PAS 36 Impairment of Assets

Learning Objectives
1. State the core principle of PAS 36
2. Account for the impairment of individual assets and cash- generating units.
3. Account for the reversal of impairment.

Introduction
PAS 36 prescribe the procedures necessary to ensure that assets are not carried in excess of their recoverable amount.
PAS 36 applies in accounting for the impairment of the following assets:
a. Property, plant and equipment
b. Investment property measured under the cost model
c. Investments in associates, joint ventures and subsidiaries
d. Intangible
e. Goodwill

 Observe that the assets within the scope of PAS 36 are noncurrent assets.

Core principle
The carrying amount of an assets shall not exceed its recoverable amount. If the carrying amount of an asset exceeds its
recoverable amount, the asset is impaired. The excess shall be written-off as impairment loss.

- If carrying amount is greater than recoverable amount, the asset is impaired. The excess is impairment loss.
- If carrying amount is equal to or less than recoverable amount the asset is not impaired. No accounting problem.

 Carrying amount is “the amount at which an asset is recognized after deducting any accumulated depreciation
(amortization) and accumulated impairment losses thereon.” (PAS 36.6)
 Recoverable amount is the amount expected to be recovered from the sale or use of an asset. It is higher of an asset’s
a. Fair value less costs of disposal, and
b. 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”. (PAS 36.6)
 Costs of disposal are” incremental costs directly attribute directly attributes to the disposal of an asset or cash-
generating unit, excluding finance costs and income tax expense.” (PAS 36.6)
 Value in use is “the present value of the future cash flows expected to be derived from an asset or cash-generating
unit”. (PAS 36.6)

Illustration:
On December 31, 20x1, Entity A determines that its building is impaired. The following information is gathered:

Building 1,000,000
Accumulated depreciation 300,000
Fair value less costs of disposal (FVLCD) 600,000
Value in use (VIU) 580,000

 The impairment loss is computed as follows:

Recoverable amount (higher of FVLCD and VIN) 600,000

Less: Carrying amount (1,000,000-300,000) (700,000)
Impairment loss (100,000)
Identifying an asset that may be impaired
The entity assesses at the end of each reporting period whether there is an indication that an asset may be impaired.
 If such an indication exists, the entity estimates the recoverable amount of the asset.
 If no such indication exists, the entity need not estimate the recoverable amount of the asset.

Indications of impairment
An entity shall consider the following indications of impairment:

I. External sources of information:

a. Significant decline in the asset’s (market) value.
b. Significant changes in technological, market, economic, or legal environment that adversely affect the
recoverable amount of an asset.
c. Increase in market interest rates that adversely affect the discount rate used in calculating an asset’s value in
use, and consequently, its recoverable amount.
d. The carrying amount of the entity’s net assets exceeds its market capitalization.

II. Internal sources of information:

e. Obsolescence or physical damage of an asset.
f. Significant changes in the expected use of an asset adversely affect its recoverable amount (e.g., the asset
becomes idle, plan to discontinue or restructure the operation to which an asset belongs, plan to dispose of
the asset earlier than expected, and reassessment of an asset’s useful life from indefinite to finite).
g. Indications that the economic performance of an asset is, or will be, worse than expected (e.g., the
maintenance costs of the asset are significantly higher than expected; or the cash inflows from the asset are
significantly lower than expected).

An indication that an asset may be impaired may signify that the remaining useful life, the depreciation or
amortization method, or the residual value of the asset needs to be review and adjusted even if no impairment loss is recognized
for the asset.

Required testing for impairment

The following assets are required to be tested for impairment at least annually even if there are no indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination

These assets may be tested for impairment at any time during the annual period provided it is performed at the same time
every year. Concurrent testing is not required for dissimilar assets. Such an asset recognized during the year must be tested for
impairment in relation to the cash-generating unit to which it has been allocated.

Measuring recoverable amount

Recoverable amount is the higher of an asset’s FVLCD and VIU. PAS 36 provides the following guidance when measuring an
asset’s recoverable amount:
 It is not always necessary to determine both the FVLCD and VIU. If one of them exceeds the asset’s carrying amount,
the asset is not impaired, and the other amount need not be computed.
 If it is not possible to determine the FVLCD, the VIU is used as the recoverable amount.
 If there is no reason to believe that the VIU exceeds the FVLCD, the FVLCD is used as the recoverable amount. This
is normally the case if the asset is held for disposal.

Fair value less costs of disposal (FVLCD)

An entity uses PFRS 13 Fair Value Measurement WHEN MEASURING AN ASSETS’S FAIR VALUE.
Costs of disposal, except those that have been recognized as liabilities, are deducted in measuring fair value
less costs of disposal. Examples of such costs are:
a. Legal costs, stamp duty and similar transaction taxes
b. Costs of removing the asset
c. Direct incremental costs to bring an asset into condition for its sale.
 Termination benefits and costs associated with reducing or recognizing a business following the disposal of an
asset are not regarded as costs of disposal.

Value in use (VIU)

VIU is the present value of the future net cash flows expected to be derived from the continuing use of an asset from its disposal
at the end of its useful life. VIU is computed using the following steps:
1. Estimate the future cash inflows and outflows expected to be derived from continuing use of the asset and from its
final disposal.
2. Apply an appropriate discount rate to those future cash flows.

Estimate of future cash flows

 Cash flows projections are based on management’s gives greater weight to external evidence.
 Cash flow projections are based on the most recent financial budgets/forecasts approved by management.
 Cash flow projection are based on the asset’s current condition and exclude and include the following:

Exclude cash flows arising from: Include cash flows arising from:
1. Future restructurings not yet committed. 1. Revenues to be derived from the continuing
2. Improving or enhancing the asset’s use of the asset
performance 2. Day-to-day costs of using the asset
3. Income taxes 3. Any residual value of the asset and disposal
4. Financing activities costs.

 Cash flows projections cover a maximum period of 5 years, unless a longer period can be justified.
Projection beyond the 5-year period are extrapolated using a steady or declining growth rate
(e.g., zero or negatives unless an increasing rate can be justified.

 “To avoid double-counting estimates of future cash flows do not include:

a. Cash inflows from assets that generate cash inflows that are largely independent of the cash inflows from
the asset receivables); and
b. Cash flow projections based on a foreign currency are translated using the spot exchange rate at the VIU
is calculated.
 Cash flow projections based on a foreign currency are translated using the spot exchange rate at the date the
VIU is calculated.

Discount rate
The discount rate is pre-tax rate that reflects current assessments of the time value of money and risks for which the future
cash flow estimates have not been adjusted.
VIU computation takes into account the effect of inflation, however to avoid double-computing, either the estimate
of future cash flows or the discount rate is adjusted for inflation, but not both.

Recognizing and measuring an impairment loss

If the carrying amount of an asset exceeds its recoverable amount, the carrying amount is reduced to the recoverable amount.
The reduction is impairment loss.
Impairment loss is recognized immediately in profit or loss unless the asset is carried at revalued amount, in which
case, revaluation surplus is decreased first and any excess is recognized in profit or loss. The decrease in the revaluation surplus
is recognized in other comprehensive income.
If the impairment loss exceeds the carrying amount of the asset, a liability is recognized if this is required by another
PFRS. For example, this would be the case for a leased asset for which the lessee guarantees a residual value.
After impairment the subsequent depreciation (amortization) for the asset is based on the asset’s recoverable amount.
Illustration:
On December 31, 20x0, ABC Co. identifies that its building with a carrying amount of 600,000 is impaired. In estimating the
recoverable amount, Entity A determines the following information:
 Fair value less costs of disposal, 400,000
 Project cash flows:
Year Future cash inflows Future cash out flows
20x1 300,000 100,000
20x2 280,000 100,000
20x3 260,000 80,000

 The discount rate is 10%. The following are the relevant present value factors:
PV of 1 10% n=1 0.909091
PV of 1 10% n=2 0.826446
PV of 1 10% n=1 0.751315

 The value in use is computed as follows:

Year Cash inflows Cash outflows Net cash flow s PV factors Present value
(a) (b) (c)=(a)-(b) (d) €=(c)x(d)
20x1 300,000 100,000 200,000 0.909091 181,818
20x2 280,000 100,000 180,000 0.826446 148 ,760
20x3 260,000 80,000 180,000 0.751315 135,237
Value in use 465,815

 The impairment loss is computed as follows:

Recoverable amount (VIU-higher) 465,815

Less: Carrying amount (600,000)
Impairment loss (134,185)

 If the building has a meaning useful life of 10 years and a zero residual value, the depreciation in subsequent periods
using the straight line method is computed as follows:

Recoverable amount 465,815

Divided by: 10
Revised depreciation 46,582

Cash-generating units and Goodwill

Recoverable amount is normally determined for an individual asset, except when the asset belongs to a cash-
generating unit (CGU), in which case, recoverable amount is determined for the CGU to which the asset belongs.

 Cash-generating unit (CGU) is “the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or group of assets”. (PAS 36.6)

For example, a CGU may be a retail store of a fast food chain, a bookstore of a school a convenient store of a
gasoline station, a supermarket of a mall, a product line, etc. These examples generate cash flows that are independent from
the cash flows of the entity as a whole. If these segments are the smallest identifiable group of assets, then they are considered
as CGUs.
Assets are generally tested for impairment individually. Accordingly, their recoverable amounts are determined
individually.
However, when it is not possible to determine an individual asset’s recoverable amount, the recoverable amount
of the CGU to which that individual asset belongs is determined. This would be the case if the asset’s VIU cannot be estimated
to be close to its FVLCD and the asset does not independently generate in own cash inflows.
In such cases, the asset is tested for impairment, not on its own, but together with the other assets in CGU as a
whole.
 As an exception, an asset for which management is committed to dispose is tested for impairment separately even
if it belongs to a CGU.

Recoverable amount and Carrying amount of a CGU

The recoverable amount determined in a manner PVLCD and VIU.
The CGU’s carrying amount is determined in a manner that is consistent with how the CGU’s recoverable amount
is determined. Accordingly, the carrying amount of a CGU includes only those assets and liabilities that are directly attributable
to the CGU or are allocated to the CGU on a reasonable basis and will generate the future cash flows used in determining the
CGU’s value in use. (PSA 36.37(a)).
The carrying amount of a CGU does not include financial assets, such as receivables, and recognized liabilities, such
as payables, pensions or provisions, just as these items are excluded as determining the CGU’s recoverable amount (PAS 36.43
and 28)
However, for practical reasons, the recoverable amount of a CGU is sometimes determined by considering financial
assets, such as receivables, and recognized liabilities, such as payables, pensions or provisions. In such case, these items are
also included in the CGU’s carrying amount. (PAS 36.79)

Goodwill
For purposes of impairment testing, goodwill recognized in a business combination is allocated to each of the acquirer’s
CGU’s in the year of business combination. If the allocation cannot be completed before the end of the year, it must be
completed before the end of the immediately following year.
Goodwill does not generate its own cash flows but it often contributes to the cash flows of multiple CGU; s.
Goodwill is an unidentifiable asset: thus, it can only be tested for impairment if it synergies of the combination.
The CGUs to which goodwill is allocated is partially lowest levels within the entity at which the good will is
monitored for internal management purposes and are not larger than an operating segment.
If a CGU to which goodwill is allocated is partially dispose, the allocated goodwill reallocated to the portions sold
and unsold based on their relative values for purposes of determining the gain or loss on disposal.
Similarly, if an entity reorganizes its reporting structure in a manner that changes the composition of CGUs to which
goodwill has been allocated, the goodwill is reallocated to the CGUs affected based on their relative values.

Impairment of a CGU
A CGU to which goodwill has been allocated or contains an intangible asset with indefinite useful life or an intangible asset
not yet available for use is tested for impairment at least annually whether or not there are indications of implement.
A CGU is tested for impairment by comparing the CGU’s carrying amount, including any allocated goodwill, with the
CGU’s recoverable amount.
The CGU is impaired if its carrying amount, including the allocated goodwill, exceeds its recoverable amount. In such
case, the impairment loss on the CGU is allocated as follows:
a. First, to any goodwill included in the CGU:
b. Then, to the other assets of the CGU pro rata based on their carrying amounts.

When allocating the impairment loss, the carrying amount of an asset belonging to the CGU shall not be reduced
below the highest of;
a. Its fair value less costs of disposal (if determinable)
b. Its value in use (if determinable); and
c. Zero

Any amount that cannot be allocated to an asset because of the limitation above is allocated to the other assets of the
CGU pro rata based on their carrying amounts.
If the recoverable amount of an individual asset cannot be determined, no impairment loss is recognized for
that asset if the CGU to which it belongs is not impaired. This applies even if the individual asset’s fair value less
costs of disposal is less than its carrying amount.
 Illustration:
Entity A determine that one of its cash-generating units is impaired. The following information was gathered.
 Carrying amount of CGU.
Assets Carrying amount
Inventory 200,000
Investment property (at cost model) 400,000
Building 600,00 0
Goodwill 300,000
1,500,000

 Fair value less costs of disposal of CGU: 900,000

 Value in use of CGU: 1,000,000

 The impairment loss is computed as follows:

Recoverable amount (value in use – higher) 1,000,000

Carrying amount (1,500,000)
Impairment loss (500,000)

 The impairment loss is allocated as follows:

First, to good will:

Impairment loss (500,000)

Allocation to good will 300,000
Excess impairment loss (200,000)

Then, to the other noncurrent assets in the CGU:

Assets Carrying amount Functions Allocation of Excess Impairment Loss

Inventory N/A N /A N/ A
Investment property 400,000 400/1,000 (-200K x 400/1,000) (80,000)
Building 600,000 600/1,000 (-200K x 600/1,000) (120,000)
1,0000,000 1,000/1,000 (200,000)

Notes:
 No impairment loss is allocated to the inventory because inventories are outside the scope of PAS 36. (PSA 36.2 and
PFRS 5. Part B, example 10)
 The impairment loss on a CGU is allocated only to the assets that are within the scope of PAS 36. (See introduction
to this chapter).
 The fractions above are derived from the carrying amounts of the noncurrent assets.

 The carrying amount of CGU after impairment is analyzed below:

Assets Carrying amounts Allocations Carrying

BEFORE of impairment amounts AFTER
Impairment loss impairment

Inventory 200,000 - 200,000

Investment property 400,000 (80,000) 320,000
Building 600,000 (120,000) 480,000
Goodwill 300,000 (300,000) -
1,500,000 (500,000) 1,000,000
The procedure illustrated above is called the “bottom-up test” This is performed when goodwill can be allocated to individual
CGUs on a reasonable and consistent basis.
However, if goodwill cannot be allocated to individual “bottom-up test” and a “top-down test: as follows;
a. Compare the carrying amount of the CGUs comprising the smallest unit (i., e, the group of CGUs in which goodwill
can be allocated, excluding the goodwill, with their respective recoverable amounts, Recognized any impairment loss.
b. Compare the carrying amount of the unit as a whole after recognizing any impairment loss from procedure (a) above
with the unit’s recoverable amount (“top-down test”) Recognized any additional impairment loss.

Corporate assets
Corporate assets are assets that contribute to the future cash flows of several departments or divisions within an entity. Examples
include Electronic Data Processing ((EDS) equipment, such as a mainframe computer used by several divisions within an
entity, the entity’s headquarters building or a research center. (PAS 36.100)
Corporate assets do not independently generate their own cash inflows. Thus, to test a corporate asset for impairment,
it needs to be allocated to the various CGUs using that asset.
The accounting procedures applied to the impairment testing of a corporate asset are similar to those applies to
goodwill.

Reversal of impairment loss

The entity assesses at the end of each reporting period whether there is an indication that an impairment loss recognized in
price periods for an asset may not estimates the recoverable another of that asset.
In making the assessment, the entity considers the exact opposite of the indications of impairment provided earlier (e.,g,.
significant increase-in the asset’s market value – rather than decline; significant changes in technological……. that favorably
affect the recoverable amount of an asset – rather than adversely, etc.).
If the recoverable amount of the previously impaired asset exceeds its carrying amount, the carrying amount is
increased to equal the recoverable amount. The increase is the reversal of impairment loss. However, this is subject to the
following limitations:
a. The reversal of impairment loss shall not result to a carrying amount in excess of the asset’s would-be carrying amount
had no impairment loss been recognized in prior periods; and
b. Impairment loss on goodwill is never reversed.

The reversal of impairment loss is recognized in profit or loss, unless the asset is carried at revalued amount, in which
case, revaluation surplus is increased for the portion representing a revaluation increase. The revaluation increase is recognized
in other comprehensive income. The portion that represents a several of an amount that was previously recognized in profit or
loss also recognized in profit or loss.
After reversal of impairment the subsequent depreciation (amortization) for the asset is based on the asset’s revised
carrying amount.
An indication that a previously recognized impairment loss may no longer exist or may have decreased may signify
that the remaining useful life, depreciation or amortization methods, or the residual value of the asset needs to be reviewed and
adjusted even if no reversal of impairment loss is recognized.
For a CGU, the reversal of impairment loss is allocated as increase in the carrying amounts of the assets in the CGU,
except goodwill, pro rate based on their carrying amounts. In making this allocation, the carrying amount of an asset shall not
be increased above the lower of:
a. Its recoverable amount (if determinable); and
b. Its would-be carrying amount had no impairment loss been recognized in prior periods.

Illustration:
On January 1, 20x1, Entity A acquires a building for a total cost of 1,200,000. The building estimated to have a 30-year useful
life and a 5% residual value. Entity A uses the straight-line method of depreciation.

 The annual depreciation is 38,000 [(1.2M x 95%) / 30]

On December 31, 20x5, Entity A determines that the building is impaired and makes the following estimates:

Fair value less costs to sell…………………………………...650,000

Value in use…………………………………………………..750,000
  The impairment loss is computed as follows:

Recoverable amount (VIU-higher) 750,000

Carrying amount [1.2M-(38,000x5yrs)] 1,010,000
Impairment loss (260,000)

Following the impairment, Entity A revises the building’s residual value to 5% of the recoverable amount.

 The revised annual depreciation in subsequent periods is 28,500[(750Kx95%)/25 years remaining]

On December 31, 20x8, Entity A determines an indication that the impairment loss recognized in the prior period may no
longer exist. Entity A makes the following estimates and computations:

Fair value less costs to sell…………………………………..800,000

Value in use………………………………………………….900,000

 The new recoverable amount is 900,000(higher)

 The actual carrying amount on December 31, 20x8 is computed as follows:

Carrying amount (C.A) – 12/31/x5 750,000

Accumulated depreciation (28,500 x 3yrs). (85,500)
Carrying amount (C.A)- 12/31/x8 664,500

 The would-be carrying amount- had no impairment loss been recognized in the prior is computed as follows:

Historical Cost 1,200,000

Accumulated (original) depreciation (38,000 x 8yrs.) (304,000)
Carrying amount had no impairment loss been
Recognized in prior period – 12/31/x8 896,000

 The reversal of impairment loss is computed as follows:

New Recoverable Amount 900,000

Difference is revaluation
increase
C.A had no I.I been required in prior period 896,00

difference is gain on reversal o

f impairment
C.A at date of impairment reversal 664,500

From the graph above, the components of the reversal are analyzed as follows:

C.A had no impairment loss been recognized in prior pd. 896,000

C.A at date of reversal 664,500
Gain on reversal of impairment loss (profit or loss) 231,500

New recoverable amount 900,000

C.A had no impairment loss been recognized in prior pd. 896,000
Revaluation increase father comprehensive income) 4,000

Total increase in carrying amount 235,500

Summary:

 An asset is impaired if its carrying amount exceeds its recoverable amount. The excess represents the
impairment loss.
 Recoverable amount is the higher of an asset’s (a) fair value less costs of disposal and its (b) value in use.
 An asset is tested for impairment only when an indication of impairment exists, except for certain intangible
assets that are required to be tested for impairment at least annually.
 It is not always necessary to compute both the FVLCD and the VIU. If any one of them exceeds the carrying
amount, the asset is not impaired and the other one need not be computed. If the FVLCD cannot be
determined, the VIU is used as the recoverable amount is the FVLCD.
 Value in use the present value of estimate future cash flows expected to arise from the continuing use of an
asset for (or CGU) and from its disposal at the end of its useful life.
 Impairment loss is recognized profit or loss unless it represents a revaluation decrease.
 After impairment, the subsequent depreciation (amortization) for the asset is based on the asset’s recoverable
annual.
 If an asset’s recoverable amount can be determined reliably, it is tested for impairment on its own. If its
recoverable amount cannot be determined reliability, the CGU to which that assets belongs is the one tested
for impairment.
 For purposes of impairment, goodwill and corporate asset allocated to CGUs.
 The impairment loss on a CGU is allocated first to any goodwill, in the CGU. The excess is allocated to the
other assets of the CGU. Pro rate based on their carrying amounts.
 The reversal of impairment loss shall not result to a carrying amount had no impairment loss been recognized
in prior periods.
 Impairment loss on goodwill is never reversed.

SELF-CHECK PROBLEMS

PROBLEM 1
1. Which of the following assets is not tested for impairment in accordance with PAS 36?
a. Investment property measured under the cost model
b. Investment in associate
c. Goodwill
d. Accounts receivable

2. According to PAS 36 an asset is impaired if its carrying amount exceeds its recoverable amount. Recoverable amount
is the asset’s
a. Fair value less costs of disposal
b. Value in use
c. Higher of a and b
d. Lower a and b

3. Entity A uses a calendar year accounting period. On May 21, 20X1, Entity A acquires an intangible asset with an
indefinite useful. According to PAS 36, the first impairment testing of the asset is.
a. On May 21, 20x2
b. Anytime between May 21,20x1 to May 21, 20x2.
c. On or before December 31, 20x1
d. When an indication of impairment is assessed to exist for the asset.

4. The impairment loss on which of the following assets is never reversed?

a. Intangible assets with indefinite useful life
b. Goodwill
c. Intangible assets not yet available for use
d. All of these
PROBLEM 2
Use the following information for the two questions:
1. On December 31 20x1, Entity A determines that its building is impaired. Entity A gathers the following information:

Building 2,000,000
Accumulated depreciation 600,000
Fair value less costs of Disposal (FVLCD) 900,000
VALUE IN USE (VIU) 1,080,000

After the impairment, the building is assessed to have a remaining useful life of six years and no residual value. How
much is the impairment loss?
a. 320,000 c.500,000
b. 180,00 d.270,00

2. On December 31, 20x2, Entity A determines an indication that the impairment loss recognized in the prior period may
no longer exist. The revised recoverable amount of the building on December 31, 20x2 is 1,280,000. If no impairment
loss had been recognized in the prior period, the carrying amount of the building on December 31, 20x2 would have
been 1,200,000. How much is the gain on reversal of impairment on December 31, 20x2?
a. 314,351 c.303.315
b. 312,156 d.300,000