CHAPTER TWO

FAIR VALUE MEASUREMENT AND IMPAIRMENT

FAIR VALUE MEASUREMENT (IFRS 13)
Definition of fair value
fair value: the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is an exit price
(e.g. the price to sell an asset rather than the price to buy that asset). An exit price embodies
expectations about the future cash inflows and cash outflows associated with an asset or liability
from the perspective of a market participant (i.e. based on buyers and sellers who have certain
characteristics, such as being independent and knowledgeable about the asset or liability).
Fair value is a market-based measurement, rather than an entity-specific measurement, and is
measured using assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk.
Measurement of fair value
Fair value accounting refers to the practice of measuring your business’s liabilities and assets at
their current market value. Fair value accounting was implemented by the Financial Accounting
Standards Board (FASB) in order to harmonize the calculation of financial instruments. When it
comes to fair value accounting, you need to understand the following concepts:
a. Current market conditions – The fair value of an asset is based on the market conditions
on the date of measurement, rather than historical transactions.
b. Intention of holder – It’s also important to note that the holder’s intention should be
irrelevant when calculating fair value. For example, if the holder intends to sell the asset
immediately, it could lead to a rushed sale, thereby lowering the price of the asset.
c. Orderly transaction – Also, fair value is based on orderly transactions where there isn’t
any pressure on the seller to sell, which is why fair value accounting does not apply to
companies that are in the process of liquidation.
d. Third party – Furthermore, fair value is understood to derive from the sale to a third party,
rather than a corporate insider or anyone who is related in some way to the seller (as this
could skew the value of the asset).

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when measuring fair value an entity shall take into account the characteristics of the asset or
liability if market participants would take those characteristics into account when pricing the asset
or liability at the measurement date. Such characteristics include, for example, the following:
a. The condition and
b. location of the asset; and
c. Restrictions, if any, on the sale or use of the asset.
The effect on the measurement arising from a particular characteristic will differ depending on
how that characteristic would be taken into account by market participants.
The asset or liability measured at fair value might be either of the following:
a. a stand-alone asset or liability (eg a financial instrument or a non-financial asset); or
b. a group of assets, a group of liabilities or a group of assets and liabilities (eg a cash-
generating unit or a business).
Scope of fair value measurement
Applies to IFRSs that require or permit fair value measurements or disclosures about fair value
measurements except for;
 IFRS 2; share based payment
 IAS 2; inventories
 IAS 17; lease
 IAS 36; impairment of assets
IFRS 13 does not mandate when fair value measurements should be used – this is dealt with in
other IFRSs.
A fair value measurement assumes that the transaction takes place either: on the principal market
for the asset or liability; or on the absence of a principal market, in the most advantageous market
for the asset or liability.
 The principal market is the market with the greatest volume and level of activity for that
asset or liability.
 The most advantageous market is the market in which the entity could achieve the most
beneficial price. This is the market that would maximize the amount that would be
received to sell an asset or minimize the amount that would be paid to transfer a liability,
taking into account transaction and transportation costs.
An entity should measure the fair value of an asset or a liability using the assumptions that market

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Participants would use when pricing the asset or liability.
 Independent of each other
 knowledgeable about the asset or liability.
 Able and willing to enter into a transaction for the asset or liability.
To determine the most advantageous market, we use/apply the formula: net proceed= exit price-
transaction cost-transport cost
Example: assume the following three markets:
Market A Market B Market C
Volume (Annual) 20,000 12,000 10,000
Price 10,000 9,800 11,000
Transport cost (5,000) (5,000) (5,500)
Possible fair value 5,000 4,800 5,500
Transaction cost (1,000) (1,000) (1,200)
Net proceeds 4,000 3,800 4,300
Required: determine:
a. The principal market
b. The most advantageous market
Answer:
Market A is the principal market because it has high volume of sale or high level of activity
which is 20,000>12,000>10,000
Market C is the most advantageous market because it has high level of net procced which is
4,300>4,000>3,800
Fair value at initial recognition
When an asset is acquired (or a liability assumed), the transaction price paid for the asset (or
received to assume a liability) normally reflects an entry price. IFRS 13 requires fair value
measurements to be based on an exit price. Although conceptually different, in many cases the exit
price and entry price are equal and therefore fair value at initial recognition generally equals the
transaction price. Entities do not necessarily sell assets at the prices paid to acquire them. Similarly,
entities do not necessarily transfer liabilities at the prices received to assume them.

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In many cases the transaction price will equal the fair value (eg that might be the case when on the
transaction date the transaction to buy an asset takes place in the market in which the asset would
be sold).
When determining whether fair value at initial recognition equals the transaction price, an entity
shall take into account factors specific to the transaction and to the asset or liability. If another
IFRS requires or permits an entity to measure an asset or a liability initially at fair value and the
transaction price differs from fair value, the entity shall recognize the resulting gain or loss in profit
or loss unless that IFRS specifies otherwise.
Valuation Techniques
An entity shall use valuation techniques that are appropriate in the circumstances and for which
sufficient data are available to measure fair value, maximizing the use of relevant observable inputs
and minimizing the use of unobservable inputs.
The objective of using a valuation technique is to estimate the price at which an orderly transaction
to sell the asset or to transfer the liability would take place between market participants at the
measurement date under current market conditions.
The three widely used valuation techniques cited by IFRS 13 are:
1. Market approach – uses prices generated by market transactions.
2. Income approach – converts future amounts to a single (present value) amount.
3. Cost approach – determines the value that reflects current replacement cost.
Market Approach
The market approach uses prices and other relevant information generated by market transactions
involving identical or similar assets and liabilities. Valuation techniques based on market approach
often use market multiples derived for certain variables. Market approach is usually used for the
measurement of:
 Cash generating units and businesses (by reference to quoted prices or transactions in the
same industry).
 Properties (by reference to transactions for similar properties).
As an example, let’s say your company owns a piece of machinery that was purchased for £10,000
two years ago. To calculate the fair value of this machine, you will need to research recent sales
or listings of similar machines to calculate the estimated value. You notice that a few companies
are selling the same machine on their websites. One company is selling for £6,000, another for

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£7000, and another for £6,800. You will then calculate the average sale price by adding them
together and dividing by 3.
From your calculations, this machine has a fair value of £6,600 and this will be inputted on your
financial statement.
Income approach
The income approach converts future amounts (e.g. cash flows or income and expenses) to a single
discounted amount taking into account, inter alia, risk and uncertainty. When the income approach
is used, the fair value measurement reflects current market expectations about those future
amounts. Examples of valuations techniques consistent with income approach given by IFRS 13
include present value techniques, option pricing models and the multi-period excess earnings
method.
Example: Mr. X is planning to buy a Road Roller. The income from the Road Roller year wise is
mentioned below –
Year 1: $80,000
Year 2: $50,000
Year 3: $200,000
Year 4: $100,000
Year 5: $200,000
The Interest rate running in the market is 5%. The life of the Roller is five years. Calculate the fair
value of the asset
Solution
The Fair value of the asset should be its capacity to earn a return throughout its life after adjustment
of the Interest rate.
Step #1 – determine the total Earning of the Road Roller
Total earning= $80,000 + $50,000 + $200,000 + $100,000 + $200,000
= $630,000
Step #2 – Calculate the Present Value of Future Cash-Flows of each year
Bring all the payments that you will receive in future to year 0. So, discount them cash-flows with
the interest rate prevailing in the market.
Year 1 – Present Value of the Cash Flow $80,000 = 80,000 / 1.05 = 76,190
Year 2 – Present Value of the Cash Flow $50,000 = 50,000 / (1.05)^ 2 = 45,351

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 Year 3 – Present Value of the Cash Flow $200,000 = 200,000 / (1.05)^3 = 172,768
Year 4 – Present Value of the Cash Flow $100,000 = 100,000 / (1.05)^ 4 = 82,270
Year 5 – Present Value of the Cash Flow $200,000 = 200,000 / (1.05)^5 = 156,705
step #3 Calculation of Total Present Value
Total present value= 76,910 + 45,351 + 172,768 + 82,270 + 156,705
Total Present Value (Fair Value) = $533,285
So, Mr. X should record $533,285 as of the value of the asset in the asset side of the Balance Sheet.
Cost approach
The cost approach, often referred to as a current replacement cost, aims to reflect the amount that
would be currently required to replace the service capacity of an asset adjusted for obsolescence
(e.g. physical deterioration, technological or economic obsolescence). This valuation technique
assumes that a market participant would not pay more for an asset than the amount for which it
could obtain the service capacity of that asset elsewhere.
Cost approach is usually used for measurement of:
 tangible assets that are developed internally or
 assets that are used in combination with other assets and liabilities.
Example: On 1 January 20X1, Entity A acquired a specialized piece of equipment for $1 million.
On 31 December 20X4, Entity A was acquired by Entity X and Entity X must recognize this
equipment at fair value under IFRS 3 requirements. The equipment was heavily tailored for the
needs of Entity A and there is no identical or even very similar equipment available ‘off the shelf’.
In order to overcome this obstacle, Entity X obtains price lists of pieces of equipment similar to
that held by Entity A at 1 January 20X1 and 31 December 20X4 and determines that they have
risen by 20% during that period. Entity X determines that this is the reasonable approximation of
an increase in price that would have to be paid to obtain the tailored equipment held by Entity A.
Therefore, the replacement cost of a new piece of identical equipment is determined to be $1.2
million. This however is not equal to the fair value as at 31 December 20X4, as it has to adjust to
take obsolescence into account. Field experts working at Entity A determined that the equipment
should be valued at 70% of the new equivalent.
Therefore, the fair value is determined to be $0.84 million or $840,000 ($1.2 m x 70%).

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Reasons to change valuation techniques
Valuation techniques used to measure fair value shall be applied consistently. However, a change
in a valuation technique or its application (e.g A change in its weighting when multiple valuation
techniques are used or a change in an adjustment applied to a valuation technique) is appropriate
if the change results in a measurement that is equally or more representative of fair value in the
circumstances. That might be the case if, for example, any of the following events take place:
i. New markets develop;
ii. New information becomes available;
iii. Information previously used is no longer available;
iv. Valuation techniques improve; or
v. Market conditions change
Fair value hierarchy
For disclosure and comparability purposes, IFRS 13 establishes a fair value hierarchy that
categorizes the inputs to valuation techniques into three levels:
1. Level 1: the fair value is based on observable inputs that reflect quoted prices for identical
assets/liabilities in active markets.
2. Level 2: the fair value is based on observable inputs that reflect quoted prices for similar
assets/liabilities traded in less active market.
3. Level 3: the fair value is based on unobservable inputs or entity specific information but
level 1 and level 2 used market-oriented information (observable inputs).
When inputs used to measure fair value fall into different levels, the whole fair value measurement
is categorized in the same level of the fair value hierarchy as the lowest level input that is
significant to the entire measurement (IFRS 13.73, 75).
Level 1inputs
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
that the entity can access at the measurement date. Typical examples of Level 1 inputs are prices
of financial assets and liabilities traded on stock exchanges that meet the definition of an active
market. An active market is a market in which transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing information on an ongoing basis.

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Level 2 inputs
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual)
term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 2 inputs include the following:
a. Quoted prices for similar assets or liabilities in active markets.
b. Quoted prices for identical or similar assets or liabilities in markets that are not active.
c. Inputs other than quoted prices that are observable for the asset or liability, for example:
Interest rates and yield curves observable at commonly quoted intervals; implied
volatilities; and credit spreads.
Level 3 inputs
Level 3 inputs are unobservable inputs and are used when relevant observable inputs are not
available. Unobservable inputs should be developed using the information available to the entity,
which can often be entity’s own data adjusted to account for assumptions of other market
participants and exclude entity-specific factors
Therefore, According to IFRS 13 Fair Value Measurement, there are three levels of data that you
can use to determine the value of an asset or liability. These are as follows:
 Level 1 – The quoted price of identical items in an active market (market where liabilities
and assets are transacted frequently and at high volumes, giving ongoing pricing
information).
 Level 2 – Observable information for similar items in active or inactive markets, rather
than quoted prices. For example, real estate in similar locations.
 Level 3 – Unobservable inputs, only used when markets are non-existent or illiquid.
Examples include your company’s own data, such as an internally generated financial
forecast.
Disclosure
The IFRS 13 disclosure objective is to help users of financial statements assess the valuation
techniques and inputs used in fair value measurements.
 Fair value disclosures are based on the level within which a measurement falls in the fair
value hierarchy;

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  This is on the basis that there is greater subjectivity about fair value measurements that use
inputs that are lower in the fair value hierarchy, and so increased disclosure is required.
 Furthermore, the disclosures differentiate fair value measurements that are recurring from
those that are non-recurring.
 For recurring fair value measurements using significant unobservable inputs, the
disclosures are also intended to help users understand the effect of the fair value
measurement on profit or loss or other comprehensive income for the period.
 More extensive disclosures are required for Level 3 measurements, including a description
of valuation processes applied, quantitative information about significant unobservable
inputs, and narrative disclosure of the sensitivity of the fair value measurement to
significant reasonably possible alternative unobservable inputs.
 IFRS 13 retains the quantitative sensitivity analysis from IFRS 7 for Level 3 financial
assets and financial liabilities.
 Fair value hierarchy disclosures for financial instruments measured at fair value are
required for interim financial reports prepared in accordance with IAS 34 Interim Financial
Reporting.
Impairment (IAS 36)
Definition of impairment
Impairment is defined as sudden diminution in value of an individual non-current asset or cash
generating unit (CGU).
An impaired asset is an asset valued at less than book value or net carrying value. In other words,
an impaired asset has a current market value that is less than the value listed on the balance sheet.
To account for the loss, the company’s balance sheet must be updated to reflect the asset’s new
diminished value.
 CGU 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.
 CGUs are likely to follow the way in which management monitors and makes decisions
about continuing/discontinuing different parts of the business.
Fundamental principles
 To prescribe the procedures to ensure that non-current assets and CGUs are recorded at no
more than their recoverable amounts.

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  Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value
in use (VIU).
An impairment loss is the amount by which the carrying amount (NBV) of an asset or CGU
exceeds its recoverable amount.
The impairment of a fixed asset can be described as an abrupt decrease in fair value due to physical
damage, changes in existing laws creating a permanent decrease, increased competition, poor
management, obsolescence of technology, etc. In the case of a fixed-asset impairment, the
company needs to decrease its book value in the balance sheet and recognize a loss in the income
statement. All assets, either tangible or intangible, are prone to impairment. A tangible asset can
be property, plant and machinery (PP&E), furniture and fixtures, etc., whereas intangible assets
can be goodwill, patent, license, etc.
Key definitions
Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit
exceeds its recoverable amount.
Carrying amount: the amount at which an asset is recognized in the balance sheet after
deducting accumulated depreciation and accumulated impairment losses.
Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes
called net selling price) and its value in use.
* Prior to consequential amendments made by IFRS 13 Fair Value Measurement, this was referred
to as 'fair value less costs to sell'.
 Fair value: the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (see IFRS 13
Fair Value Measurement)
 Value in use: the present value of the future cash flows expected to be derived from an
asset or cash-generating unit.
Indicators of Impairment Test
Companies must assess the external environment and look for the indicators below to decide when
to impair assets. Given below are just some of the indicators relevant for impairment:

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Internal factors:
 Asset as a part of a restructuring or held for disposal
 Obsolescence or physical damage to the asset
 Inability to bring in post-merger synergy benefits that were expected earlier
 Worse economic performance than what is expected
External factors:
 Drastic change in economic or legal factors affecting the company or its assets
 Significant fall in the market price of the asset
 Muted demand for a medium-term period due to global macroeconomic conditions
 decline in assets’ market value
 adverse changes in technological, market, economic or legal environment
scope of impairment (IAS 36)
Exclusions as per IFRS IAS 36
IAS 36 applies to all assets except those for which other standards address impairment. The
exceptions to this standard are:
 Assets from construction contracts
 Inventories
 Deferred tax assets
 Financial assets (within the scope of IFRS 9)
 Assets arising from employee benefits
 Agricultural assets carried at fair value (within the scope of IAS 41)
 Investment property carried at fair value
 Non-current assets held for sale
 Insurance contract assets
Therefore, IAS 36 applies to (among other assets):
 land
 buildings
 machinery and equipment
 investment property carried at cost
 intangible assets
 goodwill

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  investments in subsidiaries, associates, and joint ventures carried at cost
 assets carried at revalued amounts under IAS 16 and IAS 38
Advantages of Impairment
 Impairment charges provide investors and analysts with different ways to assess a
company’s management and decision-making track record. Managers who write off or
write down assets because of impairment might not have made good investment decisions
or lacked the vision before making that kind of investment.
 Many business failures are heralded by a fall in the impairment value of assets. Such
disclosures act as early warning signals to creditors and investors.
Disadvantages of Impairment
 It is generally difficult to know the measurement value that must be used to ascertain the
impairment amount. A few of the popular ways of measuring impairment include finding
out the current market value, current cost, NRV, or the sum of future net cash flows from
the income-producing unit.
 The detailed guidance on treatment for impairing assets is not there, like when to
recognize impairment, how to measure impairment, and how to disclose impairment.
Asset Depreciation vs. Asset Impairment
Asset impairment reflects a drastic, and often a one-time and sudden, reduction in the recoverable
amount of an asset. Causes run the gamut from natural disasters to manmade regulatory changes
and many factors in between. An asset’s carrying value, or book value, equals the cost to acquire
the asset minus accumulated depreciation. Asset impairment is a current market value that is less
than the carrying value as recorded on the company’s balance sheet. If you were to chart asset
depreciation, it would appear as a slow declining line over time. A chart depicting asset impairment
would show a distinct and likely sudden drop in value, either one time or several times on the same
chart, depending on how many times the asset value was impacted by one or more events.
Impairment vs. Amortization
Though both terms may seem similar, impairment relates more to a sudden and irreversible
decrease in the value of an asset, for example, the breakdown of a machine due to an accident.
Generally, amortization is believed to be a systematic decrease in an intangible asset’s book value,
based on the planned amortization plan. The total write-off is usually spread across the complete
life of the asset, also considering its expected resale value.

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measurement and Recognition of Impairment
Business assets should be tested for impairment when a situation occurs that causes the asset to
lose value. An impairment loss is recognized and accrued to record the asset’s revaluation. Once
an asset has been revalued, fluctuations in market value are calculated periodically. Certain
intangible assets, such as goodwill, are tested for impairment on an annual basis. Impairment
losses can occur for a variety of reasons:
 when an asset is badly damaged (negative change in physical condition)
 the asset’s market price has been significantly reduced
 legal issues have had a negative impact on the asset
The asset is set for disposal before the end of its useful life. A loss on impairment is recognized
as a debit to Loss on Impairment (the difference between the new fair market value and
current book value of the asset) and a credit to the asset. The loss will reduce income in the
income statement and reduce total assets on the balance sheet. A loss on impairment is recognized
as a debit to Loss on Impairment (the difference between the new fair market value and current
book value of the asset) and a credit to the asset. The loss will reduce income in the income
statement and reduce total assets on the balance sheet.
For an example, take a retail store that is recorded on the owner’s balance sheet as a non-current
asset worth USD 20,000 (book value or carrying value is USD 20,000). Based on the asset’s book
value, assume the store has a historical cost of USD 25,000 and accumulated depreciation of USD
5,000. A hurricane sweeps through the town and damages the store’s building. After assessing the
amount of the damage, the owner calculates that the building’s market value has fallen to USD
12,000.
The Loss on Impairment is calculated to be USD 8,000 (20,000 book value – 12,000 market value)
The journal entry to recognize the Loss on Impairment:
 Debit Loss on Impairment for USD 8,000
 Debit Store Building-Accumulated Depreciation for USD 5,000
 Credit Store Building for USD 13,000
The Loss on Impairment for USD 8,000 is recognized on the income statement as a reduction to
the period’s income and the asset Store Building is recognized at its reduced value of USD 12,000
on the balance sheet (25,000 historical cost – 8,000 impairment loss – 5,000 accumulated
depreciation). After the impairment, depreciation expense is calculated using the asset’s new value.

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Measurement of impairment
Two tests are performed to determine the amount of an impairment loss: recoverability and
measurement.
 The recoverability test evaluates if an asset‘s undiscounted future cash flows are
less than the asset’s book value. When cash flows are less, the loss is measured.
 The measurement test uses the difference between the asset’s market value and
book value to calculate the amount of the impairment loss.
Key Terms
Recoverability: The property of being able to recover.
Cash flows: cash received or paid by a company for its business activities.
Intangible asset: Any valuable property of a business that does not appear on the balance sheet,
including intellectual property, customer lists, and goodwill.
To measure the amount of the loss involves two steps:
 Perform a recoverability test is to determine if an impairment loss has occurred by
evaluating whether the future value of the asset’s undiscounted cash flows is less than the
book value of the asset. If the cash flows are less than book value, the loss is measured.
 Measure the impairment loss by calculating the difference between the book value and the
market value of the asset.
The impairment decision
Example 1: Take an asset at 31 December 2012:
Carrying amount €10,000
Fair value less costs to sell €12,000
Value in use €13,000 – take higher
Impairment Decision: there is no impairment because carrying amount < recoverable amount.
Example 2: Take an asset at 31 December 2012:
Carrying amount €10,000
Fair value less costs to sell €8,000
Value in use €9,000 – take higher
Impairment Decision: there is impairment because carrying amount > recoverable amount.
Impairment = carrying amount less recoverable amount = €10,000 - €9,000 = €1,000

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The use of undiscounted cash flows in determining impairment loss assumes that the cash flows
are certain and risk-free, and the timing of the cash flows is ignored. For example, assume a new
USD 20,000 sewing machine, with a useful of life of 3 years, is damaged and has a new book value
of USD 10,000.
The expected undiscounted cash flows generated by the machine after the damage are:
USD 2,000 in Year1
USD 2,000 in Year2
USD 2,000 in Year3
Since the asset’s future undiscounted cash flows are USD 6,000, less than the USD 10,000 book
value, an impairment loss has occurred. Use the market value of the sewing machine, USD 20,000,
and deduct the USD 10,000 book value to arrive at an impairment loss of USD 10,000.
Certain assets with indefinite lives require an annual test for impairment. Trademarks and
Goodwill are examples of intangible assets that are tested for impairment on an annual basis.
These lists are not intended to be exhaustive. Further, an indication that an asset may be impaired
may indicate that the asset's useful life, depreciation method, or residual value may need to be
reviewed and adjusted.
Determining recoverable amount
 If fair value less costs of disposal or value in use is more than carrying amount, it is not
necessary to calculate the other amount. The asset is not impaired.
 If fair value less costs of disposal cannot be determined, then recoverable amount is value
in use.
 For assets to be disposed of, recoverable amount is fair value less costs of disposal.
Fair value less costs of disposal
 Fair value is determined in accordance with IFRS 13 Fair Value Measurement
 Costs of disposal are the direct added costs only (not existing costs or overhead).
Value in use
The calculation of value in use should reflect the following elements:
 an estimate of the future cash flows the entity expects to derive from the asset
 expectations about possible variations in the amount or timing of those future cash flows
 the time value of money, represented by the current market risk-free rate of interest
 the price for bearing the uncertainty inherent in the asset

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  other factors, such as illiquidity, that market participants would reflect in pricing the future
cash flows the entity expects to derive from the asset
Here,
 Cash flow projections should be based on reasonable and supportable assumptions, the
most recent budgets and forecasts, and extrapolation for periods beyond budgeted
projections. IAS 36 presumes that budgets and forecasts should not go beyond five years;
for periods after five years, extrapolate from the earlier budgets. Management should assess
the reasonableness of its assumptions by examining the causes of differences between past
cash flow projections and actual cash flows.
 Cash flow projections should relate to the asset in its current condition – future
restructurings to which the entity is not committed and expenditures to improve or enhance
the asset's performance should not be anticipated.
 Estimates of future cash flows should not include cash inflows or outflows from financing
activities, or income tax receipts or payments.
Recognition of an impairment loss
 An impairment loss is recognized whenever recoverable amount is below carrying amount.
 The impairment loss is recognized as an expense (unless it relates to a revalued asset where
the impairment loss is treated as a revaluation decrease).
 Adjust depreciation for future periods.
Reversal of impairment
An impairment loss is recognized immediately in profit or loss (or in comprehensive income if it
is a revaluation decrease under IAS 16 or IAS 38). The carrying amount of the asset (or cash-
generating unit) is reduced. In a cash-generating unit, goodwill is reduced first; then other assets
are reduced pro rata. The depreciation (amortization) charge is adjusted in future periods to allocate
the asset’s revised carrying amount over its remaining useful life. An impairment loss for goodwill
is never reversed. For other assets, when the circumstances that caused the impairment loss are
favorably resolved, the impairment loss is reversed immediately in profit or loss (or in
comprehensive income if the asset is revalued under IAS 16 or IAS 38). On reversal, the asset’s
carrying amount is increased, but not above the amount that it would have been without the prior
impairment loss. Depreciation (amortization) is adjusted in future periods.

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Reversing an impairment loss
To reverse an impairment loss, the estimated service potential of the asset (or CGU), either from
its use or from its sale, must have improved since the company impaired the asset. An impairment
loss is not reversed merely due to the passage of time – i.e. when the increase in the recoverable
amount is caused only by unwinding the discount.
Disclosure
Disclosure by class of assets:
 impairment losses recognized in profit or loss
 impairment losses reversed in profit or loss
 which line item(s) of the statement of comprehensive income
 impairment losses on revalued assets recognized in other comprehensive income
 impairment losses on revalued assets reversed in other comprehensive income
Disclosure by reportable segment:
 impairment losses recognized
 impairment losses reversed

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