IAS 36: Impairment of assets
Objective and scope of IAS 36
An asset is said to be impaired when its carrying amount in the statement of
financial position is above the recoverable amount of the asset or its cash-
generating unit.
Key Concepts:
1. Impairment Loss:
Occurs when the carrying amount of an asset exceeds its recoverable
amount.
The impairment loss is recognized immediately in profit or loss.
2. Carrying Amount:
The amount at which an asset is recognized in the balance sheet after
deducting accumulated depreciation and accumulated impairment
losses.
3. Recoverable Amount:
The higher of an asset’s fair value less costs of disposal and its value
in use.
Fair Value Less Costs of Disposal: The price that would be received
to sell an asset in an orderly transaction between market participants
at the measurement date, minus the costs of disposal.
Value in Use: The present value of the future cash flows expected to
be derived from an asset.
Identification of Impairment Indicators:
Internal Sources of Information:
Significant decline in the market value of the asset.
Physical damage or obsolescence.
Significant changes in the use or expected use of the asset.
Evidence from internal reporting indicates the asset's performance is worse
than expected.
External Sources of Information:
Decline in market interest rates affecting the discount rate used in
calculating an asset’s value in use.
Significant adverse changes in technological, market, economic, or legal
environments.
Measuring Recoverable Amount:
1. Fair Value Less Costs of Disposal:
Determined by reference to an active market, recent transactions, or a
suitable valuation model.
2. Value in Use:
Estimated by discounting future cash flows to their present value
using a pre-tax discount rate reflecting current market assessments of
the time value of money and the risks specific to the asset.
Recognition and Measurement:
1. Recognizing an Impairment Loss:
Impairment losses are recognized immediately in profit or loss.
If the impaired asset is carried at a revalued amount, the impairment
loss is treated as a revaluation decrease.
2. Subsequent Reversal of Impairment Loss:
An impairment loss for an asset other than goodwill is reversed if
there has been a change in the estimates used to determine the asset’s
recoverable amount.
The reversal of an impairment loss is recognized immediately in profit
or loss, unless the asset is carried at a revalued amount.
Cash-Generating Units (CGUs):
A cash-generating unit is the smallest identifiable group of assets that
generates cash inflows largely independent of the cash inflows from other
assets or groups of assets.
If it is not possible to estimate the recoverable amount of an individual asset,
an entity should determine the recoverable amount of the CGU to which the
asset belongs.
Allocating an impairment loss to the assets of a cash-generating unit
When an impairment loss arises on a cash-generating unit, the impairment loss is
allocated across the assets of the cash-generating unit in the following order:
In line with IAS 36 - Impairment, first to the goodwill allocated to the cash-
generating unit;
Derecognize any of the assets that caused the total loss or that are
specifically impaired to the extent that they no longer meet the recognition
criteria in line with IAS 16 - PPE (if there is any);
Next, to the other assets in the cash-generating unit, on a pro-rata basis (i.e.,
in proportion to the carrying amount of the assets of the cash-generating
unit).
Disclosure Requirements:
1. For Each Class of Asset:
The amount of impairment losses and reversals recognized during the
period.
The events and circumstances leading to the recognition or reversal of
the impairment loss.
The nature of the asset and the segment to which it belongs.
The recoverable amount of the asset or CGU
Exercise Question
A company owns a machine with a carrying amount of ₦12 million. Due to new
technology,
the expected future cash flows are ₦2 million per year for 4 years. Fair value less
cost to sell is ₦6 million.
The appropriate discount rate is 10%.
Required:
a) What is the recoverable amount?
b) Is there an impairment loss?
c) Where is the loss recognized?
d)What is the journal entry
Solution
a) What is the Recoverable Amount?
Under IAS 36, the Recoverable Amount is the higher of:
1. Value in Use (VIU) – Present value of expected future cash flows from the asset
2. Fair Value Less Costs of Disposal (FVLCD) – Market-based valuation
Step 1: Calculate Value in Use (VIU)
Formula: PV = Cash Flow × [1 - (1 + r)^-n] / r
Where:
Cash Flow = ₦2,000,000 annually
r = Discount rate (10% = 0.10)
n = 4 years
PV = 2,000,000 × [1 - (1 + 0.10)^-4] / 0.10
PV = 2,000,000 × [1 - (1 / 1.4641)] / 0.10
PV = 2,000,000 × (1 - 0.6829) / 0.10
PV = 2,000,000 × 0.3171 / 0.10
PV = 2,000,000 × 3.171
Value in Use (VIU) = ₦6,342,000 (approximately ₦6,339,730.89)
Step 2: Compare VIU and FVLCD
VIU = ₦6,339,730.89
FVLCD = ₦6,000,000
Recoverable Amount = Higher of the two = ₦6,339,730.89
b) Is there an Impairment Loss?
Impairment Loss = Carrying Amount - Recoverable Amount
= ₦12,000,000 - ₦6,339,730.89 = ₦5,660,269.11
c) Where is the Loss Recognized?
The impairment loss of ₦5,660,269.11 should be recognized immediately in the
income statement (Profit or Loss).
d) Journal Entry for the Impairment Loss
Dr Impairment Loss (P/L) ................ ₦5,660,269.11
Cr Accumulated Impairment Loss .......... ₦5,660,269.11
Summary Table
Item Amount (₦)
Carrying Amount 12,000,000.00
Value in Use (VIU) 6,339,730.89
Fair Value Less Cost to Sell 6,000,000.00
Recoverable Amount 6,339,730.89
Impairment Loss 5,660,269.11
Recognition Profit or Loss
QUESTION: IFRS 5 & IAS 36
SOLUTION
b CALCULATION OF
1 IMPAIRMENT LOSS
ITEMS N N N
IMPAIRMEN
ASSETS-COST T C/A
1 GOODWILL 800,000 -800,000 0
2 PPE(REVALUE) 3,050,000 -678,320 2,371,680
3 PPE(COST) 3,200,000 -711,680 2,488,320
4 INVENTORY 840,000 0 840,000
5 OTHER ASSETS 700,000 0 700,000
8,590,000 -2,190,000 6,400,000
WORKINGS
IMPAIRMENT LOSS:
TOTAL ASSET 8,590,000
RECOVERABLE -6,400,000
IMPAIRMENT LOSS: 2,190,000
GOODWILL -800,000 1,390,000
ALLOCATION OF THE
IMPAIRMENT LOSS:
3,050,000/6,250,000X1,390,
PPE(REVALUE) 000 678,320
3,200,000/6,250,000X1,390,
PPE(COST) 000 711,680
6,250,000
OR
3,050,000X(2,190,000-
PPE(REVALUE) 800,000)/6,250,000 678,320
3,200,000X(2,190,000-
PPE(COST) 800,000)/6,250,000 711,680
ASSIGNMENT ONE:
IAS 36 stipulates how a company should test for impairment of assets. A
multinational oil marketing company operating in Nigeria is not sure how to test
for impairment of its assets, especially those that do not generate cash flows that
are independent of other assets.
Required:
(i) Identify TWO external and TWO internal indicators that an asset of the
multinational oil company may have been impaired.
(ii) Briefly discuss how the multinational oil company should test for
impairment of assets that do not generate independent cash flows.
ASSIGNMENT-TWO ON IAS 36
Require:
1: Before considering any impairment, what is the carrying amount of TARIQ S'
plant and the balance on the revaluation surplus at 30 November,20x8?
2: What is the value in use of TARIQ‘S plant as of November,20x8?
3. What is the carrying amount of the RASA S plant as at November 30,20X8,
after the impairment loss has been correctly apportioned between its assets?
4. Show workings
