International Accounting

Standards
IAS 36 Impairment of Assets
(1998)

Scope
Applies to all assets other than:

inventories;
deferred tax assets;
assets arising from construction contracts;
assets arising from employee benefits;
financial assets included in scope of IAS 32
( IAS 36 applies to investments in subsidiaries,
associates and joint ventures).

Objective
Assets should not be carried at amounts in

excess of their recoverable amount.

IAS 36 defines recoverable amount as the
higher of value in use and net selling
price.
Asset is impaired if carrying amount
exceeds recoverable amount.

Identifying Impaired Assets

Assess at each reporting date whether any

indication that asset may be impaired.

IAS 36 includes list of internal and external
factors that must, at a minimum, be considered
and whose existence provides evidence that asset
may be impaired.

Only need to test for impairment (i.e.,

measure recoverable amount) if there is

indication that asset may be impaired.
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Measuring Recoverable Amount

= Higher of Value in Use and Net Selling

Price
Net Selling Price

Amount obtainable from sale in arms length

transaction between knowledgeable, willing
parties, less costs of disposal.

Value in Use
Present value of estimated future cash flows
expected to arise from continued use and disposal
at end of useful life.
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Value in Use Considerations

1.

2.

3.

The basis for the entitys estimates of future

cash flows that is, what estimates to make
about how much those cash flows should be;
this is inherently very judgmental;
The composition of estimates of future cash
flows that is, which cash flows should be
included; detailed guidance is provided on this;
and
The discount rate that should be used; detailed
guidance is provided on this, but again it is a
very judgmental area.
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Measuring Recoverable Amount

Value in Use Future Cash Flow Estimates
Should be based on:
managements best estimate of economic
conditions that will exist over assets remaining
useful life; and
most recent financial budgets/forecasts approved
by management and covering maximum period of
5 years (unless longer period can be justified).
Cash flows beyond 5 years to be estimated by
extrapolating budgets/forecasts using steady or
declining growth rate (unless increasing rate can
be justified).
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Continued-Measuring Recoverable...
Value in Use Future Cash Flow Estimates

(cont.)
Must be estimated for asset in its current
condition and should included expected:
cash inflows from continuing use;
cash outflows necessarily incurred to generate cash
inflows and either directly attributable to asset or
that can be allocated on reasonable and consistent
basis; and
net cash flows on disposal at end of useful life in
arms length transaction after deducting disposal
costs.
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Continued-Measuring Recoverable...
Value

in Use Future Cash Flow

Estimates (cont.)
Should not include future cash flows
expected to arise from:
future restructuring to which enterprise is not yet
committed;
future capital expenditure to enhance asset in
excess of originally assessed standard of
performance; or
financing
activities
or
income
tax
receipts/payments.
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Future Cash flow Considerations

Use one of the following two methods:
Forecast cash flows in real terms do not increase to reflect
future inflationDiscount at a real discount rate
Include estimated inflation Discount at a nominal rate of
interest (one including inflation)

To avoid double counting, only include cash

inflows and outflows from the asset or CGU

under consideration in the forecasts and
calculations
Exclude cash inflows relating to the following:
a future restructuring to which an enterprise is not yet
committed; or
future capital expenditures that will improve or enhance the
asset in excess of its originally assessed standard of
performance.

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Measuring Recoverable Amount

Value in Use Discount Rate
Pre-tax rate that reflects current market
assessments of time value of money and risks
specific to the asset.
Should not reflect risks for which future cash flow
estimates have been adjusted.
As a starting point, can take into account WACC,
incremental borrowings rate and other market
borrowing rates.
These rates are then, adjusted to reflect market
assessment of specific risks associated with
projected cash flows and to exclude not relevant to
projected cash flows.

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Impairment Losses
Impairment loss = any excess of carrying

amount over recoverable amount.

Reduce carrying amount of asset to
recoverable amount and recognize
impairment loss as an expense, unless
asset carried at revalued amount (in which
case treat as revaluation decrement).

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Recording Impairment Losses

If asset is maintained at historical amortized
cost (the benchmark treatment)
Recognize as current period expense in income
from operations as either:
Part of depreciation; or
A separately identified charge

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Continued-Recording.
If asset is maintained under revaluation (the
allowed alternative treatment)
Impairment adjustment will be accounted for as
revaluation decrease of a previous upward
revaluation in stockholders equity
Charge impairment loss against revaluation
surplus
If the entire revaluation account is eliminated due
to recognition of impairment, charge any excess
impairment to expense
The revaluation account cannot contain a net debit
balance.
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Cash Generating Units

Recoverable amount should be estimated for

individual asset where possible.

But, recoverable amount of individual asset not
determinable if:
assets value in use is likely to differ from its net selling
price (e.g., specialized item of plant); and
asset does not generate cash inflows from continuing use
that are largely independent of those from other assets.

In such cases, recoverable amount must be

determined for cash generating unit asset

belongs to.
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Continued-Cash Generating Units

CGU = smallest identifiable group of

assets generating cash inflows from

continuing
use
that
are
largely
independent of cash inflows from other
assets/groups of assets.
Only include assets that can be allocated to CGU
directly or on reasonable and consistent basis.

Must

be identified consistently from

period to period (unless a change is
justified).
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Identification of cash-generating unit

Practical applications
See separate handout for detailed discussion
on identification of:

Multi locations
Restaurant chains
Retailers
Bank branches
Hotels
Petrol stations
Vertically integrated operations
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Cash Generating Units

Even if part/all of the output produced by an

asset/group of assets is used by other units

within the enterprise, treat as separate CGU
if active market exists for that output.
Use best estimate of future market prices for output to
determine value in use.

CGU recoverable amount = higher of CGUs

value in use and net selling price.

Test CGU for impairment by comparing
CGU carrying amount to CGU recoverable
amount.
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Continued-Cash Generating Units

Goodwill and Corporate Assets
Do not generate independent cash flows and can
support one or more CGU.
Need to assess whether they can be allocated to
CGUs they support on reasonable and consistent
basis.
Therefore, when testing CGU for impairment,
include in CGUs carrying amount any part of
goodwill and corporate assets that can be allocated
to that CGU on reasonable and consistent basis.
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Continued-Cash Generating Units

Goodwill and Corporate Assets (cont.)
For goodwill and corporate assets that
cannot be allocated to CGUs they support
on reasonable and consistent basis:
identify smallest CGU to which carrying amount
of goodwill and corporate assets can be allocated
on reasonable and consistent basis (the larger
CGU);
then, test larger CGU for impairment by
comparing larger CGU carrying amount to
larger CGU recoverable amount.
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Continued-Cash Generating Units

Allocating CGU Impairment Loss
Individual Assets in CGU
Allocate in the following order:

to

first, to any goodwill allocated to the CGU;

then, to other assets in the CGU on pro-rata basis
based on carrying amount of each asset.

When allocating, must not reduce carrying

amount of asset below higher of:

net selling price (if determinable);
value in use (if determinable);
zero.

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Reversal of Impairment Loss

Assess at each reporting date whether any

indication that all/part of impairment loss

recognized in previous period has
reversed.
IAS 36 includes list of internal and external
factors that must, at a minimum, be considered
and whose existence provides evidence that
impairment loss may have reversed.

Only

need to test for reversal of

impairment if there is indication that
impairment loss may have reversed.
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Continued-Reversal of Impairment Loss

Can only reverse impairment loss if

estimates used to determine recoverable

amount have changed since last
impairment loss recognized.
E.g., change in amount/timing of estimated
future cash flows or discount rate if
recoverable amount based on value in use.
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Continued-Reversal of Impairment Loss

Reversing Impairment Loss for Individual
Asset
Increase carrying amount to recoverable amount
(but cannot exceed carrying amount asset would
have had if impairment loss had not previously
been recognized).
Recognize reversal of impairment loss as revenue,
unless asset carried at revalued amount (in which
case treat as revaluation increment).

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Reversals of Previously Recognized

Impairments on Revaluation Assets
Report the recovery as a reversal of the
impairment
If the previous impairment was accounted for
entirely as reversal upward revaluations, account
for as an upward revaluation and increase to an
equity account, not reported through earnings.
If impairment had eliminated the entire
revaluation capital account, and the excess loss
was reported in earnings, account for later
recovery in earnings to the extent the earlier writedown had been so reported, with the balance taken
to the stockholders equity.

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Reversal of Impairment Loss

Reversing Impairment Loss for Cash Generating
Unit
Allocate in the following order:
first, to assets in the CGU other than goodwill on pro-rata
basis based on carrying amount of each asset;
then, to any goodwill allocated to the CGU, provided certain
criteria are met.

Carrying amount of individual asset cannot be

increased above lower of recoverable amount (if

determinable) and carrying amount asset would
have had if impairment loss had not previously
been recognized.

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Continued-Reversal of Impairment Loss

Reversing Impairment Loss for Cash Generating
Unit (cont.)
Recognize reversal of impairment loss as
revenue, unless asset carried at revalued amount
(in which case treat as revaluation increment).
Impairment loss previously recognized for
goodwill can only be reversed if:
impairment loss caused by specific external event of
exceptional nature that is not expected to recur; and
subsequent external events have occurred that reverse effect
of first event.

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Impairments Mitigated by Recoveries

or Third Party Compensation
Typically related to natural or physical damages

to long-lived assets
Example: Commercial insurance payment for flood damaged
equipment

Impairment must be recognized and cannot be

offset by actual or estimated recovery

Account separately for impairment and
reimbursement claim
Third party compensation should be recognized
as income when funds become receivable
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Disclosure
Disclosures are significant and required

for:
Each class of assets
Material impairment recognition and reversals on
individual assets or cash generating units

Additional disclosures are required for

enterprises applying IAS 14, Segment

Reporting.
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