IMPAIRMENT OF ASSETS [IAS 36]

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IAS 36: IMPAIRMENT OF ASSETS

▪ Introduction – Definition -Scope and objectives of IAS 36

▪ Circumstances that may indicate an asset is impaired and
frequency of testing
▪ Cash-generating units and goodwill
▪ Allocation of impairment losses to assets of a cash generating unit
▪ Reversal of impairment losses
▪ Disclosure

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IAS 36-THE OBJECTIVE

To ensure that assets are carried at no more than their

RECOVERABLE AMOUNT, and to define how
recoverable amount is determined.

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IAS 36-THE SCOPE
✓ IAS 36 applies to;
✓ Land building, machinery( IAS 16)
✓ Investment property at cost (IAS 40)
✓ Intangible assets (IAS 38)
✓ Goodwill
✓ Associates, subsidiaries, JV at cost
✓ Assets at revalued amount

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 IMPAIRMENT LOSS-DEFINITION

▪Impairment loss: is the amount by which the CARRYING

AMOUNT of an asset or a cash-generating unit [CGU]
exceeds its RECOVERABLE AMOUNT

IMPAIREMT LOSS
[IL]
Carrying amount
Recoverable
[CA] EXCEEDS amount [RA] ?
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 DETERMINING THE RECOVERABLE AMOUNT
▪ The recoverable amount is determined for individual assets.
▪However, some asset only has a value due to its relationship with
other assets.
▪If an asset does not generate cash inflows that are
independent of those from other assets, the recoverable amount
is determined for the Cash Generating Unit [CGU] to which the
asset belongs.
▪For example, the tables in a restaurant do not
generate cash. They do belong to a larger CGU (the restaurant
itself). It is the restaurant that is then tested for impairment
▪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. 6
 DETERMINING THE RECOVERABLE AMOUNT
Recoverable amount of an asset or a CGU- is the higher of an assets
or a CGU FAIR VALUE LESS COSTS OF DISPOSAL and its VALUE IN
USE. Recoverable amount
[RA]

FAIR VALUE less Value in use

Greater of
costs of disposal [VIU]
Asset’s/CGU
[FVLCD]*
*Prior to the amendments made by IFRS 13 Fair Value Measurement, this was
referred to as 'fair value less costs to sell'.
Costs of disposal are direct incremental cost to bring the asset into condition
for sale, legal cost, stamp duty, cost of removing asset etc

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 ILLUSTRATION: FAIR VALUE LESS COST OF
DISPOSAL
ABC operates in leased premises. It owns a bottling plant which is
situated in a single factory unit. The plants are sold periodically as a
complete assets. Professional valuers have estimated that the plant
might be sold for Tshs.100M. They have charged a fee of Tshs.1M for
providing this valuation. ABC would need to dismantle the asset and
ship it to any buyer. Dismantling and shipping would cost Tshs. 5M.
Specialist packaging would cost a further Tshs.4M and legal fees
Tshs.1.5M.
Compute fair value less costs of disposal

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DETERMINING THE RECOVERABLE AMOUNT
Recoverable amount
[RA]

Fair value less Greater of Value in use

costs of disposal Asset’s

▪ If either of these amounts exceeds the asset's CARRYING

AMOUNT-the asset is not impaired and it is not necessary to
estimate the other amount
▪ If FV less cost of disposal is impossible to set- Use value in use

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 RECOVERABLE AMOUNT
Value in use Fair value Recoverable Carrying Comment
less cost of amount amount
disposal
900 1050 1000

900 980 1000

960 925 1000

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INDICATIONS OF IMPAIRMENT AND
FREQUENCY OF TESTING
an entity should assess whether there is ANY
At each balance sheet date
INDICATION that an asset or a CGU may be
impaired.
▪ If any such indication exists, the entity should estimate the
YES
recoverable amount of the asset.
If no indication exists, no need to make a formal estimate of
NO
recoverable amount
▪ except for:
√Goodwill acquired in business These need to be tested for impairment
combination ANNUALLY, irrespective of whether there is
√Intangible assets with an indefinite any indication that they may be impaired.
useful life. Even more frequently if events or changes in
√Intangible assets not yet available circumstances suggest that the asset might be
for use impaired.
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 IDENTIFYING AN ASSET THAT MAY BE IMPAIRED
INDICATIONS OF IMPAIRMENT
EXTERNAL FACTORS INTERNAL FACTORS
▪ Negative changes in ▪ Physical damage or obsolescence
technology of the asset.
▪ Changes in legal environment ▪ discontinuance, disposal, idle
(new environmental laws) ▪ asset performance declining or
expected to decline
▪ Significantdeclinein market
value of the asset ▪ High maintenance, Net cash flow is
worse than budgeted, Operating
losses
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 FREQUENCY OF TESTING-SUMMARY
Impairment
yes
test
Assets/CGU
With no Goodwill Indication? Impairment
no
test

Assets/CGU
yes Impairment Recent calculation
With Goodwill, (RA) can be used
intangibles with test if criteria are met
indefinite useful life Indication? any time within
or not available for an annual
use Impairment reporting period
no test at least (consistency)
ANNUALLY Different CGUs
may be tested
for impairment
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at different
times.
 RE-USE PREVIOUS PERIODS’ IMPAIRMENT
CALCULATIONS
▪ The entity may re-use previous periods’ impairment calculations,
when ALL of the following criteria are met:
▪ The assets and liabilities comprising the CGU, or group of CGUs,
have not changed significantly since the most recent calculation of
recoverable amount.
▪ The previously calculated recoverable amount exceeded the
carrying amount by a substantial margin.
▪ The likelihood that an updated calculation of the recoverable amount
would be less than the CGU’s, or group of CGUs’, carrying amount is
remote.

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 RECOGNITION OF AN IMPAIRMENT LOSS
FOR AN INDIVIDUAL ASSET
▪ An impairment loss is recognized whenever recoverable amount is below
carrying amount.
▪The impairment loss is recognized AS AN EXPENSE

▪ Unless it relates to a revalued asset where the impairment loss is treated as a

revaluation decrease and recognized directly in OCI, reducing the
revaluation surplus for that asset to the extent the impairment loss exceeds
the revaluation surplus, the remaining loss is recognized as an expense
immediately in profit or loss.

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 RECOGNITION OF AN IMPAIRMENT LOSS

IMPAIRMENT LOSS

Cost Model Revaluation Model

Dr. P/L [Impairment loss ] Dr. Revaluation surplus (OCI) Dr. P/L [Impairment loss ]
Dr. P/L [Impairment loss] Cr. Acc. impairment loss (SFP)
Cr. Acc. impairment loss (SFP)
CR. Acc. Impairment loss (SFP)

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ILLUSTRATION #1
On January 1, 2020, a company acquired a piece of equipment for
TZS.100,000. It was decided that the equipment would be depreciated
over ten years with zero salvage value. At December 31, 2023, the
equipment has significantly decreased in value due to technological
innovations in the industry in which the company operates. The current
carrying value of the equipment is TZS.60,000 (TZS.100,000 cost less
TZS.40,000 of accumulated depreciation). The expected future
undiscounted cash flows from the use of this equipment are TZS.61,000. The
discounted net present value of expected cash flows from this piece of
equipment is TZS.51,000. Additionally, the fair value of the piece of
equipment is TZS. 50,000 and the selling costs are minimal.
▪ Is the equipment impaired under IAS 36?
▪ Show any required journal entries.
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ILLUSTRATION #1: SOLUTION

RECOVERABLE
AMOUNT
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ILLUSTRATION #2

A plant which is subject to a policy of revaluation has a

carrying amount of TZS10m. Its depreciated historical cost is
TZS.8m. There is an amount of TZS.2m accumulated in
revaluation surplus in respect of the plant. The plant
becomes impaired due to an adverse change in the market
for goods that it produces. Its recoverable amount is
calculated to be TZS.7m.
▪ Calculate the amount of impairment loss
▪Show any required journal entries.
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SUBSEQUENT MEASUREMENT AFTER
RECOGNIZING AN IMPAIRMENT LOSS

Subsequent measurement After recognizing an

impairment loss;
▪the revised carrying amount of the asset, less
any residual value, should be depreciated over
the asset’s remaining useful life.

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RECOGNITION & MEASUREMENT OF AN
IMPAIRMENT LOSS FOR AN INDIVIDUAL ASSET
Internal and External
Stage -1 Indications of Impairment
Impairment conditions

Stage -2 Determine recoverable Higher of fair value less cost

amount of disposal and value in use

Stage -3 Reduce carrying amount to

Recognize impairment loss recoverable amount

Adjust depreciation for future

periods to New CA

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IMPAIRMENT LOSSES AND CGUS – INCLUDING
GOODWILL

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IMPAIRMENT LOSSES AND CGUS – INCLUDING
GOODWILL

▪If there is a goodwill acquired in a business combination,

then it must be allocated to each of the acquirer’s cash-
generating units (or group of them) that are expected to
benefit from the synergies of the combination.

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 IMPAIRMENT LOSSES AND CGUS – INCLUDING
GOODWILL
▪A CGU to which goodwill has been allocated shall be
tested for impairment at least annually by comparing the
carrying amount of the unit, including the goodwill, with the
recoverable amount of the unit:
▪ If the recoverable amount of the unit exceeds the carrying
amount of the unit, the unit and the goodwill allocated to that
unit is not impaired
▪ If the carrying amount of the unit exceeds the recoverable amount
of the unit, the entity must recognize an impairment loss.

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 IMPAIRMENT LOSSES AND CGUS – INCLUDING
GOODWILL
▪ Where an impairment loss arises in a CGU with goodwill
the following ALLOCATION RULES apply:
1. first, reduce the carrying amount of any goodwill
allocated to the cash-generating unit (group of units);
and
2. then, reduce the carrying amounts of the other assets
of the unit (group of units) pro rata on the basis.

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 ILLUSTRATION #3

A cash generating unit (CGU) is made up of the following assets

Tshs(m)
Property, plant and Equipment 90
Goodwill 10
Other assets 60
160

The recoverable amount of the CGU has been assessed as Tshs.140m.

Required: Show how the impairment loss will be allocated across
the assets of a CGU.
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 IMPAIRMENT LOSSES AND CGUS – INCLUDING
GOODWILL
▪ The carrying amount of an asset should not be reduced below
the highest of:
🢝 its fair value less costs of disposal (if measurable)
🢝 its value in use (if measurable)
🢝 zero.
▪ If the preceding rule is applied, further allocation of the
impairment loss is made pro rata to the other assets of the unit
(group of units).
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ILLUSTRATION #3.
An entity carries out an impairment assessment for a CGU with
a total carrying value of Tshs.2,600,000 and estimates that its
total recoverable amount is Tshs.1,350,000. The total
impairment loss is therefore Tshs.1,250,000.
C A pre-
impairment FVLCTS VIU
Tshs'000' Tshs'000' Tshs'000'
Goodwill 800 - -
Other intangibles 300 100 Not known
Property 600 500 Not known
Plant and Equipment 500 Not known Not known
Debtors and Cash 400 400 400
Total 2,600

How the impairment loss is allocated ?

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ILLUSTRATION #4. SOLUTION

ALLOCATION OF IMPAIRMENT LOSS (IL)

CA pre- Excess
impairment Initial allocation impairment FVLCTS/VIU
Tshs'000'
Goodwill 800 800 - 0
300
×450
1800
Other intangibles 300 75 - 100
600
×450
1800
Property 600 150 50 500
500
×450
1800
Plant and Equipment 500 125 - Not known
400
×450
Debtors and Cash 400 1800 100 100 400
Total 2,600 1,250 150

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ILLUSTRATION #4. SOLUTION

ALLOCATION OF IMPAIRMENT LOSS (IL)

CA pre- Excess Reallocation of Impairment CA post
impairmentInitial allocation impairment impairment allocation impairment
Tshs'000'
Goodwill 800 800 - 800 0
300 300
×450 ×150
1800 800
Otherintangibles 300 75 - 56 131 169
600
×450
1800
Property 600 150 50 100 500
500 500
×450 ×150
1800 800
Plant andEquipment 500 125 - 94 219 281
400
×450
Debtorsand Cash 400 1800 100 100 - 400
Total 2,600 1,250 150 150 1,250 1,350

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 REVERSAL OF AN IMPAIRMENT LOSS
▪ An entity shall assess at the end of each reporting period
whether there is any indication that an impairment loss
recognized in prior periods for an asset other than goodwill
may no longer exist or may have decreased.
▪ If any such indication exists, the entity shall estimate the
recoverable amount of that asset.
▪ An entity shall consider the same set of indications from
external and internal sources as when assessing the existence of
impairment, just from the other side.
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 REVERSAL OF AN IMPAIRMENT LOSS FOR AN
INDIVIDUAL ASSET
▪ Reversal of an impairment loss is recognized in the profit or
loss unless it relates to a revalued asset.
▪ The increased carrying amount due to reversal should not
be more than what the depreciated historical cost would
have been if the impairment had not been recognized.
▪ Adjust the depreciation for future periods to reflect revised
carrying amount.

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 ILLUSTRATION #5
On January 1, 2009, a company acquired a piece of equipment for shs.100,000. It was decided that the
equipment would be depreciated over ten years with zero salvage value. At December 31, 2012, the
equipment has significantly decreased in value due to technological innovations in the industry in which the
company operates. The current carrying value of the equipment is shs.60,000 (shs.100,000 cost less
shs.40,000 of accumulated depreciation). The expected future undiscounted cash flows from the use of this
equipment are shs.61,000. The discounted net present value of expected cash flows from this piece of
equipment is shs.51,000. Additionally, the fair value of the piece of equipment is shs. 50,000 and the
selling costs are minimal. In 2014 it is discovered that the technological innovations related to this
piece of equipment are not effective. As a result, the fair value of this piece of equipment is now
shs.41,000. The discounted net present value of expected cash flows from this piece of equipment is
also shs.41,000.
Required:
What amount of the original impairment loss of shs.9,000 can be reversed?
Show any required journal entries to reverse the impairment loss.

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 ILLUSTRATION 5: SOLUTION
The impairment loss can be reversed up to the newly calculated recoverable amount of 41,000, but it cannot
exceed what the original carrying amount, net of depreciation, would have been.

Impaired Not impaired

Carrying amount 2012 60,000 60,000
Acc. Impairment 2012 (9,000)
New carrying amount after impairment 51,000
Depreciation 2013 shs.51,000/(6) (8,500) (10,000)
Depreciation 2014 shs.51,000/(6) (8,500) (10,000)
Carrying amount 2014 34,000 40,000
Reversal of impairment loss 6,000
40,000
Dr. Equipment 6,000
Cr. Reversal of Impairment loss (P/L) 6,000
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 REVERSAL OF AN IMPAIRMENT LOSS – CASH
GENERATING UNIT

▪ The reversal of any impairment loss relating to a CGU is

allocated across the assets of the CGU (excluding goodwill) on a
pro-rata basis
▪ The carrying amount of an assets shall not be increased above
the lower of:
-Its recoverable amount and
-The carrying amount that would have been determined (net of
amortization or depreciation) without any prior impairment loss.
The reversals for specific assets will be accounted for in the same
way as for individual assets. 35
REVERSAL OF AN IMPAIRMENT LOSS FOR
GOODWILL

Reversal of an impairment loss for goodwill is

prohibited.

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 DISCLOSURE
Disclose the following for each class of assets:
▪Events and circumstances that led to the recognition or
reversal of the impairment loss.
▪Amount of impairment losses recognized during the
period in income statement and directly to equity
▪Information on basis used for recoverable amount
▪Discount rate used etc.

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REVIEW QUESTION 1
Company X uses a machine in the manufacturing of components. In December 2009, a
competitor launched its own range of components. These components are being offered at a
much lower price. The Company forecasts a 40-50% fall in sales over the next three years.
Following detailed assessments Company X has provided you with the following information:
▪ The carrying value of the machine at the date of calculation is 35,000
▪ The asset is currently depreciated on the straight line basis at a rate of 5% and has a
remaining useful life of five years.
▪ The value of the asset on the second hand market is 12,000. Costs of disposing the asset are
expected to amount to 3,000.
▪ Discountednet cashInflows from the assetover the asset’sremaining useful life (including
disposal proceeds) has been assessed at 9,700.
▪ The current residual value of the asset has been estimated at 1,200
What is the amount of the impairment loss?
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REVIEW QUESTION
A cash generating unit (CGU) comprising a factory, plant and equipment etc and associated purchased goodwill
becomes impaired because the product it makes is overtaken by a technologically more advanced model produced
by a competitor. The recoverable amount of the cash generating unit falls to Tshs.60m, resulting in an impairment loss
of Tshs.80m, allocated as follows:
CA before impairment CA after impairment
Tshs. (m) Tshs. (m)
Goodwill 40 0
Patent (with no market value) 20 0
Tangible long-term assets 80 60
Total 140 60
After three years, the entity makes a technological breakthrough of its own, and the recoverable amount of the cash
generating unit increases to Tshs.90m. The carrying amount of the tangible long-term assets had the impairment not
occurred would have been Tshs.70m.
Required: a)State the allocation rule applied in the allocation of an impairment loss arises in a CGU with goodwill
as per IAS 36.
b)Calculate the amount of the original impairment loss of Tshs. 80m that can be reversed.
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