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IAS 36 Impairment Tests

for Valuation Professionals


May 18, 2009 ± NYSSCPA BV Conference

*connectedthinking | |
Section heading goes here

Relevance of IFRS is continouing to increase

U.S. Transition to IFRS only delayed to economic crisis


Ongoing convergence initiatives between FASB and IASB
Subsidiaries of European and many Asian companies already
need to provide IFRS reporting to parent companies
IFRS is literally moving closer:
2012 Mexico adopting IFRS
2013 Canada adopting IFRS
‡ IAS 36 Impairment Testing is an area with limited convergence
‡ Subtle differences in terminology and the standard¶s
requirement¶s proved to create confusion in practice
IFRS ± Impairment Tests under IAS 36 December 2008
PricewaterhouseCoopers Slide 2
Agenda

1. Introduction to the Standard


2. Carrying Amount and Recoverable Amount
3. Timing
4. Cash Generating Units
5. Testing Sequence
6. Goodwill Allocation
7. Impairment Losses and Reversals
8. Questions & Answers

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 3
Introduction

IAS 36 Impairment Test ± Brief Comparison to US GAAP

±  

Long-lived tangible assets  


  !"!
Intangible assets
 
with definite useful life

Intangible assets assets


with indefinite useful life  #
    !$
!"
Goodwill

a  
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 4
Introduction

Differences in IFRS and US GAAP

 % 
‡ Value concepts (fair value vs. recoverable amount: higher of fair value less
costs to sell and value in use)
‡ Goodwill impairment test methodology (one-step vs. two-step approach)
‡ Asset impairment test methodology (discounted vs. undiscounted cash
flows)
‡ Reversals of impairment losses obligatory under IFRS (except goodwill);
under US GAAP prohibited
‡ Additional triggering event under IFRS: increase in market interest rates
‡ Minority interest: IFRS grossing up approach; US GAAP fair value of
controlling interests

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 5
Carrying Amount and Recoverable Amount

Overview
Procedure of Impairment Test under IFRS

&' vs.
 "

higher of an asset¶s or CGU¶s


or group of CGUs¶

Fair Value less Costs to Sell Value in Use

1) Best evidence: arm´s length transaction


less disposal cost ³[«] an asset¶s
2) Otherwise: market price less cost of value in use reflects how the market would
disposal (provided active market) price the cash flows that management expects
3) Otherwise: best information available to to derive from that asset.´ (IAS 36.BC 60)
reflect amount an entity could obtain
(unforced transaction) (IAS 36.25pp)

()*+,- ( +,'-

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 6
Carrying Amount and Recoverable Amount  

Carrying Amount for CGU


Overview
Net working capital

l Directly attributable assets (tangibles and intangibles)

l Allocated goodwill*

l Allocated share of corporate assets

Attributable liabilities where applicable

. &'&±

| The carrying amount of a CGU shall be determined consistent with the


way the recoverable amount of the CGU is determined! (IAS 36.75)
* The carrying amount of goodwill needs to be grossed up on a 100% basis to include the goodwill attributable to the minority
interest. (IAS 36.92). Relevant for goodwill bearing CGUs only.
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 7
Carrying Amount and Recoverable Amount

Practice Issue
Determination of Carrying Amount of CGU
? 
Within a CGU there is a non-operating building rented to third
parties. Rental payments are not included in the CGUµs financial
projections.
m  

    


  

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 8
Carrying Amount and Recoverable Amount 

Fair Value less Costs to Sell r

Value Concept

Fair Value ÄThe amount for which an asset could


be exchanged, or a liability settled,
between knowledgeable, willing
parties in an armµs length transaction.³
]ey Elements:
4 "4

'# /'

01/'2 1 (& #

 3

3 '

m
m  m  
mm !"#"$mm !!#""
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 9
Carrying Amount and Recoverable Amount 

Fair Value less Costs to Sell r

Fair Value Hierarchy


³Prices from previous transactions provide empirical evidence for the indicated value of
an intangible asset´

 "
5 

&"# $
  *

3
" "
 
""#$
 #" 

m
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IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 10
Carrying Amount and Recoverable Amount 

Fair Value less Costs to Sell r

Estimating Costs to Sell

‡ Costs to sell Costs of removing the asset (e.g. legal, transaction)

Costs to bring an asset into condition for its sale

‡ No costs to sell Costs, which are already recognised as liabilities

Costs of reorganising a business

Termination benefits for employees

    6 '# 'r)3##

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 11
Carrying Amount and Recoverable Amount 

Value in Use ›

Value Concept

Value in use ÄThe present value of the future cash


flows expected to be derived from the
continuing use an asset or CGU and
its disposal at the end of its economic
useful lifetime.³
]ey elements:
2 ' #  '

)*  7
‡
 +#   8,
‡) &#*+4 99,
‡  
#'5 : # 

m
m%# )# *  *2 * * 

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 12
Section heading goes here

Value in Use
Technical Issue - Pre-tax vs. Post-tax calculation
‡ µGrossing-up¶ or omitting tax-shield of debt sometimes applied
by valuation practitioners
‡ However, pre-tax cost of equity can not be derived from capital
market data (e.g. CAPM)
‡ % # * # * 
should lead to the same result as discounting pre-tax cash
flows with pre-tax discount rate (IAS 36.BCZ85)
‡ For disclosure purposes: A two-step iterative calculation
process can be used to convert the post-tax discount rate into
an implicit pre-tax rate

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 13
Section heading goes here

Value in Use
Selected Technical Issues
Deferred taxes
‡ Area is still evolving ± treatment might be inconsistent in
practice
‡ % ' #
‡ Food for thought:
- Deferred are not subject to IAS 36 test
- DTA related to pre-existing NOLs could be easily excluded
from carrying amount
- Ignoring all deferred taxes, especially DTL subsequent to
purchase accounting for non-taxable stock deal might
inappropriately trigger impairment
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 14
Timing

Overview
³Frequency´ of Impairment Testing

!'"#

Special treatment regarding «


‡ tested in year of acquisition
Indefinite lived intangibles ‡ thereafter annually

Intangibles not yet ‡ tested annually


available for use

‡ tested in year of acquisition


Goodwill
‡ thereafter annually at the same time every period
m
m%# +m,# +,

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 15
Timing

Overview
Impairment Indicators (³Triggering Events´)

)*     


‡ Faster   ‡ Indication of the asset¶s
than expected from normal use "    physical 
‡ ; technological, ‡ Significant strategic or operational
economic, legal and market an   on

the enterprise (e.g. technology loss
‡   of customer, )
or other market rates of return on
investment ‡   is  than
‡ ;* '5 expected
 #

m
m%# "
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 16
Cash Generating Units

Overview
Asset and Goodwill Impairment Test

 
#! #!

Group of CGUs Group of CGUs

Corporate Assets
(IAS 36.102 (b)) Hierarchy
Levels for
Cash-generating Unit (CGU) Cash-generating Unit (CGU)
Impairment
Testing

Individual Asset
³If it is not possible to estimate the
³If there is any indication that an asset recoverable amount of the individual
may be impaired, recoverable amount asset, [«] determine the recoverable
shall be estimated for the individual amount of the cash-generating unit to
asset.´ which an asset belongs.´
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 17
Cash Generating Units

Overview
CGU Structure

Goodwill ³... the lowest level within the entity at which goodwill is monitored
Top-down for internal management purposes ...´
and not be larger than an IFRS 8 operating segment (IAS 36.81)
approach
Entity
Segment 2 Segment 3

Segment Segment
1 Division 1 Region 2 4
Division 2 Division 3 Region 1

Country 1 Country 2

BU BU BU
1 2 3
Region Region
1 2

« « « «
Entity¶s asset base
Bottom-up
³A cash-generating unit is the smallest identifiable group of assets
approach that generates cash inflows that are largely independent of the
Assets cash inflows from other assets or groups of assets.´ (IAS 36.6)

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers ... Slide 18
Cash Generating Units

Overview
Determination Goodwill CGU Structure ± Example
Retailer Metro Group

4 &<&

 =  >
4 +4$
)*
 4,

Top-down Goodwill
approach Impairment Test
on the Level of Germany Austria ... Poland
Group of CGUs

Asset
Impairment Store Store Store
Test on CGU 1 2 3
Bottom-up
Level
approach

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 19
Cash Generating Units

Corporate Assets

‡ Corporate assets are assets that contribute to several cash-


generating units (e.g. headquarters, R&D center)
‡ For corporate assets, it may not be possible to test the assets
on an individual basis or test them as part of a single CGU.
‡ For these assets:
1) Test the CGUs excluding the corporate assets
2) Identify the smallest group of CGUs to which a portion of
the corporate asset can be allocated reasonably
3) Compare the carrying amount of the group of CGUs
including the corporate asset (or portion thereof) to the
recoverable amount of the group of units.
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 20
Cash Generating Units

Practice Issue
Determination of Carrying Amount of CGU
? 
Certain corporate assets have been appropriately allocated to a
CGU. In the financial projections of the CGU, corporate charges
have been reflected. They relate to payments to the ultimate
parent company, being the legal owner of the corporate assets.
In performing the impairment test, all corporate charges have
been excluded to determine VIU and FVLCS.
  

 


-  

 . ./m

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 21
Cash Generating Units

Valuation Issues

4' +;& ,
‡ Carrying amount of goodwill needs to be grossed up to a
100% basis, to include the goodwill attributable to the minority
interest. (IAS 36.92)
‡ Any impairment loss is proportionally allocated between
parent company and minorities with the portion attributable to
parent being recognised as goodwill impairment loss

&
‡ Typically not applied in EU for IFRS purposes, since prices on
active markets are of higher priority to other estimates, control
premium might be difficult to defend
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 22
Tier 1 ± Individual Asset Tier 3 ± Goodwill CGU

Trigger
No !
Level 1 Yes
Impairment @ :
No
Test No
Intangible
Definite useful life?
Yes 
Ready for use?
No  !?
FVLCTS > Yes No
Yes Carrying Amount Impairment Yes Yes
FVLCTS Yes
determinable? No
No VIU >
Carrying Amount
Yes No 3@&! :3 ±
VIU Impairment
determinable? &±+,A
&' 9

Trigger 
Consider in Carrying Amount
Level 2 ?
No

Tier 2 ± Asset CGU Yes No


FVLCTS / VIU Yes Impairment
Yes No
CGU >
Assigned to CGU? Carrying Amount
;
No No Impairment #
#

Corporate Asset

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 23
Cash Generating Units

Practice Issue
Corporate Trade Name
? 
A corporate trade name accounted for according to IFRS 3/IAS
38 with indefinite life has been considered a corporate asset.
The trade name has been allocated to 10 individual CGUs.
Due to the indefinite life the trade name is to be tested for
impairment on an annual basis.

ã- 

  
 
  +


IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 24
Goodwill Allocation

Overview
Goodwill Allocation - Acquisition

Goodwill shall be allocated to each CGU / group of CGUs that are expected to benefit
from the synergies (external synergies and going concern element) of the
combination! (IAS 36.80)

Entity If detailed analysis


not applicable
Approximation
Detailed
Goodwill by a reasonable
analysis of « allocation key

CGU 1 EBIT/EBITDA?
Expected
synergies Net Revenue?
CGU 2
Net Income?
CGU 3
... Going-concern Assets in CGU?
CGU n
element «?

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 25
Goodwill Allocation

Overview
Goodwill Allocation ± First Time Adopters
First time adopters electing not to apply IFRS 3 retrospectively have to allocate US
GAAP goodwill to CGU and test goodwill for impairment as of the date of transition
(IFRS 1 B2 (iii))

Entity If detailed analysis


not applicable
Approximation
Detailed
Goodwill by a reasonable
analysis of « allocation key

CGU 1 EBIT/EBITDA?
Expected
synergies Net Revenue?
CGU 2
Net Income?
CGU 3
... Going-concern Assets in CGU?
CGU n
element «?

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 26
Impairment Losses and Reversals

Overview
Treatment of Impairment Losses

Initial recognition of impairment loss involves:


‡ First any goodwill in CGU is impaired
‡ Any remaining impairment loss is allocated pro-rata to
long-lived assets
‡ No reduction of individual assets below the highest of (a)
the asset¶s FVLCS, (b) the asset¶s VIU and (c) zero
‡ Reversal of any revaluation reserve, then through P&L
‡ Adjustment of depreciation/ amortisation charge

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 27
Impairment Losses and Reversals

Overview
Treatment of Impairment Losses

Impairment losses reversed:


‡ Only where estimates have changed
‡ Up to carrying amount had no impairment been charged
‡ Accounting for reversal corresponding to accounting for
impairment loss
‡ No reversal of goodwill impairment

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 28
Appendix

Scope of IAS 36

  )*  from scope of IAS 36

‡ Inventories (IAS 2)
Property, plant and equipment ‡ Assets arising from construction contracts
(IAS 11)
‡ Assets arising from employee benefits
Intangible assets, including (IAS 19)
goodwill ‡ Deferred tax assets (IAS 12)
‡ Financial assets within the scope of IAS 39
‡ Investment property measured at fair value
(IAS 40)
‡ Biological assets (IAS 41)
Financial assets classified as
‡ Insurance contracts (IFRS 4)
‡ Subsidiaries ‡ Non-current assets classified as held for
‡ Associates sale (IFRS 5)
‡ Joint ventures

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IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 29
Appendix

Presenter


Picture +1 646 471 4858
g.gollnow@us.pwc.com

IFRS ± Impairment Tests under IAS 36 May 7, 2009


PricewaterhouseCoopers Slide 30
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