IAS 36 – Impairment of assets, including goodwill

Standard ensures assets carried at no more than their recoverable amount i.e not overstated (non-
current assets) PPE ias16 intangible assets ias38 goodwill. Also at idv co stage investment in subs.

When to conduct impairment review?

 Annual impairment according to standards. In group accounts always impairment of
goodwill.
 Ias38 requires impairment of intangible assets if indefinite life or not ready for use.
 Other assets only impaired if there’s an indicator of impairment

External sources

 Market value declines

 Negative technology change
 Changes in interest rates (linked to value in use)
 Could also be as net asset of assets is higher than market capitalisation (if share price falls of
co. then the assets cant be higher than the assets)
Internal
 Obsolescence or physical damage
 Idle or held for disposal
 Worse economic performance than expected
 For investments and subs, If a massive dividend is paid, the carrying value of assets will be
depleted. This is an indicator of a trigger for impairment review.

Impairment loss
Asset is impaired when the carrying value exceeds recoverable value

CARRYING VALUE – RECOVERABLE AMOUNT = IMPAIRMENT LOSS

100 – 80 = 20 = IMPAIRMENT LOSS. This must be recorded. Done by writing asset down and
recording as a loss.

CV 200 – RV 250 = 0 Impairment loss – no such thing as an impairment gain (oxymoron)

Recoverable Amount
The higher of the assets FV less COS & its value in use (keep the asset).

Value in use = PV of future cash flows from the asset

Q [10:15] MR 5%

CV = 500,000
WHICH RA HIGHER =
1) FV LESS COST TO SEL
SELL PRICE 350,000
LESS 5% (17,500)
TOTAL (332,500)

2) VALUE IN USE PV FCF

Y1 [200,000 X 1.1] X 1/1.08 = 203,704
Y2 [200,000 X 1.1] X 1/ [1.08x1.08} = 207,476
VALUE IN USE =411 180

3) 411,180 > 332,500

4) CV 500,000
RA 411,180
IMP LOSS 88,820 -- Expense (reduction in asset of 88,820. Carried value now 411,180)

CASH FLOW
- Should be based on reasonable assumptions (budgets)
- Should only go upto 5 years
- Over 5 is just an extrapolations
- Need to keep assessing reasonable cash flows
- Must relate to asset in its current condition
- Future cash flow should be pre tax & pre interest.

DISCOUNT RATE

- Want a pre pre tax discount rate

- Discount rate shouldn’t reflect risks for which future cash flows have been adjusted.
- Discount rate = entity would borrow money to pay to buy asset.
- If that above rate no available, then we use the WACC. (in SBR no WACC calc needed.)
COMMENT

- There’s a lot of judgment in impairment review

- Estimate FCF
- Estimate discount rate

RECOGNITION OF AN IMPAIRMENT LOSS

- Impairment loss is an expense (recognition in P^&L)
- If its been revalued its in OCI not P&L
- You can only recognise the imp loss in the revolution reserve to the extent of the revaluation
reserve that relates to that asset. Once its exhausted then you start charging to P&L

Q [25:05] BALBEER

CV 12,000,000

RA 9,000,000

3,000,000 = 2m to reserves (this exhausts the reserves) (this was the 2m gain in
revalue)

1m to P&L

RR (in OCI) ↓ 2

Red in profit (P&L) ↓ 1

Asset ↓ 3

REVERSAL OF IMPAIRMENT LOSS

- if the conditions which caused the loss are reversed this can push a reversal
- e.g. market value dropped and then back up (property)
- e.g. interest rates.↑= impairment loss + review
interest rates ↓ = reversal of impairment loss

- when reversing impairment loss, cant overstate asset.

- Must check what value would have been
- Reversal is taken to P&L
- Can’t be done for goodwill

Q [32:01 – 40:30] WILSON - WATCH AGAIN

CASH GENERATING UNIT (CGU)

- Goodwill by itself doesn’t generate cash and can’t be sold

- Goodwill impairment is done on CGU (cash generating units)
- A CGU is a sub (in simple life)
- In SBR, may need to identify CGU and explain how and why
- If we must allocate goodwill across more than 1 cash processing unit, needs to be done in 2
stage process
- Need to see each individual CGU and see if its impaired. See it carrying value (without
common asset) vs the recoverable amount. Loss is then recognised
- Secondly the revised CV can be compared to recoverable amount to identify and then the
loss there is allocated to goodwill
- STEP 1 – impairment reviews on CGU itself ignoring the goodwill
- STEP 2 – impairment review based on the revised total that would include the goodwill.
Then any loss will be on the GW.

4 questions [1:00:30]

EXAMPLE 1 – de royale