CHAPTER TWO

Fair Value Measurement and Impairment

IFRS 13 Fair Value Measurement

2.1. Objective
This Standard:
(a) defines fair value;
(b) sets out in a single IFRS a framework for measuring fair value; and
(c) Requires disclosures about fair value measurements.

The definition of fair value focuses on assets and liabilities because they are a primary subject of
accounting measurement. In addition, this IFRS shall be applied to an entity’s own equity
instruments measured at fair value.

2.2. Defined terms

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.

An active market is a market in which transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing information on an ongoing basis.

Entry price refers to the price paid to acquire an asset or received to assume a liability in an
exchange transaction.

The exit price is the price that would be received to sell an asset or paid to transfer a liability.

When an entity performs the fair value measurement, it must determine all of the following:

the particular asset or liability that is the subject of the measurement (consistently with its unit of
account)

 for a non-financial asset, the valuation premise that is appropriate for the measurement
(consistently with its highest and best use)

 the principal (or most advantageous) market for the asset or liability

 the valuation techniques appropriate for the measurement, considering:

o the availability of data with which to develop inputs that represent the
assumptions that market participants would use when pricing the asset or liability;
and

o The level of the fair value hierarchy within which the inputs are categorized.

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The asset or liability measured at fair value might be either:
 a stand-alone (individual) asset or liability (for example, a share or a pizza oven)

 a group of assets, a group of liabilities, or a group of assets and liabilities (for example,
controlling interest represented by more than 50% of shares in some company, or cash-
generating unit being pizzeria).

Whether the asset or liability is stand-alone or a group depends on its unit of account. Unit of
account is determined in accordance with the other IFRS standard that requires or permits fair
value measurement (for example, IAS 36 Impairment of Assets).

When measuring fair value, an entity takes into account the characteristics of the asset or
liability that a market participant would take into account when pricing the asset or liability at
measurement date.

These characteristics include for example:

 the condition and location of the asset

 The restrictions on the sale or use of the asset.

Transaction fair value measurement assumes that the asset or liability is exchanged in
an orderly transaction between market participants at the measurement date under current
market conditions.

Orderly transaction

The transaction is orderly when 2 key components are present:

 there is adequate market exposure in order to provide market participants the ability to
obtain knowledge and awareness of the asset or liability necessary for a market-based
exchange

 Market participants are motivated to transact for the asset or liability (not forced).

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2.3. Inputs may be observable or unobservable.

Observable inputs are inputs that are developed using market data, such as publicly available
information about actual events or transactions, and that reflect the assumptions that market
participants would use when pricing the asset or liability.

Unobservable inputs are inputs for which market data are not available and that are developed
using the best information available about the assumptions that market participants would use
when pricing the asset or liability.

A market participant is a buyer and seller in the principal (or most advantageous) market for the
asset or liability that have all of the following characteristics:

(a) They are independent of each other, i.e. they are not related parties, although the price in a
related party transaction may be used as an input to a fair value measurement if the entity has
evidence that the transaction was entered into at market terms.

(b) They are knowledgeable, having a reasonable understanding about the asset or liability and
the transaction using all available information, including information that might be obtained
through due diligence efforts that are usual and customary.

(c) They are able to enter into a transaction for the asset or liability.

(d) They are willing to enter into a transaction for the asset or liability, i.e. they are motivated but
not forced or otherwise compelled to do so.

2.4. Market participants

Market participants are buyers and sellers in the principal or the most advantageous market for
the asset or liability, with the following characteristics:

 independent
 knowledgeable
 able to enter into transaction
 Willing to enter into transaction.

2.5. Principal vs. the most advantageous market

A fair value measurement assumes that the transaction to sell the asset or transfer the liability
takes place either:

 in the principal market for the asset or liability; or

 In the absence of a principal market, in the most advantageous market for the asset or
liability.

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Principal market is the market with the greatest volume and level of activity for the asset or
liability. Different entities can have different principal markets, as the access of an entity to some
market can be restricted

The most advantageous market is the market that maximizes the amount that would be
received to sell the asset or minimizes the amount that would be paid to transfer the liability,
after taking into account transaction costs and transport costs.

2.6. Measurement

2.6.1. Application to non-financial assets

Fair value of a non-financial asset shall be measured based on its highest and best use from a
market participant’s perspective.

The highest and best use takes into account the use of the asset that is:

 physically possible − it takes into account the physical characteristics that market
participants would consider (for example, property location or size);

 legally permissible – it takes into account the legal restrictions on use of the asset that
market participants would consider (for example, zoning regulations); or

 Financially feasible – it takes into account whether a use of the asset generates adequate
income or cash flows to produce an investment return that market participants would
require. This should incorporate the costs of converting the asset to that use.

The highest and best use of a non-financial asset may be on a stand-alone basis or may be
achieved in combination with other assets and/or liabilities (as a group).

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When the highest and best use is in an asset/liability group, the synergies associated with the
asset/liability group may be reflected in the fair value of the individual asset in a number of
ways, for example, by some adjustments via valuation techniques.

The highest and best use of a non-financial asset may be on a stand-alone basis or may be
achieved in combination with other assets and/or liabilities (as a group).

When the highest and best use is in an asset/liability group, the synergies associated with the
asset/liability group may be reflected in the fair value of the individual asset in a number of
ways, for example, by some adjustments via valuation techniques.

2.6.2. Application to financial liabilities and own equity instruments

A fair value measurement of a financial or non-financial liability or an entity’s own equity

instruments assumes it is transferred to a market participant at the measurement date, without
settlement, extinguishment, or cancellation at the measurement date.

In the first instance, an entity shall set the fair value of the liability or equity instrument by the
reference to the quoted market price of the identical instrument, if available.

If the quoted price of identical instrument is not available, then the fair value measurement
depends on whether the liability or equity instrument is held by other parties as assets or not:

 If the liability or equity instrument is held by other party as an asset, then

o If there is the quoted price in an active market for the identical instrument held by
another party, then use it (adjustments are possible for the factors specific for the
asset, but not for the liability/equity instrument)

o If there is no quoted price in an active market for the identical instrument held by
another party, then use other observable inputs or another valuation technique

 If the liability or equity instrument is not held by other party as an asset, then use a
valuation technique from the perspective of market participant

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2.7. Non-performance risk

The fair value of a liability reflects the effect of non-performance risk – the risk that an entity
will not fulfill its obligation.

Non-performance risk includes, but is not limited to an entity’s own credit risk.

For example the risk of non-performance can be reflected in the different borrowing rates for
different borrowers due to their different credit rating. As a result, they would need to discount
the same amount with the different discount rate, thus the present value of a liability would
differ.

Financial assets and financial liabilities with offsetting positions

IFRS 13 requires a market-based measurement, not for an entity-based measurement. However,

there is an exception to this rule:

If an entity manages a group of financial assets and financial liabilities on the basis of its NET
exposure to market risks or counterparty risks, an entity can opt to measure the fair value of that
group on the net basis, and that is:

 The price that would be received to sell a net long position (asset) for particular risk
exposure, or

 The price that would be paid to transfer a net short position (liability) for particular risk
exposure.

This is an option and an entity does not necessarily need to follow it. In order to apply this
exception, an entity must fulfill the following conditions:
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  It must manage the group of financial assets/liabilities based on its net exposure to
market/credit risk according to its documented risk management or investment strategy,

 It provides information on that basis about the group of financial assets/liabilities to key
management personnel,

 It measures those financial assets and liabilities at fair value in the statement of financial
position at the end of each reporting period (so not at amortized cost, or other
measurement basis).

2.8. Fair value at initial recognition

When an asset is acquired or a liability is assumed in an exchange transaction for that asset or
liability, the transaction price is the price paid to acquire the asset or received to assume the
liability (an entry price). When determining whether fair value at initial recognition equals the
transaction price, an entity shall take into account factors specific to the transaction and to the
asset or liability

When an entity acquires an asset or assumes a liability, the price paid/received or the transaction
price is an entry price.

However, IFRS 13 defines fair value as the price that would be received to sell the asset or paid
to transfer the liability and that’s an exit price.

In most cases, transaction or entry price equals to exit price or fair value. But there are some
situations when transaction price is not necessarily the same as exit price or fair value:

 The transaction happens between related parties

 The transaction takes place under duress or the seller is forced to accept the price in the
transaction

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  The unit of account represented by the transaction price is different from the unit of
account for the asset or liability measured at fair value

 The market in which the transaction takes place is different from principal or the most
advantageous market.

If the transaction price differs from the fair value, then an entity shall recognize the resulting
gain or loss (“Day 1 profit“) to profit or loss unless another IFRS standard specifies other
treatment.

2.9. Valuation techniques

When determining fair value, an entity shall use valuation techniques:

 Appropriate in the circumstances

 For which sufficient data are available to measure fair value

 Maximizing the use of relevant observable inputs

 Minimizing the use of unobservable inputs.

Valuation techniques used to measure fair value shall be applied consistently.

However, an entity can change the valuation technique or its application, if the change results in
equally or more representative of fair value in the circumstances.

An entity accounts for the change in valuation technique in line with IAS 8 as for a change in
accounting estimate.

2.10. IFRS 13 allows 3 valuation approaches:

 Market approach: uses prices and other relevant information generated by market
transactions involving identical or comparable (ie similar) assets, liabilities, or a group of
assets and liabilities, such as a business

 Cost approach: reflects the amount that would be required currently to replace the
service capacity of an asset (often referred to as current replacement cost).

 Income approach: converts future amounts (e.g. cash flows or income and expenses) to a
single current (i.e. discounted) amount. The fair value measurement is determined on the
basis of the value indicated by current market expectations about those future amounts.

If the transaction price is fair value at initial recognition and a valuation technique that uses
unobservable inputs will be used to measure fair value in subsequent periods, the valuation

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technique shall be calibrated so that at initial recognition the result of the valuation technique
equals the transaction price

2.11. Fair value hierarchy

IFRS 13 introduces a fair value hierarchy that categorizes inputs to valuation techniques into 3
levels. The highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs.

An entity must maximize the use of Level 1 inputs and minimize the use of Level 3 inputs.

Level 1 input

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
that the entity can access at the measurement date. An entity shall not make adjustments to
quoted prices, only under specific circumstances, for example when a quoted price does not
represent the fair value (ie when significant event takes place between the measurement date and
market closing date).

Level 2 inputs

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly.

Level 2 inputs include the following:

(a) Quoted prices for similar assets or liabilities in active markets.

(b) Quoted prices for identical or similar assets or liabilities in markets that are not active.

(c) Inputs other than quoted prices that are observable for the asset or liability, for example:

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(i) Interest rates and yield curves observable at commonly quoted intervals;

(ii) Implied volatilities; and

(iii) Credit spreads.

(d) market-corroborated inputs.

Level 3 inputs

Level 3 inputs are unobservable inputs for the asset or liability.

An entity shall use Level 3 inputs to measure fair value only when relevant observable inputs are
not available.

The following scheme outlines the fair value hierarchy together with examples of inputs to
valuation techniques:

2.12. Presentation and disclosure

Disclosure

IFRS 13 requires extensive disclosure of sufficient information to asses:

 Valuation techniques and inputs used to develop fair value measurement for both
recurring and non-recurring measurements;

 The effect of measurements on profit or loss or other comprehensive income for

recurring fair value measurements using significant Level 3 inputs.

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Recurring fair value measurements are those presented in the statement of financial position at
the end of each reporting period (for example, financial instruments).

Non-recurring fair value measurements are those presented in the statement of financial position
in particular circumstances (for example, an asset held for sale in line with IFRS 5).

As the disclosures are really extensive, here, the examples of the minimum requirements are
listed:

 Fair value measurement at the end of the reporting period;

 The reasons for measurement (for non-recurring)

 The level in which they are categorized in the fair value hierarchy,

 Description of valuation techniques and inputs used;

 And many others.

2.13. IAS 36 Impairment of Assets

Objective

To prescribe the procedures that an entity applies to ensure that its assets are carried at no more
than its recoverable amount. An asset is carried at more than their recoverable amount if its
carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the
case, the asset is described as impaired and the entity is required to recognize an impairment loss.

Scope
This Standard shall be applied in accounting for the impairment of all assets, other than:
(a) Inventories;
(b) Assets arising from construction contracts;
(c) Deferred tax assets;
(d) Assets arising from employee benefits;
(e) Financial assets within the scope of IAS 39 Financial Instruments: Recognition and
Measurement;
(f) Investment property that is measured at fair value;
(g) Biological assets related to agricultural activity within the scope of IAS 41
Agriculture that are measured at fair value less costs to sell;
(h) Deferred acquisition costs, and intangible assets, arising from an insurer’s
contractual rights under insurance contracts within the scope of IFRS 4 Insurance
Contracts; and
(i) Non-current assets (or disposal groups) classified as held for sale in accordance
with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

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Applies mainly to:

- Tangible and intangible A

- Investments in subs
- Joint ventures
- Associates
Although last 3 items are financial assets

2.14. NATURE OF IMPAIRMENT

 Impairment loss – amount by which carrying amount of A exceeds its recoverable

amount
 Recoverable amount – is the higher of an A’s fair value less costs to sell and its value in
use
 Fair value less costs to sell – amount obtainable from sale of A in an arm’s length
transaction between knowledgeable, willing parties, less the cost of disposal
 Value in use – PV of future cash flows expected to be derived form an A. these cash
flows will include those form the continuing use of the asset and from its disposal at end
of its useful life

2.15. Defined terms

An impairment loss is the amount by which the carrying amount of an asset or a cash
generating unit exceeds its recoverable amount.

A cash generating unit is the smallest identifiable group of assets that generates cash inflows that
are largely independent of the cash inflows from other assets or group of assets.

The carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses thereon.

The recoverable amount is the higher of an asset’s or cash generating unit fair value less costs
of disposal and its value in use.

An assets value in use is the present value of the future cash flows expected to be derived from
an asset or cash generating unit.

Although recoverable amount is defined as the higher of an asset’s or CGU’s fair value less costs
to sell and its value in use, it is not always necessary to determine both. Examples of such
situations include:

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• where either the fair value less costs to sell or the value in use are determined to be greater than
the asset’s carrying amount, the asset is not impaired and it is not necessary to determine the
other amount,

• where there is no reason to believe the asset’s value in use materially exceeds its fair value less
costs to sell, the asset’s recoverable amount is its fair value less costs to sell, and

• Where it is not possible to determine fair value less costs to sell, the recoverable amount of the
asset may be taken to be its value in use.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.

Value in use is the present value of the future cash flows expected to be derived from an asset.

Useful life is:

(a) the period of time over which an asset is expected to be used by an entity; or

(b) the number of production or similar units expected to be obtained from the asset by an entity.

Identifying when as asset may be impaired

An entity shall assess at the end of each reporting period whether there is any indication that an
asset may be impaired. If any such indication exists, the entity shall estimate the recoverable
amount of the asset.

Irrespective of whether there is any indication of impairment, an entity shall also:

(a) test an intangible asset with an indefinite useful life or an intangible asset not yet available for
use for impairment annually by comparing its carrying amount with its recoverable amount

(b) test goodwill acquired in a business combination for impairment annually.

As a minimum, the following indicators shall be considered:

2.16. Measuring recoverable amount

As stated, the recoverable amount is the higher of an asset’s or cash-generating unit’s fair value
less costs of disposals and its value in use.

It is not always necessary to determine both an asset’s fair value less costs of disposal and its
value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not
impaired and it is not necessary to estimate the other amount.

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Internal sources

 Obsolescence or physical damage of an asset.

 Current or future adverse changes in the extent to which, or manner in which, an asset is
used.
 Economic performance of an asset is, or will be, worse than expected.

External sources

 Significant decline in asset’s market value.

 Changes in technological, market, economic or legal environment.
 Changes in market interest rates.
 Low market capitalisation (the carrying amount of the net assets exceed the entity’s
market capitalisation.

Dividend from a subsidiary, joint venture or associate

The investor recognises a dividend from the investment and evidence is available that:

 the carrying amount of the investment in the separate financial statements exceeds the
carrying amounts in the consolidated financial statements of the investee’s net assets,
including associated goodwill; or
 the dividend exceeds the total comprehensive income of the subsidiary, joint venture or
associate in the period the dividend is declared

Measuring recoverable amount

As stated, the recoverable amount is the higher of an asset’s or cash-generating unit’s fair value
less costs of disposals and its value in use.

It is not always necessary to determine both an asset’s fair value less costs of disposal and its
value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not
impaired and it is not necessary to estimate the other amount.

The recoverable amount is determined for an individual asset, unless the asset does not generate
cash inflows that are largely independent of those from other assets or groups of assets. If this is
the case, recoverable amount is determined for the cash-generating unit to which the asset
belongs unless either:

(a) The asset’s fair value less costs of disposal is higher than its carrying amount; or

(b) The asset’s value in use can be estimated to be close to its fair value less costs of disposal and
fair value less costs of disposal can be measured.

Fair value less costs of disposal

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Value in use

Estimate the future cash inflows and outflows to be derived from continuing use of the asset and
from its ultimate disposal and apply the appropriate discount rate to those future cash flows:

The discount rate(s) shall be a pre-tax rate(s) that reflect(s) current market assessments of:

(a) the time value of money; and

(b) the risks specific to the asset for which the future cash flow estimates have not been adjusted.

Fair value less costs of disposal

 This is the amount obtainable from the sale of an asset or cash generating unit (CGU) in
an arm’s length transaction between knowledgeable, willing parties, less the cost of
disposal.
 The best evidence of an assets fair value less cost to sell is a price in a binding sale
agreement in an arm’s length transaction, adjusted for incremental costs that are directly
attributable to the disposal of the asset. If there is no binding sale agreement, but an asset
is traded in an active market, the asset’s market price less costs of disposal would provide
the best evidence of fair value less cost to sell.
 If there is no sale agreement or active market for an asset, fair value less costs to sell is
determined based on the best information available to reflect the amount that an entity
could obtain, at reporting date, from the disposal of the asset through an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal.
 Cost of disposals include legal costs, stamp duty and similar transaction taxes, costs of
removing the asset and direct incremental costs to bring an asset into condition for its
sale.

Value in use

 Estimate the future cash inflows and outflows to be derived from continuing use of the
asset and from its ultimate disposal and apply the appropriate discount rate to those future
cash flows:

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2.17. Estimates of future cash flows shall include:

(a) Projections of cash inflows from the continuing use of the asset;

(b) projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset (including cash outflows to prepare the asset for use) and can be
directly attributed, or allocated on a reasonable and consistent basis, to the asset; and

(c) Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its
useful life

Basis for estimates of future cash flows

In measuring value in use an entity shall:

(a) Base cash flow projections on reasonable and supportable assumptions that represent
management’s best estimate of the range of economic conditions

(b) Base cash flow projections on the most recent financial budgets/forecasts approved by
management.

(c) Estimate cash flow projections beyond the period covered by the most recent
budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady
or declining growth rate for subsequent years.

The discount rate(s) shall be a pre-tax rate(s) that reflect(s) current market assessments of:

(a) The time value of money; and

(b) The risks specific to the asset for which the future cash flow estimates have not been
adjusted.

For foreign currency, denominated future cash flows an entity translates the present value using
the spot exchange rate at the date of the value in use calculation.

Illustrative example 20.1: Calculation of recoverable amount

Roach Limited has an item of plant which has undergone an impairment review at 31 December

20X1.

At the review, the following estimates were produced:

Fair value of plant: R1 400 000

Costs to sell 2% of selling price

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Revenue and associated costs per annum for remaining useful life: (assume all cashflows
occur at the

end of the year).

Revenue Costs

20X2 R960,000 R240,000

20X3 R880,000 R220,000

20X4 R700,000 R290,000

The plant has an estimated residual value of R50 000.

A discount rate of 10% is applicable to investments equivalent in risk to this plant.

Required

Calculate the recoverable amount as at 31 December 20X1

Solution

Cash flows

20X2 20X3 20X4

Rand Rand Rand

Revenue 960 000 880 000 700 000

Costs (240 000) (220 000) (290 000)

Net Cash Inflow 720 000 660 000 410 000

Present Value Factor 0.90909 0.82645 0.75131

Present Value 654 545 545 457 308 037

Residual Value Present Value (end of 20X4: 50 000 x 0.75131) = 37 566

Value In Use = (654 545 + 545 457 + 308 037 + 37 566 = R1 545 605

Fair value less Cost to Sell = R1 400 000 – 2% = R1 372 000

Recoverable Amount (Greater of) = Value in use = R 1 545 605

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Example 2

A fixed asset was acquired in January 2008 for £200,000.Depreciation policy is 15% straight line
with a nil estimated residual value. At 1 January 2011 the NFV of the asset is £95,000and the
value in use is estimated at £87,000.

Required:

Calculate the amount of any impairment at 1 January 2011.

Solution
NBV (carrying amount) of asset at 1.1.11
Cost £200,000
Less: depreciation 2008-10 (200,000 x 15% x 3 years) 90,000
NBV – 1.1.11 £110,000

Recoverable amount
This is measured as the higher of NFV and VU (higher of £95,000 and £87,000) ie£95,000.

As the recoverable amount is £95,000, there has been an impairment of £15,000

(Carrying amount of £110,000 less £95,000).

2.18. Recognizing an impairment loss /

If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment
loss.

An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried
at revalued amount in accordance with another Standard.

Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance
with that other Standard.

When the amount estimated for an impairment loss is greater than the carrying amount of the
asset to which it relates, an entity shall recognise a liability if, and only if, that is required by
another Standard.

After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset
shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual
value (if any), on a systematic basis over its remaining useful life.

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Measuring recoverable amount of an intangible asset with an indefinite useful life

The recoverable amount of an intangible asset with an indefinite useful life or an intangible asset
not yet available for use should be estimated annually irrespective of whether there is any
indication of impairment in order to test the affected intangible asset for impairment.

2.19. Cash-generating units and Goodwill

Identifying the cash-generating unit to which an asset belongs

If there is any indication that an asset may be impaired, the recoverable amount shall be
estimated for the individual asset. If it is not possible to estimate the recoverable amount of the
individual asset, an entity shall determine the recoverable amount of the cash-generating unit to
which the asset belongs (the asset’s cash-generating unit).

If an active market exists for the output produced by an asset or group of assets, that asset or
group of assets shall be identified as a cash-generating unit, even if some or all of the output is
used internally.

If the cash inflows generated by any asset or cash-generating unit are affected by internal transfer
pricing, an entity shall use management’s best estimate of future price(s) that could be achieved
in arm’s length transactions in estimating:

(a) the future cash inflows used to determine the asset’s or cash-generating unit’s value in use;
and

(b) the future cash outflows used to determine the value in use of any other assets or cash-
generating units that are affected by the internal transfer pricing.

Corporate assets

In testing a cash-generating unit for impairment, an entity shall identify all the corporate assets
that relate to the cash-generating unit under review. If a portion of the carrying amount of a
corporate asset:

(a) can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the
carrying amount of the unit, including the portion of the carrying amount of the corporate asset
allocated to the unit, with its recoverable amount. Any impairment loss shall be recognised.

(b) Cannot be allocated on a reasonable and consistent basis to that unit, the entity shall:

(i) compare the carrying amount of the unit, excluding the corporate asset, with its recoverable
amount and recognise any impairment loss;

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(ii) Identify the smallest group of cash-generating units that includes the cash-generating unit
under review and to which a portion of the carrying amount of the corporate asset can be
allocated on a reasonable and consistent basis; and

(iii) Compare the carrying amount of that group of cash-generating units, including the portion of
the carrying amount of the corporate asset allocated to that group of units, with the recoverable
amount of the group of units.

Goodwill

For the purpose of impairment testing, goodwill acquired in a business combination shall, from
the acquisition date, be allocated to each of the acquirer’s cash-generating units, or groups of
cash-generating units, that is expected to benefit from the synergies of the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units or
groups of units.

Each unit or group of units to which the goodwill is so allocated shall:

(a) Represent the lowest level within the entity at which the goodwill is monitored for internal
management purposes; and

(b) Not be larger than an operating segment as defined by IFRS 8 Operating Segments before
aggregation

If goodwill has been allocated to a cash-generating unit and the entity disposes of an operation
within that unit, the goodwill associated with the operation disposed of shall be:

(a) included in the carrying amount of the operation when determining the gain or loss on
disposal; and

(b) measured on the basis of the relative values of the operation disposed of and the portion of
the cash-generating unit retained, unless the entity can demonstrate that some other method
better reflects the goodwill associated with the operation disposed of.

A cash-generating unit to which goodwill has been allocated shall be tested for impairment
annually and whenever there is an indication that the unit may be impaired.

Impairment loss for a cash-generating unit

An impairment loss shall be recognised for a cash-generating unit (the smallest group of cash-
generating units to which goodwill or a corporate asset has been allocated) if, and only if, the
recoverable amount of the unit (group of units) is less than the carrying amount of the unit
(group of units).

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The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit
(group of units) in the following order:

(a) first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit
(group of units); and

(b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying
amount of each asset in the unit (group of units).

In allocating an impairment loss an entity shall not reduce the carrying amount of an asset below
the highest of:
(a) its fair value less costs of disposal (if measurable);
(b) its value in use (if determinable); and
(c) zero.
The amount of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to the other assets of the unit (group of units).
A liability shall be recognised for any remaining amount of an impairment loss for a cash-
generating unit if, and only if, that is required by another IFRS.
Reversing an impairment loss

An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognised in prior periods for an asset other than goodwill may no longer exist
or may have decreased. If any such indication exists, the entity shall estimate the recoverable
amount of that asset as follows:

(a) Reversing an impairment loss for an individual asset

The increased carrying amount of an asset other than goodwill attributable to a reversal of an
impairment loss shall not exceed the carrying amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.

(b) Reversing an impairment loss for a cash-generating unit

A reversal of an impairment loss for a cash-generating unit shall be allocated to the assets of the
unit, except for goodwill, pro rata with the carrying amounts of those assets. These increases in
carrying amounts shall be treated as reversals of impairment losses for the individual assets
within the cash-generating unit. In allocating the reversal of the impairment, the carrying amount
of an asset shall not be increased above the lower of:

(i) its recoverable amount (if determinable); and

(ii) the carrying amount that would have been determined (net of amortisation or depreciation)
had no impairment loss been recognised for the asset in prior periods.

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(c) Reversing an impairment loss for goodwill – An impairment loss recognised for goodwill
shall not be reversed in a subsequent period

Illustrative example 20.2: Individual asset carried at depreciated historic cost .A pharmaceutical
company’s competitor ‘invented’ a cheap cure for AIDS. This resulted in the company moth-
balling its less effective AIDS treatment drug manufacturing plant on 31 December 20.8.

Details of the moth-balled plant are as follows:

R’000

• Original cost (1 January 20.6) 1 000

• Recoverable amount (31 December 20.8) zero

• Depreciation is provided for on the straight-line basis over 10 years to nil residual value

In December 20.9, it became apparent that the competitor’s ‘miracle’ cure was a hoax.
Fortunately, the company had not disposed of its moth-balled plant and plans to recommence
production in the 20.10 financial year. Market demand for the company’s AIDS treatment drug is
fully restored and the plant is once again expected to run profitably in the foreseeable future.

Required: Prepare journal entries to record the write down to recoverable amount and
subsequent write back

Solution: Calculation: Debit Credit

R’000 R’000

31 December 20.8

Depreciation – plant R1 000 000/10 years 100

Accumulated depreciation & impairment - plant 100

Depreciation for the year

Impairment of plant – expense (R1 000 000 cost – R300 000

accumulated depreciation) –

R0 recoverable amount

700

Accumulated depreciation & impairment – plant 700

Impairment of plant

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31 December 20.9

Accumulated depreciation & impairment - plant R700 000 above – R100 000

notional depreciation

600

Reversal of impairment – expense 600

Reversal of impairment

2.20. Disclosure

An entity shall disclose the following for each class of assets:

Impairment losses in aggregate

For each class of assets that was impaired during the period disclose:
 the amount of the impairment losses recognised in profit or loss during the period;
 the line item(s) in the statement of comprehensive income in which those impairment
losses are included; and
 the amount of impairment losses recognised directly in other comprehensive income
during the period
For each class of assets for which an impairment loss was reversed during the period
disclose:

 the amount of the reversals of impairment losses recognised in profit or loss during the
period;
 the line item(s) of the statement of comprehensive income in which those reversals of
impairment losses are included; and
 the amount of reversals of impairment losses recognised directly in other comprehensive
income during the period
These disclosure requirements may be satisfied by the reconciliation of the opening and closing
carrying amounts required by other Standards. However, because of their size and nature this
may require additional disclosures thereof in the notes to the statement of comprehensive income

An entity that reports segment information shall disclose for each reportable segment (primary
segments only) the amount of the impairment loss recognised or reversed during the period in
profit or loss, and other comprehensive income during the period.

Individually material impairment

In respect of each material impairment loss recognised or reversed during the period for an
individual asset (including goodwill) or a CGU, disclose:

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  the events or circumstances that lead to the recognition or reversal of the impairment loss;
 the amount of impairment loss recognised or reversed;
 for individual assets: (i) the nature of the asset, and (ii) the reportable segment (i.e.
primary segment) to which the asset belongs;
 for a CGU: (i) a description of the CGU, (ii) the amount of the impairment loss
recognised or reversed by class of asset and by segment (i.e. primary segment), and (iii) if
the aggregation of assets for identifying the CGU has changed since the previous estimate
of the CGU’s recoverable amount a description of the current and former way of
aggregating assets and the reasons for changing the way the cash generating unit is
identified;
 whether the recoverable amount of the asset (CGU) is its fair value less costs to sell or
its value in use;
 where the recoverable amount is the fair value less costs to sell, the basis used to
determine fair value less costs to sell (e.g. with reference to an active market); and
 Where the recoverable amount is the value in use, the discount rates used in the current
and previous estimate of value in use.

Individually immaterial impairments

For impairment losses recognized or reversed during the period that did not qualify for separate
disclosure, the entity shall disclose for the aggregate impairment losses and aggregate reversals of
impairment losses:

 the main classes of assets affected; and

 •the main events or circumstances that led to the recognition or reversal of the impairment losses.

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