LKAS 36

Impairment of Assets

SCOPE

The objective of LKAS 36 “Impairment of assets” is to ensure that assets are carried in

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the financial statements at no more than their recoverable amount. Impairment is a
reduction in the recoverable amount of an asset or cash- generating unit below its

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carrying amount.

The recoverable amount of an asset is defined as the higher of its:

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 fair value minus costs of disposal, and
 value in use.

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Value in use is the present value of future cash flows from using an asset, including its
eventual disposal.

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If fair value less costs to sell is higher than the carrying amount, there is no impairment
and no need to calculate value in use. (Vice versa)
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LKAS 36 applies to all assets, except for:
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 inventories (LKAS 2)
 deferred tax assets (LKAS 12)
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 assets arising on a pension scheme (LKAS 19)

 financial instruments (SLFRS 9)
C

 Investment property that is measured at fair value (LKAS 40)

 assets held for sale (SLFRS 5).
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LKAS 36 does cover impairments of property, plant and equipment and intangible non-
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current assets, including purchased goodwill.

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ASSESMENT OF IMPAIRMENT
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An entity is required to assess at the end of each reporting period whether there is an
indication that an asset may be impaired. If an indication of impairment is found, then
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work must continue to ascertain the recoverable amount of the asset and write down
the affected asset (by the amount of the impairment) to its recoverable amount. In
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addition, a calculation of the recoverable amount must take place annually, regardless of
any indications of impairment, for the following assets:

 goodwill has arisen on a business combination

 intangible assets with an indefinite useful life
  an intangible asset not yet brought into use (development costs that have been
capitalised, but where amortisation has not yet started)

INDICATORS OF IMPAIRMENT

When assessing whether there is an indication of impairment, LKAS 36 requires that,

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as a minimum, the following sources are considered:

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External sources of information Internal sources of information
 Unexpected decreases in an asset’s  Evidence that the asset is damaged

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market value or no longer of use to the entity.
 Significant changes in technology,  There are plans to discontinue or

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markets, economic factors or laws restructure the operation for which
and regulations that have an the asset is currently used.
adverse effect on the company.  There is a reduction in the asset’s

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 An increase in interest rates, expected remaining useful life.
affecting the value in use of the  There is evidence that the entity’s
asset.
 The company’s net assets have a
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than expected.
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higher carrying value than the
company’s market capitalization
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(which suggests that the assets are

over-valued in the statement of
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financial position).
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MEASURING THE RECOVERABLE AMOUNT

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FAIR VALUE MINUS COSTS OF DISPOSAL

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Fair value should be determined in accordance with SLFRS 13 Fair Value Measurement.
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a) If there is an active market in the asset, the net selling price should be based on
the market value, or on the price of recent transactions in similar assets.
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b) If there is no active market in the assets it might be possible to estimate a net

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selling price using best estimates of what market participants might pay in an
orderly transaction at the measurement date.
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Direct selling costs might include:

 legal costs
 stamp duty
  Any other costs necessary to bring the asset into a condition to be sold. (Costs
relating to the removal of a sitting tenant (in the case of a building))

However, redundancy and similar costs (for example, where a business is reorganized
following the disposal of an asset) are not direct selling costs. Accordingly, costs to sell
are incremental costs directly attributable to the disposal of an asset.

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VALUE IN USE

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Value in use is calculated by:
 estimating future (pre-tax) cash inflows and outflows from the use of the asset

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(including those from ultimate disposal)
 discounting them to present value.

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With regards to estimates of cash flows, LKAS 36 stipulates that:
o The cash flow projections should be based on reasonable assumptions and the

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most recent budgets and forecasts
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o The amount of net cash inflow/outflow on disposal of an asset should in an
orderly transaction between market participants.
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o Foreign currency future cash flows should be forecast in the currency in which
they will arise and will be discounted using a rule appropriate for that currency.
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The resulting figure should then be translated into the reporting currency at the
spot rate at the year end.
C

o The cash flow projections should relate to the asset’s current condition and
should exclude expenditure to improve or enhance it
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o For periods in excess of five years, management should extrapolate from earlier
budgets using a steady, declining or zero growth rate
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o Management should assess the accuracy of their budgets by investigating the

reasons for any differences between forecast and actual cash flows.
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o The discount rate should be a pre-tax rate that reflects current market
assessments of:
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o the time value of money, and

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

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Future cash flows relating to restructurings to which the entity is not yet committed, or
to future costs to add to, replace part of, or service the asset are excluded. Further Cash
inflows/ outflows from financing activities and Income tax receipts/payments are
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excluded.
 RECOGNISING IMPAIRMENT LOSSES IN THE FINANCIAL STATEMENTS

An impairment loss is normally charged immediately in the statement of profit or loss

and other comprehensive income.

 If the asset has previously been revalued upwards, the impairment is recognised as a

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component of other comprehensive income and is debited to the revaluation reserve
(as a downward revaluation) until the surplus relating to that asset has been

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reduced to nil. The remainder of the impairment loss is recognised in profit or loss.

 The recoverable (impaired) amount of the asset is then depreciated/amortised over

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its remaining useful life.

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Question 1 – Impairment of item of plant

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An item of plant is included in the financial statements at a carrying amount of Rs.
350,000. The present value of the future cash flows from continuing to operate the plant
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is Rs. 320,000. The plant could be sold for net proceeds of Rs. 275,000.
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Required:
Is the item of plant impaired and, if so, by how much?
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Question 2 – Recoverable Amount

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A company has a machine in its statement of financial position with a net book value of
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Rs. 300,000. The machine is used to manufacture the company’s best-selling product
range, but the entry of a new competitor to the market has severely affected sales. As a
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result, the company believes that the future sales of the product over the next three
years will be only Rs. 150,000, Rs. 100,000 and Rs. 50,000. The asset will then be sold
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for Rs. 25,000. An offer has been received to buy the machine immediately for Rs.
240,000, but the company would have to pay shipping costs of Rs. 5,000.
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An appropriate risk adjusted discount rate is 10%.

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Required:
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Explain the accounting treatment for impairment.

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Question 3 – Recording Impairment Losses

On 31 December 2021, an entity noticed that one of its items of plant and machinery is
often left idle. On this date, the asset had a carrying amount of Rs. 500,000 and a fair
value of Rs. 325,000. The estimated costs required to dispose of the asset are Rs. 25,000.
 If the asset is not sold, the entity estimates that it would generate cash inflows of Rs.
200,000 in each of the next two years. The discount rate that reflects the risks specific to
this asset is 10%.

Required:
a) Discuss the accounting treatment of the above in the financial statements for the

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year ended 31 December 2021.

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b) How would the answer to part (a) be different if there was a balance of Rs.
10,000 in other components of equity relating to the prior revaluation of this
specific asset?

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Question 4 – Impairment with Dismantling cost

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A company that extracts natural gas and oil has a drilling platform in the Caspian Sea. It
is required by legislation of the country concerned to remove and dismantle the

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platform at the end of its useful life. Accordingly, the company has included an amount
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in its accounts for removal and dismantling costs, and is depreciating this amount over
the platform's expected life. The company is carrying out an exercise to establish
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whether there has been an impairment of the platform.
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a) Its carrying amount in the statement of financial position is Rs. 3m.

b) The company has received an offer of Rs. 2.8 Mn for the platform from another
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oil company. The bidder would take over the responsibility (and costs) for
dismantling and removing the platform at the end of its life.
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c) The present value of the estimated cash flows from the platform's continued use
is Rs. 3.3 Mn.
A

d) The carrying amount in the statement of financial position for the provision for
dismantling and removal is currently Rs. 0.6 Mn.
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Required:
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What should be the value of the drilling platform in the statement of financial position,
and what, if anything, is the impairment loss?
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CASH-GENERATING UNITS
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It is not usually possible to identify cash flows relating to particular assets. (One asset is
not capable of generating cash flows individually). For example, a factory production
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line is made up of many individual machines, but the revenues are earned by the
production line as a whole. This means that value in use must be calculated (and the
impairment review performed) for groups of assets, rather than individual assets. These
groups of assets are called cash-generating units (CGUs).
 A cash-generating unit is the smallest identifiable group of assets that generates cash
inflows that are largely independent of those of other assets or groups of assets. For
example, a CGU of a restaurant chain may be an individual restaurant.

 In practice they are likely to mirror the strategic business units used for
monitoring the performance of the business.

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 It could also include a subsidiary or associate within a corporate group structure.

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Question 5 – Identify CGU

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An entity has three stages of production:
A – growing and felling trees

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B – creating parts of wooden furniture
C – assembling the parts from B into finished goods.

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The output of A is timber that is partly transferred to B and partly sold in an external
market. If A did not exist, B could buy its timber from the market. The output of B has no
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external market and is transferred to C at an internal transfer price. C sells the finished
product in an external market and the sales revenue achieved by C is not affected by the
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fact that the three stages of production are all performed by the entity.
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Required:
Identify the cash generating unit(s).
C

Question 6 – Identify CGU

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Minimart belongs to a retail store chain Maximart. Minimart makes all its retail
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purchases through Maximart's purchasing centre. Pricing, marketing, advertising and

human resources policies (except for hiring Minimart's cashiers and salesmen) are
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decided by Maximart. Maximart also owns five other stores in the same city as Minimart
(although in different neighbourhoods) and 20 other stores in other cities. All stores are
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managed in the same way as Minimart. Minimart and four other stores were purchased
five years ago and goodwill was recognised.
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Required:
N

Is Minimart a CGU?
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Question 7 – Identify CGU

Mighty Mag Publishing Co owns 150 magazine titles of which 70 were purchased and 80
were self-created. The price paid for a purchased magazine title is recognised as an
intangible asset. The costs of creating magazine titles and maintaining the existing titles
 are recognised as an expense when incurred. Cash inflows from direct sales and
advertising are identifiable for each magazine title. Titles are managed by customer
segments. The level of advertising income for a magazine title depends on the range of
titles in the customer segment to which the magazine title relates. Management has a
policy to abandon old titles before the end of their economic lives and replace them
immediately with new titles for the same customer segment.

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Required:

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What is the cash-generating unit for an individual magazine title?

Question 8 – Identify CGU

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Cash generating units 1 Lanka Bus Company provides services under contract with a
municipality that requires a minimum service on each of five routes. Assets devoted to
each bus route and cash flows arising from each route can be identified separately; one

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of the routes operates at a significant loss. The management of the Lanka Bus Company
has designated each of the five routes as a separate CGU for the purposes of impairment
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testing. Required Comment on the management decision to designate each route as a
CGU.
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Required:
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What is the cash-generating unit for Lanka Bus?

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ALLOCATING ASSETS TO CASH-GENERATING UNITS

C

There are two problem areas:

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a) Goodwill, which does not generate cash flows independently of other assets and
often relates to a whole business. LKAS 36 requires that goodwill should be
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reviewed for impairment annually, and the value of goodwill cannot be

estimated in isolation. The assessment of impairment will have to take into
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consideration the entire CGU.

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b) Corporate assets: assets that are used by several cash-generating units (e.g. a
head office building or a research centre). They do not generate their own cash
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inflows, so do not themselves qualify as cash- generating units.

Corporate assets and goodwill should be allocated to cash-generating units on a

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reasonable and consistent basis in determining the value in use.

 ALLOCATING CORPORATE ASSETS TO CASH-GENERATING UNITS

Corporate assets are group or divisional assets such as a head office building, EDP
equipment or a research centre. Essentially, corporate assets are assets that do not
generate cash inflows independently from other assets, hence their carrying amount
cannot be fully attributed to a cash-generating unit under review.

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In testing a cash generating unit for impairment, an entity should identify all the

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corporate assets that relate to the cash-generating unit.

a) If a portion of the carrying amount of a corporate asset can be allocated to the

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unit on a reasonable and consistent basis, the entity compares the carrying
amount of the unit (including the portion of the asset) with its recoverable

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amount.

b) If a portion of the carrying amount of a corporate asset cannot be allocated to the

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unit on a reasonable and consistent basis, the entity:

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1. Compares the carrying amount of the unit (excluding the asset) with its
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recoverable amount and recognises any impairment loss.
2. Identifies the smallest group of cash-generating units that includes the
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cash-generating unit to which the asset belongs and to which a portion of

the carrying amount of the asset can be allocated on a reasonable and
consistent basis.
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3. Compares the carrying amount of that group of cash-generating units,

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(including the portion of the asset allocated to the group of units) with the
recoverable amount of the group of units and recognises any impairment
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loss.
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ALLOCATING GOODWILL TO CASH-GENERATING UNITS

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Goodwill acquired in a business combination does not generate cash flows

independently of other assets. It must be allocated to each of the acquirer's cash-
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generating units (or groups of cash-generating units) that are expected to benefit from
the synergies of the combination. Each unit to which the goodwill is so allocated should:
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a) Represent the lowest level within the entity at which the goodwill is monitored
for internal management purposes
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b) Not be larger than a reporting segment determined in accordance with SLFRS 8

Operating segments

The annual impairment test may be performed at any time during an accounting period,
but must be performed at the same time every year.
 IMPAIRMENT IF REASONABLE ALLOCATION OF GOODWILL IS NOT POSSIBLE

It may be possible to allocate goodwill across several cash-generating units. If allocation

is not possible, the impairment review is carried out in two stages:

1. Carry out an impairment review on each of the cash generating units (excluding

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the goodwill) and recognize any impairment losses that have arisen.

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2. Then carry out an impairment review for the entity as a whole, including the
goodwill.

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Example
An entity acquires a business comprising three cash-generating units, D, E and F, but

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there is no reasonable way of allocating goodwill to them. After three years, the carrying
amount and the recoverable amount of the net assets in the cash-generating units and
the purchased goodwill are as follows:

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D E
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F Goodwill Total
Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000
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Carrying amount 240 360 420 150 1,170
Recoverable amount 300 420 360 1,080
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Step 1: Review the individual units for impairment.

C

F is impaired. A loss of Rs. 60,000 is recognised and its carrying amount is reduced to
Rs. 360,000.
C

Step 2: Compare the carrying amount of the business as a whole, including the goodwill,
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with its recoverable amount.

E

The total carrying amount of the business is now Rs. 1,110,000 (Rs. 1,170,000 – Rs.
60,000). A further impairment loss of Rs. 30,000 must then be recognized in respect of
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the goodwill (Rs. 1,110,000 – Rs. 1,080,000).

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ACCOUNTING TREATMENT OF AN IMPAIRMENT LOSS

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When an impairment loss arises on a cash generating unit, the impairment loss is
allocated across the assets of the cash-generating unit in the following order:
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1. first, to assets that are obviously impaired

2. next, to the goodwill allocated to the cash-generating unit
3. then , to the other assets in the cash-generating unit, on a pro-rata basis.

However, the carrying amount of an asset cannot be reduced below the highest of:
 1. its fair value less costs of disposal (if determinable)
2. its value in use (if determinable), and
3. zero.

Question 9 – Impairment allocation within CGU

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Tinud has identified an impairment loss of Rs. 41 Mn for one of its cash- generating
units. The carrying amount of the unit’s net assets was Rs. 150 Mn, whereas the unit’s

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recoverable amount was only Rs. 109 Mn.

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The draft values of the net assets of the unit are as follows:

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Rs. Mn
Goodwill 13
Property 20

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Machinery 49
Vehicles 35
Patents
Net monetary assets
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19
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150
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The net selling price of the unit’s assets were insignificant except for the property,
which had a market value of Rs. 35 Mn. The net monetary assets will be realised in full.
C

Required:
C

How is the impairment loss allocated to the assets within the cash-generating unit?
A

Question 10 – Impairment allocation within CGU

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There was an explosion in a factory. The carrying amounts of its assets were as follows:
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Rs. 000
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Goodwill 100
Patents 200
Machines 300
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Computers 500
Buildings 1,500
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2600

The factory operates as a cash-generating unit. An impairment review reveals a net

selling price of Rs. 1.2 Mn for the factory and value in use of Rs. 1.95 Mn. Half of the
 machines have been blown to pieces but the other half can be sold for at least their
carrying amount. The patents have been superseded and are now considered worthless.

Required:
Discuss, with calculations, how any impairment loss will be accounted for.

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Question 11 – Impairment allocation within CGU

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A company has acquired another business for Rs. 4.5 Mn tangible assets are valued at
Rs. 4.0 Mn and goodwill at Rs. 0.5 Mn An asset with a carrying value of Rs. 1 Mn is

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destroyed in a terrorist attack. The asset was not insured. The loss of the asset, without
insurance, has prompted the company

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The recoverable amount of the business is measured at Rs. 3.1 Mn.

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Required:
What would be the impairment requirement?

Question 12 – Impairment allocation within CGU

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A cash-generating unit (CGU) consists of the following assets:
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Asset Carrying value Rs.

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Machine 300,000
Feeder 30,000
C

Packer 70,000
Share of factory space used (1/20 × Rs. 2 million) 100,000
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License to produce the product range 50,000

Allocated goodwill (1/12 × Rs. 240,000) 20,000
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Total carrying value of CGU 570,000

N

The recoverable amount of the CGU is Rs. 470,000, giving rise to an impairment loss of
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Rs. 100,000.

Required
N

Explain how the impairment will be allocated across the cash-generating unit
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Question 13 – Impairment allocation within CGU

The Antimony Company acquired its head office on 1 January 2008 at a cost of Rs. 5.0
million (excluding land). Antimony’s policy is to depreciate property on a straight-line
basis over 50 years with a zero residual value. On 31 December 2012 (after five years of
 ownership) Antinomy revalued the non-land element of its head office to Rs. 8.0 million.
Antinomy does not transfer annual amounts out of revaluation reserves as assets are
used: this is in accordance with the permitted treatment in LKAS 16 Property, plant and
equipment. In January 2018 localised flooding occurred and the recoverable amount of
the non-land element of the head office property fell to Rs. 2.9 million.

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Required
What impairment charge should be recognised in the profit or loss of Antimony arising

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from the impairment review in January 2018 according to LKAS 36 Impairment of
assets?

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REVERSING AN IMPAIRMENT LOSS

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The calculation of impairment losses is based on predictions of what may happen in the
future. Sometimes, actual events turn out to be better than predicted. If this happens,
the recoverable amount is re-calculated and the previous write-down is reversed.

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
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Impaired assets should be reviewed at each reporting date to see whether there are
indications that the impairment has reversed.
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 A reversal of an impairment loss is recognised immediately as income in profit or
loss. If the original impairment was charged against the revaluation surplus, it is
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recognised as other comprehensive income and credited to the revaluation reserve.

 The reversal must not take the value of the asset above the amount it would have
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been if the original impairment had never been recorded. The depreciation that
would have been charged in the meantime must be taken into account.
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 The depreciation charge for future periods should be revised to reflect the changed
carrying amount.
A

External sources of information Internal sources of information

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 Increases in the asset’s market  Favourable changes in the use of

value the asset
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 Favourable changes in the  Improvements in the asset’s

technological, market, economic or economic performance.
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legal environment
 Decreases in interest rates.
N
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Impairment reversals and cash-generating unit

If the reversal relates to a cash-generating unit, the reversal is allocated to assets other
than goodwill on a pro rata basis. The carrying amount of an asset must not be
increased above the lower of:
  its recoverable amount (if determinable)
 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.
The amount that would otherwise have been allocated to the asset is allocated pro rata
to the other assets of the unit, except for goodwill.

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Impairment reversals and goodwill

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Impairment losses relating to goodwill can never be reversed. The reason for this is that
once purchased goodwill has become impaired, any subsequent increase in its

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recoverable amount is likely to be an increase in internally generated goodwill, rather
than a reversal of the impairment loss recognised for the original purchased goodwill.

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Internally generated goodwill cannot be recognised.

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Question 14 – Impairment Reversal

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Boxer purchased a non-current asset on 1 January 2021 at a cost of Rs. 30,000. At that
date, the asset had an estimated useful life of ten years. Boxer does not revalue this type
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of asset, but accounts for it on the basis of depreciated historical cost. At 31 December
2022, the asset was subject to an impairment review and had a recoverable amount of
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Rs. 16,000.
C

At 31 December 2025, the circumstances which caused the original impairment to be

recognised have reversed and are no longer applicable, with the result that recoverable
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amount is now Rs. 40,000.

A

Required:
Explain, with supporting computations, the impact on the financial statements of the
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two impairment reviews.

N

Question 15 – CGUs and impairment reversals

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On 31 December 2012, an impairment review was conducted on a cash generating unit

and the results were as follows:
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Asset Carrying amount Impairment Carrying amount

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pre- impairment post- impairment

Rs. 000 Rs. 000 Rs. 000
Goodwill 100 (100) Nil
Property, plant and equipment 300 (120) 180
400 (220) 180
 The property, plant and equipment was originally purchased for Rs. 400,000 on 1
January 2011 and was attributed a useful economic life of 8 years. At 31 December
2013, the circumstances which caused the original impairment have reversed and are
no longer applicable. The recoverable amount of the cash generating unit is now Rs.
420,000.

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Required:
Explain, with supporting computations, the impact of the impairment reversal on the

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financial statements for the year ended 31 December 2013.

DISCLOSURE REQUIREMENTS

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LKAS 36 requires disclosure of the following:

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 losses recognised during the period, and where charged in the statement of profit or
loss and other comprehensive income
 reversals recognised during the period, and where credited in the statement profit

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or loss and other comprehensive income
 for each material loss or reversal:
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o the amount of loss or reversal and the events causing it
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o the nature of the asset (or cash-generating unit) and its reportable
segment
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o the recoverable amount of the asset (or cash generating unit)

o whether the recoverable amount is the fair value less costs to sell or value
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in use
o the level of fair value hierarchy (per SLFRS 13) used in determining fair
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value less costs to sell

o the discount rate(s) used in estimating the value in use and, if applicable,
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fair value less costs to sell.

E
N
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N
O