IMPAIRMENT OF ASSETS - IAS 36

Compiled By: Dr. F.O.Ikapel

BACC 421: Advanced Financial Reporting
Introduction
The primary objective of accounting for the impairment of assets according to IAS 36 is to
ensure that assets are not stated in the statement of financial position at more than they are
worth to the business (recoverable amount). Where asset carrying amounts are not recoverable
through the returns generated from them, the underlying assets are impaired and should have
their carrying amounts reduced accordingly. An impairment review is intended to ensure that
financial statements comply with the objectives of financial reports as set out in the IASB’s
Framework for the Preparation and Presentation of Financial Statements. This ensures that
financial statements are more comprehensible and relevant to users and serv their information
needs.
The IAS 36 seeks to ensure that non-current and other asset carrying amounts will be recovered
from future operations of the entity to avoid the overstatement of profits and capital employed
which would occur if assets were carried at values above their recoverable amounts. The
impairment losses recognised reduce the return on capital employed and adjust gearing to more
realistic levels and provides more realistic information for decision making by the users of
financial statements.

The Scope of IAS 36

IAS 36, Impairment applies to all tangible, intangible and financial assets except;
• inventories (IAS 2),
• assets arising from construction contracts (IAS 11),
• deferred tax assets (IAS 12),
• assets arising from employee benefits (IAS 19)
• financial assets within the scope of IFRS 9 (IAS 39)
• biological assets carried at fair value (IAS 41)
• investment property carried at fair value (IAS 40)
• insurance contract assets (IFRS 4)
• non-current assets held for sale (IFRS 5)
This is because those IAS’s already have rules for recognizing and measuring impairment for
the respective assets.
Therefore, IAS 36 applies to (among other assets):
• land
• buildings
• machinery and equipment
• investment property carried at cost
• intangible assets
• goodwill
• investments in subsidiaries, associates, and joint ventures carried at cost
• assets carried at revalued amounts under IAS 16 and IAS 38
Important definitions
a) Impairment loss - the amount by which the carrying amount of an asset or cash-generating
unit exceeds its recoverable amount
b) Carrying amount - the amount at which an asset is recognized in the balance sheet after
deducting accumulated depreciation and accumulated impairment losses
c) Recoverable amount - the higher of an asset's fair value less costs of disposal (sometimes
called net selling price) and its value in use
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 d) 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.
e) Fair value less cost to sell/ the Net realizable value -the value realized if the asset is sold
currently less cost associated with the sell or disposal
f) Value in use or entity specific value - the present value of the future cash flows expected
to be derived from an asset or cash-generating unit continued use.
g) 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 groups of
assets.

Indicators of impairment
IAS 36 states that an entity should look for evidence of impairment at each reporting date and,
as a minimum, the following indicators should be considered.
External indicators of impairment
i. Decline in the market value of the asset that is more than would be expected from
passage of time or normal use
ii. Changes in the technological, market legal or economic environment in which the
business operates.
iii. An increase in market interest rates of return on investment thus affecting the discount
rate used in the calculation of value in use.
iv. The carrying amount of the entity’s net assets being more than its market capitalization.
Internal indicators of impairment
i. Evidence of obsolescence or physical damage
ii. Changes which have an adverse effect on the entity:
• The asset becomes idle
• Plans to discontinue/restructure operations
• Plans to dispose of asset before previously expected date
• Reassessing an asset’s useful life as finite rather than indefinite.
iii. Internal evidence that asset performance is or will be less favourable than expected
If such indications are evident, the asset’s recoverable amount should be estimated, in other
words an impairment review should be carried out.
It is important to note that when assessing internal factors an entity should compare the cash
flows associated with an asset, or group of assets, with those budgeted or net book value.
Irrespective of whether there are indicators of impairment, annual impairment tests are
required for: intangible assets with an indefinite useful life; and goodwill acquired in a business
combination.
Measuring the recoverable amount of an asset
Assets should be carried in the books of account at not more than their recoverable amount.
Impairment should be determined by comparing the carrying amount (CA) of the asset with
the recoverable amount (RA). Where there are indications of impairment, an entity should
assess the recoverable amount of the asset, or group of assets.
Where the carrying amount exceeds the recoverable amount the asset is impaired.
The recoverable amount is higher of:
i) Fair value less cost to sell and
ii) Value in use

Fair Value Less Cost to Sell

This is the amount net of selling costs that could be obtained from the sale of an asset or cash
generating unit in an arm’s length transaction between knowledgeable willing parties. Selling
costs include sales transaction costs, such as legal expenses and costs of removing the asset.
If there is an active market in the asset, the net selling price should be based on the market
Compiled by Dr. F. Ikapel Page 2 of 14
value, or on the price of recent transactions in similar assets.
If there is no active market in the assets it may be possible to estimate a net selling price using
best information available of what ‘knowledgeable, willing parties’ might be willing to pay in
an orderly transaction between market participants at the measurement date.

Value in Use
This is the present value of the future cash flows (inflows minus outflows) derived from an
asset (or cash generating unit), including its estimated net disposal value (if any) at the end of
its expected useful life. It is the value that an entity can derive by continuing to trade with the
asset, producing cash flows by producing and selling products or providing a service.

The following elements should be reflected in the calculation of an asset’s value in use:
▪ 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
▪ Other factors that market participants would reflect in pricing the future cash flows the
entity expects to derive from the asset.
In summary, estimating the value in use involves estimating the future cash flows attributable
to the asset, and the application of an appropriate discount rate to those future cash flows.
Companies need to plan ahead. Market capitalization below net asset value is an impairment
trigger, and calculations of recoverable amounts are need. If the stock market value of the
company is lower than the value in use calculation, then the assumptions used for this
calculation may need investigation.

Estimating future cash flows

Cash outflows should not include outflows relating to obligations already recognized as
liabilities and no account should be taken of future restructuring costs which the entity is not
yet committed to. In order to guard against the use of over-optimistic estimates of cash flows
IAS 36 states the following:
1. Cash flow projections should be based on reasonable and supportable assumptions made
by management.
2. Cash flow projections should be based on the most recent financial budgets or forecasts.
These budgets should cover a maximum period of five years unless a longer period can be
justified.
3. For cash flow projections beyond five years, detailed cash flows budgets are unreliable and
management should just extrapolate the fifth year using a steady or declining growth rate.
IAS 36 does permit an increasing growth rate if, in the unlikely case, it can be justified.
Discounting
The cash flows should be discounted at an appropriate rate using a pre-tax rate (and pre-tax
cash flows) that reflects current market assessments of the time value of money and the risks
specific to the asset for which future cash flow estimates have not been adjusted. Discount rates
must be sensible. Interest rates in most countries are falling, but other factors affect discount
rates in impairment calculations, including corporate lending rates, weighted average cost of
capital and risks associated with cash flows, all of which are increasing within the current
global economic environment.

Example
ABC Co purchased a machine worth 90,000,000 on 01/01/20X1. The machine is depreciated
on a straight-line method over its useful life of 3 years.
The recoverable amounts through the years are as given below:
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• 31/12/20X1: 120,000,000
• 31/12/20X2: 20,000,000
• 31/12/20X3: 0
Required
Calculate the value of the machine to be recognized in the Financial Statements at the end of
each year using the cost model and the revaluation model. The financial year of ABC Co is
from 01/01 to 31/12. Assume opening balance of PPE is nil and the residual value of machine
is also nil after its useful life. ABC Co continue to use the machine after full depreciation. •
CA: Carrying amount RA: Recoverable amount
Solution
Cost model
For the year ended 31/12/20X1:
• Opening CA 90,000,000
• Less: Depreciation charge (30,000,000)
• Ending CA 60,000,000
• RA (given) 120,000,000

Impairment = Carrying Amount (CA) – Recoverable Amount (RA)

Ending CA is lower than RA, there is no impairment loss as at 31/12/20X1 and due to cost
model is applied, the CA of machine will not be adjusted upward to RA.
Therefore the machine value presented in Financial Statement as at 31/12/20X1 is 60,000,000.

For the year ended 31/12/20X2:

• Opening CA 60,000,000
• Less: Depreciation charge (30,000,000)
• Ending CA 30,000,000
• RA (given) 20,000,000
Impairment Loss = Carrying Amount (CA) – Recoverable Amount (RA)
30,000,000 – 20,000,000 = 10,000,000
Ending CA is higher than RA so there is impairment loss as at 31/12/20X2. The impairment
loss will be recorded in Profit or loss and the machine value will be written down to 20,000,000.
Therefore, the machine value presented in Financial Statement as at 31/12/20X2 is 20,000,000.
For the year ended 31/12/20X3:
• Opening CA (after adjusted): 20,000,000
• Less: Depreciation charge (20,000,000)
• Ending CA 0
• RA (given) 0

Ending CA is equal to RA after machine’s useful life and equal to zero.

Therefore, the machine value presented in Financial Statement as at 31/12/20X3 is 0.

Revaluation model
For the year ended 31/12/20X1:
• Opening CA 90,000,000
• Less: Depreciation charge (30,000,000)
• Ending CA 60,000,000
• RA (given) 120,000,000
• Revaluation surplus: 60,000,000

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Ending CA is lower than RA so there is no impairment loss as at 31/12/20X1 and due to
revaluation model is applied, the CA of machine will be adjusted upward to RA and the
revaluation increase of 60,000,000 will be recorded in revaluation surplus (part of Equity).

Therefore, the machine value presented in Financial Statement as at 31/12/20X1 is 120,000,000

and the revaluation surplus is 60,000,000.

For the year ended 31/12/20X2:

• Opening CA 120,000,000
• Less: Depreciation charge (60,000,000)
• Ending CA 60,000,000
• RA (given) 20,000,000
• Revaluation surplus 20,000,000

Ending CA is higher than RA so there is impairment loss as at 31/12/20X2. The impairment

loss of 40,000,000 will be deducted in revaluation surplus and the machine value will be written
down to 20,000,000.

Therefore, the machine value presented in Financial Statement as at 31/12/20X2 is 20,000,000

and the revaluation surplus is 20,000,000.

For the year ended 31/12/20X3:

• Opening CA 20,000,000
• Less: Depreciation charge (20,000,000)
• Ending CA 0
• RA (given) 0
• Revaluation surplus 20,000,000

Ending CA is equal to RA after machine’s useful life and equal to zero.

Therefore, the machine value presented in Financial Statement as at 31/12/20X3 is 0 and the
revaluation surplus is 20,000,000.
Example
The following information relates to three intangible assets
Assets 1 2 3
KSh KSh KSh
Net book Value 1,200,000 1,300,000 1,240,000
Net realizable Value 1,220,000 1,250,000 1,200,000
Value in use 1,240,000 1,260,000 1,180,000
Required
a) Determine the recoverable amount of each asset
b) Calculate the impairment loss for each asset (if any)
Solution
a) Recoverable amount of each asset
This is the higher of Net Realizable value and Value in use of the asset
Assets 1 2 3
KSh KSh KSh
Recoverable amount 1,240,000 1,260,000 1,200,000
b) Calculate the impairment loss for each asset
Assets 1 2 3
KSh KSh KSh

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 Recoverable amount (RA) 1,240,000 1,260,000 1,200,000
Net book Value (CA) (1,200,000) 1,300,000 1,240,000
Impairment Loss 40,000 40,000

Example
A company extracts coal and other minerals in the coastal region of Kenya. The company is
required by law to remove and dismantle the drilling and extraction plant and machinery at the
end of its useful life. The Company has included in its financial statements and accounts an
amount for the removal and dismantling costs and is amortizing this amount over the expected
useful life of the plant and machinery. The company is carrying out and exercise to establish
whether there is an impairment of the plant and machinery. The carrying amount of the plant
and machinery in the books is KSh.3,000,000. The company has received an offer from another
mining company of KSh.2,800,000 for the plant and machinery. The bidder would take over
the responsibility of loss and removal and dismantling of the plant and machinery at the end of
its useful life. The present value of the plant and machinery’s continued use is KSh.3,300,000.
The carrying amount in the financial statements for the dismantling and removal of the plant
and machinery is KSh.600,000.
Required
Determine the Carrying amount of the plant and machinery in the financial statements and the
impairment loss if any.
Solution
Carrying Amount KSh.3,000,000
Fair value less cost to sell KSh.2,800,000
Value in use = 3,300,000 – 600,000 KSh.2,700,000
Impairment loss = Carrying Amount – Recoverable Amount
= 3,000,000 – 2,800,000
= 200,000
N/B: Recoverable Amount is the higher of Fair value less cost to sell and value in use
Example
An entity has net assets with carrying amount of KSh.1,420,000 and value in use determined
as KSh.1,480,000. Several years earlier, the entity had acquired another business and the
amount of goodwill arising from the acquisition was KSh.140,000. At the time of the
acquisition, the original business had internally generated goodwill of KSh.1,200,000.
Required
Determine the impairment loss and show how the same should be allocated.
Net Assets
Net Assets 1,420,000
Add: Purchased Goodwill 140,000
Add: Internally Generated Goodwill 1,200,000
2,760,000 (CA)
Value in use = Recoverable Amount 1,480,000 (RA)
Therefore,
Impairment Loss = KSh.2,760,000 – 1,480,000
= KSh.1,280,000
Allocation of Impairment loss
The allocation of impairment loss is based on the proportion of the intangible assets as follows;
Particulars Before Loss After
Impairment Impairment
Net Assets 1,420,000 1420/1,560*80 72,821 1,347,179
Purchased Goodwill 140,000 140/1,560*80 7,179 132,821

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 Internally generated 1,200,000 1,200,000 -
Goodwill
Total 2,760,000 (1,280,000) 1,480,000

The loss on the purchased goodwill of KSh.132,821, should be recognized in the income
statement as a loss since the entity paid for the acquisition of the Net Assets. However, the loss
on internally generated goodwill is as a result of the internal operations and hence is not
recognized in the income statement.

Example
X Ltd has a single manufacturing plant which has a carrying amount of KSh.900,000. A new
government has passed legislation which significantly restricts exports of the product produced
by the plant. As a consequence, and for the foreseeable future, X Ltd’s production will be cut
by 40%. Cash flow forecasts have been prepared derived from the most recent
budgets/forecasts for the next five years approved by management.
Year 1 2 3 4 5
KSh.000 KSh.000 KSh.000 KSh.000 KSh.000
Cash flows 280 253 188 125 280

If the plant was sold now it would realize KSh.660,000, net of selling costs. X Ltd estimates
the pre-tax discount rate specific to the plant to be 15%, excluding the effects of general
inflation.

Required
Calculate the recoverable amount of the plant and any impairment loss.

Solution

The fair value less costs to sell of the plant KSh.660,000 is below its carrying value,
KSh.900,000, so, the asset may be impaired.

It is now necessary to estimate the value in use in order to determine whether impairment has
occurred and to quantify the impairment loss.

Future cash flows Discount rate 15% PV

Year KSh.000 KSh.000 KSh.000
1 280,000 0.86957 243,000
2 253,000 0.75614 191,000
3 188,000 0.65752 124,000
4 125,000 0.57175 71,000
5 280,000 0.49718 139,000
Value in use 768,000

Carrying Amount KSh.900,000

Fair value less cost to sell KSh.660,000
Value in use KSh.768,000
Recoverable amount is the higher of value in use and fair value less cost to sell (Net realizable
value)
Impairment loss = Carrying Amount (CA) – Recoverable Amount (RA)

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 = KSh.900,000 – KSh.768,000
= KSh.132,000
Recognizing an impairment loss in the financial statements

If the recoverable amount of an asset is lower than the carrying amount, the carrying amount
should be reduced by the difference (i.e. the impairment loss) which should be charged as an
expense to the statement of comprehensive income.

An impairment loss on an asset held at a revalued amount should be treated as a

revaluation decrease under the relevant IAS.
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 against the revaluation surplus
• Any excess should be recognized in the statement of comprehensive income.
Example
ABC Ltd. Produces and sells through export specialized products. The company owns a plant
which has a book value of KSh.18,000,000 as at January 1st 2020. The Kenyan Government
has introduced new taxes that have restricted the export of the products due to increased
production costs and consequently, the Company has been forced to reduce production by 40%.
The cashflow forecasts for the next five years included in the financial statements of the
company in January 2020 are as follows;
Year Cashflows (KSh)
2020 5,550,000
2021 5,060,000
2022 3,760,000
2023 2,500,000
2024 5,600,000
The cashflow forecast for 2024 includes the expected proceeds from disposal of the plant. The
cashflow projections also ignore the effects of price changes. It is estimated that if the plant is
sold in January 2020, it would realize net proceeds of KSh.13,200,000. The company’s cost of
capital is 15%. Ignore inflation.
Required
Determine the recoverable amount of the plant and the impairment loss if any.
Solution
Future cash flows Discount rate 15% PV
Year KSh.000 KSh.000 KSh.000
2020 5,550,000 0.870 4,828,500
2021 5,060,000 0.756 3,825,360
2022 3,760,000 0.658 2,474,080
2023 2,500,000 0.572 1,430,000
2024 5,600,000 0.497 2,783,200
Value in use 15,341,140
Carrying Amount KSh.18,000,000
Fair value less cost to sell KSh.13,200,000
Value in use KSh.15,341,140

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Recoverable amount is the higher of value in use and fair value less cost to sell(Net realizable
value).
Therefore, Recoverable Amount is KSh. 15,341,140
Impairment loss = Carrying Amount – Recoverable Amount
= KSh.18,000,000 – KSh.15,341,140
= KSh.2,658,860
Question:
The following information is extracted from the Statement of Financial Position at reporting
day of a cash-generating unit (CGU):
• Building 30,000,000
• Intangible asset 12,000,000
• Equipment 9,000,000
• Goodwill 10,000,000
Following a recession, an impairment test has been carried out and the CGU now has a fair
value of 39,000,000. The related disposal cost is 3,000,000. The estimated present value of the
cash flow from the continued use is 42,000,000. The building has a fair value less cost of
disposal (FV – CoD) of 27,000,000.
Required
Calculate and allocate the impairment loss and show how the same will be allocated
Solution
Step 1: Recoverable amount measurement Recoverable amount is the higher of a CGU’s fair
value less costs of disposal and its value in use.
• Fair value less cost of disposal (39,000,000 – 3,000,000): 36,000,000
• Value in use (given): 42,000,000
Therefore, the recoverable amount is 42,000,000.
Step 2: Calculate impairment loss
An asset is impaired when it’s carrying amount exceeds its recoverable amount.
• Carrying amount (CA) [(30 + 12 + 9 + 10) x 1,000,000] = 61,000,000
• Recoverable amount (RA): = 42,000,000
The carrying amount is higher than its recoverable amount so the CGU has been impaired.
Impairment loss (IL) = (61,000,000 – 42,000,000) = 19,000,000
Allocation of Impairment loss
The allocation of impairment loss is based on the proportion of the intangible assets as follows;
19,000,000/22,000,000
Particulars Before Workings Loss After
Impairment Impairment
Buildings 30,000,000 30,000/51,000*9,000 (5,294,118) 24,705,882
Intangible 12,000,000 12,000/51,000*9,000 (2,117,647) 9,882,353
Assets
Equipment 9,000,000 9,000/51,000*9,000 (1,588,235) 7,411,765
Goodwill 10,000,000 (10,000,000) -
Total 61,000,000 (19,000,000) 42,000,000

Example 2
ABC Ltd. acquired its head office on 1 January 2001 at a cost of KSh.10 million (excluding
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land). The company’s depreciation policy is to depreciate property over 50 years on a straight-
line basis. The estimated residual value is zero. On 31 December 2005, ABC Ltd. revalued the
non-land element of its head office to KSh.16 million. In accordance with IAS 16 Property
plant and equipment, the company has elected not to transfer annual amounts out of revaluation
reserves as assets are used. In January 2011, a storm damage occurred and the recoverable
amount of the head office property (excluding land) fell to KSh.5.8 million.
Required
According to IAS 36, what impairment charge should be recognized in the statement of
comprehensive income arising from the impairment review in January 2011?
Solution
IAS 36 and IAS 16 require that an impairment that reverses a previous revaluation should be
recognized through other comprehensive income to the extent of the amount in the revaluation
surplus for the same asset.
Any remaining amount should be recognized in the statement of comprehensive income. Thus:

Carrying value at 31 December 2005 is 45/50 x KSh10m = KSh.9m

The revaluation reserve (KSh.16 – KSh.9) = KSh.7m
The carrying amount at the 31 December 2010 is 40/45 x KSh.16 =Sh.14.2m
The recoverable amount at 31 December 2010 = KSh.5.8m
The total impairment charge is (KSh.14.2 – KSh.5.8) = KSh.8.4m

Of this, KSh.7m is a reversal of the revaluation reserve, so only KSh.1.4m is recognized

through the statement of comprehensive income.

Cash generating units (CGU)

A cash generating unit is the smallest identifiable group of assets for which independent
cash flows can be identified and measured. These arises where it is not possible to estimate the
recoverable amount of an individual asset. The recoverable amount of the asset should therefore
be determined together with other assets of the CGU to which it belongs.

The CGU is therefore an asset;

✓ That generate cash inflows not largely independent of other assets; and
✓ Whose value in use cannot be estimated to be close to its fair value less cost to
sell, especially when significant cash inflows are expected from their continued
use.
Examples of CGUs include:
✓ Individual stores or store chains in the retail sector;
✓ Individual properties in the real estate sector;
✓ Service lines in the technology industry like cloud computing, cybersecurity, or
data analytics;
✓ Product lines in the technology industry like smartphones, laptops, or software
solutions
✓ Business units like retail banking, investment banking, or asset management in
the financial sector;
✓ Hotels, resorts or theme parks in the hospitality and entertainment industry;
✓ Content divisions like film production, television, and streaming services in the
media industry;
✓ Oil fields in the energy sector.
In determining cash-generating unit, it is needed to be consistent from period to period to
include the same asset or type of assets.
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Example
Smart Ltd. is part of a large food retail store chain Halal Group. Smart makes all its purchases
through Halal’s procurement Centre at the head office. All pricing, advertising and human
resources (except for hiring of Smart’s cashiers and sales representatives) are determined by
Halal Group. Halal Group also owns three other stores in the same city (different districts) as
Smart and 20 stores in other cities. All stores are managed in the same way as Smart. Smart
and three other stores were purchased four years ago and goodwill was recognized.
Required
Determine if Smart is a CGU
Solution
All Halal Group’s stores are in different neighborhoods and probably have different customer
bases. So, although Smart is managed at corporate level, Smart generates cash inflows that are
largely independent from those of Halal Group’s other stores. Therefore, it is likely that Smart
is a CGU in its own right.
As we can see from the definition and the worked example above, the identification of a CGU
is a judgmental exercise.
However, the factors which need to be considered include:
• How management monitors the entity’s operations and performance (e.g. product lines,
regions etc)
• How management makes decisions about continuing or disposing of the entity’s assets
and operations.
The carrying amount of a CGU is made up of the carrying amounts of the individual assets that
can be directly attributed to it.
Certain assets, however, may contribute to the revenue generating activities of the entity as a
whole and it may be difficult to allocate to an individual CGU. Examples include corporate
assets and goodwill.
Goodwill and impairment of assets
Goodwill arising from a business combination does not generate cash flows independently of
other assets. It must therefore be allocated to each of the acquirer’s CGU’s (or groups of CGUs)
that are expected to benefit from the synergies of the combination. Each unit to which the
goodwill is allocated should:
(a) represent the lowest level within the entity at which goodwill is monitored for internal
purposes
(b) Not be larger than a reporting segment determined in accordance with IFRS 8 Operating
Segments.
Goodwill that cannot be allocated to a CGU on a non-arbitrary basis should be allocated to
each group of CGUs to which it relates.

Testing CGUs with goodwill for impairment

Goodwill should be tested annually for impairment irrespective of whether indicators are
identified. A CGU to which goodwill has been allocated should be tested for impairment
annually by comparing the carrying amount of the unit, including any goodwill, with the unit’s
recoverable amount. Any impairment loss is allocated to reduce the carrying amount of the
CGU in the following order:
First, reduce goodwill allocated to the CGU; and
Then, reduce the other assets of the CGU on a pro rata basis.

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 Example
An entity has a cash generating unit with carrying amounts and corresponding value in use for
the year ended 31st December, 20X3 as follows;

Carrying Amount Recoverable Amount

KSh. KSh.
Goodwill 1,050,000 750,000
Buildings 2,500,000 1,250,000
Property, plant and equipment 1,750,000 1,150,000
Total 5,300,000 3,150,000

Required
Determine the impairment loss and how the same will be allocated.
Solution

Particulars Carrying Amount Recoverable Amount Loss

Goodwill 1,050,000 750,000 300,000
Buildings 2,500,000 1,250,000 1,250,000
Property, Plant & 1,750,000 1,150,000 600,000
Equipment
Total 5,300,000 3,150,000 2,150,000

Allocation of Impairment Loss

Full allocation is done on the intangible non-current assets and then the balance allocated on
prorate basis on the remaining assets.

Particulars Before Impairment After

Impairment Loss Impairment
Goodwill 1,050,000 (1,050,000) -
Buildings 2,500,000 1,100/4,250*2,500 (647,059) 1,852,941
Property, Plant 1,750,000 1,100/4,250*1,750 (452,941) 1,297,059
& Equipment
Total 5,300,000 (2,150,000) 3,150,000

Example
A CGU holds the following assets:
KSh.000
Goodwill 40,000
Patent 80,000
Property, plant and equipment 120,000
Total 240,000
An annual impairment review is required as the CGU contains goodwill. The most recent review
assesses its recoverable amount to be KSh180,000,000. An impairment loss of KSh.60,000,000
has been incurred and is recognized in the statement of comprehensive income.
Required
Show the allocation of the impairment loss
Compiled by Dr. F. Ikapel Page 12 of 14
Solution
First, the carrying amount of goodwill is written off since the impairment loss exceeds the value
of goodwill within the CGU, all the goodwill is written off. The entity then reduces the amount
of other assets on a pro rata basis.
Hence the remaining loss of KSh.20,000,000 should be allocated pro rata between the property,
plant and equipment and the patent.
The allocation of impairment loss is based on the proportion of the intangible assets as follows;
Particulars Before Workings Loss After
Impairment Impairment
Goodwill 40,000 (40,000) -
Patents 80,000 80/200*20,000 (8,000) 72,000
Property, Plant & 120,000 120/200*20,000 (12,000) 108,000
Equipment
Total 240,000 (60,000) 180,000

Goodwill and non-controlling interests

The recoverable amount of a CGU relates to all the assets attributable to that CGU, including
goodwill. If there is a non-controlling interest (NCI) in the CGU and at the acquisition date the
NCI was measured at its proportionate share of the acquiree’s net assets (also called partial
goodwill method under IFRS 3, Business Combinations), then only the goodwill attributable to
the owners of the parent will be recognised. However, part of the calculation of the recoverable
amount of the CGU relates to the NCI’s unrecognized goodwill. For the purposes of calculating
the impairment loss, the carrying amount of the CGU should be notionally grossed up to include
the goodwill attributable to the NCI. Any impairment loss calculated is only recognised in the
statement of comprehensive income to the extent of the parent’s share (the impairment loss
allocated against the NCI’s goodwill is a notional amount and is not recognised in calculating
profit).

Example 5
On 1 January 2006 a parent acquired an 80% interest in a subsidiary for KSh1,600,000 when the
identifiable net assets of the subsidiary were KSh1,500,000. The non-controlling interest was
measured at the acquisition date at its share of the net assets. The subsidiary is a CGU. At 31
December 2010, the recoverable amount of the subsidiary was KSh1,100,000. The carrying
amount of the subsidiary’s identifiable net assets was KSh1,350,000.
Required
Calculate the impairment loss to be recognized in the year ended 31 December 2010. At 1 January
2006 the goodwill is calculated as follows:

KSh000
Consideration 1,600
Non-controlling interest at share of identifiable net assets (20% x 1,500) _300
1,900
Identifiable net assets 1,500
Goodwill 400
The carrying value of the net assets and goodwill amounts to KSh.1,750,000. Because goodwill
was calculated using the partial method at the acquisition date, goodwill needs to be grossed up
to reflect the 20% NCI.
Goodwill Net assets Total
KSh.000 KSh.000 KSh.000
Carrying amount 400 1,350 1,750
Unrecognized NCI (400 x 20/80) 100 100
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 500 1,850
Recoverable amount (1,100)
Impairment loss 750
The impairment loss should be allocated as follows.
Goodwill Goodwill Identifiable
(80%) (NCI) net assets
KSh.000 KSh.000 KSh.000
Carrying amount 400 100 1,350
Impairment (400) (100) (250)
- - 1,100
Recoverable amount 1,100
The entity recognises an impairment of KSh.650,000 (400,000 + 250,000) in its financial
statements, all of which is allocated to owners of the parent.

Reversal of an impairment loss

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 value. In other words, there might have been
a reversal of some of the previous impairment loss. In such cases:
The reversal of the impairment loss should be recognised immediately as income in the
statement of comprehensive income for the year
The carrying amount of the asset should be increased to its new recoverable amount. The
reversal of an impairment loss for an asset should only be recognised to the extent that the
carrying amount of the asset is revised to the amount it would have been (after
subsequent depreciation) if no impairment loss has ever been recognised. An impairment loss
recognised for goodwill should not be reversed in a subsequent period.

Disclosure
IAS 36 calls for substantial disclosure about impairment of assets. The information to be
disclosed includes the following:
(a) For each class of assets, the amount of the impairment losses recognised and the amount of
any impairment losses recovered (i.e. reversals of impairment losses)
(b) For each individual asset or CGU that has suffered a significant impairment loss, details of
the nature of the asset, the amount of the loss, the events that led to the recognition of the
loss, whether the recoverable amount is fair value price less costs to sell or value in sue,
and if the recoverable amount is value in use, the basis on which this value was estimated
(e.g. discount rates used etc).

Compiled by Dr. F. Ikapel Page 14 of 14