IAS 36 Impairment of Assets

05
DEFINITIONS |1

Cash is the smallest identifiable group of assets that generates cash inflows that
generating are largely independent of the cash inflows from other assets or groups of
unit (CGU) assets.
Impairment is the amount by which the carrying amount of an asset or a CGU exceeds
loss its recoverable amount.
Recoverable of an asset or a CGU is the higher of its fair value less costs to sell and its
amount value in use.
is the present value of the future cash flows expected to be derived from an
Value in use
asset or CGU.
Fair value The price that would be received to sell an asset or paid to transfer a liability
less cost to in orderly transaction between market participants at the measurement date
sell less the costs of disposal.
Cost of are incremental costs directly attributable to the disposal of an asset or cash-
disposal generating unit, excluding finance costs and income tax expense.
QUESTION 01
A bus company provides services under contract with a municipality that requires minimum
service on each of five separate routes. Assets devoted to each route and the cash flows
from each route can be identified separately. One of the routes operates at a significant loss.

Identify the CGU.

QUESTION 02
The following information relates to three assets:
Asset A B C
Rs. 000 Rs. 000 Rs. 000
Carrying value 100 150 120
Net selling price [FV-CTS] 110 125 100
Value in use 120 130 90
Recoverable amount?
Impairment loss?

TIMING OF IMPAIRMENT REVIEW

IAS 36 requires that at each reporting date, an entity must assess whether there are
indications of impairment. Indications may be derived from within the entity (internal
sources) or the external market (external sources.
 Obsolescence or physical damage
 Significant changes with an adverse effect in the manner in which an
Internal
asset is used or is expected to be used.
sources
 Economic performance of an asset is worse than expected.
 Actual cash flows are worse than the budgeted
 ICMAP M4 Financial Accounting

 Asset’s market value has declined significantly more than expected.

 Significant changes with an adverse effect in the technological, market,
economic or legal environment in which the entity operates.
External
 Market interest rates or other market rates of return on investments have
sources
increased during the period, and those increases are likely to affect the
discount rate used in calculating an asset’s value in use and decrease the
2| asset’s recoverable amount materially.
If an indication of impairment exists then an impairment review must be
Indication
performed. Where there is no indication of impairment, then no further action
exists
needs to be taken.
The following assets must be reviewed annually for impairment (in addition to
when an indication exists):
Annual
 Goodwill acquired in a business combination
review
 An intangible asset with an indefinite useful life
 An intangible asset not yet available for use

MEASURING RECOVERABLE AMOUNT

Entities have to bear in mind the following steps and considerations when evaluating an
asset’s recoverable amount:
No need to It is not always necessary to determine both an asset’s net selling price and
calculate its value in use. For example, if either of these amounts exceeds the asset’s
both carrying amount, the asset is not impaired and it is not necessary to
amounts estimate the other amount
FV – CTS not If it is not possible to determine fair value less cost to sell then value is use
determinable should be taken.
If asset is held for disposal then present value of cash flow from the use of
Assets held
asset until its disposal are likely to be negligible, in this case recoverable
for disposal
amount shall be equal to the FV – CTS.
Recoverable amount is determined for an individual asset. If the asset does
Asset or
not generate cash flows independent from other assets. This asset is
CGU
clubbed to CGU and impairment loss is calculated of this CGU.

RECOGNITION OF IMPAIRMENT LOSS

Recognising An impairment loss should be recognized as an expense in the income
expense statement immediately, unless the asset is carried at revalued amount.
An impairment loss on a revalued asset is recognized directly against any
On revalued
revaluation surplus for the asset to the extent that the impairment loss does
asset
not exceed the amount held in the revaluation surplus for that same asset.
Depreciation The depreciation (or amortisation) of an impaired asset shall be charged on
etc. its revised amount.
QUESTION 03
An entity owns a property which was originally purchased for Rs. 300,000. The property has
been revalued to Rs. 500,000 with the revaluation of Rs. 200,000 being recognised as other
comprehensive income and recorded in the revaluation reserve. The accumulated
depreciation related to property after revaluation is Rs. 40,000 and therefore its carrying
amount is Rs. 460,000 but the recoverable amount of the property has just been estimated
at only Rs. 200,000.

What is the amount of impairment and how should this be treated in the financial
statements?

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 Class Notes

IMPAIRMENT OF CGU
The impairment loss should be allocated to reduce the carrying amount of the
assets of the CGU in the following order:
(a) First, to any asset specifically impaired
Order
(b) Second, to goodwill allocated to the CGU (if any); and
(c) Then, to the other assets of the unit on a pro-rata basis based on the |3
carrying amount of each asset in the unit.
These reductions in carrying amounts should be treated as impairment losses
Treatment
on individual assets.
In allocating in impairment loss, the carrying amount of an asset should not
be reduced below the highest of:
(a) Its net selling price (if determinable);
(b) Its value in use (if determinable); and
Extent
(c) Zero
The amount of the impairment loss that would otherwise have been allocated
to the asset should be allocated to the other assets of the unit on a pro-rate
basis.

QUESTION 04
A company runs a unit that suffers a massive drop in income due to the failure of its
technology on 1 January 2008. The following carrying values were in the books immediately
prior to the impairment:
Rs. m
Goodwill 20
Technology 5
Brands 10
Land 50
Buildings 30
Other net assets 40
155

The recoverable value of the unit is estimated at Rs. 85 million. The technology is worthless,
following its complete failure. The other net assets include inventory, receivables and
payables. It is considered that the book value of other net assets is a reasonable
representation of its net realizable value.

Required:
(a) Show the impact of the impairment on 1 January 2008.
(b) Show the impact of the impairment on 1 January 2008 assuming that net selling price
of land is Rs. 29 million

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 ICMAP M4 Financial Accounting

QUESTION 05 PE February 2014 Q5 (a)

Khan & Company acquired the whole business (for a purchase consideration of Rs. 5.2
million) on January 1, 2013 from Afridi Transport, a company that operates CNG Rickshaws
in Karachi. Statement of financial position (at fair value) of Afridi Transport on the date of
acquisition show the following:
Rupees
4| Goodwill 500,000
Operating license 1,500,000
Parking complex and office 600,000
Workshop 600,000
20 CNG Rickshaws 2,000,000
 On March 1, 2013, CNG cylinders of three rickshaws exploded. Fortunately no one
was injured, but the 3 rickshaws were beyond repair having no residual value. The
estimated value in use of the whole of the business after this accident was assessed
at Rs. 3.2 million. Three rickshaws would be written off as they no longer existed and
were no longer part of the cash generating unit.
 Number of passengers was below expectations after the accident. They were not
using CNG rickshaws because of their fear of a similar accident occurring to the
remaining rickshaws. As per market research report, value of business was
reassessed on June 30, 2013 at Rs. 2.6 million.
 On June 30, 2013, Khan & Company received an offer of Rs. 700,000 in respect of
the operating licence that is transferable. The operating licence is for fifteen (15)
years.
 The carrying values of the parking complex and office area were based on their
.values in use.
 The CNG rickshaws are valued at their net selling prices.

Required:
Work out the carrying value of the assets of Afridi Transport after recognizing the impairment
losses at
(i) March 1, 2013.
(ii) June 30, 2013. (11)

QUESTION 06 PE February 2013 Q4 (b)

(i) Briefly state the accounting treatment of impairment loss of assets under IAS-36.
(02)
(ii) Following information relates to a cash generating unit as of December 31, 2011:
(Rs. in
millions)
Machinery 50
Building 16
Goodwill 15
Current assets 24
105

The company's policy is to carry out an impairment review annually which has estimated the
recoverable amounts to be Rs.85 million.

Required:
(i) Advise, how the impairment loss will be allocated under IAS-36 - Impairment of
Assets. (05)
(ii) Give necessary journal entry for the impairment loss adjustment. (02)

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