Chapter 3 Non Current Assets Flashcards
Impairment of assets (IAS 36)
Assets must be carried at no more than their recoverable amount.
Recoverable amount = Higher of fair value less costs of disposal and value in use.
Fair value less costs of disposals
The price that would be received to sell the asset in an orderly transaction between market participants at the measurement date (IFRS 13 Fair Value) less the direct incremental costs attributable to the disposal of the asset.
Value in use
Cash flow projections are based on the most recent management approved budgets/ forecasts.
The discount rate or rates should be a pre tax rate that reflects current market assessments of:
- The time value of money and
- The risks specific to the asset for which future cash flow estimates have not been adjusted.
Impairment indicators
External
- Observable indications that the asset’s value has declined during the period significantly more than expected due to the passage of time or normal use.
- Significant changes with an adverse effect on the entity in the
- technological or market environment
- economic or legal environment - Increased market interest rates or other market rates of return effecting discount rates and thus reducing value in use.
- Carrying amount of net assets of the entity exceeds market capitalisation.
Internal
- Evidence of obsolescence or physical damage.
- Significant changes with an adverse effect on the entity
- the asset becomes idle
- plans to discontinue/ restructure the operation to which the asset belongs
- plans to dispose of an asset before the previously expected date
- reassessing an asset’s useful life as finite rather than indefinite - Internal evidence available that asset performance will be worse than expected.
Cash generating unit (IAS 36)
A cash generating unit is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Recognition of impairment losses in financial statements
- Assets carried at historical cost in - profit or loss.
- Revalued assets
The impairment loss should be treated under the appropriate rules of the applicable IFRS.
e.g. PPE first to other comprehensive income in respect of any revaluation surplus relating to the asset and then to profit or loss.
Allocation of impairment losses with a CGU
The impairment loss is allocated in the following order.
- Goodwill allocated to the CGU
- Other assets on a pro-rata basis based on carrying amount.
The carrying amount of an asset cannot be reduced below the higher of its recoverable amount (if determinable) and zero.
The amount of the impairment loss that would otherwise be allocated to the asset is allocated to the other assets on a pro rata basis.
Allocation of loss with unallocated corporate assets or goodwill
Where not all assets or goodwill will have been allocated to an individual CGU then different levels of impairment tests are performed to ensure the unallocated assets are tested
- Test the individual CGUs
- Test of group of CGUs
Reversal of past impairments
A reversal is allocated to the assets of the CGU except for goodwill, pro rata with the carrying amounts of those assets.
However the carrying amount of an asset is not increased above the lower of:
- its recoverable amount (if determinable) and
- its depreciated carrying amount had no impairment loss originally been recognised
Any amounts unallocated are allocated to the other assets (except goodwill) pro-rata.
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 e applicable IFRS.
e.g. An impairment loss reversal on PPE reverses the loss recorded in profit or loss and any remainder credited to other comprehensive income (reinstating the revaluation surplus).
Goodwill - once recognised, impairment losses on goodwill are not reversed.
Fair Value (IFRS 13)
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Measurement
Fair value is a market based measure, not an entity specific one. Therefore valuation techniques used to measure fair value maximise the use of relevant observable inputs and minimise the use of unobservable inputs.
IFRS 13 establishes a fair value hierarchy that categorises the inputs to valuation techniques into 3 levels.
Level 1 inputs: quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 inputs: inputs other than quoted prices included within Level 1 that are observable for the asset or liability.
Level 3 inputs: unobservable inputs for the asset or liability.
Fair value measurement (IFRS 13)
A fair value measurement assumes that the transaction takes place either
- In the principal market for the asset or liability or
- In the most advantageous market (in the absence of a principal market)
The most advantageous market is assessed after taking into account transaction costs and transport costs to the market.
Fair value also takes into account transport costs but excludes transaction costs.
For non-financial assets, the fair value measurement is the value for using the asset in its highest and best use or by selling it to another market participant that would use it in its highest and best use.
The highest and best use of a non-financial asset takes into account the use that is physically possible, legally permissible and financially feasible.
Investment property (IAS 40)
Investment property is property (land or building or part of a building or both) held (by the owner or by the lessee as a right of use asset) to earn rentals or for capital appreciation or both rather than for
- Use in the production or supply of goods or services or for administrative purposes or
- Sale in the ordinary course of business
Measurement after recognition
- Fair value model:
- Any change in fair value reported in profit or loss
- Not depreciated - Cost model
- As cost model of IAS 16 - unless held for sale (IFRS 5) or leased (IFRS 16)
- Depreciated
Government grants (IAS 20)
- Grants are not recognised until there is reasonable assurance that the conditions will be complied with and the grants will be received.
- Government grants are recognised in profit or loss so as to match them with the related costs they are intended to compensate on a systematic basis.
- Government grants relating to assets can be presented either as deferred income or by deducting the grant in calculating the carrying amount of the asset.
- Grants relating to income may either be shown separately or as part of ‘other income’ or alternatively deducted from the related expense.
- A government grant that becomes repayable is accounted for as a change in accounting estimate in accordance with IAS 8.
Repayments of grants relating to income are applied first against any unamortised deferred credit and then in profit or loss.
Repayments of grants relating to assets are recorded by increasing the carrying amount of the asset or reducing the deferred income balance. Any resultant cumulative extra depreciation is recognised in profit or loss immediately.
