IMPAIRMENT OF ASSETS

Impairment It is a fall in the market value of an asset so that the “recoverable amount” is now
less than the carrying amount in the statement of financial position.

An asset shall not be carried at above the recoverable amount. The basic principle is
that if the recoverable amount of an asset is lower than the carrying amount, the
asset is judged to have suffered an impairment loss. The recoverable amount of an
asset shall be determined for the asset individually. If it is not possible to estimate
the recoverable amount of the individual asset, an entity shall determine the cash
generating unit (CGU) to which the asset belongs.

INDICATION OF IMPAIRMENT

An entity shall assess whether there is any indication of impairment at each reporting
date.
Indicators of impairment are classified into external sources and internal sources.
If such indication of impairment exists , conduct now an impairment test, meaning
entity estimates the recoverable amount of the asset
If no such indication exists, the entity need not estimate the recoverable amount of the
asset.
The following assets are required to be tested for impairment at least annually even of
there are no indications for impairment:
1. Intangible asset with indefinite useful life
2. Intangible asset not yet available for use
3. Goodwill acquired in a business combination

INDICATORS OF IMPAIRMENT
EXTERNAL SOURCES
Significant decrease in the market value of the
asset
Significant change in the technological,
market, legal or economic environment of the
business in which the asset is employed
Increase in the interest rate or market rate of
return on investment
Carrying amount of net assets is more than
the market capitalization (Fair value of net
assets)
INTERNAL SOURCES
Evidence of obsolescence or physical damage
of an asset
Significant change in the manner or extent in
which the asset is used with an adverse effect
on the entity
Evidence that the economic performance of an
asset will be worse than expected

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MEASUREMENT OF RECOVERABLE AMOUNT

It is the fair value less cost of disposal or value in use, whichever

Recoverable is HIGHER
Amount

HIGHER BETWEEN
FAIR VALUE – COST OF DISPOSAL VALUE IN USE
- Fair value is the price that would be - Value in use is the present value of the
received to sell an asset or paid to future cash flows expected to be derived
transfer a liability in an orderly from an asset or cash-generating unit.
transaction between market
participants at the measurement date.

- Costs of disposal are incremental

costs directly attributable to the
disposal of an asset or CGU,
excluding finance costs and income
tax expense.

FAIR VALUE HIERARCHY

PFRS 13, para. 72, enumerates the fair value hierarchy or best evidence of fair value as
follows:

Level 1 Inputs Quoted Prices Active Market Identical Assets

Quoted Prices Active Market Similar Assets
Level 2 Inputs Identical/Similar
Quoted Prices Not Active Market Assets
Level 3 Inputs They are unobservable inputs for the asset. Unobservable
inputs are usually developed by the entity using the best
available information from the entity’s own data.

VALUE IN USE COMPUTATION

Calculating value in use calls for estimates of future cash flows. The discount rate used in
estimating future cash flows is the current pretax rate that reflects the current assessment of
the time value of money & the risks specific to the asset.

Estimates of future cash flows:

INCLUDES (/) EXCLUDES (X)

Cash inflows from the continuing use of
the asset
Cash outflows necessarily incurred to
generate the cash inflows from the
continuing use of the asset
Future cash flows relating to restructuring to
which the entity is not yet committed
Future cost of improving or enhancing the
asset’s performance

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 Net cash flows received or paid on the Cash inflows or outflows from financing
disposal of the asset at the end of its useful activities
life in an arm’s length transaction.
Income tax receipts or payments

RECOGNITION OF IMPAIRMENT LOSS

Carrying Amount > Recoverable

Amount

INDIVIDUAL ASSET
COST MODEL REVALUATION MODEL
Impairment loss is recognized in Profit Impairment loss is charged first against the
/Loss & presented separately in the revaluation surplus and the remainder to
Income Statement expense.
After the recognition of an impairment loss, the depreciation charge for the asset shall be
adjusted in future periods to allocate the revised carrying amount less residual value on
systematic basis over the remaining useful life.

CASH GENERATING UNIT

It is the smallest identifiable group of assets that generate cash
Cash Generating inflows from continuing use that are largely independent of the
Unit cash inflows from other assets or group of assets.

When an impairment loss is recognized for a CGU, this loss shall be allocated to the assets of the
unit in the following order:
1. Goodwill
2. Other Noncash Assets of the unit prorata based on their carrying amount

In the computation of Impairment Loss, the carrying amount of CGU includes cash and goodwill but
excludes liabilities. The carrying amount of an asset shall not be reduced below the highest of fair
value less cost of disposal, value in use and zero.

REVERSAL OF AN IMPAIRMENT LOSS

Recoverable Amount > Carrying

Amount

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 INDIVIDUAL ASSET
COST MODEL REVALUATION MODEL
The reversal of impairment loss on a
The reversal of impairment loss shall be revalued asset shall be credited to income to
recognized immediately as income in the the extent that it reverses a previous
income statement. revaluation decrease and any excess credited
directly to revaluation surplus.
The increased carrying amount of an asset due to reversal of an impairment loss shall not exceed
the carrying amount that would have been determined, had no impairment loss been recognized
for the asset in prior years.

CASH GENERATING UNIT

The reversal of an impairment loss for CGU shall be allocated to the assets of the unit,
except goodwill, on a prorata based on the carrying amount of those assets. These increases
in carrying amounts shall be treated as reversals of impairment losses for individual assets
and recognized in profit or loss, unless the assets are carried at revalued amount, that any
reversal of impairment on revalued asset or assets shall be treated as revaluation increase
and credited directly to equity.

Compilation by:

Jay Lourd De Veyra, CPA

Arleen Rocabo, CPA

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