IMPAIRMENT (PAS 36)

DEFINITION

Impairment is a fall in the market value of an asset so that

the recoverable amount is now less than the carrying
amount in the statement of financial position.
Indication of Impairment
 Assessment of indication should
be at each reporting date
 Intangible asset with indefinite
useful life/not yet available for
use – tested annually for
impairment whether there is an
indication or not.
 INDICATORS ARE CLASSIFIED INTO
TWO:
EXTERNAL SOURCES INTERNAL SOURCES
SIGNIFICANT DECREASE/DECLINE EVIDENCE OF
IN THE MARKET VALUE OF THE OBSOLESCENCE/PHYSICAL
ASSET DAMAGE OF AN ASSET
SIGNIFICANT CHANGE IN THE SIGNIFICANT CHANGE IN THE
TECHNOLOGICAL, MARKET, MANNER OF EXTENT IN WHICH
LEGAL/ ECONOMIC ENVIRONMENT THE ASSET IS USED
INCREASE IN INTEREST EVIDENCE THAT THE ECONOMIC
RATE/MARKET RATE OF RETURN PERFORMANCE OF AN ASSET WILL
ON INVESTMENT BE WORSE THEN EXPECTED
CARRYING AMOUNT > MARKET
CAPITALIZATION
 MEASUREMENT OF RECOVERABLE AMOUNT (FAIR
VALUE LESS COST OF DISPOSAL OR VALUE IN USE,
WHICHEVER IS HIGHER
FAIR VALUE – PRICE THAT WOULD BE VALUE IN USE – PRESENT VALUE OR
RECEIVED TO SELL THE ASSET IN AN DISCOUNTED VALUE OF FUTURE
ORDERLY TRANSACTION BETWEEN NET CASH FLOWS EXPECTED TO BE
MARKET PARTICIPANTS AT THE DERIVED FROM AN ASSET. (PRE TAX
MEASUREMENT DATE CASH FLOWS & PRE TAX DISCOUNT
COST OF DISPOSAL – INCREMENTAL RATE)
COST DIRECTLY ATTRIBUTABLE TO
THE DISPOSAL OF AN ASSET OR CGU
EXCLUDING FINANCE COST &
INCOME TAX EXPENSE.
THEREFORE, FAIR VALUE LESS COST
OF DISPOSAL IS THE EXIT
PRICE/SELLING PRICE OF AN ASSET
MINUS COST OF DISPOSAL
 REVERSAL OF AN IMPAIRMENT LOSS
 PAS 36, paragraph 114, provides that an impairment loss recognized for an asset in prior years
shall be reversed if there has been a change in the estimate of the recoverable amount.

 PAS 36, paragraph 117, provides that the increased carrying amount of an asset due to a
reversal of an impairment loss shall not exceed the carrying amount that would have been
determined had no impairment loss been recognized for the asset in prior years.

 The increased carrying amount is the carrying amount had no impairment loss been
recognized or the recoverable amount, whichever is lower.
 CASH GENERATING UNIT (CGU)
 A cash generating unit is the smallest identifiable group of assets that generate cash
inflows from continuing use that are largely independent of the cash inflows from
continuing use that are largely independent of the cash inflows from other assets or group of
assets. (Department, Product line, Factory)

 As a basic rule, the recoverable amount of an asset shall be determined for the asset
individually.

 If not possible individually, then the entity should determine the recoverable amount of the
CGU to which the asset belongs.
 CASH GENERATING UNIT (CGU)
 PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash
generating unit (CGU), this loss shall be allocated to the assets of the unit in the following
order:
a) First, to the goodwill, if any
b) Then, to all other noncash assets of the unit prorate based on their carrying
amount
 PAS 36, paragraph 105, provides that the carrying amount of an asset shall not be reduced
below the highest of fair value less cost of disposal, value in use & zero.
 The amount of impairment loss that would otherwise have been allocated to the asset shall
be allocated prorata to the other assets at the cash generating unit.
 CASH GENERATING UNIT (CGU) WITH
GOODWILL
 Goodwill does not generate cash flows independently from other assets or group of assets or
group of assets, and therefore, the recoverable amount of goodwill as an individual asset
cannot be determined.

 As a consequence, if there is an indication that goodwill may be impaired, recoverable

amount is determined for the cash generating unit to which goodwill belongs.

 PAS 36, paragraph 90, provides that a cash generating unit to which goodwill has been
allocated shall be tested for impairment at least annually by comparing the carrying amount of
the unit, including the goodwill, with the recoverable amount.
Recoverable amount > Carrying amount = unit & goodwill is deemed not
impaired
Recoverable amount < Carrying amount = unit recognized impairment loss
 REVERSAL OF AN IMPAIRMENT LOSS ON
GOODWILL
 PAS 36, paragraph 124, explicitly provides that an impairment loss recognized for goodwill
shall not be reversed in a subsequent period

CARRYING AMOUNT OF CGU

 PAS 36, paragraph 76, provides that the carrying amount of a CGU includes the
carrying amount of only those assets that can be attributed directly or allocated on a
reasonable and consistent basis to the CGU and can generate future cash inflows
used in determining the value in use of the CGU.
 CGU does not include the carrying amount of any recognized liability (Payables &
Provisions)
 CORPORATE ASSETS
 Corporate assets are assets other than goodwill that contribute to the
future cash flows of both the CGU under review and other CGU’s.
( Head office building, EDP, equipment or a research center)
 Corporate assets are assets that do not generate cash inflows
independently from other assets.
 Thank you

BY YOURS TRULY,

LOUIE JIM D PIALDA, CPA