Summary Notes

Topic: PAS 36- Impairment of Assets

1. Impairment - Impairment is a fall in the market value of an asset where the recoverable amount
becomes lesser that the carrying amount.
2. Accounting for impairment
a. Indications of Possible Impairment
• The entity must assess at each reporting date whether there is any indication that an asset may
be impaired, if so, then they should estimate the recoverable amount of the asset.
• For an intangible asset with an indefinite useful life or one that is not yet available for use must
be tested for impairment yearly, regardless if there is no indications.
• Goodwill is not being impaired

1. Internal Sources
a. Market value has declined significantly;
b. negative changes in technology, markets, economy, or laws;
c. increases in market interest rates;
d. Net assets of the company higher than market capitalization.
2. External Sources
a. obsolescence or physical damage;
b. asset is idle, part of a restructuring or held for disposal;
c. worse economic performance than expected;
d. or investments in subsidiaries, joint ventures or associates, the carrying amount
is higher than the carrying amount of the investee's assets, or a dividend exceeds the
total comprehensive income of the investee.

b. Measurement of the Recoverable amount

1. Fair Value Less Cost of Disposal
• Price received from sale of asset less the directly attributable cost of selling

2. Value in Use
• Present value of future net cash flows (inflows-outflows) expected to be derived from the asset.
Calculated as follows:
a. The future cash inflows and outflows from continuing use of the asset are estimated
b. The cash flow (based on recent 5 year-financial forecast) from the ultimate disposal of
the asset is estimated.
c. These cash inflows and outflows are then discounted using an appropriate discount
rate (current pretax rate that reflects the time value of money and risks specific to the asset).

c. Recognition of Impairment Loss

• Impairment loss is recognized immediately by reducing the carrying amount of the asset to its
recoverable amount.
d. Reversal on an Impairment Loss
• Reversal of impairment loss happens if the impaired asset regains or bounces back in its value,
then, a gain of that specific amount will be recorded in the income statement which should not
be more than the original impairment amount.

3. Cash Generating Unit

 • A cash-generating unit is the smallest group of assets that independently generates cash flow
and whose cash flow is largely independent of the cash flows generated by other assets.
• As a general rule, the recoverable amount of an asset shall be determined individually. However,
if it cannot be determined individually then the recoverable amount of the CGU is used.
• When an impairment loss is recognized for a cash generating unit then the loss shall be allocated
base on the ff order:
a. Goodwill if any;
b. Then, to all the noncash assets in the CGU proportional to their carrying amount

4. Corporate Assets
• Assets other than goodwill that contribute to the future cash flows of the CGU. So, these are
assets that don’t generate cash individualy from other assets.
• Recoverable amount of these assets cannot be determined unless it will be disposed. So, if there
is an indication of impairment, impairment loss of the corporate asset shall be determined by:
• Allocate the carrying amount of the corporate asset to the CGU’s that are directly related to the
corporate asset
• Impairment loss on the CGU’s that are impaired are allocated proportionally to the assets amount
(CA of CGU and amount of Corporate asset related to the CGU being impaired).
Summary Notes
Topic: PAS 37- Provision, Contingent Liability, and contingent assets

1. Contingent Liability (PAS37)

• A contingent liability is a possible liability that arises from past event that may occur depending
on the outcome of an uncertain future event not wholly within the control of the entity.
• Shall not be recognized in the financial statement but shall be disclosed only (if liability is remote
no disclosures necessary), this is because it is not probable that an outflow of resource
embodying economic benefit will be required to settle the obligation or the amount cannot be
measured reliably.
• Contingent liability is either probable or measurable but not both, if both then it is a provision.

2. Disclosures of a Contingent Liability

a. Brief description of the nature of the contingent liability
b. An estimate of its financial effects
c. An indication of the uncertainties that exist
d. Possibility of any reimbursement

3. Contingent Asset
• A contingent asset is a possible asset that arises from past event and whose existence may
occur depending on the outcome of an uncertain future event not wholly within the control of the
entity.
• Shall not be recognized and only disclosed when probable.

4. Decommissioning Liability
a. Meaning
• An obligation to dismantle, remove and restore an item of PPE as required by law or contract

b. Change in Decommissioning Liability

1. Decrease in the liability is deducted from the cost of the asset
2. Increase in liability is added to the cost of the asset
Summary Notes
Topic: PAS 38- Intangible Assets

• An identifiable nonmonetary asset without a physical substance that must be controlled by the
entity as a result of past events and from which future economic benefits are expected to flow to
the entity.
• Essential Criteria of an intangible asset;

a. Identifiability
• An intangible asset must be identifiable to distinguish it from good will.
• It is identifiable when it is separable from the entity and it arises from contractual of legal
rights

b. Control
• Under the control of the entity as a result of past events

c. Future Economic Benefit

• Revenue can be derived from it

2. Recognition of Intangible Assets

• An intangible asset can only be recognized when the ff conditions are present:
a. Probable future economic benefit from the asset will flow to the entity
b. The cost of the intangible asset can be measured reliably

3. Measurement
a. Initial- @cost
b. Subsequent
4. Subsequent Expenditures Related to an Intangible Asset
5. Intangible Assets
6. Amortization of Intangible Assets (PAS38)
a. Amortization
• Systematic allocation of the amortizable amount of an Intangible Asset over its useful
life. Amortizable amount is the cost of the Intangible Asset less residual value.
• Intangible Assets with finite or limited life must be amortized over their useful life
• Intangible Assets with indefinite life are not amortized but are testes for impairment
annually

b. Amortization Period
• Amortization starts when the intangible asset is available for use
• Amortization ceases when the intangible asset is derecognized or when held for sale

c. Amortization Method
• The method of amortization being used shall reflect the pattern in which the future
economic benefit from the asset are expected to be consumed by the entity. However, if
such pattern is not reliable then the straight-line method shall be used.

d. Change in Amortization Method and Useful Life

 • Amortization Method and Useful Life shall be reviewed at each financial year-end.
Differences shall be accounted as Changes in Accounting Estimates.
7. Impairment of Intangible Assets
• Intangible assets with finite life are tested for impairment when there is an indicati on of
impairment at the end of reporting period
• Intangible assets with indefinite life are tested for impairment at least annually and when
there is an indication of impairment

8. Derecognition of Intangible Assets

• An Intangible Assets can be derecognized or removed from the statement of financial
position on:
a. disposal of the asset
b. no future economic benefits are expected from its use and disposal

9. Research and Development Cost

a. Research
• Original and planned investigation undertaken with the prospect of gaining specific or
technical knowledge of understanding that will be useful in developing new product or
that will result insignificant improvement of existing product
• Expensed when incurred

b. Development Cost
• Application of research findings or other knowledge to a plan or design for the production
of a new or substantially improved product or service prior to the commencement of
commercial production
• Capitalized when there is technical feasibility of completing the intangible asset for use
or sale