IPSAS 21 & 26

IMPAIRMENT OF NON-CURRENT
ASSETS

IMPAIRMENT OF CASH-GENERATING ASSETS - 26

IMPAIRMENT OF NON-CASH-GENERATING ASSETS- 21
 Overview of IPSAS 21 & 26
Logic Behind :
~An asset recognized in the statement of
financial position should not be reported at
a value above the amount that could be
recovered from using or selling the asset.

Carrying Amount ≠ > Recoverable Amount

 Overview of IPSAS 21 & 26

Impairment is a loss in the value of an asset

Carrying amount > Recoverable amount

Sources of Accounting Guidance

IPSAS 21 Impairment of non-cash-

generating assets

IPSAS 26 Impairment of cash-generating

assets.
 Key Definitions
Key definitions:

Cash-generating assets:
Assets held with the primary objective of
generating a commercial return.

Non-cash-generating assets:
Assets other than cash-generating assets.
 Examples of cash-generating and non-
cash-generating assets

~ Can you think of examples of cash-generating

assets and non-cash- generating assets?
 Examples of cash-generating and non-
cash-generating assets
Cash-generating assets (IPSAS 26):

~Hospital building with fee-paying

patients where the hospital receives no
government subsidy Deeds office earning
land registry fees.
 Examples of cash-generating and non-
cash-generating assets
Non-cash-generating assets (IPSAS 21):

• School
• Hospital
• Transport depot
• Administrative offices.

It should be noted that some assets may be both cash-

generating and non- cash-generating.
 The Impairment Process
Assessment of impairment
• An entity is required to assess at each
reporting date whether there is an
indication of impairment.
 The Impairment Process
Impairment loss:
An impairment loss of a cash generating asset is the
amount by which the carrying amount of an asset exceeds
its recoverable amount.

For a non-cash generating asset, it is the amount by which

the carrying amount exceeds its recoverable service
amount.

Recoverable amount:
The higher of an asset’s fair value less costs to sell and its
value in use.
 The Impairment Process
1. Assess whether there is an indication
that an asset may be impaired.
(if there is no such indication, then normally no
further action is required)
2. If there is an indication of impairment,
identify the asset's recoverable amount.
3. Reduce the asset's carrying amount to its
recoverable amount, usually by treating
the loss as a separately disclosed expense.
 Indications of Impairment
External sources of information:

•A significant decline in the asset's market value. This may

arise, for example, as a result of a new competitor entering the
market. (IPSAS 26)
•Significant changes in the technological, market,
economic or legal or government policy environment in
which the entity operates. This could be as simple as a change in
customer tastes. (IPSAS 21 and IPSAS 26)
•Increases in market interest rates which are likely to
affect discount rates. (IPSAS 26)
•Cessation, or near cessation, of the demand or need for
services provided by the asset. (IPSAS 21)
 Indications of Impairment
Internal sources of information:
• Obsolescence or physical damage to the asset. (IPSAS 21 and
IPSAS 26)
•Significant changes in how an asset is used or is expected to be
used, including the asset becoming idle and plans to discontinue or
restructure the division in which an asset is used. (IPSAS 21 and
IPSAS 26)
•Performance of the asset being below that planned, for
example actual net cash flows generated by the asset being below
that budgeted, or the service performance of an asset being
significantly worse than expected. (IPSAS 21 and IPSAS 26)
•A decision to halt the construction of the asset before it
is complete or in a useable condition. (IPSAS 21 and IPSAS 26)
 Indications of Impairment

~ Provide examples of indications of

impairment for non-cash-generating units
 Indications of Impairment
External Source Non-Cash G. U.
• Medical diagnostic equipment that is rarely or never
used because a newer machine embodying more
advanced technology provides more accurate results

• A drinking water plant that cannot be used because it

does not meet new environmental standards.

• a school closed because of a lack of demand for school

services, rising from a population shift to other areas.
 Indications of Impairment
Internal Source Non-Cash G. U.
• Building damaged by fire or flood
• A bridge that is weight-restricted due to identification of
structural deficiencies
• A school building that is being used for storage rather than
for educational purposes
• Construction was stopped due to identification of an
archaeological site of specific importance
• An internal health department report on operations of a rural
clinic may indicate that an x-ray machine used by the clinic
is impaired because the cost of maintaining the machine has
significantly exceeded that originally budgeted.
 Measuring the recoverable amount

Recoverable amount is the higher of

• Fair value less costs to sell
• Value in use.

Organisations will always choose to use their assets

in the best possible way, in order to maximize
economic benefits, whether this is in the form of
income generation or service potential.
 Measuring the recoverable amount
Fair value less costs to sell:

Fair value is the amount obtainable from a

sale in an arm’s length transaction between
a willing buyer and seller, less the costs
of disposal
 Measuring the recoverable amount
Value in use: (a) Cash -generating assets

The present value of the estimated future

cash flows expected to be derived from the
continuing use of an asset and from its
disposal at the end of its useful life.
 Measuring the recoverable amount
Two steps involved in calculating the value
in use of an asset:-

1. Estimate the future cash inflows and

outflows
2. Discount the scheduled cash flows to
arrive at a present value
Measuring the recoverable amount

• The recoverable amount should be

determined on an individual asset basis as
far as possible. If, however, the individual
asset does not generate cash flows largely
independent from other assets, then the
asset is grouped with other assets to form
what is referred to in IPSAS 26 as a ‘cash-
generating unit’.
 Exercise :Identifying cash generating units
A bus company has a single contract with a local authority to
service five different bus routes in and around the city. One of the
routes is making deficits because it services a remote area and, as a
result, the number of passengers collected is much lower than on the
other four routes which are more highly populated and are
generating surpluses.
Requirement:

Which of the following options correctly identifies the cash-

generating unit?
a) Each route is a separate cash-generating unit.
b) The five routes combined are a single cash-generating unit.
c)The four surplus making routes are one cash-generating unit and
the deficit making route is a separate cash-generating unit.
 Measuring the recoverable amount
Value in use: (b ) Non-cash-generating assets

~The present value of the asset’s remaining

service potential.
~ No mention of cash flows because a non-
cash-generating asset is held primarily for
service potential
 Measuring the recoverable amount
a) Depreciated replacement cost approach: The present value of the
remaining service potential of the asset is determined as the depreciated
replacement cost of the asset. The replacement cost of an asset is the cost
to replace the asset’s gross service potential. This cost is depreciated to
reflect the asset in its used condition.

b) Restoration cost approach: Restoration cost is the cost of restoring

the service potential of an asset to its pre-impaired level. Under this approach,
the present value of the remaining service potential of the asset is determined
by subtracting the estimated restoration cost of the asset from the current cost
of replacing the remaining service potential of the asset before impairment.

c) Service units approach: The current cost of the remaining service

potential of the asset before impairment is reduced to conform with the
reduced number of service units expected from the asset in its impaired state.
 Recognising an impairment loss
Cash generating assets:
Illustration: Recognizing an impairment loss (1)

An entity has a property that was originally acquired for £1m. The entity
measures property using the cost model in IPSAS 17. The following
approach would be followed under IPSAS 26 and IPSAS 21.

The current carrying amount for the property is £800,000. Due to a

crash in the local property market, the entity has undertaken an
impairment review.

The fair value less costs to sell of the property is now estimated to be
only £500,000 and the value in use of the property is calculated as being
£600,000.
 Recognising an impairment loss
• The recoverable amount is the higher of fair value
less costs to sell (£500,000) and value in use
(£600,000).

• The recoverable amount of the property is

therefore £600,000.

Current carrying value £800,000

Recoverable amount £600,000
Impairment £200,000
 Recognising an impairment loss
Dr Statement of financial performance expense –
Impairement expense 200,000
Cr Property non-current asset 200,000
 Recognising an impairment loss
Exercise 2.
• A piece of machinery was originally acquired for
£100,000. It was expected to have a useful life of ten
years and no residual value.
•  At the start of year six, there was a downturn in
demand due to a competitor product entering the
market, and this has led to an impairment of the asset.
The impairment has been calculated as being £20,000.
• The asset’s remaining useful life is not affected.
What is the impairment Loss and Depreciation ?
 Recognising an impairment loss
Non- cash generating assets:

(Depreciated replacement cost approach)

 Recognising an impairment loss
In 20X1, the City of Addis purchased a new mainframe computer at a cost
of £10 million. Addis estimated that the useful life of the computer would
be seven years, and that on average 80% of central processing unit (CPU)
capacity would be used by the various departments. A buffer of excess
CPU time of 20% was expected and needed to accommodate scheduling
jobs to meet peak period deadlines.

Within a few months of acquisition, CPU usage reached 80%, but declined
to 20% in 20X5 because many applications of the departments were
converted to run on desktop computers or servers. A computer is available
on the market at a price of £500,000 that can provide the remaining service
potential of the mainframe computer using the remaining applications.

How would this impairment be accounted for?

Recognising an impairment loss
Acquisition cost £10,000,000
Accumulated depreciation
(£10,000,000 * 4 ÷ 7 ) (£5,714,286)
Carrying amount £4,285,714

Replacement cost £500,000

Accumulated depreciation
(£500,000 * 4 ÷ 7) £285,714
Recoverable service amount £214,286
Recognising an impairment loss
Therefore, the impairment loss £4,285,714 - £214,286 =
£4,071,428, to be accounted for as follows:

DR Impairment expense £4,071,428

CR Mainframe computer non-current asset £4,071,428

Carrying amount of asset after impairment loss

£214,286.
 Recognising an impairment loss
(Restoration cost approach)
In 20X4, North District Primary School acquired a bus at the cost of
£20,000 to help students from a nearby village to commute free of
charge.
The school estimated a useful life of 10 years for the bus. In 20X9, the
bus sustained damage in a road accident, requiring £4,000 to be
restored to a usable condition. The restoration will not affect the useful
life of the asset.
The cost of a new bus to deliver a similar service is £25,000 in 20X9.
Impairment is indicated because the bus has sustained physical
damage in the road accident.
How would this impairment be calculated and accounting for in
the school’s financial statements?
Recognising an impairment loss
Acquisition cost £20,000
Accumulated depreciation(£20,000 × 5 ÷ 10) £10,000
Carrying amount £10,000

Replacement cost £25,000

Accumulated depreciation (£25,000 × 5 ÷ 10) £12,500
Depreciated replacement cost
(undamaged state) £12,500
Less: restoration cost £4,000
Recoverable service amount £8,500

Impairment loss £10,000 - £8,500 = £1,500

DR Impairment expense £1,500

CR Vehicle non-current asset £1,500

Carrying amount of asset after impairment loss

£8,500.
 Recognising an impairment loss
(Service units approach)
In 20X3, Addis City Council constructed a 20-storey office building for use by the
Council in downtown Addis at the cost of £80 million. The building was expected to
have a useful life of 40 years.

15 years later in 20Y8, National Safety Regulations required that the top four stories
of high rise buildings should be left unoccupied for the foreseeable future. The
building has a fair value less costs to sell of £45 million in 20Y8 after the regulations
came into force. The current replacement cost of a similar 20-story building is £85
million.

Impairment is indicated because the extent of use of the office building has changed
from 20 floors to 16 floors as the result of new National Safety Regulations. The
reduction in the extent of use is significant and the occupation of the building is
expected to remain at the reduced level (16 floors) for the foreseeable future.

Calculate and account for the impairment loss.

 Acquisition cost £80,000,000
Accumulated depreciation
(£80,000,000 * 15 ÷ 40) £30,000,000

Carrying amount £50,000,000

Replacement cost (20-story building) £85,000,000

Accumulated depreciation
(£85,000,000 * 15 ÷ 40) £31,875,000
Depreciated replacement cost
(before adjustment for remaining service units) £53,125,000

Value in use of the building after the regulation came into force
(£53,125,000 * 16 ÷ 20) £42,500,000

Fair value less costs to sell of the building after regulation

came into force £45,000,000

Recoverable service amount (higher of value in use and fair

value less costs to sell) £45,000,000

The impairment loss is therefore £50,000,000 - £45,000,000 =

£5,000,000.

This would be accounted for as follows:

DR Impairment expense £5,000,000

CR Building non-current asset £5,000,000
 Reversing an impairment loss
• a reversal of an impairment loss should not
exceed the carrying amount that would have
been determined (net of amortisation and
depreciation) had no impairment loss been
recognised for the asset in prior years.
• The reversal will therefore be recognised in
surplus or deficit.
• If the reversal of the impairment is in relation to
a cash-generating unit, then the reversal is
recognised on a pro-rata basis with the carrying
amount of the assets
 Reversing an impairment loss

DR Power plant non-current asset xxxxxx

CR Impairment reversal xxxxxx
 Redesignation of assets
• It may be appropriate in certain circumstances
to redesignate assets from cash-generating
assets to non-cash-generating assets or the
other way round.
• This should only occur when there is clear
evidence that such a redesignation is
appropriate.