IAS 36 Impairment of Assets

 Impairment is determined by comparing the carrying amount of the asset with is recoverable amount. Recoverable amount is the
higher of its fair value less costs of disposal and its value in use.
 There is an established principle that assets should not be carried above their recoverable amount. An entity should write down the
carrying amount of an asset to its recoverable amount if the carrying amount of an asset is not recoverable in full.

 An impairment loss is the amount by which the CA of an asset or a cash generating-unit exceeds its RA.
 Costs of disposal are for example legal costs, stamp duties and similar transaction taxes, costs of removing the asset and direct
incremental costs to bring an asset into condition for its sale.

 If an asset’s carrying amount in the FS is higher than the value it can realistically generate, measured as its recoverable amount the
asset is judged to have suffered an impairment loss. It should therefore be reduced in value by the amount of the impairment loss. The
amount of the impairment loss should be written off against profit immediately.
 The main accounting issues to consider are therefore:
1. How is it possible to identify when an impairment loss may have occurred?
2. How should the recoverable amount of the asset be measured?
3. How should an impairment loss be reported in the FS?

Identifying a potentially impaired asset.

 An entity should assess at the end of each reporting period whether there any indications of impairment to any assets. The concept
materiality applies and only material impairment needs to be identified. If there are indications of possible impairment, the entity is
required to make a formal estimate of the recoverable amount of the assets concerned.
 IAS 36 suggests how indications of a possible impairment of assets might be recognised. The suggestions are based on largely on
common sense:
1. External sources of information
 a fall in the asset’s market value that is more significant than would normally be expected from passage of time over normal use
 a significant change in the technological, market, legal or economic environment of the business in which the assets are employed
 an increase in market interest rates or market rates of return on investment likely to affect the discount rate used in calculating the value in
use
 the carrying amount of the entity’s net assets being more than its market capitalisation
2. Internal sources of information
 evidence of obsolescence or physical damage
 adverse changes in the use to which the asset is put
 the asset’s economic performance
 Even if there are no indications of impairment, the following assets must always be tested for impairment annually: an intangible
asset with an indefinite useful life and Goodwill acquired in a business combination.

Measuring the Recoverable Amount of the asset.

 The recoverable amount of an asset should be measured as the higher value of the asset’s fair value less costs of disposal and its
value in use.
 An asset’s fair value less costs of disposal is the price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date, less direct disposal costs such as legal expense.
 If there is an active market in the asset, the fair value should be based on the market price, or on the price of 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
 Fair value less costs of disposal cannot be reduced, however by including within costs of disposal any restructuring or
reorganisation expense, or any costs that have already been recognised in the FS as liabilities.
 The concept of value in use is very important. The value in use is the present value of the future cash-flows expected to be derived
from an assets or cash-generating-unit

Recognition and measurement

1. For assets at historical cost: If the recoverable amount of an asset is lower than the carrying amount, the carrying amount should be
reduced by the difference (impairment loss) which should be charged as an expense in profit or loss.
2. For assets held at revalued amount the impairment loss is to be treated as a revaluation decrease under the relevant IFRS Standard.
In practice this means:
 To the extent that there is a revaluation surplus held in respect of the asset, the impairment loss should be charged in OCI and
shown in the revaluation surplus
 Any excess should be charged to profit or loss.
Cash generating units.
 When it is not possible to calculate the RA of a single asset, then that of its cash-generating unit should be measured instead. IAS
36 goes into detail about the important concept of cash-generating units.
 As a basic rule, the RA of an asset should be calculated for the asset individually. However, there will be occasions when it is not
possible to estimate such a value for an individual asset, particularly in the calculation of value in use. This is because cash inflows
and outflows cannot be attributed to the individual asset.
 If it is not possible to calculate the RA for an individual asset, the RA of the asset’s CGU should be measured instead.

 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 group of assets.

 If an active market exists for the output produced by the asset or a group of assets, this asset or group should be identified as a cash-
generating unit, even if some or all of the output is used internally. Cash-generating units should be identified consistently from
period to period for the same type of asset unless a change is justified.
 The group of net assets less liabilities that are considered for impairment should be the same as those considered in the calculation of
the recoverable amount.

Goodwill.
 Purchased goodwill arises in a business combination and is calculated as the excess of the amount paid to acquire a business over the
fair value of the business’s identifiable net assets. It therefore represents a payment made by an acquirer in anticipation of future
economic benefits or synergies that will result from the acquisition.
 Purchased goodwill is recorded as intangible asset in the CFS of the acquirer and like other assets, it should be tested for
impairment. Due to the nature of goodwill, IAS 36 requires goodwill to be tested for impairment at least annually.

Allocating goodwill to cash-generating units

 Testing goodwill for impairment is difficult because goodwill does not generate cash-flows independently of other assets. Therefore
we cannot calculate the RA of goodwill as an asset on its own. Instead IAS 36 requires that the goodwill must be allocated to each of
the acquirer’s CGU (or group of cash-generating units) that are expected to benefit from the synergies of the business combination.
Each unit to which goodwill is allocated should:
1. Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes
2. Not be larger than an operating segment determined in accordance with IFRS 8.

 It may be impracticable to complete the allocation before the first reporting date after a business combination, particularly if the
acquirer is accounting for the combination for the first time using provisional values. The initial allocation of goodwill must be
complete before the end of the first reporting period after the acquisition date.
 A cash generating unit to which goodwill has been allocated is tested for impairment annually.
 The carrying amount of the unit, including goodwill, is compared with the recoverable amount. If the carrying amount of the unit
exceeds the recoverable amount, the entity must recognised an impairment loss. The annual impairment test may be performed at any
time during an accounting period but must be performed at the same time every year. When an impairment loss arises, goodwill is
always written off first with any excess impairment allocated to the other assets pro-rata

Accounting treatment of an impairment loss.

 If and only if the recoverable amount of an asset is less than its carrying amount in the SOFP, an impairment loss has occurred. This
should be recognised immediately. The asset’s carrying amount should be reduced to its recoverable amount in the SOFP
 The impairment loss should be recognised immediately in profit or loss (unless the asset has been revalued upwards in which case the
loss is treated as a revaluation decrease).
 After reducing an asset to its recoverable amount, the depreciation charge on the asset should then be based on its new carrying
amount, its estimated residual value (if any) and its estimated remaining useful life.

 An impairment loss should be recognised for a cash-generating-unit if and only if the recoverable amount for the cash generating
unit is less than the carrying amount in the SOFP for all the assets in the unit.
 When an impairment loss is recognised for a cash-generating unit, the loss should be allocated between the assets in the unit in the
following order:
1. First to the carrying amount of any goodwill allocated to that cash-generating unit
2. Then to all other assets in the cash-generating unit, on a pro rata basis.
 If any individual asset within a cash generating unit can be specifically identified as being impaired, for example because they are
damaged or have become obsolete, then the carrying amount of those assets should be reduced first.

 In allocating an impairment loss, the CA of an asset should not be reduced below the highest of:
1. Its fair value less costs of disposal
2. Its value in use (if determinable)
3. Zero.
 Any remaining amount of an impairment loss should be recognised as a liability if required by other IFRS Standards.
 Allocating an impairment loss to goodwill is further complicated by the choice in IFRS 3 to value the NCI at fair value or at the
proportionate share of net assets.
Reversal of an impairment loss.
 The annual assessment to determine whether there may have been some impairments should be applied to all assets, including assets
that have already been impaired in the past. In some cases the recoverable amount of an asset that has previously been impaired
might turn out to be higher than the asset’s current carrying amount. In other words, there might have been a reversal of some of the
previous impairment loss.
 In which case, the carrying amount of the asset should be increased to its new recoverable amount and
1. If the asset is carried at revalued amount, the reversal of the impairment loss should be accounted for as a revaluation increase,
recognised in OCI and accumulated as a revaluation surplus in equity
2. If the asset is not carried at revalued amount, the reversal of the impairment loss should be recognised immediately as income in
profit or loss.

 The asset cannot be revalued to a carrying amount that is higher than its value would have been if the asset had not been impaired
originally, its depreciated carrying amount had the impairment not taken place.
 Depreciation of the asset should now be based on its new revalued amount, its estimated residual value (if any) and its estimated
remaining useful life.
 An exception to this rule is for goodwill. An impairment loss for goodwill should not be reversed in a subsequent period.

If Carrying amount > Recoverable amount → Asset is impaired

Recoverable amount of an asset: Higher value of (Fair value less costs of disposal; Value in use less provision)

Value in use: present value of the future cash flows expected to be derived from an assets or cash-generating unit.
Value in use: present value of cash flows less CA of the provision/liability (if any), discounted
Value in use: SUM (Future cash-flows × annuity factor (discounting factor))

CF CF CF+ultimate sale (disposal proceeds)

VU = 1
+ 2
+…
(1+ %) (1+ %) (1+ %)n

Fair value less costs of disposal: amount at which it can be sold for net of direct selling expenses

Debit: Impairment losses P&L = Credit: Property cost

 Current asset are considered to be stated at fair value and hence no impairment loss is allocated to them.
 IAS 36 does not apply to:
 Inventories, IAS 2
 Investment property that is measured at fair value IAS 40
 Biological assets that are measured at fair value less costs to sell IAS 41
 Non-current assets classified as HFS IFRS 5
 Contract assets and assets arising from costs to obtain or fulfil a contract IFRS 15
 Deferred tax assets IAS 12
 Assets arising from employee benefits IAS 19
 Financial assets that are within the scope of IFRS 9

 IAS 36 applies to assets that are carried at revalued amount (fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses) in accordance with other IFRSs, such as the revaluation
model in IAS 16 and IAS 38.
 The only difference between an asset’s fair value and its fair value less costs of disposal is the direct incremental costs attributable
to the disposal of the asset