IMPAIRMENT OF PPE
An asset is impaired if its recoverable amount is less than its carrying amount.
The recoverable amount is the higher of:
Asset’s fair value less cost of disposal; and
Its value in use
Impairment of assets is covered under IAS 36.
IAS 36 applies to all assets apart from those specifically excluded from the
standard including subsidiaries, associates and joint ventures.
Intangible assets are excluded as they fall under IAS 38.
Basic principles
If an asset’s value is higher than its realistic value, measured as its
‘recoverable amount’, the asset is judged to have been impaired.
The value of the asset should be reduced by the amount of the impairment
loss. This loss should be charged to profit immediately.
The main accounting issues to consider are:
(a) How to identify when an impairment loss has occurred
(b) How the recoverable amount should be measured
(c) How impairment loss should be reported in the financial statements
Indications of impairment
Assessment at the end of the year should be made to check any indications of
impairment.
Materiality should be considered.
If available, the entity should make a formal assessment of the recoverable
amount.
When making the assessment, the entity should consider the following:
(a) External sources of information
i. A fall in the asset’s market value.
ii. Significant change in technological, market, legal or economic
environment of business.
iii. An increase in market interest rates or market rates of return on
investments likely to affect the discount rate.
iv. The carrying amount of the entity’s net assets being more than its
market capitalisation.
(b) Internal sources of information
i. Obsolescence or physical damage.
ii. Adverse changes in the use to which the asset is put.
iii. Indications that economic performance will be worse than expected.
Some assets are always tested for impairment annually even if there is no
indication for impairment:
An intangible asset with an indefinite useful life
Goodwill acquired in a business combination
Measuring the recoverable amount of the asset
Recoverable amount is the higher of:
Its fair value less costs of disposal; and
Its value in use
Fair value is 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.
Cost of disposal is the incremental costs directly attributable to the disposal of
an asset or cash generating unit excluding finance costs and income tax
expense. For instance, legal costs, costs of removing the asset.
Value in use is the present value of the future cash flows expected to be
derived from an asset.
An asset’s fair value less costs of disposal is compared with its value in use in
order to determine the recoverable amount.
Accounting treatment of impairments
If the recoverable amount of an asset is less than the carrying amount, the
difference is the impairment loss.
(a) An impairment loss for assets at historical cost is recognised in the same
way as a decrease on revaluation, as an expense in profit or loss.
(b) If impairment loss relates to an asset that has previously been revalued,
then it is treated as a revaluation decrease and not an impairment loss.
Balance on the asset is treated in revaluation surplus while the excess is
recognised in profit or loss
(c) Depreciation charges in future accounting periods are calculated based on
the revised carrying amount, less residual value, spread over the asset’s
remaining useful life.
Practice Question
Carrying amount 1,000,000
Revalued to 1,600,000
Amount recognised in the revaluation surplus 600,000
Current carrying amount 1,500,000
Fair value less cost of disposal 600,000
Value in use 800,000
Recoverable amount 800,000
Requirement:
Calculate the impairment loss, record its accounting treatment
Disclosure
It must be made for each class of asset
Details must include any amount of impairment loss recognised in profit and
loss and the amount of impairment loss recognised on revalued assets.
Derecognition of PPE
PPE is derecognised when:
(a) It is disposed of
(b) No future economic benefits are expected i.e abandonment
Gain or loss on disposal is included in profit or loss account
Classification as held for sale
Criteria:
(a) The asset must be available for immediate sale in the present condition
(b) Its sale must be highly probable
For sale to be highly probable:
(a) Management must be committed to sale
(b) An active programme to locate a buyer
(c) Asset being marketed at reasonable price
(d) Sale to take place within a year from the date of classification
(e) It is unlikely that the plan will be withdrawn
Disclosures
The following disclosures must be made:
i. The measurement basis(cost model or revaluation model)
ii. Depreciation methods
iii. Useful lives or depreciation rates
iv. Gross carrying amounts and accumulated depreciation at the start and
end of period
v. A reconciliation of the net carrying amount at the start and end of period
by reference to:
- additions
-disposals
-depreciation
-the effects of revaluation
-impairment losses
-exchange differences
-other changes like assets classified as held for sale
vi. Assets pledged as security for loans
vii. Details after revaluation
Practice Question II
MN’s Ltd statement of financial position at its year end 31 December, 2022
includes the following PPE:
Cost Acc. depn
K’000 K’000
Freehold property 1,000 300
Plant and machinery 700 330
Fixtures and fittings 300 180
On 1 January, 2023 the company revalued its existing freehold property to its
market value of K1.2 million and bought additional freehold property at a
cost of K100,000. As a result of no depreciation being charged on the land
element, the effective rate of depreciation is 2% per annum on cost/valuation,
assuming no residual value.
On 1 April 2023, the company classified as held for sale a machine with an
original cost of K360,000 and a carrying amount at 31 December 2022 of
K100,000. The machine’s fair value at 1 April 2023 was estimated at K80,000
with K5,000 costs to sell. The company also bought plant and machinery at a
cost of K400,000. Depreciation is to be charged at the rate of 10% per annum
on cost, assuming no residual value.
On 1 July, 2023 the company scrapped fixtures and fittings with an original
cost of K40,000 and accumulated depreciation at 31 December 2022 of K25,000
and bought new fixtures at a cost of K80,000. Depreciation is to be charged at
15% per annum on cost, assuming no residual value.
Requirement:
Prepare the note showing the movements on PPE including accumulated
depreciation, which would be included in the financial statements for the year
ended 31 December 2023.
