The document discusses IAS 36 Impairment of Assets. It provides guidance on identifying potential asset impairment, determining an asset's recoverable amount, recognizing and measuring impairment losses, and impairment testing for cash-generating units. Key points include:
- An entity should assess for impairment indicators annually and if found, estimate an asset's recoverable amount.
- Recoverable amount is the higher of fair value less costs to sell or value in use.
- If recoverable amount is less than carrying amount, an impairment loss is recognized for the difference.
- For cash-generating units, the loss is allocated first to goodwill, then other assets pro rata based on carrying amounts.
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The document discusses IAS 36 Impairment of Assets. It provides guidance on identifying potential asset impairment, determining an asset's recoverable amount, recognizing and measuring impairment losses, and impairment testing for cash-generating units. Key points include:
- An entity should assess for impairment indicators annually and if found, estimate an asset's recoverable amount.
- Recoverable amount is the higher of fair value less costs to sell or value in use.
- If recoverable amount is less than carrying amount, an impairment loss is recognized for the difference.
- For cash-generating units, the loss is allocated first to goodwill, then other assets pro rata based on carrying amounts.
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IAS 36 Impairment of assets
Basic concept and
indicator Identifying a potentially impaired asset An entity should assess at the end of each reporting period whether there are any indications of impairment to any assets. If there are indications of possible impairment, the entity is required to make a formal estimate of the recoverable amount of the assets concerned. IAS 36 suggests how indications of a possible impairment of assets might be recognised. The suggestions are based largely on common sense. (a) External sources of information I. A fall in the asset's market value that is more significant than would normally be expected from passage of time over normal use II. A significant change in the technological, market, legal or economic environment of the business in which the assets are employed III. An increase in market interest rates or market rates of return on investments likely to affect the discount rate used in calculating value in use IV. The carrying amount of the entity's net assets being more than its market capitalisation (b) Internal sources of information: evidence of obsolescence or physical damage, adverse changes in the use to which the asset is put, or the asset's economic performance Ex1 Which of the following is NOT an indicator of impairment? A. Advances in the technological environment in which an asset is employed have an adverse impact on its future use. B. An increase in interest rates which increases the discount rate an entity uses. C. The carrying amount of an entity's net assets is higher than the entity’s number of shares in issue multiplied by its share price. D. The estimated net realisable value of inventory has been reduced due to fire damage although this value is greater than its carrying amount. Ex1 Answer D Although the estimated NRV is lower than it was (due to fire damage), the entity will still make a profit on the inventory and thus it is not an indicator of impairment. Even if there are no indications of impairment, the following assets must always be tested for impairment annually. (a) An intangible asset with an indefinite useful life (b) Goodwill acquired in a business combination Impairment test Measuring the recoverable amount of the asset
What is an asset's recoverable amount?
The recoverable amount of an asset should be measured as the HIGHER VALUE of: (a) The asset's fair value less costs of disposal (b) Its value in use Ex2 A vehicle was involved in an accident exactly halfway at year end. The vehicle cost $10,000 and had a remaining life of 10 years at the start of the year. Following the accident, the expected present value of cash flows associated with the vehicle was $3,400 and the fair value less costs to sell was $6,500. What is the recoverable amount of the vehicle following the accident? $ . Ex2 Answer $6,500 The recoverable amount of an asset is the higher of its value in use (being the present value of future cash flows) and fair value less costs to sell. Therefore the recoverable amount is $6,500. Recognition and measurement of an impairment loss
If the recoverable amount of an asset is lower than the
carrying amount, the carrying amount should be reduced by the difference (ie the impairment loss) which should be charged as an expense in profit or loss. To the extent that there is a revaluation surplus held in respect of the asset, the impairment loss should be charged to revaluation surplus Any excess should be charged to profit or loss Ex3 Riley acquired a non-current asset on 1 October 20X9 at a cost of $100,000 which had a useful economic life of ten years and a nil residual value. The asset had been correctly depreciated up to 30 September 20Y4. At that date the asset was damaged and an impairment review was performed. On 30 September 20Y4, the fair value of the asset less costs to sell was $30,000 and the expected future cash flows were $8,500 per annum for the next five years. The current cost of capital is 10% and a five year annuity of $1 per annum at 10% would have a present value of $3.79 What amount would be charged to profit or loss for the impairment of this asset for the year ended 30 September 20Y4? $ . Ex3 Answer $17,785 $ Cost 1 October 2009 100,000 Depreciation 1 October 2009 to 30 September 2014 (100,000 x 5/10) (50,000) Carrying amount 50,000
fair value less costs to sell value in use
30,000 32,215 (8,500 x 3.79) (is higher) the recoverable amount is therefore $32,215 $ Carrying amount 50,000 Recoverable amount (32,215) Impairment to statement of profit or loss 17,785 Cash generating units Cash generating units When it is not possible to calculate the recoverable amount of a single asset, then that of its cash generating unit should be measured instead. A cash-generating unit is the smallest identifiable group of assets for which independent cash flows can be identified and measured. Ex4 The net assets of Fyngle, a cash generating unit (CGU), are:
Property, plant and equipment 200,000
Allocated goodwill 50,000 Product patent 20,000 Net current assets (at net realisable value) 30,000
300,000 Ex4 As a result of adverse publicity, Fyngle has a recoverable amount of only $200,000. What would be the value of Fyngle’s property, plant and equipment after the allocation of the impairment loss? A. $154,545 B. $170,000 C. $160,000 D. $133,333 Ex4 Answer A Goodwill should be written off in full and the remaining loss is allocated pro rata to property plant and equipment and the product patent. B/f Loss Post loss $ $ $ Property, plant and equipment 200,000 (45,455) 154,545 Goodwill 50,000 (50,000) nil Product patent 20,000 (4,545) 15,455 Net current assets (at NRV) 30,000 nil 30,000 . . . 300,000 (100,000) 200,000 . . . Ex5 A division of a company has the following balances in the financial statement: Goodwill 700,000 Plant 950,000 Property 2,300,000 Intangible 800,000 Other net asset 430,000 Following a period of losses, the recoverable amount of the division is deemed to be 4m. A recent valuation of the building showed that the building has a market value of 2.5m. Ex5-1 To the nearest thousand, what is the balance on property following the impairment review? A. $2,300,000 B. $2,500,000 C. $2,027,000 D. $1,776,000 Ex5-1 Answer A In a cash generating unit, no asset should be impaired below its recoverable amount. The valuation of $2.5 million is an indication that the property is not impaired and should therefore be left at $2.3 million. $2.5 million cannot be chosen as the company uses the cost model. If you chose item C or D then you have impaired the asset. Ex5-2 To the nearest thousand, what is the balance on plant following the impairment review? A. $862,000 B. $837,000 C. $689,000 D. $261,000 Ex5-2 Answer C The cash generating unit is impaired by $1,180,000, being the difference between the recoverable amount of $4 million and the total carrying values of the assets of $5,180,000. In a cash generating unit, no asset should be impaired below its recoverable amount, meaning that the property and other net assets are not impaired. The impairment is allocated to goodwill first, resulting in the entire $700,000 being written off. This leaves a remaining impairment of $480,000 to be allocated across plant and intangibles. This should be allocated on a pro-rata basis according to their carrying value. The plant and intangible have a total carrying value of $1,750,000 ($950,000 plant and $800,000 intangible). Therefore the impairment should be allocated to plant as follows: $950,000/$l,750,000 x $480,000 = $261,000. The carrying value of plant is therefore $950,000 - $261,000 = $689,000 If you selected D you have chosen the impairment rather than the carrying amount. If you selected A or B you have pro-rated the impairment over the property or other net assets as well as the plant and intangibles. 先个别再虚再实 When an impairment loss is recognised for a cash- generating unit, the loss should be allocated between the assets in the unit in the following order. a) First, to any assets that are obviously damaged or destroyed b) Next, to the goodwill allocated to the cash generating unit c) Then to all other assets in the cash-generating unit, on a pro rata basis You’re a Champion! Thanks for staying with us. You have finished this task.
