638 | IMPAIRMENT OF ASSETS

Part C: Impairment of cash-generating

units
Introduction
A CGU 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’ (IAS 36, para. 6). CGUs are
only relevant for impairment testing when the recoverable amount of an asset is unable to be
individually determined (IAS 36, para. 66). Goodwill is an example of an asset for which the
recoverable amount is unable to be individually determined.

Part C addresses how to identify CGUs and determine their carrying amount, including how to
identify corporate assets that form part of a CGU. The identification of CGUs is a matter requiring
significant professional judgment. Part C also considers the requirements of IAS 36 relating to the
allocation of goodwill to CGUs and the impairment testing of assets, including goodwill, as part
of the CGU to which they belong.

The IAS 36 principles for identifying potential impairment of individual assets that were considered
in Part B apply equally to CGUs (IAS 36, para. 7). Therefore, where there is an indication that a CGU
may be impaired, a formal estimate of the recoverable amount of the CGU must be undertaken
(IAS 36, para. 8). The recoverable amount of a CGU is the higher of the CGU’s ‘fair value less costs
of disposal and its value in use’ (IAS 36, para. 18). Recoverable amount is then compared to the
CGU’s carrying amount. An impairment is recognised if the carrying amount of the CGU exceeds
its recoverable amount.

Recoverable amount: Individual asset or

cash‑generating unit?
A determination must be made on whether the recoverable amount of an asset, for which there is
an indication of impairment, is made on an individual asset basis or as part of the CGU to which
the asset belongs. IAS 36 requires the recoverable amount to be determined on an individual
asset basis (IAS 36, para. 66), unless this is not possible because:
(a) the asset’s value in use cannot be estimated to be close to its fair value less costs of disposal; and
(b) the asset does not generate cash inflows that are largely independent of those from other
assets (IAS 36, para. 67).

Where conditions (a) and (b) apply, the recoverable amount of the asset is estimated as part of
the CGU to which it belongs. This decision scenario is also summarised in Figure 7.4.
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Figure 7.4: Decision scenario for estimating recoverable amount on individual

asset or cash-generating unit basis

Can the asset’s value in use be Yes

Calculate recoverable amount

estimated to be close to its fair value

for the individual asset

less costs to sell? (IAS 36, para. 67)

No

Does the asset generate cash Yes

inflows largely independent of
other assets? (IAS 36, para. 67)

No

Calculate recoverable amount for CGU

Source: CPA Australia 2017.

IAS 36 illustrates this point by reference to a mining entity that owns a private railway to support
its mining activities. The railway, by itself, does not generate its own cash inflows. Rather, it is the
combination of the railway and other assets associated with the mine that generates independent
cash inflows. Therefore, condition para. 67(b) of IAS 36 is satisfied. Further, although the railway
could be sold for its scrap value, that amount is likely to be different to its value in use as part of
the mine of which it is a part (i.e. IAS 36, para. 67(a)). This is because the collective benefits of using
the railway together with the other mining assets could result in the value in use of the railway not
being close to its fair value less costs of disposal. Therefore, as conditions (a) and (b) are satisfied,
the recoverable amount of the railway is tested as part of the CGU to which it belongs, that is,
the mine as a whole (IAS 36, para. 67).

Identifying cash-generating units

As provided earlier, IAS 36 defines a CGU as ‘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’ (IAS 36, para. 6). This definition requires entities to consider the lowest level
of aggregation of assets that work together to generate their own cash inflows.

IAS 36 cautions that although cash inflows may be associated with a particular asset, they may
not be able to be earned independently of other assets. To illustrate this point, IAS 36 cites the
example of a bus company that provides services on five routes under contract to a municipality.
One of these routes operates at a significant loss. However, as the bus company does not have
the option to withdraw its services from any of the routes (including the unprofitable route)
because of the contract in place, the CGU for each route is the bus company as a whole
(IAS 36, para. 68).
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The identification of CGUs involves professional judgment. As a guide, the following key factors
should be considered:
• At what level does management monitor the entity’s operations? For example, is it by
product lines, businesses or geographical areas?
• At what level does ‘management make decisions about continuing or disposing of the
entity’s assets and operations’ (IAS 36, para. 69)?

IAS 36 also includes a specific requirement for assets that have an active market for the output
they produce (refer to IAS 36, para. 70). An active market is defined in IFRS 13 as:
… a market in which transactions for the asset or liability take place with sufficient frequency and
volume to provide pricing information on an ongoing basis (IFRS 13, Appendix A).

If there is an active market for the output produced by an asset or group of assets, the assets
concerned are always identified as a CGU, ‘even if some or all of the output is used internally’
(IAS 36, para. 70). For example, an entity may have established a business unit that is involved in
the smelting of aluminium (an ‘upstream unit’). It may also have another business that processes
the aluminium into value-added products (a ‘downstream unit’). If an active market exists for the
product of the upstream unit, that unit must be identified as a CGU, even though some or all
of the output of the upstream unit may be used by the downstream unit.

Value in use calculations arising from internal transfers of product must be based on an arm’s
length transfer price when estimating cash flows for the relevant CGUs (IAS 36, para. 70).
This requirement has particular application to vertically integrated operations, such as the
‘upstream’ and ‘downstream’ units in the example.

Once CGUs are identified, they are consistently applied across reporting periods, unless a
change is warranted, such as a company restructure (IAS 36, para. 72).

To explore this topic further, read paras 6 and 66–73 of IAS 36.

Question 7.4 requires the appropriate CGU to be identified using situations based on the
‘Illustrative examples’ section of IAS 36 (paras IE1–89).

➤➤Question 7.4
Example 1: Identification of CGUs, IAS 36, Illustrative examples, para. IE1.
(a) Retail store chain
Store X belongs to a retail store chain, M. X makes all its retail purchases through M’s
purchasing centre. Pricing, marketing, advertising and human resources policies (except for
hiring X’s cashiers and sales staff) are decided by M. M also owns five other stores in the
same city as X (although in different neighbourhoods) and 20 stores in other cities. All stores
are managed in the same way as X. X and four other stores were purchased five years ago,
and goodwill was recognised.
Is X a CGU?
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(b) Plant for an intermediate step in a production process

A significant raw material used for plant Y’s final production is an intermediate product
bought from plant X of the same entity. X’s products are sold to Y at a transfer price that
passes all margins to X. Sixty per cent of X’s final production is sold to Y, and the remaining
40 per cent is sold to customers outside the entity. Eighty per cent of Y’s final production is
sold to customers outside the entity.
For each of the following cases, what are the CGUs for X and Y?
Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices are
higher than market prices.

Case 2: There is no active market for the products X sells to Y.

Check your work against the suggested answer at the end of the module.

Recoverable amount and carrying amount

of a cash-generating unit (impairment of
cash‑generating units)
As defined in the introduction to Part C, the recoverable amount of a CGU is the higher of its
‘fair value less costs of disposal and its value in use’ (IAS 36, para. 18). Determining the carrying
amount of a CGU and allocating the amount of any impairment loss to individual assets within
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that CGU are often more complicated than for individual assets.

The carrying amount of a CGU must be determined consistently ‘with the way in which its
recoverable amount is determined’ (IAS 36, para. 75). To this end, the carrying amount of a
CGU is determined as illustrated in Figure 7.5 (IAS 36, para. 76).

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Figure 7.5: Carrying amount of a cash-generating unit

Assets allocated
Assets directly Purchased
CGU carrying on reasonable
= attributed to + + goodwill expected
amount and consistent
CGU to benefit CGU
basis to CGU

Note: Do not
include liabilities
For example, corporate
assets allocable
on such basis
Two exceptions to this
rule apply (refer below)

Source: CPA Australia 2017.

Per Figure 7.5, the two situations where the carrying amount of a CGU would include recognised
liabilities are:
1. when the sale of a CGU would require a buyer to assume a liability (or liabilities)—in this
case, the recognised liability would be deducted from the CGU’s value in use and its
carrying amount (IAS 36, para. 78)
2. when it is only practical to determine the recoverable amount of a CGU by including assets
(e.g. receivables and other financial assets) or liabilities (e.g. payables, pensions or other
provisions) (IAS 36, para. 79). This may tend to occur for CGUs that are large in size relative
to the entity. In this case, the carrying amount of the CGU is increased for those assets and
decreased for those liabilities.

IAS 36 highlights the importance of including in the CGU all assets that contribute to the cash
inflows or cash outflows of the CGU. Otherwise, a CGU may not appear to be impaired when,
in fact, it is impaired due to its carrying amount being understated (IAS 36, para. 77).

Some assets that contribute to the cash flows of a CGU may not be capable of being allocated
to that CGU on a reasonable and consistent basis. This includes corporate assets and goodwill
(IAS 36, para. 77). The next section covers the requirements in IAS 36 for testing these assets
for impairment.

To explore this topic further, read paras 74–79 of IAS 36.

Testing cash-generating units with goodwill for impairment

In the acquisition of a business that gives rise to purchased goodwill, that goodwill needs to be
allocated to the CGU, or group of CGUs, expected to benefit from the goodwill (this is discussed
in further detail in this section). The CGU, or group of CGUs, to which goodwill is allocated may
be different to the CGU, or group of CGUs, to which other assets that make up the acquired
business are allocated.

When goodwill relates to a CGU but has not been allocated to that CGU, the CGU is tested
for impairment whenever there is an indication that the CGU may be impaired (IAS 36, para. 88).
This is the same screening procedure required for testing individual assets for impairment
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(IAS 36, para. 9). Where there is an indication that impairment may exist, the carrying amount
of the CGU (excluding any goodwill) is compared to its recoverable amount, and any impairment
loss recognised.

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The impairment testing procedures for CGUs to which goodwill has been allocated are stricter.
IAS 36 requires a formal estimate of the recoverable amount of a CGU (or group of CGUs)
to which goodwill has been allocated at least once per year, regardless of whether there is
any indication that the CGU (or group of CGUs) may be impaired (IAS 36, para. 10(b)).

Similarly, the recoverable amount of a CGU that includes any intangible asset that has an indefinite
useful life or is not yet available for use must be formally estimated at least once per year,
regardless of whether there is any indication that the CGU may be impaired (IAS 36, para. 10(a)).

IAS 36 also requires that the recoverable amount of a CGU (or group of CGUs) to which goodwill
has been allocated must be formally estimated whenever there is an indication that the CGU
(or group of CGUs) may be impaired (para. 90).

To explore this topic further, read paras 9–10 and 88–90 of IAS 36.

Timing of impairment tests

In accordance with para. 96 of IAS 36, the requirements in Table 7.10 apply to the annual testing
of goodwill for impairment.

Table 7.10: Timing of impairment tests

Scenario Timing of annual impairment test

CGU (or group of CGUs) to which goodwill has Any time during an annual period, but must be
been allocated at the same time each year

Different CGUs may be tested for impairment at

different times throughout the year

Some or all of the goodwill allocated to a CGU (or Before the end of the current annual period
group of CGUs) arose from a business combination
that occurred during the current annual period

Source: CPA Australia 2016.

If there is an indication of impairment of an asset (excluding goodwill) that is within a CGU that
includes goodwill, the asset is tested for impairment first, and any impairment loss is recognised
on that individual asset before the entire CGU is tested for impairment. This ensures that
the carrying amount of individual assets included in a CGU is appropriate before being included
in the impairment test for the entire CGU. Similarly, if there is an indication of impairment of
a CGU that forms part of a group of CGUs to which goodwill has been allocated, impairment
testing procedures are applied to the individual CGU before being applied to the group of
CGUs (IAS 36, para. 97).
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The concept of materiality applies in testing the recoverable amount of a CGU (or group of
CGUs) to which goodwill has been allocated. Therefore, the most recent detailed calculation
made in a preceding period of the recoverable amount of a CGU to which goodwill has been
allocated may be used in the impairment test of that CGU in the current period (IAS 36, para. 99),
provided that the following conditions are satisfied:
(a) the assets and liabilities making up the unit have not changed significantly since the most
recent recoverable amount calculation;
(b) the most recent recoverable amount calculation resulted in an amount that exceeded the
carrying amount of the unit by a substantial margin; and
(c) based on an analysis of events that have occurred and circumstances that have changed since
the most recent recoverable amount calculation, the likelihood that a current recoverable
amount determination would be less than the current carrying amount of the unit is remote
(IAS 36, para. 99).

To explore this topic further, read paras 96–99 of IAS 36.

Allocating goodwill to cash-generating units

As goodwill works with other assets to generate economic benefits, its carrying anount must
be allocated to each CGU that is expected to benefit from the goodwill. The requirements in
Table 7.11 apply when allocating goodwill to a CGU.

Table 7.11: Requirements for allocating goodwill to cash-generating units

Requirement Comments

Goodwill is allocated to a CGU (or group of This applies regardless of whether the acquiree’s
CGUs) expected to benefit from an acquisition other assets or liabilities that gave rise to the
(IAS 36, para. 80). goodwill are assigned to the same CGU (or group
of CGUs) to which the goodwill has been allocated.

Changes to the goodwill allocation are only possible

where an entity later reorganises its reporting
structure ‘in a way that changes the composition
of one or more’ CGUs (IAS 36, para. 87).

Where the initial allocation of goodwill is not Certain acquisitions may only be able to
completed before the end of the annual reporting be determined provisionally at the end of
period in which the business combination that gave the reporting period in which the business
rise to that goodwill occurs, the initial allocation combination occurs. For example, the cost of
must be completed before the end of the next a business combination may depend on future
annual reporting period (IAS 36, para. 84). events, such as the market price of the acquirer’s
equity instruments being offered as purchase
consideration.

The acquirer accounts for the business combination,

including any goodwill, using those provisional
values (IAS 36, para. 85). Note that, at this stage,
goodwill has not yet been allocated to a CGU.
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The provisional values must be finalised within

12 months of the acquisition date (IAS 36,
para. 85(b)). Adjustments to finalise the amount
of goodwill must be made, including allocating
that amount to a CGU (or group of CGUs),
‘before the end of the next annual reporting
period beginning after the acquisition date’
(IAS 36, para. 84).

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Requirement Comments

Goodwill is allocated to ‘the lowest level’ at This is consistent with the approach in IAS 36 by
which the entity monitors goodwill ‘for internal which goodwill is tested for impairment through
management purposes’ (IAS 36, para. 80(a)). the ‘eyes of management’ (IAS 36, para. 82).

The CGU (or group of CGUs) to which goodwill An operating segment is defined in IFRS 8
is allocated cannot be higher than an operating Operating Segments, para. 5.
segment (IAS 36, para. 80(b)).

When a CGU to which goodwill has been allocated This impacts on the carrying amount of the
includes a number of operations and one of those operation disposed of and, therefore, any gain
operations is disposed of, it may be necessary or loss on the disposal of that operation.
to consider whether a portion of the goodwill
relates to the operation that has been disposed
of (IAS 36, para. 86(a)).

This portion of goodwill is determined ‘on the

basis of the relative values … disposed of and
the portion of the CGU’ that is ‘retained, unless the
entity can demonstrate that some other method
better reflects the goodwill associated with the
operation disposed of’ (IAS 36, para. 86(b)).

Source: CPA Australia 2017.

Example 7.9 illustrates the allocation of goodwill to CGUs.

Example 7.9: Identifying cash-generating units for allocation

of goodwill
Entity P has two operating segments, Country A and Country B. Each segment consists of the following
four divisions:
1. Manufacturing (M)
2. Retail (R)
3. Telecommunications (T)
4. Commercial Property (C).

Entity P acquires 100 per cent of Q Ltd (Q). Q operates in Country B. Goodwill arising from the
acquisition of Q is expected to equally benefit all four divisions.

Each division has discrete cash inflows. Financial information, including the goodwill allocation from the
purchase of Q, is reviewed by management at the division level. Management also regularly reviews
the operating results of each division.

Each division is a CGU. Therefore, management is required to assess goodwill impairment for each
division separately.

The identifiable assets of Q are property, plant and equipment of $90. These assets can be allocated
on a reasonable and consistent basis to M and R.
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The goodwill of $40 arising from this acquisition is expected to equally benefit all four divisions
(CGUs): M, R, T and C. This level also corresponds with the lowest level at which the goodwill will be
monitored by P for internal management purposes. For the purposes of impairment testing under
IAS 36, the following allocations are made:

M R T C
$ $ $ $

Net assets (pre-acquisition of Q Ltd) 100 100 100 100

Net identifiable assets of Q Ltd 45 45 — —

Goodwill arising on acquisition of Q Ltd 10 10 10 10

Carrying amount of CGU 155 155 110 110

CGU groups
Assume that there was no basis on which to allocate the goodwill to each of the CGUs. In this situation,
it may be necessary to allocate goodwill to a group of CGUs. For example, the M and R CGUs
may form one group (a ‘larger’ CGU), and the T and C CGUs may form another group, or ‘larger’
CGU. The recoverable amount of the larger CGU would then be compared to its carrying amount
(including the carrying amount of goodwill allocated) and any impairment loss recognised. Assuming
that the goodwill equally benefited the two ‘larger’ CGUs, the following allocations would be made:

M R M&R T C T&C
$ $ $ $ $ $

Net assets (pre-acquisition of Q Ltd) 100 100 200 100 100 200

Net identifiable assets of Q Ltd 45 45 90 — — —

Goodwill arising on acquisition of Q Ltd — — 20 — — 20

Carrying amount of CGU(s) 145 145 310 100 100 220

To explore this topic further, read paras 80–87 of IAS 36.

Corporate assets
Corporate assets are assets other than goodwill that contribute to the future cash flows of both
the CGU under review and other CGUs. Examples of corporate assets include the head office of
an entity, information technology (IT) infrastructure and research facilities. The key characteristics
of corporate assets are that:
• ‘they do not generate cash inflows independently from other assets or groups of assets’
(similar to purchased goodwill)
• ‘their carrying amount cannot be fully attributed to the [CGU] under review’ (IAS 36, para. 100).

If it is possible to establish that the fair value less costs of disposal of a corporate asset is greater
than its carrying amount, no impairment exists. However, it may still be necessary to allocate the
carrying amount of that corporate asset to a CGU in order to correctly determine the carrying
amount of that CGU.
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If there is an indication that a corporate asset may be impaired, the recoverable amount of the
corporate asset will need to be determined as part of the CGU (or group of CGUs) to which
it belongs.

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When allocating a corporate asset to a CGU, the requirements shown in Table 7.12 apply.

Table 7.12: Requirements for allocating a corporate asset to a cash-generating unit

Requirement Comments

If the carrying amount of a corporate asset ‘can This enables the carrying amount of a CGU
be allocated to a CGU(s) on a reasonable and (or CGUs), including any portion of a corporate
consistent basis’, then do so (IAS 36, para. 102(a)). asset, to be compared to their recoverable amount
and any impairment loss recognised (IAS 36,
para. 102(a)).

If the carrying amount of a corporate asset is not These requirements are demonstrated in
allocable on a reasonable and consistent basis Example 8 (paras IE69–79) in the ‘Illustrative
to a CGU(s), then: examples’ section of IAS 36.
1. test the carrying amount of the CGU,
excluding the corporate asset, for impairment
and recognise any impairment loss (IAS 36,
para. 102(b)(i))
2. determine the smallest group of CGUs to which
the corporate asset can be allocated, test for
impairment at this level and recognise any
impairment loss (IAS 36, paras 102(b)(ii)–(iii)).

Source: CPA Australia 2017.

To explore this topic further, read paras 100–103 of IAS 36.

Identifying and allocating an impairment loss for a cash-

generating unit
An impairment loss exists if the carrying amount of a CGU (or group of CGUs) to which
goodwill or a corporate asset has been allocated exceeds its recoverable amount.

The process of allocating any impairment loss is as follows:

1. the carrying amount of any goodwill allocated to the CGU (or group of CGUs) is reduced—
this is consistent with the view that the asset most likely to be impaired is goodwill
2. the remainder of any impairment loss is allocated on a pro rata basis to other assets in the
CGU (or group of CGUs) on the basis of their carrying amount in that CGU (or group of
CGUs) (IAS 36, para. 104).

Note that although impairment testing to determine the extent of any impairment loss for an
asset is undertaken at a CGU level, the reductions in carrying amounts are treated as impairment
losses on individual assets included the CGU (IAS 36, para. 104).

IAS 36 places an important constraint on the amount of an impairment loss that can be allocated
to an individual asset. The standard provides that the carrying amount of an asset cannot be
reduced below the highest of:
• its fair value less costs of disposal (if these costs are measurable)
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• its value in use (if this can be determined)

• zero (IAS 36, para. 105).

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This constraint means that the amount of an impairment loss that would otherwise have been
allocated to a particular asset in a CGU must be allocated on a pro rata basis to other assets of
the CGU.

The requirements for testing CGUs to which goodwill has been allocated are outlined in Example 2
(paras IE23–32) in the ‘Illustrative examples’ section of IAS 36. If you wish to explore this topic
further, you may now read this example.

To explore this topic further, read paras 104–8 of IAS 36.

Example 7.10: Impairment loss for a cash-generating unit

An entity has identified an impairment loss of $20 000 relating to one of its CGUs. The relevant details
of the carrying amount of each asset in the CGU (assets A, B, C and D), as well as the allocation of
the impairment loss to each asset based on the asset’s proportional carrying amount, are as follows:

Share of Carrying amount

Carrying amount Percentage of total impairment loss after impairment loss
Asset $ carrying amount $ $

A 30 000 23% 4 600 25 400

B 25 000 19% 3 800 21 200

C 60 000 46% 9 200 50 800

D 15 000 12% 2 400 12 600

Total 130 000 100% 20 000 110 000

However, asset C has an estimated fair value less costs of disposal of $55 000. According to para. 105(a)
of IAS 36, the extent of the impairment loss for asset C is limited to $5000 (i.e. $60 000 – $55 000).

The remaining impairment loss of $4200 (i.e. $55 000 – $50 800) that is attributable to asset C must
therefore be allocated to the remaining assets in the CGU based on those assets’ proportional carrying
amounts after the impairment loss, as determined above. Therefore:

Carrying amount Share of Carrying amount

after impairment loss Percentage of total impairment loss after impairment loss
Asset $ carrying amount $ $

A 25 400 43% 1 806 23 594

B 21 200 36% 1 512 19 688

D 12 600 21% 882 11 718

Total 59 200 100% 4 200 55 000

The requirement that any impairment loss be allocated first against any goodwill is a matter of some
controversy. For example, it can be argued that this procedure is arbitrary and fails to adequately
consider whether other identifiable assets are impaired. Other objections relate to the application of
the value in use test to goodwill. This is considered in Question 7.5.
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➤➤Question 7.5
Three members of the IASB dissented to the issuing of IAS 36. The members’ concerns are set out
in paras DO1–10 of IAS 36. What were the two key concerns raised in the members’ dissenting
opinions?

Check your work against the suggested answer at the end of the module.

The requirements for testing CGUs to which goodwill has been allocated are illustrated in Example 7.11.
This material has been adapted from Example 2 (paras IE23–32) in the ‘Illustrative examples’ section
of IAS 36.

Example 7.11: Impairment testing for cash-generating units

to which goodwill has been allocated
At the end of 20X0, entity T acquires 100 per cent of the net assets of entity M for $10 000. M has
manufacturing plants in three countries (Country A, Country B and Country C). Each plant is considered
a CGU. Activities in each country also represent the lowest level at which the goodwill is monitored
for internal management purposes.

The goodwill is determined as the difference between the purchase price of the activities in each
country, as specified in the purchase agreement, and the fair value of the net assets (the identifiable
assets acquired and the liabilities assumed) in accordance with IFRS 3 Business Combinations. At the
end of 20X0, the allocation of the fair value of identifiable assets and goodwill to the respective CGUs
is as follows:

Allocation of Fair value of

purchase price net assets Goodwill
$ $ $

Activities in Country A 3 000 2 000 1 000

Activities in Country B 2 000 1 500 500

Activities in Country C 5 000 3 500 1 500

Total 10 000 7 000 3 000

Because goodwill has been allocated to the activities in each country, each of those activities must be
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tested for impairment once a year, or more frequently if there is any indication that they may be impaired.

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The recoverable amounts (i.e. the higher of the value in use and fair value less costs of disposal)
of the CGUs are determined on the basis of value in use calculations. At the end of 20X0 and 20X1,
the value in use of each CGU exceeds its carrying amount. Therefore, the activities in each country
and the goodwill allocated to those activities are not regarded as impaired.

At the beginning of 20X2, a new government is elected in Country A. It passes legislation significantly
restricting exports of T’s main product. As a result, and for the foreseeable future, T’s production in
Country A will be cut by 40 per cent. The significant export restrictions and the resulting decreased
production require T to estimate the recoverable amount of the Country A operations at the beginning
of 20X2.

T uses straight-line depreciation over a 12-year life for the identifiable assets of Country A and
anticipates no residual value. Therefore, the carrying amounts of the assets of Country A at the
beginning of 20X2 are as follows.

Fair value of
Goodwill identifiable assets Total
$ $ $

Cost 1 000 2 000 3 000

Accumulated depreciation — (167) (167)

Carrying amount 1 000 1 833 2 833

T determines that the value in use of the Country A CGU at the beginning of 20X2 is $1360. This is
$1473 less than the carrying amount (i.e. $2833 – $1360). The fair values of the assets of Country A
are not individually determinable. As the carrying amount exceeds the recoverable amount by $1473,
T recognises an impairment loss of $1473 immediately in P&L. The first step is to reduce to zero the
carrying amount of the goodwill that relates to the Country A operations before reducing the carrying
amount of the other identifiable assets within the Country A CGU.

As at the beginning of 20X2, the carrying amounts of the assets of the Country A CGU after allocation
of the $1473 impairment loss are as follows.

Fair value of
Goodwill identifiable assets Total
$ $ $

Cost 1 000 2 000 3 000

Accumulated depreciation — (167) (167)

Carrying amount 1 000 1 833 2 833

Impairment loss (1 000) (473) (1 473)

Adjusted carrying amount — 1 360 1 360

Source: Adapted from IFRS Foundation 2017, IAS 36 Impairment of Assets,

in 2017 IFRS Standards, IFRS Foundation, London, pp. B2524–6.

Intangible assets
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Impairment testing for intangible assets is similar to impairment testing for goodwill, with the
following differences:
• Previously recognised impairment losses may be reversed (IAS 36, para. 114).
• Intangible assets should be allocated to individual CGUs rather than to groups of CGUs,
unless the intangible asset meets the definition of a ‘corporate asset’.
• Impairment losses are not allocated to intangible assets first. Rather, they are allocated on
a pro rata basis to all assets in the CGU (IAS 36, paras 104 and 105).

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Reversal of impairment losses

Part B of this module discussed the requirements for reversal of impairment losses for
individual assets. Those requirements apply equally to CGUs. The reversal of an impairment
loss for a CGU is allocated to the assets of the CGU, except for goodwill, on a pro rata basis
according to the carrying amounts of those assets. Those reversals are treated as reversals
of impairment losses on individual assets (refer to Part B of this module).

When a reversal of an impairment loss for a CGU is allocated, the carrying amount of an asset
cannot be increased above the lower of its recoverable amount and the carrying amount if no
impairment loss was recognised in previous years. Any remaining reversal not otherwise allocated
to the asset is allocated on a pro rata basis to the other assets of the CGU other than goodwill.

‘An impairment loss recognised for goodwill shall not be reversed in a subsequent period’
(IAS 36, para. 124). The reason for this is that any increase in goodwill would most likely be an
increase in internally generated goodwill, rather than the reversal of the impairment loss that was
previously recognised (IAS 36, para. 125). It would be difficult, or even impossible, to distinguish
events or circumstances contributing to the reversal of the previously impaired goodwill from
goodwill generated internally subsequent to the business combination that gave rise to the
acquired goodwill. This requirement is linked to the prohibition on recognising internally
generated goodwill in para. 48 of IAS 38.

To explore this topic further, read paras 122–125 of IAS 36.

Summary
Part C addressed how to identify CGUs and to determine the carrying amount of CGUs, including
how to identify corporate assets. Corporate assets are assets other than goodwill that contribute
to the future cash flows of both the CGU under review and other CGUs. Examples of corporate
assets include the head office of an entity or a division of an entity, IT infrastructure and research
facilities. The remainder of Part C considered the requirements of IAS 36 relating to the allocation
of goodwill to CGUs and the impairment testing of assets, including goodwill, as part of the
CGU to which they relate. If the carrying amount of a CGU (or group of CGUs) to which goodwill
or a corporate asset has been allocated exceeds its recoverable amount, an impairment loss
exists. The impairment loss is allocated to reduce the carrying amount of the assets of the CGU
(or group of CGUs), in the following order:
1. The carrying amount of any goodwill allocated to the CGU (or group of CGUs) is reduced.
2. The other assets of the CGU (or group of CGUs) are allocated on a pro rata basis based on
the carrying amount of each asset in the unit.

Part D now considers the disclosure requirements of IAS 36.

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Part D: IAS 36 Impairment of Assets—

disclosure
Introduction
The disclosures required by IAS 36 regarding impairment are extensive. They can be grouped
into the following two broad categories:
1. disclosures that are designed to inform users of financial reports about actual impairment
losses that have occurred during the reporting period and any reversals of impairment losses
2. disclosures of the estimates that are used to measure the recoverable amounts of CGUs
that contain goodwill or indefinite life intangibles, i.e. those intangible assets that have
‘no foreseeable limit to the period over which the asset is expected to generate net cash
flows for the entity’ (IAS 38, para. 88).

The disclosures in each of these categories are discussed below.

Disclosures of impairment losses and reversals

IAS 36 requires numerous disclosures when an entity recognises an impairment loss in its financial
report. For example, for each class of assets, the financial report must disclose the following:
(a) the amount of impairment losses recognised in profit or loss during the period and the line
item(s) of the statement of comprehensive income in which those impairment losses are included;
(b) the amount of reversals of impairment losses recognised in profit or loss during the period and
the line item(s) of the statement of comprehensive income in which those impairment losses
are reversed;
(c) the amount of impairment losses on revalued assets recognised in other comprehensive
income (equity) during the period; and
(d) the amount of reversals of impairment losses on revalued assets recognised in other
comprehensive income during the period (IAS 36, para. 126).

These disclosures can be combined with those required by other IFRSs. For example, disclosures
regarding impairment losses (or reversals) can be included as reconciling items in the reconciliation
of the carrying amount of each class of property, plant and equipment, at the beginning and end
of the period, required by para. 73(e) of IAS 16.

An entity that reports segment information under IFRS 8 is required to disclose the following
for each reportable segment:
(a) the amount of impairment losses recognised in profit or loss and in other comprehensive income
during the period; and
(b) the amount of reversals of impairment losses recognised in profit or loss and in other
comprehensive income during the period (IAS 36, para. 129).

For an individual asset or CGU in respect of which an impairment loss has been recognised,
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or reversed, during a period, the following disclosures are required by IAS 36 (para. 130):
• events and circumstances (e.g. internal or external to the entity) that resulted in the need
for the impairment loss (or reversal)
• the amount recognised or reversed
• the nature of the impaired asset and, for an entity that reports segment information
under IFRS 8, the reportable segment to which the asset has been allocated

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• for a CGU:
–– a description of the CGU (e.g. whether it is a product line or geographical area)
–– the amount recognised by class of assets and, for an entity that reports segment
information under IFRS 8, the amount recognised by reportable segment
–– if the assets that make up a CGU have changed since the last time the recoverable
amount of that CGU was estimated, a description of how the composition of assets has
changed and the reasons for the change
• the recoverable amount of the asset or CGU and whether this is based on fair value less costs
of disposal or value in use
• if recoverable amount is based on fair value less costs of disposal:
–– details regarding the fair value measurement (e.g. the level of the fair value hierarchy
in IFRS 13 to which the fair value measurement is categorised and, for certain levels within
that hierarchy, key assumptions made in estimating fair value)
• if recoverable amount is based on value in use, the discount rate(s) used in estimating both
the current and previous (if any) value in use.

To explore this topic further, read paras 126–133 of IAS 36.

Disclosures of estimates used to measure recoverable amounts

in cash-generating units
When an entity has goodwill or intangible assets with an indefinite useful life, IAS 36 requires
significant additional disclosures. This reflects the greater level of uncertainty surrounding
the recoverable amount of these assets. Disclosures include the key assumptions made
by management in estimating the future cash flows of such assets. The provision of such
disclosures may involve management exercising high levels of professional judgment.

To explore this topic further, read paras 134–137 of IAS 36.

ASIC’s review of the December 2015 financial reports of Australian entities indicates the
corporate regulator’s concern that a number of entities are not making the required disclosures,
including key assumptions, such as discount rates and growth rates, and the valuation
techniques and inputs used to determine fair value (ASIC 2016).

Summary
IAS 36 includes requirements for extensive disclosures of impairment losses, including estimates
used to measure the recoverable amount of CGUs containing goodwill or indefinite useful
life intangibles.
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Review
This module examined the procedures set out in IAS 36 for ensuring that assets are not carried
in excess of their recoverable amounts. Impairment testing is critical to financial reporting,
particularly in a changing economic environment. As noted by ASIC (2015):
Financial reports should provide useful and meaningful information for investors and other users of
those financial reports so that they can be confident and informed in making investment and other
decisions.
Non-financial assets are often significant assets of a company. The value attributed to these assets
may affect not only the company’s reported financial position, but also its reported performance.

Part A provided an introduction to the impairment of assets, including the key issues that need
to be resolved in specifying impairment requirements. Asset values and impairment calculations
are a consistent focus area for regulators, including ASIC, when monitoring financial reports.
The scope of the impairment requirements set out in IAS 36 are seen as being applicable to a
broad range of non-financial assets. With the exception of goodwill and certain intangible assets,
IAS 36 allows assets first to be reviewed for indications of impairment before a formal estimate
of recoverable amount is made (assuming an indication of impairment exists).

Part B examined how IAS 36 prefers that recoverable amount be estimated on an individual
asset basis. The detailed requirements for measuring the recoverable amount of an asset were
then considered. The value in use method of determining recoverable amount was seen as being
potentially more difficult to estimate than fair value less costs of disposal. Part B also examined
the requirements of IAS 36 that must be met to recognise an impairment loss on an individual
asset or reversals of previous impairment losses.

In practice, the recoverable amount may only be determinable for groups of assets (referred to as
CGUs) rather than for individual assets. The identification of CGUs, and the challenges associated
with testing corporate assets and goodwill for impairment, were considered in Part C.

Part D looked at the extensive disclosures specified by IAS 36, which must be made in relation
to actual impairment losses, and the estimates used to measure the recoverable amount of
CGUs containing goodwill or indefinite life intangibles. These disclosures continue to attract
the interest of corporate regulators.
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