TOPIC 7

IMPAIRMENT OF ASSETS (MFRS 136)
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CONCEPT OF IMPAIRMENT
 Some

non-current assets are subjected to a sudden, dramatic drop in market value due to a substantial decline in value of the assets, economic changes, technological advancements and fluctuation in market interest rate. these factors would lead to a phenomenon which called impairments value or benefits of assets declined to the value expected to be recovered from the use of the assets.

 All

 The

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MFRS 136 IMPAIRMENT OF ASSETS

Applicable to impairment of:  Property, Plant and Equipment (MFRS 116)  Intangible assets (MFRS 138)  Goodwill (MFRS 3)  Investment in subsidiary (MFRS 127)  Investment in associate (MFRS 128)  Interest in joint venture (MFRS 131)

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Fair value – cost to sell Value in use 4 .RECOGNITION OF IMPAIRMENT Para 59:  an asset is considered as impaired when: carrying amount > recoverable amount Carrying amount (PPE) = cost – accumulated depreciation Recoverable amount: = The higher of.

RECOGNITION OF IMPAIRMENT  carrying value should be reduced to the recoverable amount loss = carrying amount – recoverable amount recoverable amount > carrying amount:  an asset is not impaired 5  Impairment  If .

000 400 600 400 200 6 .RECOGNITION OF IMPAIRMENT Example 7.1: Cost Accumulated depreciation Carrying amount Recoverable amount Impairment loss 1.

000 – 400 – 200 = 400 (equal to recoverable amnt)  7 .RECOGNITION OF IMPAIRMENT  Journal entry: Dr Impairment Loss Cr Accumulated Impairment 200 200  New carrying amount = Cost – accum depreciation – accum impairment New carrying amount = 1.

market.IDENTIFY AN IMPAIRED ASSET (PARA 12) (a) External Sources of Information i) Asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use. iii) Market interest rates or other market rates of return on investments have increased during the period. ii) Significant changes with an adverse effect on the entity have taken place in the near future. in the technological. 8 . iv) The carrying amount of the net assets of the entity is more than its market capitalization. economic or legal environment in which the entity operates or in the market to which an asset is dedicated.

9 . These changes include the asset becoming idle. in the extent to which. worse than expected. ii) Significant changes with an adverse effect on the entity have taken place during the period.IDENTIFY AN IMPAIRED ASSET (b) Internal Sources of Information i) Evidence is available of obsolescence or physical damage of an asset. and reassessing the useful life of an asset as finite rather than indefinite. plans to dispose of an asset before the previously expected date. an asset is used or is expected to be used. or will be. or manner in which. iii) Evidence is available from internal reporting that indicates that the economic performance of an asset is. plans to discontinue or restructure the operation to which an asset belongs. or are expected to take place in the near future.

economic or legal environment Significant change in the interest rate 10 .IDENTIFY AN IMPAIRED ASSET (PARA 12) (a) (b) (c) (d) (e) (f) Physical damage to an asset Significant decline in the market value of an asset Lower-than-expected economic performance of a segment Discontinuance or restructuring of operation Significant changes in the technological.

cost of removing the assets. stamp duty.RECOVERABLE AMOUNT: FAIR VALUE LESS COST TO SELL  Best resource .price in a binding sale agreement in an arm’s length transaction minus cost of transaction If unavailable but the asset has active market .refer to most recent transaction.    Cost to sell = legal cost. 11 .market price minus it’s selling cost. If both unavailable .

cash flow projection on reasonable and supportable assumption cash flow projection on most recent financial budget approved by management 12 . 2.RECOVERABLE AMOUNT: VALUE IN USE  Definition = present value of the future cash flow expected to be derived from an asset. for estimate =  Bases 1.

2: CALCULATION OF VALUE IN USE Year 2009 2010 2011 Future cash flow RM 560 450 690 Present value factor at 15% discount rate 0.49718 423 398 2.86957 0.75614 0.EXAMPLE 7.57175 0.65752 Discounted future cash flow 487 340 454 2012 2013 Value in use 740 800 0.102 13 .

Example – Annual Report 2007 of Ekowood Bhd 14 .

Plant and Equipment Goodwill 15 .RECOGNITION & MEASUREMENT OF IMPAIRMENT LOSS a) b) Property.

PLANT AND EQUIPMENT  The accounting treatment : a) b) cost model revaluation model 16 .IMPAIRMENT LOSS: PROPERTY.

Impairment  Journal entry: Dr Impairment loss XXX Cr Accumulated Impairment ( to record impairment loss during the year ) XXX  Impairment loss should be recognized in income statement immediately. Dep – accm.IMPAIRMENT LOSS: PROPERTY. 17 . PLANT AND EQUIPMENT Cost Model  Carrying amount (balance sheet) = Cost – accm.

000.000 Suggested solution: Recoverable amount = RM60.000 Value in use: RM55. The company estimated the recoverable amount of the asset as in the information provided below: Net selling price: RM60. the market value of the machine suffered a significant decline. Vision Berhad acquired a piece of machinery at RM150. At the end of 2007.000 (the higher is net selling price) Carrying amount of machine = [RM150.000 Impairment loss = RM30.000/5 x 2)] = RM90. PLANT AND EQUIPMENT Example 7.3: On 1 January 2006. The machine is expected to have useful life of 5 years with no salvage value.IMPAIRMENT LOSS: PROPERTY.000 – (RM150.000 18 .

19 .000(acc. PLANT AND EQUIPMENT Example (cont…)  Journal entry: Dr Impairment loss 30. Dep.) .000(acc. will be based on new carrying amount.30.000 Cr Accumulated impairment 30. If the expected useful life is unchanged.000 (RM60.impairment) = 60.000 (equal to recoverable amount) The calculation of depreciation for 2008.000 New carrying amount (end 2007) = 150. the depreciation charge for 2008 is RM20.000(cost) – 60.IMPAIRMENT LOSS: PROPERTY.000/3 years).

or the carrying amount of the asset be increased to a new recoverable amount the increased carrying amount of an asset attributable to a reversal of an impairment loss should not be more than the carrying amount that would have been determined had no impairment loss been recognized for the asset in previous years.IMPAIRMENT LOSS: PROPERTY. . if the write-down had not occurred. Impairment loss which was recognized in the previous year may need to be reversed.    the amount of write-back should be reduced by the amount20 that would have been recognized as depreciation. the company needs to estimate the new recoverable amount based on current asset situation. PLANT AND EQUIPMENT Reversing an Impairment Loss (Cost Model)  If indication that led to the recognition of impairment loss is cease.

The write-back of impairment loss is calculated as follows: If no impairment loss was recognized in year 2007.000 21 Depreciation charge per year = RM30.000. the details for the machine will be: Carrying amount = RM150.3.000 – (RM150.000 (RM150.000/5) .IMPAIRMENT LOSS: PROPERTY. PLANT AND EQUIPMENT Reversing an Impairment Loss (Cost Model) (cont…) Refer to example 7. the company re-assesses and estimates that the recoverable amount of the machine is RM70.000/5 × 3) = RM60. assuming that at the end of year 2008.

000. The journal entry: Dr Accumulated impairment 30.000 Cr Accumulated depreciation 10. or in this case.000.000 Write-back of impairment loss 20. PLANT AND EQUIPMENT Reversing an Impairment Loss (Cost Model) (cont…) The standard requires that the increase in carrying amount should not exceed the carrying amount that would have been determined if no impairment loss had been recognized for the asset in previous years.Thus. the increment should not exceed RM60. the new carrying amount after reversal is RM60.IMPAIRMENT LOSS: PROPERTY.000 22 .

as it would have been without the impairment recognition in 2007 and the reversal in 2008. After the reversal. PLANT AND EQUIPMENT Reversing an Impairment Loss (Cost Model) (cont…)  The amount of write-back would be equal to the reinstatement of the RM30.000 [150.000 previously written down. 23  . reduced by the amount of depreciation of RM10.000 – accumulated depreciation (30.000/5 (depreciation with no impairment) – RM20.000 [cost RM150.IMPAIRMENT LOSS: PROPERTY.000 (depreciation after impairment) ] that had not been recorded in 2008 because of the impairment.000 × 3). the carrying amount of the machine will be RM60.

PLANT AND EQUIPMENT Revaluation Model  assets are carried at revalued amount less any subsequent accumulated depreciation and accumulated impairment Impairment loss is recorded as a revaluation decrease (or increase) and the journal entry: Dr Revaluation Reserve RMXXX Cr Accumulated Impairment ( to record impairment loss during the year )  RMXXX 24 .IMPAIRMENT LOSS: PROPERTY.

The impairment loss of RM2. PLANT AND EQUIPMENT Example 7.000 In 2008. the company revalued the asset to RM25.000 Cr Revaluation reserve RM5.000 and the journal entry will be: Dr Assets RM5.000.000.IMPAIRMENT LOSS: PROPERTY.000 Cr Accumulated impairment RM2.4: Revaluation Model A piece of land was acquired in 2006 at the cost of RM20.000 is accounted as revaluation decrease as journalized below: Dr Revaluation reserve RM2.000 25 . In 2007. the company did an impairment test and found that the recoverable amount was RM23.

and an excess loss has been reported in earnings as impairment loss.  26 .IMPAIRMENT LOSS: PROPERTY. with any balance taken directly to revaluation reserve account. then a reversal later should be reported in earnings(provided the earlier write-down had been so reported). PLANT AND EQUIPMENT Reversing an Impairment Loss (Revaluation Model)  Reversal of an impairment loss recognized previously for revalued asset should be treated as a revaluation increase If impairment has eliminated the entire revaluation capital account.

000 Recoverable amount of RM23.000 27 . Year Events 2006 2007 2008 2009 Acquired an asset at cost of RM20.5 A piece of land was acquired by RIMA Bhd in 2006. The table below list several events related with the land.000 Recoverable amount of RM18.IMPAIRMENT LOSS: PROPERTY.000 Revalue the asset at RM25. PLANT AND EQUIPMENT Example 7.

000 5.000 28 .IMPAIRMENT LOSS: PROPERTY.000 2.000 7.000 5. PLANT AND EQUIPMENT Suggested solution: Journal entry: 2007 Dr Land Cr Revaluation reserve 2008 Dr Revaluation reserve Impairment loss Cr Accumulated Impairment 5.

000 29 .000 Cr Revaluation reserve Write-back of impairment loss 3.IMPAIRMENT LOSS: PROPERTY.000 2. PLANT AND EQUIPMENT 2009 Dr Accumulated Impairment 5.

IMPAIRMENT LOSS . cash flow associated with the specific asset (goodwill) cannot be reliably measured and then it is not possible to determine fair value less cost to sell for goodwill   30 .GOODWILL  Categorized as unidentifiable intangible asset. Referred to residual asset that cannot be individually identified Hence.   Arise on business combination Calculated as difference between cost of acquisition and net fair value of identifiable net assets.

   Ex: manufacturing plant.represent the smallest identifiable group of assets that generate cash inflows from other group of assets.IMPAIRMENT LOSS . goodwill should be allocated to each cash generating units (CGU) CGU. Impairment loss for a CGU should be allocated to reduce the carrying amount of the assets of the units according to the following order: i)  Reduce the carrying amount of any goodwill allocated to the CGU Reduce the carrying amount of other assets of the unit on pro-rata basis.  Impairment test for goodwill should be performed annually and whenever there is indication that the unit may impaired. 31 ii) .GOODWILL  Impairment test for goodwill cannot be tested on its own – not identifiable At acquisition date. supermarket outlet.

IMPAIRMENT LOSS – GOODWILL Example: In January 2008. Bersatu Bhd operation consist of manufacturing unit and hypermarket unit. the hypermarket unit of Bersatu Bhd was adversely effected by the development of new business park.2 m 0.1 m 3. The carrying amount of the unit is: Hypermarket Unit Goodwill Net Identifiable assets Total Cost 1.2 m Depreciation Carrying amount 1. Sejati Bhd acquired 100% interest in Bersatu Bhd for RM10 million. Bersatu Bhds net fair value of identifiable asset is RM8 million (RM4 million from each manufacturing unit and hypermarket unit).1 m 32 .1 m.9 m 0. The recoverable amount of the Hypermarket unit at end 2008 is RM4.1 m 5. At the end of 2008.2 m 4m 5.Goodwill is allocated 40% to manufacturing unit and 60% to hypermarket unit.

IMPAIRMENT LOSS – GOODWILL Answer: Impairment loss = 5.1 m – 4.1 m = 1 million Journal entry: Dr Impairment loss Cr Goodwill ( record impairment loss) 1m 1m Carrying amount of Goodwill = 0.2 million 33 .

6 million.1 m – RM3. The balance will be allocated to carrying amount of identifiable assets on pro-rata basis. Impairment loss = RM5.  2.6m = RM1. 34 . The impairment loss first is allocated to goodwill.IMPAIRMENT LOSS – GOODWILL Answer (cont…):  But if the recoverable amount is RM3.5 m (higher than goodwill RM1.2m) 1. writing down to zero.

): • Assuming that at end of 2008 hypermarket unit comprise of Building and equipment RM3 m (net).IMPAIRMENT LOSS – GOODWILL Answer (cont.2 m 1.3m x 0.25) 1.. Inventory RM1 m and net monetary liabilities RM0.225 m 0.75) .2 m 0.3m x 0.1.  The journal entry: Dr Impairment loss Cr Goodwill Dr Impairment loss Cr Accumulated depreciationBuilding and Equipment* Cr Inventory (0.075 m 35 ( to record and allocate impairment loss on pro-rata basis ) * (0.3 m 0.

36 .any increase in the recoverable amount of goodwill is likely to be an increase in internally generated goodwill (the recognition is prohibited under MFRS 138 Intangible Assets.REVERSAL OF IMPAIRMENT LOSS – GOODWILL  Prohibited under MFRS 136  Reason.

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