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Asset Impairment
IAS 36

PPE Impairment

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Subsequent measurement
• Final issue in subsequent measurement
• Similar accounting mechanics to revaluations

• Different reason
• Unexpected events (not regular)

• Revaluation model → up or down

• Impairment → only down
• Check that item is not overstated

PPE Impairment → IAS 36

• Tested when there is an indicator of impairment (IAS 36.9)
• Something negative / unexpected happens
• PPE not tested for impairment annually

• Impairment principle:
• Measurement issue:
• PPE should not be measured above amount that can be recovered
• Impairment looks at future potential of the item
• Fair value → sale
• Value in use → use

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Identifying indicators of impairment (IAS 36.12)

Something negative / unexpected happens
• Indicators within the business (internal):
• Asset damaged
• Entity performs worse than expected
• Asset becomes technologically obsolete
• Asset is stolen
• Change in intention with asset
• Entity is making losses
• Indicators external to the business:
• Legal changes
• The exchange rate changes
• The interest rate increases (.16)
• General macroeconomic changes
• e.g. Recessions
• Net assets exceed market capitalisation of company
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PPE Impairment Mechanics

• When there is an indicator

• Compare Carrying Amount (CA) and Recoverable Amount (RA)

• RA = Higher of
• Use value: “Value in use” – present value of cash flows from the
item
• Sale value: “Fair value (IFRS 13) less costs of disposal”
• Impairment looks at the future potential of the item
• If CA > RA
• Impaired down to RA

• Impairment presented in P/L

• Unless there is a revaluation surplus
• Then presented in OCI until revaluation surplus = 0

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PPE Impairment Mechanics

• Impairment reversal
• Assess impaired assets annually for impairment reversal (IAS 36.110)
• Can’t reverse above carrying amount if no impairment
• This would be a revaluation
• Reversal to P/L unless previously to OCI

• Impairment indicators may also indicate other factors should be reviewed (.17)
• Useful life
• Residual value
• Depreciation method

Compensation for Impairment

(IAS 16.65 & 66)
• Usually where an item is insured
• Insurance company compensates entity for loss, theft, damage or destruction
• What can’t you do?
• Company has insurance
• Restored to same position
• No accounting
• Principle: Offsetting is not allowed, there are  separate events:

•  Impair damaged / lost item

•  Derecognise item disposed

•  Compensation received

•  Recognition of replacement item

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Broadening our view on Asset Impairment

What we know
• Think risk
• Asset measurement standard
• Applicable to other standards
• Biased down
• Test assets not overstated

• PPE impairment – narrow view of a specific case

• Let’s look at a wider view of IAS 36

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What IAS 36 covers

• Non-financial assets that do not have a built-in impairment test

• Investment property on the cost model (IAS 40.56(c))

• PPE – cost and reval model (IAS 16.63)

• Intangible assets – cost and reval model (IAS 38.111)

• Investments in subsidiaries, associates and joint ventures

(in separate financial statements)

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What IAS 36 does not cover (IAS 36.2 & 3)

• Already have a built-in “impairment test”

• Investment property on the fair value model

• No risk over being overstated as at fair value

• Inventory

• Non-current assets held for sale

• Financial assets
• Deferred tax assets

• Others in IAS 36.2 – 5

• End of scope

Test for impairment: When?

• Think risk:

• Impairment tests can be expensive and time consuming if there is no particular risk

• General rule: (.9): Test for impairment when indicator asset may be impaired

• At least annually, assessments should be made of whether there is an indicator

that asset(s) should be impaired

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Indicators of impairment (.12 - .17)

Internal indicators
Obsolescence / physical damage
Change in intention with asset
Asset stolen
Entity performs worse than expected
Entity making losses
External indicators
General macroeconomic changes
Legal changes
The exchange rate changes
Net assets > market capitalisation of company
The interest rate increases

• Checklist? How many?

• Impairment indicates other issues may need to be reviewed (.17)
• Shorter useful life?
• Lower residual value?
• Different depreciation method? 15

Mandatory Annual Impairment Test (.10)

• Specific assets not amortised
• Goodwill
• Intangible asset with indefinite useful life
• Intangible asset not available for use

• Tested before year end of year of initial recognition

• Thereafter, tested at the same time annually
• May use pragmatic and material approach (.15)

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Process

Accounting for IAS 36 Impairment

(.58 – .64)
1. Account for asset in accordance with applicable IFRSs
• Depreciation, amortisation, revaluation, etc.
2. Mandatory annual impairment test required?
3. Annually consider if there’s is an indication of impairment
4. If impairment test required, calculate Recoverable Amount (RA)
• RA = Higher of:
• Use value: “Value in use” – present value of cash flows from the item
• Sale value: “Fair value (IFRS 13) less costs of disposal”
5. If RA < CA then impairment
• Impaired down to RA (as long as still an asset)
• Presented in P/L
• Unless there is a revaluation surplus
• Then presented in OCI until revaluation surplus = 0
6. Adjust deferred tax
• Change in carrying amount with no change in tax base
7. Depreciation/amortisation for future periods based on new CA 18

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Reversal of Impairment (.111 – 121)

• For impaired assets
• Consider annually whether a change of circumstances has occurred
• i.e. Indication of reversal of impairment on assets impaired in prior periods (.111)
• If so, calculate recoverable amount

• On cost model (.119):

• Reversal limited to asset CA if never impaired (.117)
• Reverse impairment through P/L

• On revaluation model (.120):

• To extent reverses impairment to historic carrying amount
• Reversal to P/L
• To extent reverses impairment on revalued amount (above HBV)
• Reversal to revaluation surplus (OCI)
• Any further increase
• Not impairment reversal (.118)
• Separate revaluation (IAS 16; IAS 38)

• Adjust depreciation for remaining periods (.121) 19

Determining appropriate inputs in

performing an Impairment Test

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Determining the Inputs – think finance

• Impairment testing looks at:
• Estimates of asset value based on forecasting future

• Inputs – defined in IAS 36.6

• Recoverable amount
• Fair value
• Costs of disposal
• Value in use

• Recoverable amount
• Higher of
• Fair value less costs of disposal (sale)
• Value in use
• Concept?

Fair Value Less Costs of Disposal

• “Fair value” – value from selling the asset

• Not an IAS 36 issue → IFRS 13

• Price that would be received from sale

• In an orderly transaction
• Between market participants (company’s intention not considered)
• Remember: “Highest and best use” (IFRS 13.27 – 33)

• Approaches: Market, income, cost (IFRS 13.61 – 66)

• “Costs of disposal” (.6, .28 & .29)

• Direct incremental costs necessary to get asset ready to sell
• E.g. Legal costs, transaction costs, costs of removing asset
• Not:
• Indirect consequential costs, like restructuring costs, taxes, interest
• Recognised liabilities (.78) 22

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Value in Use (.30 - .57)

• Value from using asset in the business

• Company’s intention with asset is considered (.53A)
• Present value of expected cash flows from the asset (.6)
• Future cash flows
• Discounted to today

• Expectations of uncertainty – weighted average of outcomes (.30(b))

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Value in Use (.30 - .57)

• Cash flow forecasts (think MAF)

• Reasonable and supportable assumptions over asset’s remaining life

• Budgets / forecasts (.33)

• Cash flow forecasts limited to 5 years
• Unless detailed reliable longer forecasts available – unlikely (.33(b) & .35)
• After 5 years, terminal value at a steady or declining growth rate
(.33(c), .36 & .37)

• Consider asset in current condition

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Value in Use (.30 - .57)

• Includes asset cash flows:
• During useful life:
• Inflows from using asset
• Outflows, necessary to generate inflows
• Servicing and maintenance to maintain current condition
• Disposal at end of useful life:
• Cash inflows from arm’s length sale less necessary disposal costs (.52)
• Amount sold for in condition at end of useful life
• Expectations of uncertainty – weighted average of outcomes (.30(b))
• Excludes:
• Future changes to asset that are :
• Improvements / repairs
• Restructuring not committed to
• Cash flows from:
• Interest
• Tax

Value in Use (.30 - .57)

• Discount rate if this asset was invested in
• Time value of money plus
• Asset-specific risk

• Pre-tax rate (pre-tax cash flows)

• Could be WACC, adjusted for asset risk

• If in foreign currency (.54)

• Whole VIU calculation in foreign currency, cash flows and discounting
• Convert PV to Rand at spot rate on VIU calculation date
• MAF concepts
• Inflation? – match cash flows and interest rate (.32 and .40)
• Don’t risk adjust cash flows and interest rate (.56)

• IAS 36 Appendix A and Illustrative examples 23 – 32

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Recoverable Amount
• Usually need to calculate both VIU and FV less costs of disposal to get RA
• BUT if either more than CA, clearly no impairment (.19)

• If intention to sell asset

• Then FV less costs of disposal ≈ VIU
• If intention is to use asset
• Then FV less costs of disposal ≠ VIU

• Won’t get a detailed PV VIU calc to perform

• Critically evaluate / discuss
• Select value
• Read IAS 36.30 – 57
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Assets that do not generate

independent cash flows:
Cash generating units

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“Cash generating units” (CGUs)

(IAS 36.66 – 68)
• Impairment problems
• Value in use
• Fair value less costs of disposal
• Some assets (.67)
• Cannot be sold on their own
• Do not generate independent cash flows
• Examples
• Goodwill
• Supportive business assets – like a head office building
• Assets that work as part of a bigger group – like the shoe machine
• Solution: Group with other assets

Individual assets vs CGUs

• Impairment test starting point:
• Individual asset level (lowest possible level)

• If problem:
• Unable to calculate recoverable amount
• Solution: Group assets

• “Cash Generating Unit” (CGU) (.6 & .68)

• Smallest group of assets that generate independent cash inflows
• Key words:
• Smallest group
• Independent cash flows
• Look at how management monitors (.69)
• Almost looking for separate business units

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CGUs

More Principles in Determining CGUs (.70 - .72)

• Example: Mobile phone manufacturer – 1 product
1. Screens
2. Electronics
3. Batteries
4. Combines
• CGUs have an active market for the group of asset’s output (.70)
• Including partially completed products that are:
• Used internally
• That could be used externally?
• Separate CGUs, even if all used internally
• May need to estimate fair cash flows
• CGU’s carrying amount excludes liabilities (.76, .28, .43)
• Involves judgement (.72)
• Apply consistently each period
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CGU Impairment Process

• Same impairment principles
• CGU RA is higher of (.74):
• CGU’s FV less costs of disposal; and
• CGU’s value in use
• When asset in a CGU needs to be tested, determine:
• FV-COD
• Usually determinable
• VIU: Future cash flows asset will generate
• No need to look at CGU if:
• FV-COD > CGU’s CA
• Intention to dispose and replace
• VIU ≈ FV-COD (.15)
• Must look at CGU if intends to continue to use
• VIU ≠ FV-COD
• Compare CGU’s RA to CGU carrying amount
• No impairment to individual asset if entire CGU not impaired
• Impairment test at a point, asses condition at that point
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Examples: Assets that do not

generate independent cash flows:
Cash generating units

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Railway – CGU Example (.67)

• Mining company owns private railway for

transporting its ore
• Railway is damaged → Indicator of
impairment
• Intention is to repair and continue
using railway
• What is the RA of the railway?

Railway – CGU Example (.67)

• FV – COD: Can determine, but probably low
• Could be sold for scrap
• VIU: Can’t determine
• Does not generate independent cash inflows
• Intention not to sell
• Can’t test railway separately as:
• VIU cannot be determined
• VIU ≠ scrap value (FV less COD)
• Thus, look at RA of CGU to which railway belongs
• i.e. mine as a whole

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Bus Route – CGU Example (.68)

• Company’s business is bus transport
• Contract requires all 5 different routes to be
operated
• 4 routes are profitable; 1 route is not
• Each routes has separate cash flows
• What is the CGU?
• Is each route a CGU?

Further examples
• IAS 36 Illustrative example (separate IFRS book – Part B2)
• Example 1 IE IAS36 A – E

• Test yourself

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Assets that do not generate

independent cash flows:
Corporate Assets & Goodwill

Completeness of CGUs (.75 – 77)

• CGU’s carrying amounts must:

• Exclude liabilities

• Include ALL recognised assets that generate future economic benefits

for CGU
• Could be assets
• Directly part of CGU, and
• Allocated to CGU

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Assets that do not generate independent cash flows:

Corporate Assets & Goodwill

Allocation of GW & Corp Assets

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Corporate Assets (.100 – .103)

• Contribute to cash flows of multiple CGUs, but do not generate
independent cash flows
• Cannot be attributed to only one CGU
• To test for impairment, must allocate to CGUs that benefit
• On a reasonable and consistent basis (%?)
• Test each CGU for impairment, including its portion of corporate asset
• If such allocation not possible:
1. Test each CGU for impairment, excluding corporate asset
2. Allocate corporate asset to smallest group of CGUs that is reasonable and consistent
3. Test that group of CGUs for impairment, including corporate asset
• Completeness of CGUs (.76 & 77)

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Goodwill (IFRS 3 Business Combinations)

• Compulsory annual impairment test (no indicator necessary)
• Not amortised, risk of overstatement

• Goodwill – assets from business combination not separately identified and

recognised (IFRS 3 App A definition)
• Cannot be sold on its own
• Does not generate independent cash flows
• Generates cash flows in combination with other assets
• Can only ever be tested as part of CGU

• Must be allocated to a CGU (or a group of CGUs) for impairment test

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Allocation of Goodwill (.80)

• Allocate goodwill to all CGUs expected to benefit from business combination
• Allocated to the lowest level goodwill is monitored by management
• Allocated reasonably and consistently
• Unless allocation to individual CGUs would be arbitrary (.81)
• Cannot allocate to units larger than an IFRS 8 “operating segment”
• Regularly reviewed business activities

• Results of allocation:
1. Carrying amount of CGU increased to include goodwill
2. CGU’s with GW tested annually for impairment

• Completeness of CGUs (.76 & 77)

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CGU Impairment Calculation

• Compare (.102 & .88 – .90):
1. Recoverable amount of each CGU, to
2. Carrying amount of assets in CGU,
• Including goodwill and corporate assets (if allocated)
• If CA > recoverable amount, calculate total impairment
• Total impairment order allocated to assets (.104 – .105):
1. To goodwill, until zero
2. Excess allocated to other assets in CGU pro-rata
• Only to assets within IAS 36 scope
• Check: Cannot reduce individual assets in a CGU below highest of their:
• FV less costs of disposal
• Value in use, or
• Zero – consider if a liability (.108) 46

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Reversal of Impairment in CGUs

• Impairment on goodwill can never be reversed (.124)

• Same principles as reversal on individual assets

• Assets not within IAS 36 scope cannot share in reversal
• Assets within IAS 36 scope share in impairment reversal pro-
rata (.122)

• Reversal limited to (.123):

• Recoverable amount; and
• Carrying amount (net of depreciation) CGU would have had if
never impaired

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Approach to impairment testing

Mandatory
annual test
Goodwill
Order of testing

CGUs
Indicator-
(& corporate assets)
based
testing Individual assets

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Goodwill Impairment:
Subsidiaries with NCIs

Goodwill in Subsidiaries with NCI

• A acquires control of B by purchasing 60% of its ordinary shares
• A consolidates B and recognises 100% of B’s assets
• Goodwill is calculated
• For impairment testing: Goodwill allocated to ALL CGUs that benefit
from business combination
• CGUs of acquiree – NCI have interest
• CGUs of parent – NCI do not have an interest
• Subsidiary’s CA and RA includes goodwill
• NCI measurement election
• Proportionate share, or
• Fair value
• Changes things – why?
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Goodwill where NCIs at Proportionate Share

100% 60% 40%
FV of sub’s net assets at aqu; NCI share 1 000 600 400
Paid 700
Goodwill 100

Goodwill where NCIs at Fair Value

100% 60% 40%
FV of sub’s net assets at aqu 1 000
Paid; FV of NCIs 1 105 700 405
Goodwill 105

• Parent recognises 100% of subsidiary’s assets,

even if partially owned
• Subsidiary’s CA and RA includes 100% goodwill
• Compare apples with apples

Goodwill in Subsidiaries with NCI

IAS 36 IE Example 7
• If NCI at proportionate share of identifiable net assets at acq (.C4)
• Goodwill grossed up to 100%
•  Identifiable assets + grossed up goodwill
•  Compare to recoverable amount
• Calculate grossed up impairment (if any) =  – 
• Gross down to recognise impairment
• NCI do not share in impairment of goodwill

• If NCI at fair value at acquisition (.C6)

• Goodwill does not need to be adjusted to perform impairment test
• Allocate impairment losses to NCI on same basis as profit attribution
(IE 7)
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Impairment Wrap Up

Wrap up
• All references to “assets” also refer to CGUs (IAS 36.74)

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Accounting for IAS 36 Impairment

(.58 – .64 & .74)
1. Account for asset in accordance with applicable IFRSs
• Depreciation, amortisation, revaluation, etc.
2. Mandatory annual impairment test required?
3. Annually consider if there’s is an indication of impairment
4. If impairment test required, calculate Recoverable Amount (RA)
• RA = Higher of:
• Use value: “Value in use” – present value of cash flows from the item
• Sale value: “Fair value (IFRS 13) less costs of disposal”
5. If RA < CA then impairment
• Impaired down to RA (as long as still an asset)
• Presented in P/L
• Unless there is a revaluation surplus
• Then presented in OCI until revaluation surplus = 0
6. Adjust deferred tax
• Change in carrying amount with no change in tax base
7. Depreciation/amortisation for future periods based on new CA 55

Disclosure of Impairment (.126 - .137)

• Per .126, for each class of asset
• Impairments and reversals recognised in P/L and line items in which included
• Impairments and reversals recognised in OCI
• Per .130, for material impairments or reversals
• Events or circumstances
• Amount
• Nature of asset or description of CGU
• Whether recoverable amount is VIU or FV less costs of disposal and basis used to calculate these
• Per .131, for non-material impairments or reversals (in aggregate)
• Main classes of assets affected
• Main events and circumstances
• Any unallocated goodwill & reasons (.133)
• Onerous requirements in terms of .134 where significant goodwill or intangibles with
indefinite useful lives allocated to CGU

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