FINANCIAL ACCOUNTING 278

IAS 36
IMPAIRMENT OF ASSETS
 IAS 36 IMPAIRMENT OF ASSETS

PLANNING
Principles Slides Examples Class
questions
Lecture 1 : 29 Feb Impairment loss 1 – 21 1 and 2
Lecture 2 : 1 March Impairment loss write- 22 - 25 1
down
Lecture 3 : 4 March Reversal & disclosure 26 – 35 3 2
Lecture 4 : 5 March Practical question 3
Lecture 5 : 7 March CGU 36 - 52 4

ILP : 12 March Integration

Structured tut : 19 March Integration

Self study questions For A1S1 preparation: self study questions 1&2
2
For A2S1 preparation: remainder of questions
 IAS 36 IMPAIRMENT OF ASSETS

Learning outcomes
• Identifying an asset which could be impaired (individual asset and
CGU)
• Measurement of recoverable amount
• Recognition and measurement of an impairment loss (Individual
asset and CGU)
• Recognition and measurement of reversal of previously recognised
impairment loss (individual asset)
• Disclosure of impairment loss and reversal of previously recognised
impairment loss (individual asset)
• Discussion of all aspects (individual asset and CGU)
3
• Integration with other topics (individual and CGU)
 IAS 36 IMPAIRMENT OF ASSETS

STUDY SOURCES

• IFRS Accounting Standards 2023 – IAS 36 Impairment of

assets

• 1 - 24
• 28 - 53
• PARAGRAPHS:
• 55 – 64
• 65 – 79
• 104
• 109 - 133

4
 IAS 36 IMPAIRMENT OF ASSETS

Background to impairment losses

• Conceptual Framework (previous version): Recognise an asset

when it is probable that it will generate future economic benefits

• If it is not probable any more? Then recognise as expense

Remember: A user of the FS expects that the amount at

which an asset is shown in the SFP, will be recovered.

5
 ASSET STANDARDS
ABC Limited
Statement of financial position on 31 December
2016

ASSETS
Non-current assets
Investment property (cost price model) 1 200 000
Property, plant and equipment 750 000
Possible impairment ? Intangible assets 250 000

ABC Limited
Statement of comprehensive income for the
year ended 31 December 2016

OBJECTIVE ...
Other income xxx
Other expenses xxx
...
Must NOT recognise @ CA if CA >
ABC Limited
RECOVERABLE AMOUNT
Notes to the financial statements for the year
ended 31 December 2016

8. Profit before tax

Profit before tax are shown after taking into account
the following:
Income
Reversal of previously recognised
impairment loss: eg. Vehicles xxx
6
Expenses
Impairment loss: eg. Equipment xxx
IAS 36 IMPAIRMENT OF ASSETS
Identifying an asset that may be impaired
2 SCENARIOS

ALWAYS TEST FOR Par 10

SCENARIO 1
IMPAIRMENT

• Intangible assets indefinite useful life

not yet available for

use

• Goodwill
ONLY TEST IF THERE
SCENARIO 2 IS AN INDICATION OF Par 9
IMPAIRMENT
• All other assets 7
IAS 36 IMPAIRMENT OF ASSETS
Identifying an asset that may be impaired

• EXTERNAL
Sources of indication?
Par 12
• INTERNAL

Par 15-16
• Previous calculation (eg. PY) indicated that RA =
Materiality significantly > CA then NOT necessary to
recalculate RA if no events occurred that would
eliminate the difference

Par 17 • May indicate review of (IAS 8!!)

- remaining useful life Consider
Indication of first!
impairment - depreciation / amortisation method
- residual value
IAS 8 8
IAS 36 IMPAIRMENT OF ASSETS
ABC Limited
Statement of financial position on 31 December
2016

ASSETS
Non-current assets
Investment property (cost price model) 1 200 000
Property, plant and equipment 750 000 CA > RA =
Intangible assets 250 000
impairment loss

Indication of determine
decrease in value
RECOVERABLE Par 22
AMOUNT
(indiv. Assets)

Assess for indication at Highest of:

- FV less cost of disposal
the end of every year
- Value in use

Par 19: if either of the above amounts exceeds the CA, the asset is
not impaired and it is not necessary to estimate the other amount.
9
IAS 36 IMPAIRMENT OF ASSETS
RECOVERABLE
AMOUNT DEFINITIONS

Highest of:
- FV Price that would be received to sell an
less asset (or paid to transfer liability) in an
cost of disposal orderly transaction between market
OR participants @ measurement date
- Value in use FV-cod
• Incremental cost
• Directly attributable to disposal of asset
• EXCLUDING: - finance costs
- income tax expense

• Present value of future cash flows

VIU
from USE / appropriate DISCOUNT RATE
10
DISPOSAL
IAS 36 IMPAIRMENT OF ASSETS

INCREMENTAL COSTS
Par 28
Costs directly attributable to the disposal

Consider the following:

A Sales manager receives R50 000 p/m. Half of his time will be
spent to arrange the sale of the asset. Should R25 000 be included
in the cost of disposal?

11
IAS 36 IMPAIRMENT OF ASSETS
• FUTURE CASH FLOWS
VALUE IN USE

Par 30 - 53
g u s e fu l li fe
Remainin
Year 1 Year 2 Year 3
Cash inflows 10 000 10 000 10 000
Cash outflows 2 000 2 000 2 000
NET cash flows - disposal - - 5 000

e a sset years
s = s a ry ur 5
l ow c e s
Outf iture ne ; e.g. M e a s e nt Max ed data
rr et
d
expen the ass
et in cu ion! budg
it
se
to u nance cond
te
m ain Par 33 & 39
12
 IAS 36 IMPAIRMENT OF ASSETS
VIU: the use of management budgets (5 year limit)

Assume a machine has a remaining useful life of 7 years (no residual value).
Long term industry growth rate = 1%

Source year amount

Per budget 1 10 000
Per budget 2 10 500
Per budget 3 13 000
Per budget 4 11 200
Per budget 5 12 000
Extrapolated (using industry 6 12 120 = 12 000 x 1.01
Par 36 growth rate)
Extrapolated (using industry 7 12 241 = 12 120 x 1.01
growth rate) 13
IAS 36 IMPAIRMENT OF ASSETS
VALUE IN USE

• DISCOUNT RATE PRE-TAX RATE

REFLECT:
Par 55 & 56
• Time value of money
• Risks specific to the asset

Risks only included if not already

taken into account in
determination of future cash flows
14
IAS 36 IMPAIRMENT OF ASSETS

Fair value
V Value in use

Reflects assumptions made

by market participants to
S Reflects effects of factors
specific to entity (i.e. N/A
price an asset to entities in general)

15
IAS 36 IMPAIRMENT OF ASSETS

Carrying
amount > Recoverable
amount

Cost

IMPAIRMENT LOSS
LESS Acc dep
LESS Acc impairment loss

r o u g h P /L
xp e ns e th
E
UNLESS previously revalued

Depreciation /
amortisation = “NEW” CA / remaining useful life
16
 IAS 36 IMPAIRMENT OF ASSETS

Example
R
Carrying value 10 000
Fair value 11 000
Cost of disposal 2 500
Fair value less cost of disposal ?
Value in use 8 000
Recoverable amount ?
Impairment loss ?
New carrying amount ?
17
 IAS 36 IMPAIRMENT OF ASSETS
Example
Fair value
less cost of
disposal

N
Value in use GIVE

RECOVERABLE GHEST
HI
AMOUNT

IMPAIRMENT
LOSS
CA - RA

NEW CARRYING
AMOUNT 18
RA
 IAS 36 IMPAIRMENT OF ASSETS

Example

Journal entry:
DR Impairment loss (P/L)
CR Accumulated impairment loss (SFP)

19
 IAS 36 IMPAIRMENT OF ASSETS

Example

R
Cost of asset [depr – 10 years] 10 000
Recoverable amount [after 5 years] 3 500
Carrying amount [after 5 years] 5 000
Impairment loss ?

Adjusted depreciation ?

20
 IAS 36 IMPAIRMENT OF ASSETS
Example
IMPAIRMENT
LOSS
CA - RA

NEW CARRYING
AMOUNT RA

ADJUSTED
DEPRECIATION
New CA / remaining useful life

Journal entry:
DR Impairment loss (P/L) 21
CR Accumulated impairment loss (SFP)
IAS 36 IMPAIRMENT OF ASSETS
Exceptions when determining RA

NB! Unless an exception is applicable, both FV-cod

AND Value in use must be calculated to determine RA
• FV-cod OR value in use is higher than CA
-> no impairment loss
Exceptions
• FV cannot be reliably measured (i.t.o. IFRS NOT
13) -> can use value in use as RA VISA
VERSA!
• No reason to believe that the value in use is
significantly higher than FV-cod (TIPICALLY
Par 20 & 21 WHEN AN ASSET IS TO BE SOLD]

22
 IAS 36 IMPAIRMENT OF ASSETS
Exceptions: FV-cod higher than CA

Consider
the Irrespective of these 3 options, CA
following: is recoverable when considering
only FV-cod

Rand

CA FV-cod VIU (1) VIU (2) VIU (3)23

 IAS 36 IMPAIRMENT OF ASSETS
Exceptions: VIU higher than CA

Consider
the Irrespective of these 3 options, CA
following: is recoverable when considering
only VIU

Rand

CA VIU FV-cod (1) FV-cod (2) FV-cod 24

(3)
 IAS 36 IMPAIRMENT OF ASSETS

Exceptions: VIU not expected to be significantly higher

than FV-cod
Consider the following:

• Company year-end is 31/12/20x8. The FV-cod of an asset = R1m (FV = price received
to sell an asset...)
• If the asset is to be sold on 1/1/20x9, then the value in use calc might look follows

Cashflows
1/1/20x9
Net inflow from use -
Net inflow from sale R1m
Total net inflows on 1/1/20x9 R1m
Present value on 31/12/20x8 (ONE DAY BACK) R1m
Assume discount rate of 10%, but effect of time 25
value of money insignificant
IAS 36 IMPAIRMENT OF ASSETS
Reversal of impairment loss

ASSESSMENT Indication that impairment loss in prior

EVERY YEAR END periods no longer exists / decreased
Par 110 r ea s e in
c
ie. in of asset
value

ONLY REVERSED? Change in estimates used to

determine recoverable amount
• Change in basis for RA
• Change in amount / timing of estimated future CF’s /
Par 115 discount rate (if value in use)
• Change in estimate of components of FV less cost of
26
disposal (if fv less cost of disposal)
IAS 36 IMPAIRMENT OF ASSETS
Reversal of impairment loss

IF change in estimate of RA
Increase current CA to RA

LIMITED to what CA would have been,

t en ti a l had NO impairment loss previously
= po
E
BOV ion
se A been recognised
In c r e
a uat
reval
u g h P / L
c o m e t hro
Par 117 In
Par 119
27
 IAS 36 IMPAIRMENT OF ASSETS
Example
R

Cost price [useful life = 10 years] 10 000

End of year 4:
Carrying amount [10 000 – 4 000] 6 000
Recoverable amount 4 000
Impairment loss ?
End of year 5:
Recoverable amount 6 000
Carrying amount ?
Reversal [P/L] ?

Carrying amount ?

Depreciation for year 6 28

?
 IAS 36 IMPAIRMENT OF ASSETS
END OF YEAR 4 Example
IMPAIRMENT
LOSS
CA - RA
END OF YEAR 5
E
CARRYING BEFOR
AMOUNT
”New CA” – ”New CA” / remaining useful life

REVERSAL R1 667

REMEMBER: limit to what CA would have

been if no impairment loss recognised in year 4

AFTER
CARRYING
AMOUNT 29
 IAS 36 IMPAIRMENT OF ASSETS
Example
YEAR 4

Journal entry:
DR Impairment loss (P/L)
CR Accumulated impairment loss (SFP)

END OF YEAR 5

Journal entry:
DR Accumulated impairment loss (SFP)
CR Reversal of impairment loss (P/L)

30
IAS 36 IMPAIRMENT OF ASSETS

DISCLOSURE

SELF STUDY

31
IAS 36 IMPAIRMENT OF SELF STUD
ASSETS Please refer Y
to addition
presentatio al
n and
disclosure e
xample
DISCLOSURE PAR. 126 - 133 template

Disclose for each class of assets:

a) Amount of impairment loss recognised during period in
profit and loss, as well as the line item(s) in which included
in the SCI
b) Amount of reversals of impairment losses recognised in
profit or loss during period and line item(s) in which
included in the SCI
c) The amount of impairment losses on revalued assets
recognised in OCI
d) The amounts of reversals of impairment losses on revalued
32
IAS 36 IMPAIRMENT OF SELF STUD
ASSETS Please refer Y
to addition
presentatio al
n and
disclosure e
xample
DISCLOSURE PAR. 126 - 133 template

Disclose for each impairment loss recognised/ reversed:

a) Events and circumstances that led to the recognition or
reversal of the impairment loss

b) Amount of the impairment loss recognised or reversed

c) Nature of the asset

d) Leave for Hons

33
IAS 36 IMPAIRMENT OF SELF STUD
ASSETS Please refer Y
to addition
presentatio al
n and
disclosure e
xample
DISCLOSURE PAR. 126 - 133 template

e) Whether the recoverable amount is the "fair value less

costs of disposal" or "value in use"
f) If the recoverable amount is the "fair value less costs of
disposal" the
• Fair value hierarchy of the measurement
• The valuation techniques used
• Key assumptions by management
g) If the recoverable amount is the value in use, the discount
rate used in the current estimate and previous estimate (if
any)
34
IAS 36 IMPAIRMENT OF SELF STUD
ASSETS Please refer Y
to addition
presentatio al
n and
disclosure e
xample
DISCLOSURE PAR. 126 - 133 template

Disclose the following for aggregate impairment losses and

the aggregate reversals of impairment losses recognised
during period for which no information is disclosed in terms of
(.130) (i.e. not material impairment loss or reversal)
a) Main classes of assets affected
b) Main events and circumstances that led to the recognition or reversal

35
CASH GENERATING UNITS

36
 CGU VS INDIVIDUAL ASSET?

• Recall: when calculating RA of an asset, both VIU and FV-cod

must be determined

• Recall: VIU is the present value of FUTURE CASH FLOWS

generated by the asset

• WHAT IF THE ASSET DOES NOT GENERATE CASH INFLOWS

ON ITS OWN (i.e. independently from other assets)?
• How then to determine RA?

37
 CGU VS INDIVIDUAL ASSET? (CONT.)

• Identify the GROUP of asset (to which the asset being tested,
belongs to) that generates cash inflows for which value in use can
be calculated.

• If the impairment test for the GROUP of assets indicates that the
GROUP have experienced an impairment loss, then it indicates
that the INDIVIDUAL assets in the group have undergone an
impairment.

Remember: we test individual assets, since we

include individual assets in the SFP 38
IAS 36 IMPAIRMENT OF ASSETS
CASH-GENERATING UNITS

STUDY SOURCES

• IFRS Accounting Standards 2023 – IAS 36 Impairment of assets

• PARAGRAPHS: • 6
• 65 – 79
• 104 – 107

• Disclosure of CGU
EXCLUDED: • Reversal of impairment of CGU 39
IAS 36 IMPAIRMENT OF ASSETS
CASH GENERATING UNITS DEFINITION

Smallest identifiable group of assets

generate cash INflows independently from cash INflows of other

assets or groups of assets

1. Independent cash inflows?

2. Cash inflows as
part of CGU

40
IAS 36 IMPAIRMENT OF ASSETS CG Us
IDENTIFYING THE CGU TO WHICH THE ASSET BELONGS

STEP 1 Estimate the recoverable amount of individual asset

Cannot be determined if:

• Value in use cannot be estimated close to FV less cost of disposal – ie.
Value in use must be calculated AND
• Asset does not generate cash inflows that is largely independent from other
assets

STEP 2 Determine value in use and FV-cod for CGU to which asset belongs

41
IAS 36 IMPAIRMENT OF ASSETS CG Us
IDENTIFYING THE CGU TO WHICH THE ASSET BELONGS

Smallest identifiable group of assets

generate cash INflows independently from cash INflows of other

assets or groups of assets

Inflow from parties external to the entity

42
IAS 36 IMPAIRMENT OF ASSETS CG Us
IDENTIFYING THE CGU TO WHICH THE ASSET BELONGS

Identify consistently over time for the same assets

unless a change is justified

43
IAS 36 IMPAIRMENT OF ASSETS CG Us
RECOVERABLE AMOUNT & CARRYING AMOUNT OF CGU

RECOVERABLE CARRYING
AMOUNT AMOUNT

Highest of: INCLUDES:

- FV - CA of asset that can be directly attributed
less to CGU
cost of disposal - Will generate future cash flows for
OR determination of value in use
- Value in use
of CGU EXCLUDES:
as
ie. not o a whole – - CA of recognised liability HONS
f individ
assets ual UNLESS
- RA of CGU cannot be determined without
consideration of the liability

44
IAS 36 IMPAIRMENT OF ASSETS CG Us
RECOGNITION OF IMPAIRMENT LOSS FOR CGU

Carrying
amount > Recoverable
amount

IMPAIRMENT LOSS

1 Allocate to goodwill allocated to the CGU PGDA

2 Pro-rata to other assets of CGU Based on CA of each asset

45
IAS 36 IMPAIRMENT OF ASSETS CG Us
RECOGNITION OF IMPAIRMENT LOSS FOR CGU

2 Pro-rata to other assets of CGU Based on CA of each asset

CA of asset not DEcreased • FV less cost of disposal (if measurable)

below the HIGHEST of the • Value in use (if determinable)
following: • ZERO

amount of impairment loss which otherwise would be allocated to the asset

should be allocated to other assets of CGU on pro-rata basis

46
IAS 36 IMPAIRMENT OF ASSETS CG Us
RECOGNITION OF IMPAIRMENT LOSS FOR CGU

If recoverable amount of No loss recognised for

individual asset cannot be asset if related CGU not
determined impaired

47
IAS 36 IMPAIRMENT OF ASSETS CG Us
REVERSAL OF IMPAIRMENT LOSS

PGDA

48
IAS 36 IMPAIRMENT OF ASSETS CG Us
GRIPPING GAAP: EXAMPLE 14
Allocation of impairment loss

A cash-generating unit, measured under the cost model, which has a

recoverable amount of C10 000, includes the following assets:
Carrying amount Recoverable
amount
• Equipment C3 000 Unknown
• Vehicles C2 000 Unknown
• Plant C6 000 Unknown
• Factory building C4 000 Unknown

Required: Calculate and allocate the impairment loss to this cash-generating

unit and then journalise it.

49

This material has been copied under licence and is not for resale
IAS 36 IMPAIRMENT OF ASSETS CG Us
GRIPPING GAAP: EXAMPLE 14
Allocation of impairment loss
SOLUTION
W1: Impairment loss of cash-generating unit C
Carrying amount
Recoverable amount Given
Impairment loss

W2: Impairment loss allocated to individual assets CA before Impairmen CA after

impairmen t allocated impairmen
t t
• Equipment C 3 000
• Vehicles C 2 000
• Plant C 6 000
• Factory building C 4 000
C15 000 50

This material has been copied under licence and is not for resale
IAS 36 IMPAIRMENT OF ASSETS CG Us
GRIPPING GAAP: EXAMPLE 14
Allocation of impairment loss
SOLUTION

Journals at year-end Debit (C) Credit

(C)
Impairment loss (P/L)
Equipment: accumulated impairment loss (SFP)
Impairment loss (P/L)
Vehicles: accumulated impairment loss (SFP)
Impairment loss (P/L)
Plant: accumulated impairment loss (SFP)
Impairment loss (P/L)
Building: accumulated impairment loss (SFP)
Impairment of assets within the cash-generating unit

51

This material has been copied under licence and is not for resale