5 Impairment of assets Flashcards
How is Impairment determined?
Impairment is determined by comparing the carrying amount of the asset with its recoverable amount. This is the higher of its fair value less costs of disposal and its value in use.
What is impairment? What is Carrying value?
Impairment. A fall in the value of an asset, so that its ‘recoverable amount’ is now less than its carrying amount in the statement of financial position. Carrying amount. The net value at which the asset is included in the statement of financial position (ie after deducting accumulated depreciation and any impairment losses).
The basic principle underlying IAS 36 is relatively straightforward. If an asset’s value in the accounts is higher than its realistic value, measured as its ‘recoverable amount’, the asset is judged to have suffered an impairment loss. It should therefore be reduced in value, by the amount of the impairment loss. The amount of the impairment loss should be written off against profit immediatelyThe main accounting issues to consider are therefore:
(a) How is it possible to identify when an impairment loss may have occurred? (b) How should the recoverable amount of the asset be measured? (c) How should an ‘impairment loss’ be reported in the accounts?
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
AS 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 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
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
An asset’s fair value less costs of disposal is the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date, less direct disposal costs, such as legal expenses.
(a) If there is an active market in the asset, the fair value should be based on the market price, or on the price of recent transactions in similar assets. (b) If there is no active market in the asset it might be possible to estimate fair value using best estimates of what market participants might pay in an orderly transaction.
What is value in use?
The value in use of an asset 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.
The rule for assets at historical cost is
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.
The rule for assets held at a revalued amount (such as property revalued under IAS 16) is:
In practice this means: 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
What is the cash generating unit?
A cash-generating unit is the smallest identifiable group of assets for which independent cash flows can be identified and measured.
A cash-generating unit to which goodwill has been allocated is tested for impairment annually. The carrying amount of the unit, including goodwill, is compared with the recoverable amount. If the carrying amount of the unit exceeds the recoverable amount, the entity must recognise an impairment loss. The annual impairment test may be performed at any time during an accounting period, but must be performed at the same time every year. True/ False
A cash-generating unit to which goodwill has been allocated is tested for impairment annually. The carrying amount of the unit, including goodwill, is compared with the recoverable amount. If the carrying amount of the unit exceeds the recoverable amount, the entity must recognise an impairment loss. The annual impairment test may be performed at any time during an accounting period, but must be performed at the same time every year
If, and only if, the recoverable amount of an asset is less than its carrying amount in the statement of financial position, an impairment loss has occurred. This loss should be recognised immediately
(a) The asset’s carrying amount should be reduced to its recoverable amount in the statement of financial position. (b) The impairment loss should be recognised immediately in profit or loss (unless the asset has been revalued in which case the loss is treated as a revaluation decrease).
An impairment loss should be recognised for a cash-generating unit if (and only if) the recoverable amount for the cash- generating unit is less than the carrying amount in the statement of financial position for all the assets in the unit. 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 In allocating an impairment loss, the carrying amount of an asset should not be reduced below the highest of: (a) Its fair value less costs of disposal (b) Its value in use (if determinable) (c) Zero
