IMPAIRMENT OF ASSETS

STUDY OBJECTIVES:
A GUIDE TO INTERNATIONAL FINANCIAL REPORTING 1. WHY/ WHAT TO TEST FOR IMPAIRMENT?
2. IMPAIRMENT INDICATOR REVIEW
Chapter 11 – Impairment of assets
2019 3. RECOVERABLE AMOUNT
4. FAIR VALUE LESS COSTS OF DISPOSAL
5. VALUE IN USE
IMPAIRMENT OF ASSETS 6. RECOGNISING & MEASURING AN IMPAIRMENT LOSS
IAS 36

IMPAIRMENT OF ASSETS IMPAIRMENT OF ASSETS

STUDY OBJECTIVES: REFERENCES:
7. CASH‐GENERATING UNITS a) IAS 36
b) Chapter 11: A Guide to International Financial Reporting – Stainbank, Razak & Oakes
8. GOODWILL IMPAIRMENT
9. CORPORATE ASSETS
10. REVERSAL OF IMPAIRMENT LOSSES
11. TAX IMPLICATIONS
12. DISCLOSURE

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1. WHY / WHAT TO TEST FOR IMPAIRMENT? 1. WHY / WHAT TO TEST FOR IMPAIRMENT?

1.1 Basic objective is to ensure: 1.5 Does not apply to (why do you think?):
 CA of assets do not exceed their recoverable amounts (RA)  inventories
 contract assets/ costs per IFRS 15
1.2 Can you link this objective to the conceptual framework?
 investment property measured at fair value
 qualitative characteristics, definitions, measurement
 other IFRS’s  financial assets per IFRS 9
 NCA held‐for‐sale
1.3 CA > RA if CA exceeds amount to be recovered through:  deferred tax assets
 use, or
 sale 1.6 IAS 36 does apply to:
 investments in subsidiaries, associates and JV’s – separate AFS vs group AFS
1.4 So if CA > RA, asset is described as ‘impaired’ revalued assets (but what about revaluation downwards?)
 recognise an impairment loss; give journal entry…? P/L vs OCI??  refer example 1 next slide

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1. WHY / WHAT TO TEST FOR IMPAIRMENT? 2. IMPAIRMENT INDICATOR REVIEW

EXAMPLE 1 (students to know this example – revaluation vs impairment) 2.1 At end of each period, entity carries out an ‘impairment‐indicator review’
On 1 January 20.1, X Ltd purchased land for R8 000.  indicator is the cue to estimate recoverable amount
At 31 December 20.1 – FV = R7 000  no estimate of RA made if no indicators
VIU = R11 000
2.2 Consider the following indicators – Read IAS 36 para 12
Costs of disposal = R1 000  ‘external indicators’ (list these indicators!), eg decline in market value
Answer the following questions, assuming that the land is revalued annually on 31  ‘internal indicators’ (list these indicators!), eg physical damage
December:
a) Draft the revaluation journal entry for 20.1! 2.3 Three exceptions when impairment test always carried out, irrespective of
b) Is the asset impaired? indicators:
 goodwill (in a bus com)
c) Is the asset impaired if the VIU is R6 700? Give J/E!
 indefinite useful life intangible asset
d) Redo a) to c) above if asset not revalued!  intangible asset not yet available for use, eg development costs

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2. IMPAIRMENT INDICATOR REVIEW 3. RECOVERABLE AMOUNT

EXAMPLE 2 3.1 Recoverable amount (RA) is the higher of :

Do you think these are impairment indicators?  fair value less costs of disposal (COD)
a. Plant revalued on a market value basis which is fair value  value in use (VIU)
b. Increase in plant decommissioning / dismantling provision
3.2 Not always necessary to determine both to arrive at RA… for eg. where:
c. Increase in market interest rates that affects discount rates for VIU calc
 if either one exceeds the asset’s CA
d. Carrying amount of NAV of entity > market capitalisation
 if not possible to determine FV less COD then use VIU
e. Operating cash outflows for a machine is significantly higher than originally
 if asset held for disposal – may use FV less COD if continuing cash flows
budgeted
negligible
f. Due to a restructuring, there are significant changes to way asset is used
g. Dividend declared by a subsidiary exceeds its TCI 3.3 Individual asset vs ‘cash‐generating unit (CGU) ???’
h. Waning demand for the entity’s products

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3. RECOVERABLE AMOUNT 4. FAIR VALUE LESS COSTS OF DISPOSAL

3.4 Determine RA first for an individual asset unless: 4.1 Definition of fair value – is per IFRS 13
 asset does not generate largely independent cash inflows  price that would be received to sell an asset
 in which case determine RA for the CGU to which asset belongs  in an orderly transaction
 NB not necessary if FV less COD of individual asset > CA; or VIU is close to  between market participants, at measurement date
FV less COD & latter can be determined
4.2 FV less COD takes into account costs of disposal, eg
 COD – incremental costs directly attributable…
3.5 For indefinite life intangibles…use most recent detailed calculation of preceding  cost of removing asset
period if 3 criteria met…:  bringing asset into condition for sale
 if no significant change to assets and liabilities of its CGU since..
 the most recent RA calculation exceeded CA substantially 4.3 Cost of disposal excludes:
 likelihood that new RA would be less than CA is remote  cost of reorganising business after disposal
 termination benefits if reducing business, etc (eg for CGU)

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5. VALUE IN USE 5. VALUE IN USE

5.1 What do you understand by ‘value in use’ (VIU): 5.4 PV techniques – refer Appendix A of IAS 36:
 it is the present value of the future cash flows expected from an asset /CGU  traditional approach
 expected cash flow approach (using probabilities)
5.2 Estimating value in use involves 2 basic steps:
 1st estimate future cash inflows and outflows 5.5 Basis for estimates of future cash flows (IAS 36.33)
 2nd apply pre‐tax discount rate  base projections on reasonable & supportable assumptions
 base projections on most recent financial budgets/forecasts but:
5.3 Elements to be reflected in calculation of VIU (IAS 36.30)  exclude cash flows from future restructurings
 estimates of future cash flows,  exclude cash flows from future enhancements to asset
 expectations of variations in these cash flows,  base projections on maximum 5‐year forecasts unless longer period
 time value of money, justifiable
 inherent uncertainty in asset, and  extrapolate projections using steady/ declining growth rate unless increasing
rate justified
 other factors that market participants would reflect

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5. VALUE IN USE 6. RECOGNISING & MEASURING AN IMPAIRMENT LOSS

5.6 Composition of estimates of future cash flows (IAS 36.39): 6.1 Where CA > RA, then reduce CA to RA
 use cash inflows from continuing use  reduction is an impairment loss
 use cash outflows (direct or allocable) from continuing use
 net cash flows on disposal of asset at end of useful life
6.2 Impairment loss recognised in P&L
5.7 Estimate cash flows for asset in its current condition: therefore ignore future  credit accumulated depreciation and impairment account
cash flows:
 from future restructurings to which entity is not yet committed  adjust depreciation charge for revised CA
 from future enhancement of asset’s performance
 Example 5 in IAS 36IE (Students are also referred to all Examples 1‐9 here)
6.3 If non‐depreciable (and depreciable) asset carried at revalued amount
 treat as a revaluation decrease in terms of IAS 16
5.8 How to determine foreign currency future cash flows?
 i.e. decrease in amount above cost taken to OCI
ILLUSTRATIVE EXAMPLE 11.1; Chapter 11, page 4  and, difference between DHC and CA (if any) taken to P&L

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7. CASH‐GENERATING UNITS 7. CASH‐GENERATING UNITS

7.1 General rule: if there is an indication that asset is impaired:
 first estimate RA for individual asset.
7.2 RA of individual asset however, may not be determinable if:
 asset’s VIU is not ‘close to’ its FV less COD, and
 asset does not generate cash inflows that are largely independent from
other assets (cannot determine the asset’s VIU)
 Eg mining company using a private railway line – para 67
 (eg if railway line CA = R1 000 and FVLCOD = 600 – is it impaired?)
7.3 If not determinable then:
 look to/estimate RA for the CGU to which the asset belongs
7.4 Note definition of CGU
 smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash flows of other assets/groups of assets
 Refer Example 1 in IAS 36IE (examples of CGUs)
7.5 CGU’s to be identified consistently from year to year unless change is justifiable
7.6 CA and recoverable amount of CGU’s to be determined in a consistent way:
 goodwill and corporate assets may not be allocable
 RA of CGU sometimes includes assets/liabilities that are not part of the CA
of the CGU (eg receivables or bank)…adjustment required – refer para 43/79
 liabilities excluded from carrying amount unless necessary to determine RA,
eg. environmental restoration liability

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7. CASH‐GENERATING UNITS 7. CASH‐GENERATING UNITS

EXAMPLE 3 7.7 Allocation of impairment loss for a CGU:

 first to any goodwill allocated to that CGU
Situation where a liability is taken into account in the carrying amount of a CGU
 then to other assets in CGU on a pro‐rata basis
X Limited’s chemical plant and factory buildings comprise a CGU. The fair value
less COD of the CGU is R4 000 and this amount takes into account the obligation
7.8 On allocation, an asset cannot be reduced to below the highest of:
of the purchaser to restore the site.
 its fair value less COD (if measurable);
 its value in use (if determinable); and
The CA of this restoration provision is R2 200. The CA of the chemical CGU assets  zero
is R5 000. The VIU of the chemical CGU of X limited, excluding the restoration
provision, is R6 000.
7.9 Reallocate unallocated loss in 7.8 pro‐rata to new CA
Required:
Calculate the impairment loss on the chemical CGU (if any). ILLUSTRATIVE EXAMPLE 11.6; Chapter 11, page 19

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8. GOODWILL IMPAIRMENT 8. GOODWILL IMPAIRMENT

8.1 Allocate goodwill acquired in a business combination to CGUs at acquisition 8.6 Testing CGUs with goodwill for impairment
 to each of the acquirer’s CGUs that benefit from the related synergies  if goodwill not allocated – test if there are indicators
 if goodwill allocated – test annually and whenever there is an indication of
8.2 Allocate goodwill to lowest level at which goodwill is monitored by internal impairment (IAS 36.90)
management but not to a level larger than an operating segment
8.7 If CA of CGU exceeds recoverable amount of CGU:
8.3 Initial allocation to be completed by end of following year  CGU is impaired
 if not done in year acquired
 allocate impairment loss to goodwill first
 the balance pro‐rata
8.4 If entity disposes of operations within a CGU – reduce goodwill

8.5 If changes in composition of CGUs – then reallocate goodwill ILLUSTRATIVE EXAMPLES 11.9 & 11.10; Chapter 11, pages 24 – 26

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8. GOODWILL IMPAIRMENT 8. GOODWILL IMPAIRMENT

8.8 IFRS 3 permits NCI to be measured initially in 2 ways: 8.11 NCI measurement therefore impacts on goodwill impairment
 at their proportionate interest in the identifiable net assets of the acquiree,  issue arises if CGU with goodwill is housed in partly‐owned subsidiary
 or at fair value  and NCI not measured at fair value

8.9 NCI measured at proportionate interest result in ‘partial goodwill’
8.10 NCI measured at fair value result in ‘full goodwill’
 goodwill is therefore recognised at 100%
 i.e. some of the goodwill is attributed to the NCI
8.12 If NCI measured using ‘proportionate interest’ approach:
 only parent’s share of goodwill is recognised in consolidated financials
 BUT recoverable amount includes goodwill attributable to both parent and NCI
8.13 Read IAS 36 Appendix C carefully

ILLUSTRATIVE EXAMPLE 11.11; Chapter 11, pages 27 – 28

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9. CORPORATE ASSETS 10. REVERSAL OF IMPAIRMENT LOSSES

9.1 Corporate assets 10.1 Impairment indicator review

 contribute to the future cash flows of more than one CGU
 feature: they do not generate cash flows independently
 examples: head office building or EDP equipment
10.2
9.2 Where corporate assets can be allocated to CGU:
 compare CA of CGU – including portion of corporate asset allocated to RA
10.3
9.3 Where corporate assets cannot be allocated to CGU:
 ignore corporate assets but consider at ‘higher’ CGU
10.4
ILLUSTRATIVE EXAMPLE 11.8; Chapter 11, pages 22 – 23
 for possible reversals of prior impairment losses
 again using external / internal indicators
Reversing impairment loss for an individual asset
 basic rule – reversal cannot exceed ‘pre‐impairment’ CA
Reversing impairment loss for a CGU
 allocated pro‐rata (note limits)
Reversal of impairment loss for goodwill not permitted
ILLUSTRATIVE EXAMPLE 11.7; Chapter 11, pages 20 – 21

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11. TAX IMPLICATIONS 12. DISCLOSURE

11.1 Generally no tax deductions for impairments 12.1 Disclose for each class of asset:
 impairment losses recognised in P/L + in which line item
 impairment loss reversals recognised in P/L + in which line item
11.2 No special treatment for deferred tax purposes
 impairment losses /reversals recognised in OCI (revalued assets)
 impairments and their reversals result in temporary differences
 above information may be presented with other information, eg in the
 impairment is essentially accelerated depreciation reconciliation of PPE
 note revaluation ‘rules’ for deferred tax
12.2 If entity reports segment information ‐ specified disclosure for each segment
11.3 NB no deferred tax arises on impairment losses relating to goodwill 12.3 Specified disclosure for each impairment loss/ reversal for:
 an individual asset
 goodwill
 CGU

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12. DISCLOSURE

12.4 Specified disclosure for each impairment loss/ reversal for an individual asset
(including goodwill) or CGU include:
 events/circumstances leading to impairment/reversal
 nature of asset or description of CGU
 RA of asset/CGU and whether RA is FVLCOD or VIU
 if FVLCOD, certain required disclosures
 if VIU, certain required disclosures, eg. discount rate

12.5 Detailed disclosures of estimates used to measure RA’s of:

 CGU’s with goodwill, or
 intangibles with indefinite useful lives

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