IAS 36

Impairment of

Assets

Scope

• IAS 36 applies to all assets except:– Inventories (IAS 2)

– Construction Assets (IAS 11)

– Deferred tax assets (IAS 12)

– Pension assets (IAS 19)

– Financial Assets (IAS 39)

– Investment Property (IAS 40)

– Biological Assets (IAS 41)

– Deferred acquisition costs arising from Insurance contracts (IFRS 4)

– Non-current assets held for disposal (IFRS 5)

When to impair

• As asset is impaired when:– Its carrying amount (CA) exceeds its recoverable

amount (RA)

Recoverable Amount

Higher of:

•FV less costs to sell

•Value in Use

Carrying Amount

Amount at which asset is

recognised in balance

sheet

When to impair (cont)

• The following must be tested for impairment

annually:

– Intangible assets with indefinite life

– Intangible assets not yet available for use (e.g. R&D)

– Goodwill

• Other than the above, no impairment test is

required unless there is an indicator of

impairment

What are indicators of impairment?

• Internal indicators:– evidence is available of obsolescence or physical damage of

an asset

– significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future. e.g. :

• asset becoming idle

• plans to discontinue or restructure the operations to which an

asset belongs

• plans to dispose of an asset earlier than expected

• reassessing the useful life of an asset as finite rather than

indefinite

– evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected

What are indicators of impairment?

• External indicators:

– during the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use.

– significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment.

– market interest rates or other market rates of return on investments have increased during the period, DCF impact.

– the Carrying Amount of the net assets > Market capitalisation

Impairment MethodologyNEW CARRYING

AMOUNT

OLD CARRYING AMOUNT RECOVERABLE AMOUNT

FAIR VALUE LESS COSTS

TO SELL

VALUE IN USE

LOWER OF:

HIGHER OF:

CGUAsset

Recoverable Amount

• Recoverable amount is assessed as the higher

of the:

– Fair value less costs to sell; and

– Value in use (VIU)

FV less costs to sell

• Amount obtainable from the sale of an asset in

an arm’s length transaction between

knowledgeable, willing parties, less the costs of

disposal.

• Costs to sell include:

– Legal costs

– Stamp Duty

– Cost of removing the asset

– Other directly attributable costs

• Excludes finance costs and income taxes

FV less costs to sell

• Evidence to support FV – costs to sell:

– Binding sale agreement in an arm’s length transaction

– If the asset is traded in an active market, fair value

less costs to sell is the asset’s market price less the

costs of disposal

– Otherwise, an entity considers the outcome of recent

transactions for similar assets within the same

industry.

Value in use (VIU)

Calculation done in 4 stages:

Step 1:

Identification of cash-generating units (CGU)

Step 2:

Estimation of expected future cash flows

Step 3:

Determination of an appropriate discount rate

Step 4:

Discounting and aggregating expected cash flows (DCF)

The present value of the future cash flows expected to be derived from an asset or cash-generating unit.

Step 1: Identification of cash-

generating units (CGU)

• Sometimes can not determine recoverable amount of individual asset as it works together with other assets to generate cash flows

• In this case, determine VIU based on group of assets together known as a cash-generating unit

• 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

Step 2: Estimation of expected

future cash flows

• Determine the future cash flows to be generated

by the asset/CGU

• Use various sources of information:

– Forecasts

– Budgets

– Cash flow projections

Step 2: Estimation of expected

future cash flows (cont)

INCLUDE

• cash inflows from the continuing use of the asset;

• cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and

• net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.

EXCLUDE

• estimated future cash inflows or outflows that are expected to arise from a future restructuring to which an entity is not yet committed; or

• improving or enhancing the asset’s performance.

• cash inflows or outflows from financing activities

• income tax receipts or payments

Step 3: Determination of an

appropriate discount rate

• Discount rate should be:

– Pre-tax rate

– That reflects current market assessments of:

• Time value of money; and

• Risks specific to the asset

• Simply: it’s the rate used in an estimate of the rate that the market would expect on an equally risky investment

Step 3: Determination of an

appropriate discount rate (cont)

• As these are usually unavailable, use a starting point of the following:– Company’s WACC; or

– Entity’s incremental borrowing rate; or

– Other market borrowing rates

• Adjusted for the following:– To reflect the way the market would assess the specific risks

associated with the assets estimated cash flows (e.g. country risk/currency risk/interest rate risk); and

– To exclude risks not relevant to the asset

Step 4: Discounting and

aggregating expected cash flows

• Discount the cash flows from Step 2 with the

rate from step 3

• Result is VIU of asset/CGU

Other IAS 36 Accounting Issues

Treatment of Goodwill

Allocation of impairment Reversal of impairment

Timing of impairment tests

IAS 36 – Write-downs

• All write-downs are recognised immediately

• Where a write-down is required in relation to a CGU with allocated goodwill, the goodwill is first written down

• Any remaining write down is taken proportionately against the non-monetary assets

• NOTE: Write-downs of goodwill may not be reversed in future reporting periods

Reversals of

Impairment

• An entity shall assess at each reporting date

whether there is any indication that an

impairment loss recognised in prior periods for

an asset may no longer exist or may have

decreased.

• If any such indication exists, the entity shall

estimate the recoverable amount of that asset.