CIA1003

INTERMEDIATE FINANCIAL
ACCOUNTING AND REPORTING
LECTURE: IMPAIREMENT OF
ASSETS
 You have covered in week 6 the
followings:
• Event after the reporting period
Definition
Two types of events
Accounting treatments
Some examples – on going lawsuit; bankruptcy
of debtors

April 2021 Dr Rusnah 2

 Topics to be covered in this
lecture

• Impairment of property, plants and

equipments
• Impairment of intangibles
• Disclosure requirement
• MFRS136

April 2021 Dr Rusnah 3

 IMPAIRMENT

What is impairments?
Impairment - is the fall in the value of an asset so that
its recoverable amount (RA) is now less than its
carrying amount (CA) in the Statement of Financial
Position.
MFRS136 basic principle is simple:
If an asset’s value in the accounts (CA) is higher than
its realistic value, measured as its RA, the asset is
judged to have suffered an impairment loss.

April 2021 Dr Rusnah 4

 IMPAIRMENT

• An impairment loss occur when the CA of

an asset is higher than (>) its RA.
• An impairment loss is the amount by which
the CA of an asset or a cash-generating unit
exceeds its RA(P6).
• Impairment loss = CA – RA

April 2021 Dr Rusnah 5

 IMPAIRMENT

• The value of the asset should therefore be

reduced by the amount of impairment loss by
providing the provision for impairment
loss.
• Need to understand the following terms:
 Carrying amount – RA
 Recoverable amount – CA
 Fair value less costs to sell. Refer also P28.
 Value in use – VIU

April 2021 Dr Rusnah 6

 IMPAIRMENT
 Carrying amount –> CA
CA is the amount at which an asset is
recognized after deducting any accumulated
depreciation (AD) [PPE]/accumulated
amortization (AA) [ITA]and accumulated
impairment losses (AIL) thereon (P6).
CA = Historical Cost – (AD/AA + AIL)
Recoverable amount –> RA
The RA of an asset or a cash-generating unit is
the higher of its fair value less costs to sell and
its VIU (P6).
April 2021 Dr Rusnah 7
 IMPAIRMENT

 Fair value less costs to sell?

Fair value less costs to sell is the
amount obtainable from the sale of an
asset or cash-generating unit in an arm’s
length transaction between
knowledgeable, willing parties, less the
costs of disposal (CoD) (P6) [Cash
proceed – CoD].
April 2021 Dr Rusnah 8
 IMPAIRMENT

 Examples of CoD are legal costs, stamp

duty and similar transaction taxes, costs of
removing the asset, and direct incremental
costs to bring an asset into condition for its
sale (P28).

April 2021 Dr Rusnah 9

 IMPAIRMENT

If it is not be possible to determine fair value

less costs to sell because there is no active
market and there is no basis for making a
reliable estimate of the amount then in this
case, the entity may use the VIU of the asset
as its RA (P20).

April 2021 Dr Rusnah 10

 IMPAIRMENT

Therefore, RA can be determined as follows:

• fair value less costs to sell OR VIU;
whichever is highest; or,
• If no active market and no basis to make a
reliable estimate of the amount for the fair
value less costs to sell, use the VIU as RA.

April 2021 Dr Rusnah 11

 IMPAIRMENT

Value in use – VIU?

VIU is the present value of the future cash
flows expected to be derived from an
asset or cash-generating unit (P6, see also
P31; 39 & 55).

April 2021 Dr Rusnah 12

 IMPAIRMENT

In general, an entity is required to make a

formal estimate of the RA when there is any
indication of impairment, except for specific
situations as described in paragraph 10 & 11 –
relate to intangible assets (P8).
• Annual assessment of triggering indication is
required (P9).
• An asset is considered impaired when its CA
exceeds its RA (P8; 59; 60 & 63).

April 2021 Dr Rusnah 13

 IDENTIFICATION OF AN
IMPAIRMENT LOSS.

MFRS136 P12 suggests how indications of a

possible impairment of asset might be recognized:
• largely based on common sense
• external sources of information:
eg. excessive decline in market value; the
occurrence of significant changes in the
technological, market, economic or legal
environment that will give an adverse effect to
the entity.
April 2021 Dr Rusnah 14
 IDENTIFICATION OF AN
IMPAIRMENT LOSS.

• internal sources of information:

eg. proof of obsolescence or physical damage
of an asset; evidence of significant changes
such as idle assets, discontinued or restructured
of operations, disposal of assets and
reassessing of useful life of assets.
• previously impaired assets.

April 2021 Dr Rusnah 15

 CALCULATION OF
IMPAIRMENT LOSS

Identifying cash
generating unit (CGU)
4 steps
Compute cash flow estimates

Compute discounted PV

Compute RA

April 2021 Dr Rusnah 16

 WHAT IS A CGU?

• Is the smallest identifiable group of assets for

which independent cash flows can be identified
and measured – P6

April 2021 Dr Rusnah 17

 HOW TO COMPUTE CASH
FLOW ESTIMATES?

VIU- is measured as the present value of

estimated future cash flows (inflows minus
outflows) generated by the asset, including its
estimated net disposal value (if any) at the end of
its expected useful life – P6.

April 2021 Dr Rusnah 18

 SOME RULES

• cash flows should be pre-tax cash flows

• cash flows projections should be based on
reasonable and supportable assumptions
• recent budgets/financial forecasts used for
short term projections
• justify growth rates - for long term
projections.

April 2021 Dr Rusnah 19

 HOW TO DISCOUNT TO
PRESENT VALUE?

• The relevant discount rate should be applied to

estimated cash flows for the CGU in order to
establish the discounted present value.
• The rate used should be an estimate of the rate
the market would expect on an equally risky
investment.
• The identification of the rate is likely to be
extremely difficult in practice.

April 2021 Dr Rusnah 20

 HOW TO COMPUTE RA?

Higher of

Fair value less VIU

costs to sell

Proceeds from sale of Present value of the

asset minus the CoD future cash flows to be
derived from the asset
April 2021 Dr Rusnah 21
 ACCOUNTING TREATMENT
FOR IMPAIRMENT LOSS

• The amount of impairment loss should be

written off against the income statement
immediately, in the case of assets being carried
at cost less accumulated depreciation [debit
Impairment loss].
• The amount of impairment loss should be
written off against revaluation reserve, in the
case of assets being carried at revalued amount
- P60, [debit Revaluation reserve account]
April 2021 Dr Rusnah 22
 EXAMPLE 1
Suria Berhad purchased a building on 2 January
2016 at a price of RM600,000. Suria occupied half
of the building as its main office and the rest of
the building are rented to other tenants. The
building has been depreciated using the straight
line method with a 20 year useful life and no
residual value. The rented spaces have reduced
significantly for the last 15 months due to slower
business environment affected by the covid 19
pandemic.
April 2021 Dr Rusnah 23
 EXAMPLE 1
As at 31 December 2020, the CFO of Suria Berhad estimates the
followings relating to the building:
1) The remaining useful life of the building is 10 years;
2) The estimated annual amount of revenues to be generated is
RM125,000 and expenses to be incurred in maintaining the
building is RM100,000 per year;
3) The fair value of the building is RM230,000; legal and
stamping fee plus brokerage fee expected to be incurred to
dispose off the building is RM25,000 and,
4) The market prevailing interest rate is 4 percent.
5) The policy of the company is to conduct annual assessment on
the triggering indication of possible impairment at the end of
the accounting year; 31 December.

April 2021 Dr Rusnah 24

 EXAMPLE 1

Required:
i. Explain whether Suria Berhad should make a
formal estimate of the recoverable amount for
the building for the financial year ending 31
December 2020.
ii. Prepare the necessary journal entries to record
the impairment loss if any.
iii. Prepare the partial Statement of Financial
Position to present the building as at 31
December 2021.
April 2021 Dr Rusnah 25
 Subsequent Expenditure

If there is any subsequent expenditure incurred

on the building, Suria Berhad need to evaluate
and determine if the amount incurred:
i) Revenue expenditure; or
ii) Capital expenditure -> to be capitalized and
added to the CA of the building, thus will
affect the computation of the impairment
loss.

April 2021 Dr Rusnah 26

 Reversal of Impairment Loss

MFRS136, P117 allows for reversal of

impairment loss recognized only if certain
conditions are met and the extent of reversal is
limited such that the new carrying amount does
not exceed the original carrying amount if no
impairment loss had been recognized.
Please see also P119 & P121.

April 2021 Dr Rusnah 27

 EXAMPLE 3
On 2nd January 2016, Emas Berhad purchased a
patent for RM110,000. The demand for the
product produced under this patent has declined
significantly for the past 11 months. On the date
of purchase, the patent had an estimated useful life
of eleven (11) years. It is estimated that currently
(31 December 2020) it has a remaining useful life
of four (4) years.

April 2021 Dr Rusnah 28

 EXAMPLE 3

The current fair value of the patent is RM43,000.

The company’s CFO estimates that the patent
will generate future net cash flows of RM12,000
per year for the next four years. The analysis of
the market shows that the prevailing market
interest rate is 6 percent.

April 2021 Dr Rusnah 29

 EXAMPLE 3
Required:
a) Explain whether there is a need for Emas Berhad to
make a formal estimate of the recoverable amount and
conduct the impairment test for the above patent.
b) Prepare the necessary journal entries to record the
impairment loss if any.
c) Prepare the partial Statement of Financial Position to
present the patent as at 31 December 2021.

April 2021 Dr Rusnah 30

 DISCLOSURE REQUIREMENTS

MFRS136 requires substantial amount of disclosures

about impairment of assets.

• For each class of assets, i) the amount of impairment

losses recognized and ii) the amount of any impairment
losses recovered (i.e. reversals of impairment losses).

April 2021 Dr Rusnah 31

 DISCLOSURE REQUIREMENTS

• For each individual asset or CGU that has suffered a

significant impairment loss, i) details of the nature of
the asset, ii) the amount of the loss, iii) the events that
led to recognition of the loss, iv) whether the
recoverable amount is net selling price or value in use,
and if the recoverable amount is value in use, v) the
basis on which this value was estimated (eg. discount
rate used etc.).

April 2021 Dr Rusnah 32

 Tutorial 5 Q 1
Sun Trading Bhd. purchased a building at the
beginning of 2015 at a price of RM600,000. Sun
occupied half of the building as its main office and
the rest of the building are rented to other tenant.
The building has been depreciated using the
straight line method with a 20 year useful life and
no residual value. The rented spaces have
reduced significantly for the last 15 months. It
was also observed that several other buildings in
the immediate area have recently been left
abandoned.
April 2021 Dr Rusnah 33
April 2021 Dr Rusnah 34