Professional Documents
Culture Documents
Objective of IAS 36
4
Impairment Applies to :
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Value in Use Considerations
1. The basis for the entity’s estimates of future
cash flows – that is, what estimates to make
about how much those cash flows should be; this
is inherently very judgmental;
2. The composition of estimates of future cash
flows – that is, which cash flows should be
included; detailed guidance is provided on this;
and
3. The discount rate that should be used;
detailed guidance is provided on this, but again
it is a very judgmental area.
10
Measuring Recoverable Amount
Value in Use – Future Cash Flow Estimates
Should be based on:
management’s best estimate of economic
conditions that will exist over asset’s remaining
useful life; and
most recent financial budgets/forecasts
approved by management and covering maximum
period of 5 years (unless longer period can be
justified).
Cash flows beyond 5 years to be estimated by
extrapolating budgets/forecasts using steady or
declining growth rate (unless increasing rate can
be justified).
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Continued-Measuring Recoverable...
Value in Use – Future Cash Flow Estimates
(cont.)
Must be estimated for asset in its current
condition and should included expected:
cash inflows from continuing use;
cash outflows necessarily incurred to generate
cash inflows and either directly attributable to
asset or that can be allocated on reasonable and
consistent basis; and
net cash flows on disposal at end of useful life in
arm’s length transaction after deducting disposal
costs. 12
Continued-Measuring Recoverable...
Value in Use – Future Cash Flow
Estimates (cont.)
Should not include future cash
flows expected to arise from:
future restructuring to which enterprise is
not yet committed;
future capital expenditure to enhance asset in
excess of originally assessed standard of
performance; or
financing activities or income tax
receipts/payments.
13
Future Cash flow Considerations
Use one of the following two methods:
Forecast cash flows in real terms – do not increase to reflect
future inflation—Discount at a real discount rate
Include estimated inflation –Discount at a nominal rate of
interest (one including inflation)
To avoid double counting, only include cash
inflows and outflows from the asset or CGU under
consideration in the forecasts and calculations
Exclude cash inflows relating to the following:
a future restructuring to which an enterprise is not yet
committed; or
future capital expenditures that will improve or enhance
the asset in excess of its originally assessed standard of
performance.
14
Measuring Recoverable Amount
Value in Use – Discount Rate
Pre-taxrate that reflects current market assessments of
time value of money and risks specific to the asset.
Should not reflect risks for which future cash flow
estimates have been adjusted.
Asa starting point, can take into account WACC, incremental
borrowings rate and other market borrowing rates.
These rates are then, adjusted to reflect market assessment of
specific risks associated with projected cash flows and to exclude
not relevant to projected cash flows.
17
Continued-Recording….
If asset is maintained under revaluation
(the allowed alternative treatment)
Impairment adjustment will be accounted for as
revaluation decrease of a previous upward
revaluation in stockholder’s equity
Charge impairment loss against revaluation
surplus
If the entire revaluation account is eliminated
due to recognition of impairment, charge any
excess impairment to expense
The revaluation account cannot contain a net
debit balance.
18
Cash Generating Units
Recoverable amount should be estimated for
individual asset where possible.
But,recoverable amount of individual asset not
determinable if:
asset’s value in use is likely to differ from its net selling
price (e.g., specialized item of plant); and
asset does not generate cash inflows from continuing use
that are largely independent of those from other assets.
Next Class
Cash Generating Units
Even if part/all of the output produced by an
asset/group of assets is used by other units
within the enterprise, treat as separate CGU
if active market exists for that output.
Use best estimate of future market prices for output
to determine value in use.
CGU recoverable amount = higher of CGU’s
value in use and net selling price.
Test CGU for impairment by comparing CGU
carrying amount to CGU recoverable amount.
22
Continued-Cash Generating Units
Goodwill and “Corporate” Assets
Do not generate independent cash flows and can
support one or more CGU.
Need to assess whether they can be allocated to
CGUs they support on reasonable and consistent
basis.
Therefore, when testing CGU for impairment,
include in CGU’s carrying amount any part of
goodwill and corporate assets that can be allocated
to that CGU on reasonable and consistent basis.
23
Continued-Cash Generating Units
Goodwill and “Corporate” Assets (cont.)
Forgoodwill and corporate assets that
cannot be allocated to CGUs they
support on reasonable and consistent
basis:
identify smallest CGU to which carrying
amount of goodwill and corporate assets can
be allocated on reasonable and consistent
basis (the “larger” CGU);
then, test “larger” CGU for impairment by
comparing “larger” CGU carrying amount to 24
“larger” CGU recoverable amount.
Continued-Cash Generating Units
Allocating CGU Impairment Loss to Individual
Assets in CGU
Allocate in the following order:
first, to any goodwill allocated to the CGU;
then, to other assets in the CGU on pro-rata basis
based on carrying amount of each asset.
Whenallocating, must not reduce carrying
amount of asset below higher of:
net selling price (if determinable);
value in use (if determinable);
zero.
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Reversal of Impairment Loss
Assessat each reporting date whether any
indication that all/part of impairment loss
recognized in previous period has reversed.
IAS 36 includes list of internal and external factors
that must, at a minimum, be considered and whose
existence provides evidence that impairment loss may
have reversed.
Onlyneed to test for reversal of impairment
if there is indication that impairment loss
may have reversed.
26
Continued-Reversal of Impairment Loss
Can only reverse impairment loss if
estimates used to determine recoverable
amount have changed since last
impairment loss recognized.
E.g., change in amount/timing of
estimated future cash flows or discount
rate if recoverable amount based on value
in use.
27
Continued-Reversal of Impairment Loss
Other disclosures:
If an individual impairment loss (reversal) is material
disclose: [IAS 36.130]
• events and circumstances resulting in the impairment loss
• amount of the loss or reversal
• individual asset: nature and segment to which it relates
• cash generating unit: description, amount of impairment loss (reversal)
by class of assets and segment
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