CH 4. Nca - Impairments of Assets Flashcards
Define Impairment of assets? (IAS 36)
And
The Main Accounting Issues to consider?
Impairment of Assets:
If an asset’s Carrying Amount is higher than 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 impairment loss should be written off against profit immediately.
The main accounting issues to consider are:
- *(a) How to identify when an impairment loss may have occurred?
(b) How the recoverable amount of the asset be measured?
(c) How an impairment loss is reported?**
What types of assets does IAS 36 Apply to?
IAS 36 applies to impairment of ALL ASSETS
Except for:
• Inventories
• Deferred tax assets
• Employee benefit assets
• Financial assets
• Investment property held under the fair value model
• Biological assets held at fair value less costs to sell
• Non-current assets held for sale
How do you identify a potentially impaired asset?
Internal
or
External
External sources of information:
- – Unexpected decreases in an asset’s market value
- – Significant adverse changes have taken place, or about to take place in the:
- technological,
- market,
- economic
- legal environment
- – Increased interest rates have decreased an asset’s recoverable amount
- – The entity’s net assets are measured at more than its market capitalisation.
Internal sources of information:
- Evidence of obsolescence or damage
- There is or about to be, a material reduction in usage of an asset
- Evidence that the economic performance of an asset has been, or will be, worse than expected.
How do calculate an impairment loss?
You carry out an Impairment test:
Compare the:
- Carrying Amount
Vs
-
Recoverable amount, Higher of:
- Fair Value less costs to sell
- Value in use
- If the recoverable amount is lower than the Carrying Amount, the asset has suffered an impairment loss.
How do you measure the “Recoverable amount” of the asset?
The recoverable amount is the higher of
- Fair Value (IFRS 13) minus the costs to sell. = Comparable Value
and
- - Value in use. - P.V of future cash flows
How do you calculate the Fair value less costs of disposal for impairment review?
Fair value less costs of disposal:
Fair Value:-
- The price that would be received to sell the asset in an orderly transaction between market participants at the measurement date (IFRS 13 definition of fair value),
Costs of disposal:-
-
Less the direct incremental costs attributable to the disposal of the asset
e.g
legal costs
stamp duty and similar transaction taxes,
costs of removing the asset
direct incremental costs to bring an asset into condition for its sale
How do you calculate the Value in use for an impairment review?
Value in use of an asset: This is measured as the:
Present Value of estimated future cash flows (inflows minus outflows) generated, including its estimated net disposal value (if any) at the end of its expected useful life.
With regards to estimates of cash flows, IAS 36 stipulates that:
- Cash Flow projections should be based on reasonable assumptions and the most recent budgets and forecasts
- The cash flow projections should relate to the asset’s current condition and should exclude expenditure to improve or enhance it
- For periods in excess of five years, management should extrapolate from earlier budgets using a steady, declining or zero growth rate
- Management should assess the accuracy of their budgets by investigating the reasons for any differences between forecast and actual cash flows.
The discount rate used to calculate the value in use should reflect:
- The time value of money
- The risks specific to the asset for which the future cash flow estimates have not been adjusted
How are impairment losses accounted for and recognised in the financial statements?
The Impairment loss is immediately charged to the P/L.
- Cr - Asset - B/S
- Dr- Impairment expense - P/L
If there is a revaluation reserve from previous periods, the impairment loss is charged to the reserve first till it is NIL and the remainder to the P/L.
- Cr - Asset - B/S
- Dr - Reserve - Other components of Equity
- Dr - Impairment Expense - P/L
Define a Cash-generating unit?
and
What are the 2 problem area’s associated?
Cash-Generating Unit is the smallest group of assets that generates independent cash flows/ A specific revenue stream.
E.g
A number of machines on a production line generating one revenue stream.
A department focused on one type of service.
Problem Areas when allocating cash - flows?
- Corporate assets: assets that are used by several CGU’s (e.g. a head office building or a research centre). Do not generate their own cash inflows, so do not themselves qualify as cash-generating units.
- Goodwill, which does not generate cash flows independently of other assets and often relates to a whole business.
Corporate assets and goodwill should be allocated to cash-generating units on a reasonable and consistent basis.
A cash-generating unit to which goodwill has been allocated must be tested for impairment annually.
How do you Allocate goodwill or to a cash-generating unit?
Goodwill does not generate independent cash flows and therefore its recoverable amount as an individual asset cannot be determined.
So it is attached to a CGU, which it belongs too and the CGU is then tested for impairment.
If Goodwill cannot be allocated to a CGU on a non-arbitrary basis it is allocated to the group of CGUs to which it relates.
For impairment tests and allocation, the entity must take a 2 step approach
How do you Allocate a corporate asset (amount) to a cash-generating unit?
Corporate assets do not generate cash inflows independently from other assets, hence their carrying amount cannot be fully attributed to a cash-generating unit under review
So similar to Goodwill.
The CGU includes corporate assets (or a portion of them) that can be allocated to it on a ‘reasonable and consistent basis (IAS 36: para. 77).
Where this is not possible:
The assets (or unallocated portion) are tested for impairment as part of the group of CGUs to which they can be allocated on a reasonable and consistent basis.
How are impairment losses allocated for CGU’s with goodwill and corporate assets:
IAS 36 requires that it is allocated among the assets in the following order:
- Goodwill
- Other assets in proportion to their carrying amount.
- *However, the carrying amount of an asset cannot be reduced below the highest
of: ** - F.V less costs to sell
- Value in use
- Nil.
Describe the process of Allocating impairment losses with a CGU with allocated goodwill corporate assets?
The impairment loss is allocated in the following order (IAS 36: paras. 59-63):
1 Goodwill allocated to the CGU
2 Other assets on a pro-rata basis based on carrying amount
How do you Allocate impairment loss with unallocated corporate assets or goodwill?
2 step process.
(a) Test of individual CGUs
- Test the individual CGUs (including allocated goodwill and any portion of the carrying amount of corporate assets that can be allocated on a reasonable and consistent basis).
(b) Test of the group of CGUs
- Test the smallest group of CGUs that includes the CGU under review and to which the goodwill can be allocated/a portion of the carrying amount of corporate assets can be allocated on a reasonable and consistent basis.
How are reversals of impairment review treated with CGUs that have been impaired?
An impairment reversal for a CGU is allocated pro rota with the carrying amounts of those assets, except for goodwill
However, the carrying amount of an asset is not increased above the lower of:
- *(a) Its recoverable amount (if determinable); and
(b) Its depreciated carrying amount had no impairment loss originally been recognised.**
Any amounts left unallocated are allocated to the other assets (except goodwill) pro rota.
Impairment losses on goodwill are not reversed, once recognised.
The reversal is recognised in profit or loss, except where reversing a loss recognised on assets carried at revalued amounts, which are treated in accordance with the applicable IFRS.
For example,
an impairment loss reversal on revalued property, plant and equipment reverses the loss recorded in profit or loss and any remainder is credited to OCI {reinstating the revaluation surplus) IIAS 36: para. 120).
