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Chapter 5 • IAS 36 Impairment of Assets
• Cash generating units
Impairment of assets • Goodwill and the impairment of
assets
• Accounting treatment of an
impairment loss
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Learning objectives
• Define, calculate and account for an impairment loss
• Account for the reversal of an impairment loss on an
individual asset
• Identify the circumstances that may indicate impairments
to assets
• Describe what is meant by a cash generating unit
• State the basis on which impairment losses should be
allocated, and allocate an impairment loss to the assets of
a cash generating unit
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Chapter overview
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Scope
IAS 36 applies to all tangible, intangible and financial assets
except inventories, assets arising from construction contracts,
deferred tax assets, assets arising under IAS 19 Employee
Benefits and financial assets within the scope of IAS 32
Financial Instruments.
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IAS 36 Impairment of Assets 5
Impairment indicators – external sources
Indicators that an asset's value has declined during the period
significantly more than would have been expected due to the passage of
time or normal use
Significant changes with an adverse effect on the entity in the
technological, market, economic or legal environment in which the entity
operates
Increased market interest rates or other market rates of return affecting
discount rates and therefore reducing value in use
The carrying amount of the entity's net assets exceeds market
capitalisation
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IAS 36 Impairment of Assets 6
Impairment indicators – internal sources
Evidence of obsolescence or physical damage
Adverse changes to the asset's use
Internal evidence that the asset's performance will be worse than
expected
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IAS 36 Impairment of Assets 1
• IAS 36 aims to ensure that the carrying amount of
assets in the financial statements is not more than their
recoverable amount.
• Carrying amount:
– The value at which the asset is included in the
financial statements
– Cost/valuation less accumulated depreciation and
impairment losses
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IAS 36 Impairment of Assets 2
Recoverable amount
Higher of
Fair value less Value in
costs to sell use
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IAS 36 Impairment of Assets 3
• Fair value less costs to sell:
– The price that would be received to sell the asset in an orderly
transaction between market participants at the measurement
date
– If there is an active market in the asset, the fair value should
be based on the market price, or on the price of the recent
transactions in similar assets
– If there is no active market in the asset it might be possible to
estimate fair value using best estimates of what market
participants might pay in an orderly transaction
– Less the direct incremental costs attributable to the disposal of
the asset
• Value in use:
– The present value of future cash flows expected to be derived
from the asset or cash-generating unit
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IAS 36 Impairment of Assets 4
• If the carrying value of an asset in the statement of
financial position is higher than the recoverable amount
of the asset, then the asset is said to be impaired.
• The impairment loss is the amount by which the
carrying amount exceeds the recoverable amount.
• An entity should consider whether there are indications
that an asset might have been impaired at the end of
each reporting period.
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At 30 September 20X9 Sandown Co's trial balance showed a brand at
cost of $30 million, less accumulated amortisation brought forward at 1
October 20X8 of $9 million. Amortisation is based on a ten year useful
life. An impairment review on 1 April 20X9 concluded that the brand had
a value in use of $12 million and a remaining useful life of three years.
However, on the same date Sandown Co received an offer to purchase
the brand for $15 million.
What should be the carrying amount of the brand in the statement
of financial position of Sandown Co as at 30 September 20X9?
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Cash-generating units
Definition
• Where it is not possible to estimate the recoverable
amount of an individual asset, an entity should
determine the recoverable amount of the cash-
generating unit to which the asset belongs.
• A cash-generating unit is the smallest identifiable
group of assets that generates cash inflows that are
largely independent of the cash inflows from other
assets or groups of assets.
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Goodwill and the impairment of assets
• Goodwill and corporate assets (such as a head office)
should be allocated to a cash-generating unit in order
to determine their carrying amount and recoverable
amount.
• Where an impairment loss is allocated to reduce the
carrying amount of the assets in a cash-generating
unit, it will firstly be taken against any goodwill
allocated to the cash-generating unit.
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Accounting treatment of an impairment loss 1
It may be possible to identify a specific asset which has
suffered an impairment.
Where an individual asset is impaired:
• If the asset is held at historic cost, the impairment loss
is recognised as an expense in profit or loss
• If the asset is held at a revalued amount, the
impairment loss is charged:
– Firstly to other comprehensive income (to remove
any previous revaluation surplus relating to the
asset)
– Any remainder is recognised as an expense in profit
or loss
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Accounting treatment of an impairment loss 2
Where a cash-generating unit is impaired, the impairment
loss is allocated in the following order:
• Firstly to goodwill allocated to the cash-generating unit
• Then to the other assets of the unit on a pro-rata basis
based on the carrying amount of each asset in the
cash-generating unit
After the recognition of an impairment loss the asset's
carrying value should be depreciated/amortised over its
remaining useful life.
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• A cash-generating unit comprises the following assets:
$'000
Building 700
Plant and equipment 200
Goodwill 90
Current assets 20
1,010
• One of the machines, carried at $40,000, is damaged and will have to
be scrapped. The recoverable amount of the cash-generating unit is
estimated at $750,000.
• What will be the carrying amount of the building after the
impairment loss has been recognised?
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Question: Impairment
A machine was acquired on 1 January 20X5 at a cost of
$50,000 and has a useful economic life of ten years.
At 31 December 20X9 an impairment review was performed.
The fair value of the machine is $26,000 and the selling costs
are $2,000.
The expected future cash flows are $5,000 per annum for the
next five years. The current cost of capital is 10%. An annuity
factor for this rate over this period is 3.791
Prepare extract from the financial statement for the year-
ended 31 December 20X9.
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Question: Individual asset impairment
A building was bought on 1 January 20X1 at a cost of $1,000,000
and has a useful life of 20 years.
The company uses the revaluation model for its land and buildings,
and on the 31 December 20X5 the fair value of the building was
$1,125,000. The company opts to transfer any excess depreciation
on the revalued amount to retained earnings.
On the 31 December 20X7 a fall in the market value of property led to
an impairment review on the building, which revealed the value of the
building to be $600,000.
Explain how the impairment of the building should be dealt with
in the financial statements for the year ended 31 December
20X7.
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Peter owned 100% of the equity share capital of Sharon, a wholly-owned
[Link] assets at the reporting date of Sharon were as follows: ($’000)
Goodwill: 2,400
Buildings: 6,000
Plant and equipment: 5,200
Other intangibles: 2,000
Receivables and cash: 1,400
Total 17,000
On the reporting date a fire within one of Sharon’s buildings led to an
impairment review being carried out.
The recoverable amount of the business was determined to be $9.8 million.
The fire destroyed some plant and equipment with a carrying value of $1.2
million and there was no option but to scrap it.
The other intangibles consist of a licence to operate Sharon’s plant and
equipment. Following the scrapping of some of the plant and equipment a
competitor offered to purchase the patent for $1.5 million.
The receivable and cash are both stated at their realisable value and do not
require impairment.
Show how the impairment loss in Sharon is allocated amongst the
assets.
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Question: Invest
On 31 December 20X1 Invest purchased all the shares of MH for
$2m. The net fair value of the identifiable assets acquired and
liabilities assumed of MH at that date was $1.8m.
MH made a loss in the year ended 31 December 20X2 and at 31
December 20X2 the net assets of MH – based on fair values at 1
January 20X2 – were as follows:
$'000
Property, plant and equipment 1,300
Capitalised development expenditure 200
Net current assets 250
1,750
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Question: Invest (continued)
An impairment review on 31 December 20X2 indicated that the
recoverable amount of MH at that date was $1.5m.
The capitalised development expenditure has no ascertainable
external market value and the current fair value less costs of disposal
of the property, plant and equipment is $1,120,000.
Value in use could not be determined separately for these two items.
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Question: Invest (continued)
Required
Calculate the impairment loss that would arise in the consolidated
financial statements of Invest as a result of the impairment review of
MH at 31 December 20X2 and show how the impairment loss would
be allocated.
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Answer: Invest
Asset values Allocation of Carrying
at 31.12.X2 impairment amount
before loss after
impairment (W1)/(W2) imp. loss
$'000 $'000 $'000
Goodwill
PPE
Development exp.
Net current assets
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Chapter Summary 1
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Chapter Summary 2
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