that generate cash inflows that are largely independent of the cash inflows from the asset under review (for example, financial assets such as receivables); and b. Cash outflows that relate to obligations that have been recognized as liabilities (for example, payables, pensions or provisions).” (PAS3643) * Cash flow projections based on a foreign currency are translated using the spot exchange rate at the date the VIU is calculated. Discount rate The discount rate is a pre-tax rate that reflects current assessments of the time value of money and risks for which the future cash flow estimates have not been adjusted VIU computation takes into account the effect of inflation. However, to avoid double-counting, either the estimates of future cash flows or the discount rate is adjusted for inflation, but not both. Recognizing and measuring an impairment loss If the carrying amount of an asset exceeds its recoverable amourt, the carrying amount is reduced to the recoverable amount. ‘The reduction is impairment loss. Impairment loss is recognized immediately in profit ¢” loss, unless the asset is carried at revalued amount, in which 25° elute) AST elite a nro) buvina the -~Impairment of Assets 483 revaluation surplus is decreased first and any excess is recognized in profit or loss. The decrease in the revaluation surplus is recognized in other comprehensive income. If the impairment loss exceeds the carrying amount of the assel, a liability is recognized if this i¢ required by another PFRS. For example, this would be the case for a leased asset for which the lessee guarantees a tesidual value. After impairment, the amortization) for the asset is based antount, subsequent depreciation on the asset’s recoverable Illustration 1: Costs of disposal On December 31, 20x1, ABC Co, identified that its machinery with a carrying amount of P1,000,000 and remaining useful life of 5 yeors has been impaired. In estimating the recoverable amount, ABC determined that fair vata the asset is P800,000. The following costs were also estimated: * Transaction taxes 50,000 * Legal costs, stamp duty, commissions, and similar fees 10,000 * Costs of dismantling or removing the asset included in provision for restoration and decommissioning cost 5,000 * Termination benefits and costs associated with Teducing or reorganizing a business following the disposal of an asset 15,000 ABC does not have any reason to believe that the value in use of the asset materially exceeds fair value less costs of disposal. The Temaining useful life of the machinery is unchanged. ABC uses the Staight-line method of depreciation, Requirements: * Compute for the impairment loss. Compute for the revised depreciation after thene. Solutions: Requirement (a): Impairment loss Fair value 800,000 Costs of disposal: Transaction taxes Legal costs, stamp duty, commissions, and similar fees _10,000 Total costs of disposal: (60,000) Fair value less costs of disposal 740,000 % Notes: = Costs of disposal do not include costs of dismantling or removing the asset that were already included in the provision for restoration and decommissioning cost. These costs are already offset from the fair value of the asset. * Termination benefits and costs associated with reducing or reorganizing a business following (or after) the disposal of an asset are not direct incremental costs to dispose of the asset. Therefore, they are excluded in determining costs of disposal. Recoverable amount - FVLCD 740,000 Carrying amount (4,000,000) Impairment loss (260,000) Dec. 31, | Impairment loss 260,000 200 Accumulated depreciation 260,000 PAS 36 does not specify whether impairment loss shall be charged directly to an asset account or through an “accumulated depreciation” or “accumulated impairment loss” account. However, the disclosure requirements of PAS 16, 38, and 40 suggest that an “accumulated depreciation” account should be used because any accumulated impairment losses are required to be aggregated with accumulated depreciation for the purpose ofrr — Impairment of Assets 485 disclosing reconciliations. Furthermore, the gross carrying amount of an asset is also required to be disclosed in the reconciliation. Of course, if the impaired asset is non-depreciable or not amortized (e.g., land, intangible asset with indefinite useful life), the use of the “accumulated impairment loss” account would be more appropriate. Again, the gross carrying amount of an asset is required to be disclosed. Requirement (b): Depreciation after impairment testing After the impairment testing, the revised carrying amount of the impaired machinery is 740,000, the recoverable amount. This amount will be ‘depreciated over the remaining useful life of the asset. ‘The revised annual depreciation expense is computed as follows: Revised carrying amount (Recoverable amount) 740,000 Residual value ‘ Depreciable amount 740,000 Divide by: Remaining useful life Revised annual depreciation after impairment Illustration 2.1: Value in use On December 31, 20x0, ABC Co. identified that its building with a carrying amount of P600,000 hes been impaired. In estimating the recoverable amount, ABC determined that the asset's fair value less costs of disposal is P400,000. In estimating the value in use, ABC determined the following: Year. Future cash inflows Future cash outflows 20x1 300,000 100,000 20x2 280,000 100,000 20x3 260,000 80,000 The discount rate is 10%. ——_ L486 Chapter 23 Requirement: Compute for the impairment loss. Solution: The future net cash flows are computed as follows: Year Cash inflows Cash outflows Net cash flows (a) ) (@=@) -() 20x1 300,000 100,000 200,000 20x2 280,000 100,000 180,000 20x3 260,000 80,000 180,000 ‘The value in use is computed as follows: Year _Net cash flows PV of PI factors Present value 20x1 200,000 PV of P1@10%,n=1 0.909091 181,818 20x2 180,000 PV of P1.@10%, n=2 0.826446 148,760 20x3 180,000 PV of P1.@10%,n=3_ 0.751315, 135,237 465,815 The recoverable amount is determined as follows: Fair value less costs of disposal 400,000 Value in use 465,815 Recoverable amount (higher) 465,815 The impairment loss is computed as follows: Recoverable amount (VIU) 465,815 Carrying amount (600,000) Impairment loss (134,185) Illustration 2.2: Value in use - with adjustment to cash flows On December 31, 20x1, ABC Co. identified that its building with a carrying amount of P600,000 has been impaired. In estimating the recoverable amount, ABC determined that the asset's fair value less costs of disposal is P400,000.r | inp mel of Assets 487 d the following: re cash outflows 20x71 300,000 100,000 20x2 280,000 100,000 0x3 260,000 80,000 ‘Additional information: + Each year’s estimated future cash outflows include P10,000 representing cash outflows from future restructuring not yet committed and ?5,000 representing cash outflows on planned improvement and enhancement of the asset, » Not included in the estimated future cash outflows are costs of | day-to-day servicing of the asset amounting to P2,000 per year. © The discount rate is 10%. | Requirement: Compute for the impairment loss. Solution: The net cash flows are computed as follows: Year Cash inflows Adjusted cash outflows Net cash flows 20x1 300,000 (100K - 10K - 5K + 2K) 213,000 20x2 280,000 (100K - 10K - 5K + 2K) 193,000 20x3 260,000 (80K - 10K - 5K + 2K) = 67,000 193,000 The future costs not yet committed and costs of planned improvement and enhancement of the asset are excluded, while costs of day-to-day servicing of the asset are included in the projected cash outflows. The value in use is computed as follows: Year _Net cash flows PY of Pt factors Present value 20xi 713,000 ‘PVefPieI0%n-1 0.909091 (193,636 20r2 193,000 -PVofP1@10%n-2 0.826446 159,504 20x3 193,000 PV ofP1@10%, n=3 (0.751315 145,004488 Chapter 23 The recoverable amount is determined as follows: Fair value less costs of disposal 400,000 Value in use 498,144 Recoverable amount (higher) 428,144 The impairment loss is computed as follows: Recoverable amount 498,144 Carrying amount (600,000) Impairment loss (101,856) Illustration 3: Value in use ~ with residual value On December 31, 20x1, ABC Co. identified that its intangible asset with a carrying amount of P600,000 has been impaired. In estimating the recoverable amount, ABC determined that the asset's fair value less costs of disposal is P400,000. ABC estimated that the future net cash flows expected to arise from the continuing use of the asset is P100,000 per year for the remaining useful life of 5 years, The estimate of future cash flows includes cash outflows for income taxes and financing activities totaling P10,000 per year. The equipment has a residual value of ?20,000. The discount rate is 10%. Requirement: Compute for the impairment loss. Solution: The adjusted net cash flows per year are determined as follows: Unadjusted net cash flows per year . 100,000 Add back: Cash outflows from income taxes and financing activities * 10,000 Adjusted net cash flows per year 110,000 Cash flow from residual value at end of useful life __20,000ry irment of Assets 489 mpa «The cash outflows from income taxes and financing activities are aided back to the net cash flows because they have decreased the net cash flows but they should be excluded. ‘The value in use is computed as follows: Bt at Present Net cash PV lows 10%, n=5 factors value 110,000 PV of anordinary annuity of P| 3.790787 416,987 20,000 PVof PI 0.620921 12,418 429,405 a Notice that the residual value (i.e., P20,000) is included in the cash flow projections. The recoverable amount is determined as follows: Fair value less costs of disposal 400,000 Value in use 429,405 Recoverable amount - (higher) P429,405 Impairment loss is computed as follows: Recoverable amount 429,405 Carrying amount (600,000) " (P170,595) Impairment loss Illustration 4: Recoverable amount exceeding Carrying amount One of ABC Co.’s plant has a carrying amount of P800,000 and a value in use of P780,000. A recent market transaction for a similar plant involved a net selling price of P820,000. Requirement: How much is the impairment loss? ired because the recoverable Answer: None, the asset is not impai higher amount) exceeds the amount (ie, FVLCD of 820K - the carrying amount.490 Chapter 23 pee SRE Illustration 5: Impairment loss on a newly constructed asset ABC Co. has just completed constructing a new building. Costs incurred are shown below: Materials, labor, and overhead 700,000 Borrowing costs appropriately capitalized 80,000 Total construction costs £780,000 Requirement: If the recoverable amount of the building is P750,000, how much is the impairment loss? Answer: P30,000 (750,000 — 780,000) An asset is impaired if its carrying amount exceeds its recoverable amount even if the asset is newly constructed and even if it is not yet put to use. Illustration 6: Impairment loss - subsequent depreciation On January 1, 20x1, ABC acquired equipment for P500,000. The equipment is depreciated using the straight line method over an estimated useful life of 10 years and residual value of P50,000. On January 1, 20x6, ABC determined that the equipment is impaired. Fair value less costs of disposal is P140,000. Projected future net cash flows from revenues produced by the equipment is 50,000 annually. The revised estimated useful life is 4 years and the new estimated residual value is P10,000. The appropriate discount rate if 10%. eee Requirement: Compute for the depreciation expense in 20x6. Solution: The value in use is computed as follows:impairment of Assets a pV factors Present @ 10%, n=4__value = Future cash flows Net cash flows from revenues 50,000 3.169865 158,493 ‘gesidual value 10,000 _0.683013_6,630_ - 165,323 Recoverable amount(VIU - higher) 165,323 Less: Revised residual value (_10,000) New depreciable amount 155,323 Divide by: Revised useful life ee | Depreciation expense -20x6 38,831 Ilustration 7: Impairment loss - Revaluation model Information on ABC’s impaired building is shown below: Carrying amount 800,000. Revaluation surplus 80,000 Fair value less costs of disposal 700,000 Value in use 680,000 Requirement: Compute for the impairment loss. Solution: Recoverable amount (FVLCS - higher) P700,000 Carrying amount (_800,000) Excess over carrying amount ( 100,000) Offset to revaluation surplus 80,000 Excess charged as Impairment loss (P.20,000) The entry to record the impairment loss is as follows: Date | Revaluation surplus 80,000 Impairment loss 20,000 Accumulated depreciation 100,000ae Se Notice that the balance of the revaluation surplus is decreased first and the remaining amount is charged to profit or loss as impairment loss. The decrease in the revaluation surplus ig recognized in other comprehensive income as “LOSS on property revaluation.” Illustration 8: Intangible asset w/ indefinite useful life ABC Co, determined that its trademark is impaired. ABC cannot reliably estimate the trademark’s fair value less costs of disposal However, ABC has determined the following information: Carrying amount 130,000 Annual future cash flows from the trademark 10,000 Discount rate 10% Requirement: Compute for the impairment loss: Solution: The value in use is determined as follows: Annual future cash flows from the trademark 10,000 Divide by: Discount rate 10% Present value of indefinite cash flows (value in use) 100,000 When there is a series of indefinite cash flows, the present value is determined by simply dividing the cash flows by the discount rate. This is called present value of perpetuity. When the value of “n” (period) in the PV of an annuity formula becomes infinitely large, the present value factor will tend toward 0 (ie. a5 the value of “n” increases, present value decreases), leading to the simplification of the formula. The impairment loss is computed as follows: Recoverable amount (VIU) Carrying amount Impairment lossry irment of Assets inp _ jilustration 9: Impairment loss - asset to be disposed of ‘one of ABC Co’s machines has been impaired. Repairs and maintenance costs on the machine have been increasing over the t years making the machine a bottleneck in ABC's production. Accordingly, management decided to sell the machine. Information on the machine is shown below: Carrying amount P 100,000 fair value less costs of disposal 50,000 Value in use 60,000 Requirement: How much is the impairment loss? ‘Answer: P50,000 (50,000 FVLCD ~ 100,000 CA). The recoverable amount of an asset that is to be disposed of is its fair value less costs of disposal, even if this amount is higher than the value in use. This is because value in use represents the economic benefits from the asset’s continuing use. If the asset is not to be used but rather sold, its value is use becomes irrelevant. Cash-generating units Recoverable amount is normally determined for each individual ' asset. However, when an asset belongs to a cash-generating unit (CGU), recoverable amount is determined for the CGU to which the asset belongs. © 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.” (PAS 36.6) " For example, a CGU may be a retail store of a fast food thain, a bookstore of a school, a convenient store of a gasoline88 ee ag station, a supermarket of a mall, a product line, etc. These examples generate cash flows that are independent from the cash flows of the entity as a whole. If these segments are the smallest identifiable group of assets, then they are considered as CGUs. Assets are generally tested for impairment individually, Accordingly, their recoverable amounts are determined individually. However, when it is not possible to determine an individual asset's recoverable amount, the recoverable amount of the CGU to which that individual asset belongs is determined. This would be the case if the asset's VIU cannot be estimated to be close to its FVLCD and the asset does not independently generate its own cash inflows. In such a case, the asset is tested for impairment, not on its own, but together with the other assets in the CGU as a whole. As an exception, an asset that management is committed to dispose of is tested for impairment separately even if it belongs to a CGU. Example 1: ABC Co. owns various buildings held as lodging quarters to accommodate its employees working at the mines. The buildings could be sold only for scrap value when the natural resource is fully extracted at ABC’s mines. Employees do not pay rent for the lodging quarters. * It is not possible to estimate the recoverable amounts of the buildings because their values in use cannot be determined and is probably different from scrap value. Therefore, the entity estimates the recoverable amount of the cash-generating unit to which the buildings belong, ie., the mine as a whole. Example 2; ABC Co. operates inter-island ferry under contract with the government that requires minimum service on each of six separate routes. Assets devoted to each route and the cash flows from each495 impairment of a significant loss @ Since the entity does not have the option to curtail any one route of each six: (ie.’ government requires minimum service the lowest level of identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets is the cash inflows generated by the six routes together. The cash- | | | route can be identified separately. One of the routes operates at a | | | | | generating unit for each route is the ferry company as 4 whole, ( Summary of concepts: 1. Assets whose recoverable amount can be determined reliably are tested for impairment individually. 2, Assets whose recoverable amount cannot be determined reliably (eg. assets that do not generate their own cash flows) are induded in a CGU. The CGU is the one tested for impairment. when management is committed to sell an individual that individual asset is separately the CGU as a whole. However, asset belonging to a CGU, tested for impairment first before testing Recoverable amount and Carrying amount of aCGU The recoverable amount of a CGU is the higher of the CGU's FVLCD and VIU. The CGU's carrying amount is determined in a manner that is consistent with how the CGU’s recoverable amount is determined, Accordingly, the carrying amount of a CCU includes only those assets and liabilities that are directly attributable to the the CGU on a reasonable basis and will CGU or are allocated to generate the future cash flows used in determining the CGU’s value in use. (PAS 36.76 (2)) The carrying amount of a CGU does not include financial assets, such as receivables, and recognized liabilities, such as Payables, pensions or provisions, just as these items are excluded in determining the CGU’s recoverable amount. (PAS 36.43 and .28) However, for practical reasons, the recoverable amount of 4 CGU is sometimes determined by considering financial assets,Chapter 23 496 Chapter23 a such as receivables, and recognized liabilities, such as payables, pensions or provisions. In such cases, these items are also included in the CGU’s carrying amount. (PAS 367) Goodwill ; For purposes of impairment testing, goodzill recognized in a business combination is allocated to each of the acquirer’s CGUs in the year of business combination. If the allocation cannot be completed before the end of that year, it must be completed before the end of the immediately following year. Goodwill does not generate its own cash flows but it often contributes to the cash’ flows of multiple CGUs. Goodwill is an unidentifiable asset; thus, it can only be tested for impairment if it is allocated to the CGUs that are expected to benefit from the synergies of the business combination The CGUs to which goodwill is allocated represent the lowest levels within the entity at which the goodwill is monitored for internal management purposes and are not larger than an operating segment, If a CGU to which goodwill is allocated is partially disposed of, the allocated goodwill is reallocated to the portions sold and unsold based on their relative values for purposes of determining the gain or loss on the disposal. Similarly, if an entity reorganizes its reporting structure in a manner that changes the composition of the CGUs to which goodwill has been allocated, the goodwill is reallocated to the (CGUs affected based on their relative values. Illustration 1: Allocation of goodwill - business combination At the end of 20x1, ABC Co. acquires Alpha Corp. for P10,000,000. Alpha has manufacturing plants in three countries. Data at the end of 20x1 is shown below. Fair Value of identifiable assets Activities in Country #1 P 1,000,000 Activities in Country #2 3,000,000 Activities in Country #3 Total fair value of identifiable assetsof Astets : : 497 Requirement: How much goodwill is allocated to each of the CGUs? Solution: Consideration transferred 10,000,000 Fair value of identifiable assets acquired (_8,000 1000) Goodwill P_2,000,000 Goodwill is allocated as follows: a cGu Fairvalues Fraction Allocation of goodwill Country #1 1,000,000 1/8 250,000 Country #2 3,000,000 3/8 750,000 Country 43 4,000,000 4/8 1,000,000 8,000,000, 8/8 2,000,000 —_—_—_———_ nS Goodwill is allocated to the various CGUs so that it can be tested for impairment. This accounting procedure is sometimes called the “bottom-up test.” Bottom-up test means goodwill is allocated to the CCU and an impairment loss has occurred if the CGU’s recoverable amount is less than its carrying amount, including the allocated goodwill. Ilustration 2: Disposal of portion of CGU ABC Co. has a cash-generating unit for which goodwill of P60,000 was allocated. During the year, an operation that was part of the CGU was sold for P500,000. The relative values of the portions sold and retained cannot be determined reliably. Information on the assets included in the CGU is as follows: Carrying amount of operation sold excluding goodwill 400,000 Cerrying amount of portion not sold excluding goodwill _1,200,000 Total carrying amount of CGU excluding goodzwill 21,600,000498 Caples AB — Requirement: How much is the gain or loss on the sale of the operation? Solution: Carrying amount of operation sold excluding goodwill? 400,000 Allocation of goodwill (60,000 x 400,000/1,600,000) —15,000 Carrying amount of operation sold including goodwill 415,000 Proceeds from sale —500,000 Gain on sale P_85,000 The entry to record the sale is as follows: Date | Cash 500,000 Various asset accounts 400,000 Goodwill 15,000 Gain on sale 85,000 Illustration 3: Reallocation of goodwill ABC Co. previously allocated P60,000 goodwill to CGU A. The goodwill allocated to CGU A cannot be identified or associated with an asset group at a level lower than CGU A, except arbitrarily. During the year, ABC Co. reorganizes its reporting structure such that CGU A is divided and integrated into three other cash- generating units - CGU's B, C and D. Additional information is shown below: 200,000 400,000 600,000 1,200,000 cGu Fair values B c D At the end of the year, CGU D is sold for 500,000 when its carrying amount is P580,000 excluding allocated goodwiiyF Inpairmen of Assets 499 TO Requirement: How much is the gain or loss on the sale? Solution’ P 580,000 Carrying amount of CGU D excluding goodwill Reallocation of CGU A’s goodwill (50,000 x 600/1,200) __30,000 Carrying amount of CGU D including goodwill 610,000 Proceeds from sale 500,000 Loss from sale (P110,000) Impairment of a CGU A CGU to which goodwill has been allocated or contains an intangible asset with indefinite useful life or an intangible asset not yet available for use is tested for impairment at least annually whether or not there is an indication of impairment. ‘A CGU is tested for impairment by comparing the CGU’s carrying amount, including any allocated goodwill, with its recoverable amount. The CGU is impaired if its carrying amount, including the allocated goodwill, exceeds its recoverable amount. In such case, the impairment loss on the CGU is allocated as follows: a. First, to any goodwill included in the CGU; b. Then, to the other assets of the CGU pro rata based on their carrying amounts. When allocating the impairment loss, the carrying amount of an asset belonging to the CGU shall not be reduced below the highest of: a. its fair value less costs of disposal (if determinable); b. its value in use (if determinable); and © zero. Any amount that cannot be allocated to an asset because Of the limitation above is allocated to the other assets of the CGU Pro rata based-on their carrying amounts.500 Chapter 23 If the recoverable amount of an individual asset cannot be determined, no impairment loss is recognized for that asset if the CGU to which it belongs is not impaired. This applies even if the individual asset's fair value less costs of disposal is less than its carrying amount. Illustration 1: Impairment of aCGU- with allocated goodwill Entity A determines that one of its cash-generating units is impaired. The following information was gathered: Carrying amount of CGU: Assets Carrying amount Inventory 200,000 Investment property (at cost model) 400,000 Building 600,000 Goodwill 300,000 1,500,000 e Fair value less costs of disposal of CGU: 900,000 © Value in use of CGU; 1,000,000 > The impairment loss is computed as follows: Recoverable amount (value in use ~ higher) _ 1,000,000 Carrying amount (1,500,000) Impairment loss (500,000) > The impairment loss is allocated as follows: First, to goodwill: Impairment loss (500,000) Allocation to goodwill’ 300,000 Excess impairment loss (200,000) Then, to the other noncurrent assets in the CGU: Mas501 | papnirment of Assets jap so coe Carrging emma Fractions Allocation of Ercoee Tpit Le [x Asset. Carrying amounts Fractions Allocation inventory NIA NIA NU = Investment property 400,000 400/1,000 (200K x 400/1,000) ~ (80,000) Buildi 600,000 600/1,000__(-200K x. 600/1,000) =_ (220,000) 1,000,000 1,000/1,000, (200,000) & Notes: e No impairment loss is allocated to the inventory because inventories are outside the scope of PAS 36. (PAS 362 and PERS 5, Part B, Example 10) © The impairment loss on a CGU is allocated only to the assets that are within the scope of PAS 36. (See introduction to this chapter) & The fractions above are derived from the carrying amounts of the noncurrent assets. ‘The entry to recognize the impairment loss is as follows: Dute | Impairment loss 500,000 Goodwill 300,000 Accumulated depreciation - IP 80,000 Accumulated depreciation -Bldg._ 120,000 > The carrying amount of the CGU after impairment is analyzed below: Carrying amounts Allocations of Carrying Assets BEFORE impairment amounts AFTER impairment loss impairment Inventory 200,000 - 200,000 Investment property 400,000 (80,000) 320,000 Building 600,000 (120,000) 480,000 Goodwill 300,000 (300,000) - 1,500,000 (500,000) ___1,000,000 The procedure illustrated above is called the “bottom-up fest.” This is performed when goodwill can be allocated to individual CGUs on a reasonable and consistent basis. A TT Nos coh ey