UNIVERSITY OF LIMPOPO

TURFLOOP CAMPUS

FACULTY OF MANAGEMENT & LAW

SCHOOL OF ACCOUNTANCY

CACN040 / CACB080 / CACC080

MODULE
IMPAIRMENT OF ASSETS
[IAS 36]
IAS 36, IMPAIRMENT OF ASSETS

Purpose of the standard

IAS 36, Impairment of Assets, prescribes the procedures that an entity applies to ensure that
its assets are carried at no more than their recoverable amount. An asset is carried at more
than its 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 IAS
36 requires the entity to recognise an impairment loss. IAS 36 also specifies when an entity
should reverse an impairment loss and prescribes the relevant disclosures.

Study material:
IAS 36, Impairment of Assets
IAS 16, Property, plant and equipment
IFRS 13, Fair Value Measurement

Learning Objectives
After studying this module, you must be able to do the following at an advanced level:
 Apply the definitions of IAS 36.
 Identify assets that may be impaired by applying impairment indicators.
 Identify assets previously impaired that may require impairment reversal by applying
impairment reversal indicators.
 Discuss the timing of impairment testing, including goodwill, intangible assets with an
indefinite useful life and intangible assets not yet available for use.
 Determine the recoverable amount of an asset, including the measurement of fair value
less costs of disposal and value in use.
CGU WILL BE COVERED WITH IFRS 5
 Identify a cash generating unit (CGU)
 Measure and recognise the impairment loss of:
- an individual asset
- a cash generating unit (CGU)
 Allocate goodwill (and corporate assets) to individual assets and CGUs for impairment
testing purposes
 Recognise and measure impairment loss reversal on individual assets or CGUs.
 Present and disclose impairment loss and impairment loss reversals in the financial
statements.
 Discuss and compute advanced deferred tax problems relating to impairment.

Assessment possibilities
IAS 36, Impairment of assets, can be assessed in the form of a discursive or computation type
of question. Good computation questions are possible on this standard. The standard is
always integrated with another, including IAS 16, Property, plant and equipment, IAS 38,
Intangible Assets, IAS 12, Income Taxes, subsidiaries (under IFRS 10 Consolidated Financial
Statements), associates (IAS 28, Investments in Associates and Joint Ventures) and joint
arrangements (IFRS 11, Joint Arrangements). The standard may be examined in the form of
journal entries, financial information presentation or note disclosure.

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Study Approach
This module provides a useful guide on the key focus areas. Thoroughly work through it
concurrently with the relevant sections in IAS 36. One of the major challenges usually faced
by students is the determination of value in use (VIU). Students must appreciate the fact that
the principles of VIU determination are derived from Management Accounting and Finance
(MAF). Therefore, linking VIU computations in IAS 36 to MAF is vital. IAS 36 provides
adequate guidance on VIU computations and students need not memorise these requirements
although it is very vital that they know where that guidance is situated for quick reference in
assessments. It is, therefore, necessary for a student to properly highlight the relevant
paragraphs in IAS 36. The topic will often be integrated with deferred tax and students must,
therefore, link IAS 12 to IAS 36 when an asset is impaired or when impairment is reversed.

Overview of IAS 36, Impairment of Assets

1. Objective (.1) what is the purpose of the standard.
2. Scope (.2-5)
3. Definitions (.6)
4. Identifying an asset that may be impaired:
 assets to be tested for impairment annually (.10)
 external sources of information (.12)
 internal sources of information (.12)
5. Measuring recoverable amount (.18-57):
 intangible asset with an indefinite useful life (.22)
 fair value less costs of disposal (.28-29)
 value in use (VIU) (.30-57)
6. Recognising and measuring an impairment loss, individual asset (.58-64)
7. Cash-generating units (CGU) and goodwill:
 identifying the CGU to which an asset belongs (.66-73)
 recoverable amount and carrying of a CGU (.74-78)
 Goodwill
- allocating goodwill to CGUs (.80-87)
- Testing CGUs with goodwill for impairment (.88-90)
- Timing of impairment tests (.96-99)
 Corporate assets (.100-103)
 impairment loss for a cash-generating unit (.104-108)
8. Reversing an impairment loss (.109-110)
 internal sources of information (.111)
 external sources of information (.111)
 reversing an impairment loss for an individual asset (.117-121)
 reversing an impairment loss for a CGU (.122-125)
9. Disclosure (.126-137)

Key principles under IAS 36, Impairment of Assets

Items not within the scope of IAS 36, Impairment of Assets:

(a) inventories (IAS 2)
(b) contract assets and assets arising from costs to obtain or fulfil a contract (IFRS 15)
(c) deferred tax (IAS 12)

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 (d) assets arising from employee benefits (IAS 19)
(e) financial assets (IFRS 9)
(f) investment properties measured according to the fair value model (IAS 40)
(g) biological assets (IAS 41)
(h) deferred acquisition costs, and intangible assets (IFRS 4, Insurance Contracts)
(i) NCAHFS (IFRS 5)

Definitions
Carrying amount
Cash generating unit
Cost of disposal
Fair value
Impairment loss
Recoverable amount

Identifying an asset that may be impaired

Impairment – a situation when an asset’s carrying amount is greater than its recoverable
amount (CA>RA).
Recoverable amount – the higher of fair value less cost of disposal (FV-CoD) and value in use
(VIU).

Identifying an asset that may be impaired

Is the asset any one of the following? (.10)

(a) intangible asset with an indefinite useful life
(b) intangible asset not yet available for use
(c) goodwill acquired in a business combination

No Yes

Test for impairment annually

Are there any impairment indicators? (regardless of whether there are
(assessment done at the end of each reporting impairment indicators) (.10)
period) (.9)

No Yes
Was asset initially recognised
Test asset for impairment (by during current annual period? (.10)
Do nothing comparing carrying amount to
the recoverable amount) Yes

Test asset for impairment before

end of current period (by
comparing carrying amount to the
recoverable amount)

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Some factors to consider (as a minimum) when assessing for indicators of impairment
(.12)

External sources of information

(a) Significant decline of an asset’s value that is more than expected.
(b) Significant changes that adversely affect an entity have taken place or will take place in
the near future in the technological environment, legal environment, market and the like.
(c) An increase in the market interest rate used in computing VIU
(d) the asset’s carrying amount is greater than its market capitalisation.

Internal sources of information

(e) evidence of obsolescence or physical damage of an asset
(f) Occurrence or expected occurrence of significant adverse changes affecting the use of
an asset. Such changes include the asset becoming idle, plans to discontinue an
operation to which the asset belongs, useful life of an intangible asset changes from
indefinite to finite.
(g) Evidence that the economic performance of an asset is, or will be, worse than expected.

Dividends from a subsidiary, joint venture or associate

(h) for an investment in a subsidiary, joint venture or associate, the investor recognises a
divided from the investment when evidence is available that:
(i) CA of the investment in the separate financial statements exceeds the CAs in the
consolidating financial statements of the investee’s net assets, including associated
goodwill; or
(ii) The dividend exceeds the total comprehensive income of the subsidiary, joint venture,
or associate in the period the dividend is declared.

Should the assessment always be performed?

If previous calculations show that an asset’s recoverable amount is significantly greater than
its carrying amount, the entity need not re-estimate the asset’s recoverable amount if no
events have occurred that would eliminate that difference.

If there is an indication that an asset may be impaired, this may indicate that the remaining
useful life, the depreciation (amortisation) method or the residual value for the asset needs to
be reviewed and adjusted in accordance with the Standard applicable to the asset, even if no
impairment loss is recognised for the asset.

Measuring recoverable amount

Recoverable amount (RA) is the higher of an asset’s (or CGU’s) fair value less costs of
disposal (FV-CoD) and its value in use (VIU).

Should one always determine both the FV-CoD and VIU when testing an asset for impairment?

If after measuring either the FV-CoD or the VIU and that amount exceed the asset’s CA, there
is no need to measure the one not yet determined. Similarly, if after measuring the asset’s FV-
CoD there is no reason to believe that the VIU exceeds the FV-CoD, then it will not be
necessary to determine the VIU. In that case the FV-CoD becomes the asset’s RA.

If it is not possible to measure an asset’s FV, then, the asset’s VIU becomes its RA.

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Fair value less costs of disposal
The asset’s fair value (FV) is determined according to IFRS 13, Fair Value Measurement.
Because PPE and intangible assets are non-financial assets, the FV is usually measured
based on the asset’s highest and best use value (return to this after covering IFRS 13).

Costs of disposal (CoD) are incremental costs directly attributable to the disposal of an asset
or cash-generating unit, excluding finance costs and income tax expense. CoD specifically
excludes those costs that have already been recognised as liabilities, otherwise, double
counting arises.

Example 1: Fair value less cost of disposal computation

ABC Ltd (ABC) owns machinery it uses in its production process which had a carrying amount
of R60 000 (on 31 December 2019) and was bought two years ago. The factory building in
which the machinery is housed is leased under a non-renewable lease and the lease period
expires in exactly three years’ time, from 31 December 2019. After the expiry of the lease, the
machinery will be disposed of. As part of the terms of the lease agreement, ABC is required
to restore the factory to its original state at the end of the lease period. The fair value of the
machinery was R65 000 on 31 December 2019. It is normal that a 3% commission of the fair
value will be payable to the second hand dealer whose services will be required to dispose of
the machinery. Repainting and transportation of the machinery for sale are expected to cost
ABC R3 000 and R5 000, respectively. The provision balance equates to the dismantling cost
that would have to be incurred by ABC if it was to dismantle and sell the machinery on 31
December 2019.

Computation of the machinery’s FV-CoD on 31 December 2019.

R Remarks
Fair value 65 000
Less Costs of disposal
3% commission (1 950)
Repainting (3 000) Cost of disposal
Transportation (5 000) Cost of disposal
Fair value less CoD 55 050

Value in use
Value in use is the present value of the future cash flows expected to be derived from an asset
or cash-generating unit (BEFORE TAX).

The following elements shall be reflected in the calculation of an asset’s value in use (.30):
(a) an estimate of the future cash flows the entity expects to derive from the asset;
(b) expectations about possible variations in the amount or timing of those future cash flows;
(c) the time value of money, represented by the current market risk-free rate of interest (since
risk is adjusted for in (b) and (d);
(d) the price for bearing the uncertainty inherent in the asset; and
(e) other factors, such as illiquidity, that market participants would reflect in pricing the future
cash flows the entity expects to derive from the asset.

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 Please note:
 One has to think in terms of the NPV of an asset or project in terms of financial
management principles.
 Although the VIU computation also excludes finance costs as is the case in financial
management, the VIU computation, unlike in the NPV determination, is performed
before tax, therefore, the discounting factor is also supposed to be before tax (pre-
tax)).
 The reasoning behind using pre-tax amounts is that all tax effects of amounts in P/L
(e.g. impairment in this case) are captured in one-line item, the income tax expense!!!

Basis for estimates of future cash flows (.33)

(a) base cash flow projections on reasonable and supportable assumptions that represent
management’s best estimate of the range of economic conditions that will exist over
the remaining useful life of the asset. Greater weight shall be given to external
evidence.
(b) base cash flow projections on the most recent financial budgets/forecasts approved by
management, but shall exclude any estimated future cash inflows or outflows expected
to arise from future restructurings or from improving or enhancing the asset’s
performance. Projections based on these budgets/forecasts shall cover a maximum
period of five years, unless a longer period can be justified.
(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, unless an increasing rate
can be justified. This growth rate shall not exceed the long-term average growth rate
for the products, industries, or country or countries in which the entity operates, or for
the market in which the asset is used, unless a higher rate can be justified.

Example 2: Computation of cash flows (beyond 5 years)

A Ltd owns an asset with a remaining useful life of 8 years. The most recent budget approved
by management indicates that the asset will generate the following expected cash flows during
the next five years:

Year 1 R500 000

Year 2 R550 000
Year 3 R650 000
Year 4 R660 000
Year 5 R680 000

The expected long-term growth rates for years 6 to 8 are as follows:

Year 6 3%
Year 7 0%
Year 8 -2%

Note that for the first five years, the cash flows used for the calculation of the asset’s value in
use should be based on the budget. Thereafter it is necessary to extrapolate using a steady,
declining, zero or negative growth rate. The growth rate of 3% for year 6 is constant in
comparison with year 5 (year 5: 680 000 - 660 000/660 000 = 3%). In year 7 the growth rate
is zero and in year 8 a negative rate applies. The future cash flows used for the calculation of
the asset’s value in use are therefore as follows:

Year 1 R500 000

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Year 2 R550 000
Year 3 R650 000
Year 4 R660 000
Year 5 R680 000
Year 6 R700 400 (680 000 x 1.03%)
Year 7 R700 400 (no growth)
Year 8 R686 392 (700 400 x .98%)
Source: GAAP Handbook

Example 3: Computation of VIU

AB Ltd, a subsidiary of ABC Ltd, owns a plant it acquired three years ago that it uses in its
production process. The plant has a five year remaining useful life. The recent budget for the
company (as tabled at a recent board meeting) reflected the following cash flows:

30 June 2019 2020 2021 2022

Actual Forecast Forecast Forecast
Inflows 300 000 400 000 450 000 490 000
Outflows (180 000) (240 000) (270 000) (290 000)
Net inflows 120 000 160 000 180 000 200 000

In his report, the financial manager stated that he expected the net cash inflows to grow by
5% and -3% (with the 2022 net cash flow as the base year) for the years 2023 and 2024,
respectively. On 30 June 2019, plant similar to that of AB that had been used under the same
conditions as that of AB Ltd were being traded by second hand dealers at the following prices:

Three year old plant 700 000

Five year old plant 460 000
Eight year old plant 50 000
A commission of 5% is applicable
Other costs of disposal (at current prices) 10 000

A pre-tax discount rate of 15% is applicable to AB’s plant.

Determination of the VIU of the plant on 30 June 2019:

Ignore the cash flows for 2019 as they are actual and not future cash flows. Use the residual
proceeds for an eight-year-old plant since AB’s plant will be disposed of at the end of eight
years (3+5). The discount rate to be used is 15% as this is the rate that reflects the risks
specific to the asset for which the future cash flow estimates have not been adjusted. The
current growth rate (for 2022) of the net cash flows is 11.11% ((200 000/180 000)-1) and the
rate is decreasing in both 2019 and 2020. There is, therefore, no need to justify the rates (IAS
36 par 33 (c)).

The VIU will be computed as flows for the five-year period (including extrapolation for 2023
and 2024):

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 2020 2021 2022 2023 2024
Net cash flow 160 000 180 000 200 000 210 000 203 700

NPV @ 15% 628 083

Net proceeds on disposal The disposal cost of R10 000 is not discounted
(50 000x95%)-10 000 37 500 since it is at current prices.
VIU (628 083+37 500) 665 583

The selling price of R700 000 for a three-year-old plant will be the plant’s fair value since the
asset is currently three years old. The selling cost (commission) and the other cost of disposal
must be deducted from the fair value of R700 000 to determine the fair value less costs of
disposal. Therefore, the FV-CoD is R655 000 ((700 000x95%)-10 000).

Recognising and measuring an impairment loss (.58-64)

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.

Why do we have to impair an asset if its CA exceeds its recoverable amount?

An asset is a resource controlled by an entity as a result of a past event from which future
economic benefits are expected to flow to the entity. The carrying amount (CA) of the asset is
a quantification of the expected future economic benefits. The economic benefits embodied in
an asset like PPE and an intangible asset are realised mainly in two possible ways; either by
using it (resulting in VIU) or through selling it (resulting in FV-CoD). Therefore, if at any point
the CA of that asset exceeds the higher of its VIU and FV-CoD (= recoverable amount), the
future economic benefits reflected in the SFP (by the asset’s CA) are overstated. An
impairment loss is, therefore, recognised to reduce the CA to an amount equal to the economic
benefits the entity expects to flow into the entity (either by using the asset or by selling it).

An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried
at revalued amount in accordance with another Standard (for example, in accordance with the
revaluation model in IAS 16 [Refer: IAS 16 paragraph 31]). Any impairment loss of a revalued
asset shall be treated as a revaluation decrease in accordance with that other Standard. An
impairment loss on a revalued asset is recognised in other comprehensive income to the
extent that the impairment loss does not exceed the amount in the revaluation surplus for that
same asset. Such an impairment loss on a revalued asset reduces the revaluation surplus for
that asset.

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.

Example 4 – individual asset measured using the cost model

Equipment acquired two years ago with an immaterial residual value had the following details
on 30 June 2018:

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Gross carrying amount R500 000
Accumulated depreciation R200 000

The equipment has never been impaired. On 30 June 2019, the equipment had a fair value
less costs of disposal of R190 000 and a value in use of R185 000. SARS allows capital
allowances on the equipment at 20% per annum.

Journal entries for the machinery for the year ended 30 June 2019 will be as follows:
30 June 2019 Dr Cr
Depreciation (P/L) (500 000/5) 100 000
Accumulated depreciation (SFP) 100 000
Depreciation for the year

Impairment loss (P/L) (500-(200+100))-190 000a 10 000

Accumulated impairment loss (SFP) 10 000
Impairment loss on equipment

Deferred tax (SFP) (10 000x28%) 2 800

Income tax expense (P/L) 2 800
Deferred tax effect of impairment

a= recoverable amount is the higher of FV-CoD (190 000) and VIU (185 000), therefore, R190
000.

The depreciation for 2020 will be based on the impaired carrying amount and will amount to
R95 000 (190 000/2).

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Example 5 – individual asset measured using the revaluation model

A piece of land was acquired on 1 July 2017 at a cost of R500 000. The land is used as a
vehicle holding area before the vehicles are sold to customers. The land was revalued to its
fair value of R550 000 on 30 June 2018.

On 30 June 2019, there were indications that the land could be impaired. The fair value less
costs of disposal of R510 000 and a value in use of R512 000 were determined, in relation to
the land.

Journal entries to account for the land for the year ended 30 June 2019 will be as follows:

Dr Cr
30 June 2019
Revaluation surplus (OCI) (550 000-512 000) 38 000
Accumulated impairment loss (SFP) 38 000
Impairment loss on the land
RA = Higher of FV-CoD (501 000) and VIU (512 000) = R512 000

Deferred tax (SFP) ((38 000x80%x28%) 8 512

Revaluation surplus (OCI) 8 512
Deferred tax on temporary difference

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 (.110).

Factors that may indication that an impairment loss recognised in prior periods for an asset
other than goodwill may no longer exist or may have decreased include the following, as a
minimum (.111):

External factors
(a) observable indications that the asset’s value has increased significantly during the period
(b) occurrence of (or expected occurrence of) significant changes with a favourable effect on
the entity during the period (or in the near future) in the technological, market, economic
or legal environment in which the entity operates or in the market to which the asset is
dedicated.
(c) decrease in market interest rates or other market rates of return on investments during
the period which are likely to affect the discount rate used in calculating the asset’s value
in use and increase the asset’s recoverable amount materially.

Information factors
(d) occurrence of (or expected occurrence of) significant changes with a favourable effect on
the entity during the period (or in the near future) in the extent to which, or manner in
which, the asset is used or is expected to be used. These changes include costs incurred
during the period to improve or enhance the asset’s performance or restructure the
operation to which the asset belongs.

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(e) evidence is available from internal reporting that indicates that the economic performance
of the asset is, or will be, better than expected.

An impairment loss recognised in prior periods for an asset other than goodwill shall be
reversed if, and only if, there has been a change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was recognised. If this is the case, the
carrying amount of the asset shall, subjection to reversal amount limitation discussed below
(from para .117), be increased to its recoverable amount. That increase is a reversal of an
impairment loss (.114).

No impairment loss reversal to be recognised due to unwinding of interest

An asset’s value in use may become greater than the asset’s carrying amount simply because
the present value of future cash inflows increases as they become closer. However, the
service potential of the asset has not increased. Therefore, an impairment loss is not reversed
just because of the passage of time (sometimes called the ‘unwinding’ of the discount), even
if the recoverable amount of the asset becomes higher than its carrying amount.

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 (.117). Cost model - for an asset measured using the cost model, the maximum
impairment reversal amount is the amount required to bring the asset’s impaired carrying
amount to its historical carrying amount disregarding any previously recognised impairment
losses. Revaluation model - for an asset measured using the revaluation model, the
maximum impairment reversal amount is the amount required to bring the asset’s impaired
carrying amount to its latest revalued carrying amount disregarding any previously recognised
impairment losses after that latest revaluation.

A reversal of an impairment loss for an asset other than goodwill shall be recognised
immediately in profit or loss, unless the asset is carried at revalued amount in accordance with
another IFRS (for example, the revaluation model in IAS 16). Any reversal of an impairment
loss of a revalued asset shall be treated as a revaluation increase in accordance with that
other IFRS (.119).

A reversal of an impairment loss on a revalued asset is recognised in other comprehensive

income and increases the revaluation surplus for that asset. However, to the extent that an
impairment loss on the same revalued asset was previously recognised in profit or loss, a
reversal of that impairment loss is also recognised in profit or loss (.120).

After a reversal of an impairment loss is recognised, 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 (.121).

Example 6: Reversal of an impairment loss - cost model

Bravo Ltd acquired plant at a cost of R500 000 on 1 January 2017 for use in its production
process. The plant’s estimated useful life and residual value have always been 8 years and
immaterial, respectively. The product manufactured from the plant suffered immense
competition from cheap imports from Asia during the year ended 31 December 2018. The
recoverable amount of the plant was determined to be R306 000 on 31 December 2018.

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In order to protect the local industry, the government imposed a strict quota on the importation
of the product in 2019 and, as a result, the consumption of the local product increased
drastically. Bravo remeasured the recoverable amount of the plant on 31 December 2019 and
it was estimated at R350 000. SARS allows an annual capital allowance of 20% per annum.
The normal tax rate is 28%.

Journal entries to account for the plant for the years ended 31 December 2018 and 2019 will
be as follows:
Dr Cr
31 December 2018
Depreciation (P/L) (500 000/8) 62 500
Accumulated depreciation (SFP) 62 500

Income tax expense (P/L) [(100 000-62 500)x0.28] 10 500

Deferred tax (SFP) 10 500

Impairment loss (P/L) [C1] 69 000

Accumulated depreciation (SFP) 69 000

Deferred tax (SFP) (69 000x0.28) 19 320

Income tax expense (P/L) (69 000x0.28) 19 320

31 December 2019
Depreciation (P/L) (306 000/6) 51 000
Accumulated depreciation (SFP) 51 000

Income tax expense (P/L) [(100 000-51 000)x0.28] 13 720

Deferred tax (SFP) 13 720

Accumulated impairment loss (SFP) [C2] 57 500

Impairment loss reversal (P/L) 57 500

Income tax expense (P/L) (57 500x0.28) 16 100

Deferred tax (SFP) 16 100

C1: Impairment loss on 31 December 2018

Carrying amount on 31 December 2018 (500 000x6/8) 375 000
Recoverable amount 306 000
Impairment loss 69 000

C2: Impairment loss reversal on 31 December 2019

Impaired carrying amount on 31 Dec 2019 (306 000-51 000) 255 000
Recoverable amount 350 000
Potential impairment loss reversal 95 000

Limited to historical carrying amount (ignoring any previously 312 500

recognised impairment) (500 000x5/8)
Impaired carrying amount 255 000
Maximum impairment reversal (312 500-255 000) 57 500

Impairment loss reversal (lower of potential and maximum

impairment reversal) 57 500

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Example 7: Reversal of an impairment loss – revaluation model

Bravo acquired land, correctly classified as property in terms of IAS 16, at a cost of R500 000
on 1 January 2016. On 1 January 2017, the land was revalued for the first time to its fair value
of R550 000. Properties in the area in which the land is situated suffered a value knock due
to increased crime in the area the year ended 31 December 2018. The recoverable amount of
the land was determined to be R460 000 on 31 December 2018.
Tight security was introduced in the area and crime reduced significantly in 2019 and the
consumption of the local product increased drastically. Bravo remeasured the recoverable
amount of the land on 31 December 2019 and it was R570 000. The fair value less costs of
disposal amount on 31 December 2019 was higher than the land’s value in use; however,
costs of disposal are insignificant. The normal tax rate is 28% and the capital gains inclusion
rate is 80%. Assume all amounts are material.

Journal entries to account for the plant for the years ended 31 December 2017, 2018 and
2019 will be as follows:

1 January 2017 Dr Cr
Land (SFP) 50 000
Revaluation surplus (OCI) 50 000

Revaluation surplus (OCI) (50 000x0.28x0.8) 11 200

Deferred tax (SFP) 11 200

31 December 2018
Revaluation surplus (OCI) (550 000-500 000) 50 000
Impairment loss (P/L) (500 000-460 000) 40 000
Accumulated impairment loss (SFP) (550 000-460 000) 90 000

Deferred tax (SFP) (90 000x0.28) 22 400

Revaluation surplus (OCI) (50 000x0.28x0.8) 11 200
Income tax expense (P/L) (40 000x0.28) 11 200

31 December 2019
Accumulated impairment loss (SFP) [C1] 90 000
Revaluation surplus (OCI) [C1] 50 000
Impairment loss (P/L) (500 000-460 000) 40 000

Revaluation surplus (OCI) (50 000x0.28x0.8) 11 200

Income tax expense (P/L) (40 000x0.28x0.8) 11 200
Deferred tax (SFP) (32 000x0.28x0.8) 22 400

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Computations
C1: Impairment loss reversal on 31 December 2019
Impaired carrying amount 460 000
Recoverable amount 570 000
Potential impairment loss reversal (570-460) 110 000

Limited to revalued carrying amount (ignoring previous 550 000

impairment loss after last revaluation)
Impaired carrying amount 460 000
Maximum impairment loss reversal (550-460) 90 000

Impairment loss reversal through OCI

Amount above original cost (550 000-500 000) 50 000

C2: Revaluation surplus on date of impairment reversal

The recoverable amount is R570 000 while the carrying amount after impairment
reversal is R550 000.

Should a revaluation surplus be recognised to bring the asset to its recoverable amount?
When we revalue an asset we do not revalue it to its recoverable amount, but rather, to its
fair value. Therefore, if we are given the asset’s fair value and it is higher than its carrying
amount (carrying amount after impairment loss reversal in this case) a revaluation must be
carried out assuming the difference is material and that the asset is subsequently measured
using the revaluation model. IAS16 requires revaluations to be as frequent to ensure that
there is never a significant difference between the asset’s carrying amount and its fair value.
Since recoverable amount is the higher of FV-CoD and VIU, when given FV-CoD and a
revaluation has to be prepared, always remember to add back the CoD as we revalue to
fair value not to FV-CoD. It is stated in the question that all amounts must be assumed
material. Furthermore, the recoverable amount is based on fair value only as the CoD are
insignificant. A revaluation should therefore be performed to bring the asset to its fair value
otherwise a significant difference will exist between carrying amount and fair value. It must
be noted that it is not always that we revalue an asset when its recoverable amount is
greater than its carrying amount (after impairment loss reversal). That is only done if the fair
value is given on that date.

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Disclosure

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

(a) the amount of impairment losses recognised in profit or loss during the period and the
line item(s) of the statement of comprehensive income in which those impairment losses
are included.
(b) the amount of reversals of impairment losses recognised in profit or loss during the
period and the line item(s) of the statement of comprehensive income in which those
impairment losses are reversed.
(c) the amount of impairment losses on revalued assets recognised in other comprehensive
income during the period.
(d) the amount of reversals of impairment losses on revalued assets recognised in other
comprehensive income during the period (.126).

This section is very important. Work through paragraphs .126-137 and be in a position apply
the paragraphs at high level it in a disclosure question.

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