IAS 36 Flashcards
Impairment assets
Carrying amount > Recoverable amount
Carrying amount
Value of asset - accumulated depreciation - accumulated impairment loss
Recoverable amount
is the higher of its ‘fair value less costs of disposal’ and its ‘value in use’
Fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participations at the measurement date
Value in use
The PV of the future cash flows expected to be derived from an asset
Identifying potentially impaired asset
The following assets must always be tested for impairment annually, regardless any indications for impairment:
- An intangible asset with an indefinite useful life
- Goodwill acquired in a business combination
Once an asset is impaired, the entity may also need to renew its useful life, residual value, depreciation and amortisation
Zinia plc has decided to comply with IAS 36 Impairment of Assets. The following information is relevant to the impairment review:
Certain items of machinery appeared to have suffered a permanent diminution in value. The inventory produced by the machines was being sold below its cost and this occurrence had affected the value of the productive machinery. The carrying value at historical cost of these machines is £290,000 and their net selling price is estimated at £120,000. The anticipated net cash inflows from the machines are now £100,000 per annum for the next three years. A market discount rate of 10% per annum is to be used in any present value computations.
(i) Impairment of machinery
Indicators are the inventory losses and the taxi business problems.
Procedure:
Compare the carrying value (£290,000) with its recoverable amount that has to be calculated.
The calculation is to determine the higher of an asset’s net selling price (£120,000) and its
value in use. The value in use is £100,000 discounted at 10% for 3 years, that is £248,600,
approximately.
Thus, the recoverable amount would be deemed to be £248,600.
Zinia would, therefore, write-down the asset from £290,000 (carrying value) to £248,600 (its
value in use) and recognise the loss of £41,400 in the statement of comprehensive income.
Judging impairment indicator
External Resources:
- Market Value Fall:
A decline in an asset’s market value exceeding the typical depreciation over time or through regular use. - External Conditions Change:
Significant alterations in technology, market dynamics, legal environment, or economic conditions affecting the asset’s utilisation. - An increase in market interest rates influencing the discount rate assumptions used in calculating the asset’s value in use.
- The carrying amount of the entity’s net assets surpassing its market capitalisation.
Internal Resources:
- Evidence of obsolescence, physical damage, or a decline in the asset’s performance.
- Significant Changes in Use, e.g. plans to discontinue or dispose
- A decline in the asset’s performance
EX: A company estimates that an asset is expected to generate the following cash flows over its useful life
Y1 75,000 (In) 6,000 (Out)
Y2 100,000 (In) 7,000 (Out)
Y3 90,000 (In) 7,000 (Out)
Y4 60,000 (In) 6,000 (Out)
All cash flows will occur at the end of the year concerned. At the end of the 4th year, the asset is expected to be sold for £50,000.
Assume a discount rate of 12%
Required: Calculate the assets value in use. Round numbers to the nearest £000
ViU = £216,000
If recoverable amount > Carrying value
No write-downs necessary
Where is impairment loss recognised
Immediately in the SoCI / P&L
What if it is not possible to estimate the recoverable value of an individual asset?
This can occur if the asset does not generate independent cash flows, and in such a case, the recoverable amount of the asset’s cash generating unit should be calculated together with value in use on the same basis.
Replacement model
- Treat impairment loss on revalued asset as a revaluation decrease, charged to revaluation account.
- Recognise liability for excessive impairment loss only if required by other International Standards.
- Adjust depreciation charge after impairment to allocate revised carrying amount systematically.
- Regularly review financial position for persistence or reduction of recognized impairment losses.
- Reversal of impairment loss should be recorded in comprehensive income.
Brightwell plc is preparing its financial statements for the year ended 30 November 2020.
On 1 May 2020, the company purchased a factory for the manufacture of optical disks, paying £24,000,000. The factory will be depreciated over its estimated life of 10 years using the straight line method on a full year basis with no residual value.
The asking price for the factory had been £30,000,000. However, Brightwell plc estimated the net present value of the factory’s future expected net cash flows at £28,500,000 and the price eventually agreed with the vendor was £24,000,000.
During October 2020 a rival company announced that it had patented a new technology which has been enthusiastically greeted by the major players in the industry. Brightwell plc now feels that it may be necessary to revise downwards its expectations for the factory. It now believes that the net present value of the expected net cash flows from the factory as at 30 November 2020 was £20,500,000. The net realisable value of the factory was estimated at £14,000,000 as at 30 November 2020.
Required:
Discuss whether or not there is evidence of impairment and describe how the factory should be treated in the financial statements for the year ended 30 November 2020.
Depreciation for the year to 30 November 2020 is £2,400,000, so the asset’s carrying amount at that date is £21,600,000 (£24,000,000 – £2,400,000).
Value in use is £20,500,000. Fair value less costs of disposal is £14,000,000. Recoverable amount is the higher of these two figures i.e. £20,500,000.
There is an impairment loss of £1,100,000 (£21,600,000 – £20,500,000). This should be recognised as an expense when calculating the company’s profit or loss for the year to 30 November 2020.
The asset’s carrying amount at 30 November 2020 is reduced to £20,500,000. Assuming that the previous estimates of useful life and residual value remain unchanged, this amount should be written off in the form of depreciation charges over the following nine years. However, the asset is clearly being used in an area of manufacturing which is subject to rapid technological change and the company should be alert to the possibility of further impairment losses in the future.
