E-Portfolio

CHAPTER 11

PAS 36 – Impairment of Assets

Basic Principle

Assets should not be carried at more

than its recoverable amount. As such the
difference between the carrying amount and
the recoverable amount is impairment loss.

Frequency of Assessment

The entity shall assess every end of

the reporting period whether there is any
indication of impairment of asset.

Formula

IMPAIRMENT LOSS = CARRYING AMOUNT – RECOVERABLE AMOUNT

WHOEVER IS HIGHER

Value if you disposed the asset

FAIR VALUE - * COST TO DISPOSE

* Legal cost, stamp duty and

similar taxes, cost of
removing, the asset, direct
incremental costs in bringing
the asset for sale.

Value if you continue using it

PRESENT VALUE OF NET CASH FLOWS

(VALUE IN USE)

REVERSAL OF IMPAIRMENT LOSS is allowed as long as it will not exceed the carrying
amount of the asset had no impairment has been recognized for the asset.
 Factors

External Factors

1. Observable indication of asset decline more than the passage

of time or normal use.
2. Technological, market, economic or legal significant deline.
3. Increase in market interest rate or market rates of ROI that
will affect the discount rate resulting to decrease in
recoverable amount.
4. The carrying amount of the net asset of the entity is more
than its market capitalization.

Internal Factors

5. Evidence of obsolescence or physical damage.

6. Significant adverse effect like asset become idle, plans to
discontinue or restructure the operation, plans to dispose.
7. Economic performance of an asset is worse than expected.
8. Other internal evidences (like cash outflow is more than what
is budgeted)

VALUE IN USE = PRESENT VALUE OF ESTIMATED FUTURE NET CASH FLOWS

PRESENT VALUE

DISCOUNT RATE

= Pretax rate of the current market assessment of time

value of money and risk adjusted estimates

IF NOT AVAILABLE:
1. WACC using CAPM
2. Incremental borrowing rate
3. Other Market borrowing cost

ESTIMATE - BASIS OF ESTIMATE

4. Based on best estimate of the range of economic condition by management.

External evidence is given greater weight.
5. Based on the cash flow projection (max of 5 years) on the most recent financial
budget excl. cash flows in enhancing or improving the assets performance.
6. Based the projection (beyond the period of most recent budget) by extrapolating it
using a steady declining growth rate which should not be exceed with the average
project/industry/country rate, unless justifiable.
 FUTURE NET CASH FLOWS

FUTURE CASH INFLOW FUTURE CASH OUTFLOW

 Future cash inflow from continued  Future cash outflow to generate cash
use inflow for continued use.
 Cash inflow from the disposal of the  Cash outflow from the disposal of the
asset asset

NOT INCLUDED

 Future restructuring to which an entity is not yet committed

 Future costs of improving or enhancing the asset’s performance
 Cash inflows or outflows from financing activities
 Income tax

Is the smallest identifiable group of assets that

CASH GENERATING UNIT (CGU) generates cash inflow independently of the cash
inflows from other assets or group of assets.

IMPAIRMENT LOSS = CARRYING AMOUNT of CGU – RECOVERABLE AMOUNT

IMPAIRMENT LOSS - ALLOCATION OF IMPAIRMENT LOSS

1. Goodwill
2. Any excess, to other assets based on the prorate using the carrying amount of the
asset; as long as the adjusted carrying amount shall not below the highest of:
 FV less cost of disposal
 Value in use
 Zero
3. If the reduction will result to the violation of VALUE IN USE, the remaining impairment
loss will be allocated to the remaining assets on prorate basis.

CARRYING AMOUNT

A. Includes the carrying amount of the asset that will generate cash inflow
to the CGUs value in use.
B. Do not include liability, unless the recoverable amount of CGU cannot be
determined without considering the liability.

RECOVERABLE AMOUNT

Same principle with the individual recoverable amount

Credit for the photo:

https://www.kpl.gov/catalog/item/?i=ent://LYNDA/0/LYNDA:103529