IAS 36 Impairment of assets

Day 2
 IAS 36 Impairment of assets
Focus on IAS 36 and dealing with situation
requiring the impairment loss to be
recognised in the SOFP & SOPL
 Basic principle of IAS 36

In SOFP:
Recognised amount –
depreciation – impairment losses

An impairment loss is the amount by which the carrying amount of an asset or

a cash-generating unit exceeds its recoverable amount.
IAS 36 Para 6

Amount you effectively

‘recover’ on the asset

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 IAS 36 Impairment of assets

• Impairment is a fall in the value of an asset, so that its

“recoverable value” is less than its “carrying value” in
SOFP
• Carrying amount is the amount at which the asset is
included in the SOFP i.e. after deducting the
accumulated depreciation & any impairment loss
• Recoverable amount of an asset is higher of its “fair value
less cost of disposal” and its “value in use”
• Value in use is computed as the PV of future cash flows
associated with the asset
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 Scope of IAS 36
This standard does not cover
– Inventories
– Assets arising out of construction contracts
– Deferred tax assets
– Assets arising under employee benefit plans
– Assets within the scope of IAS 32
– Non-current assets held for sale &
discontinued operations

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 Identifying an impairment loss
• Annual assessment of any indication of impairment loss to any asset
• The entity should make a formal estimate of recoverable amount
External Sources Internal Sources
 A fall in the asset's market value that is more evidence of obsolescence
significant than would normally be expected or physical damage,
from passage of time over normal use adverse changes in
the use to which the asset
 A significant change in the technological, is put, or the asset's
market, legal or economic environment of the economic performance
business in which the assets are employed

 An increase in market interest rates or market

rates of return on investments likely to affect
the discount rate used in calculating value in use
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Measuring recoverable amount

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 Example - 1
A company has a machine that originally cost $75,000. If it sells the
machine, then it will no longer require the services of 3 workers. The
termination benefit which Pace Co would have to pay to the three
workers is $6,000. The cost to dismantle the machine is $3,500. The
fair value of the machine is $50,000.

Required:

Calculate the fair value less cost to sell the machine.

•FV – cost to sell = 50000 – 3500 = 46500

•Termination benefits are not directly connected to the cost of
disposing the machine
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 Example - 2
A company has a group of machines worth $375,000 which together
work on a conveyor-belt. If the group of machines were sold, then it
would lead to a reorganisation of the company. The estimated costs of
reorganisation are $42,500. The fair value of the group of machines is
$250,000. The stamp duty for the contract of sale would be $2,500 and
the cost of dismantling the group of machines from the conveyor-belt is
$25,000.

Required:

Calculate FV less cost of disposal.

•FV – cost of disposal = 250,000 – 2,500 – 25,000 = 222,500

•Cost of reorganisation is not relevant

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 Example - 3

A Co has a machine whose original cost was $85,000. The accumulated

depreciation on the machine is $8,500. Air recently sold another similar
machine for $34,000 and the selling expenses were $2,300. Management has
determined the value in use of the machine as $33,000.

Required:
Calculate recoverable amount.

Carrying value = 85,000 – 8,500 = 76,500

FV – cost of disposal = 34,000 – 2,300 =31,700
Value in use = 33,000
Recoverable value is higher of 31,700 & 33,000 i.e. $33,000

Therefore impairment loss = carrying value – recoverable amount = 76,500 –

33,000 = $43,500

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 Recognition of impairment loss
• If asset is recognised based on cost model
– Carrying amount should be reduced by the amount of
impairment loss and

– The loss should be charged as an expense in profit or loss

• If asset is recognised based on revaluation model

– Impairment loss is treated as revaluation decrease (to the
extent the surplus is available) and any excess loss should be
charged as an expenses in the P & L

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 Example - 4
A company revalued a machine that originally cost $30,000 to
$40,000. What will be the accounting treatment if the identified
impairment loss is
(i) $7,500 or (ii) $12,500?

Revaluation surplus = 40,000 – 30,000 = 10,000

•In case (i)
– Dr Revaluation Surplus 7,500
– Cr PPE 7,500
•In case (ii)
– Dr Revaluation surplus 10,000
– Dr SOPL 2,500
– Cr PPE 12,500

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 Example - 5

A Co has a machine that originally cost $350,000 with accumulated

depreciation of $50,000. The market value of the machine is $300,000, the cost
of dismantling it is $10,000, and the direct selling costs are $20,000. The costs
of restructuring the company if the machine is sold are $100,000. The value in
use as determined by management is $275,000. The remaining estimated life
of the machine is 5 years and estimated residual value at the end of this life is
$25,000.
Required:
Account for the loss on impairment. Also, calculate the depreciation charge on
the machine after the impairment loss has been recognised.

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 Answer to Example 5

Carrying value = 350,000 – 50,000 = $300,000

Recoverable value = higher of

– FV less Cost of disposal = 300,000 – 10,000 – 20,000 = $270,000
– Value in use = $275,000

Impairment loss = 300,000 – 275,000 = $25,000

Revised depreciation = (275,000 – residual value 25,000) / 5 = $50,000

 Cash generating unit (CGU)

Definition: CGU is the smallest identifiable

group of assets for which independent cash
flows can be identified and measured

The CGU as a whole should be tested for

impairment annually

The resultant impairment loss, if any, should

be allocated to individual assets in the CGU
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 Understanding CGU
A bus company has an arrangement with a town's authorities to run a bus
service on four routes in the town. Separately identifiable assets are
allocated to each of the bus routes, and cash inflows and outflows can be
attributed to each individual route. Three routes are running at a profit and
one is running at a loss. The bus company suspects that there is an
impairment of assets on the lossmaking route. However, the company will
be unable to close the loss-making route, because it is under an obligation
to operate all four routes, as part of its contract with the local authority.

Consequently, the company should treat all four bus routes together as a
cash generating unit, and calculate the recoverable amount for the unit as
a whole.
 Allocation of goodwill to CGU
• Goodwill acquired in business combination
cannot generate cash flows independently
• It must be allocated to the CGU which should
– Represent the lowest level within the entity at
which goodwill is monitored for internal
management process
– Not be larger than a reporting segment
determined in accordance with IFRS 8 Operating
segments

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Allocating IL to CGU

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Example
Example continued..
Allocating IL to CGU – Specific Asset

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 Reversal of impairment
 In the event of the recoverable value of assets turn
higher than their carrying values on subsequent testing
for impairment, it is necessary to reverse the impairment
losses provided for earlier

 Reversal of impairment loss should be immediately

recognised as income in the SOPL

 Carrying value of the asset should be increased to the

new recoverable amount

 Impairment loss for goodwill should not be reversed in

any case
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