IAS 36

Question 1

What is scope of IAS 36

Answer 1

(a) inventories (IAS 2);
(b) contract assets and assets arising from costs to obtain or fulfil a contract (IFRS 15);
(c) deferred tax assets (IAS 12);
(d) assets arising from employee benefits (IAS 19);
(e) financial assets (IFRS 9)
[However, it applies to financial assets classified as subsidiaries, associates & JV];
(f) investment property measured at fair value (IAS 40);
(g) biological assets measured at fair value less costs to sell (IAS 41);
(h) contracts within the scope of IFRS 17; and
(i) non‑current assets classified as held for sale (IFRS 5)

Question 2

What is the difference between FV and FVCTS

Answer 2

The only difference between “fair value” and “fair value less cost of disposal” is the direct incremental costs attributable to the disposal of asset

Question 3

What happens when cost of disposal or CTS is negligible

Answer 3

If cost of disposal is negligible then recoverable amount of asset must be equal to or greater than fair value. Therefore, when both fair value and value in use are known, then asset is only revalued to “fair value” and there is no need for impairment

Question 4

What happens when cost of disposal or CTS is not negligible

Answer 4

If cost of disposal is not negligible then “fair value less cost of disposal” is necessarily less than “fair value”. Therefore, such asset is first revalued to “fair value” and then it is tested for impairment

Question 5

What treatment is to be done if FV is not known and only value in use is known

Answer 5

If fair value is not known and only value in use is known then asset is impaired if value in use is less than carrying amount

Question 6

Does accumulated depreciation is eliminated in case of IAS 36

Answer 6

Although charging of impairment loss as per IAS 36 and revaluation loss as IAS 16/38 are same, but accumulated depreciation is eliminated only at the time of revaluation as per IAS 16/38 and not at the time of impairment as per IAS 36.

Question 7

What is
1. Carrying amount
2. Recoverable amount
3. Impairment test

Answer 7

1. Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.
2. The recoverable amount of an asset or a cash‑generating unit is the higher of:
   * its fair value less costs of disposal
   * its value in use.
3. Impairment test is the comparison of “carrying amount [CA] determined as per relevant IAS” with “recoverable amount [RA]”. An asset is impaired if its CA exceeds RA.

Question 8

What indication may asset show when asset is tested for impairment?

Answer 8

When an asset is tested for impairment, this may indicate that estimates of useful life, residual value and depreciation method also need to be reviewed and adjusted even if asset is not impaired.

Question 9

What are timings for impairment testing?
Timing of impairment testing:
- For intangible assets not yet available for use
- For intangible assets with indefinite life
- For Goodwill acquired in business combination
- For all other assets

Answer 9

For first 3 , impairment is tested annually at the same time every year.
For other assets , An entity shall assess at the end of each reporting
period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable
amount of the asset.

Question 10

What are indication for imapirment ?

Answer 10

External sources of information
(a) the asset’s value has declined during the period significantly more than expected as a result of normal use or passage of time.
(b) significant changes with an adverse effect on the entity, in the technology, market, economy or legal environment.
(c) market interest rates or other market rates of return on investments have increased and those increases are likely to affect the discount rate used in calculating an asset’s value in use.
(d) the carrying amount of the net assets (i.e. equity) of the entity is more than its market capitalisation.
Internal sources of information
(e) Obsolescence or physical damage of an asset.
(f) significant changes with an adverse effect on the entity, in the extent to which, or manner in which, an asset is used
(g) economic performance of an asset is, or will be, worse than expected.

Question 11

Indicators to impairment related to consolidation

Question 12

Is it always necessary to measure both FV less CTS and VIU?

Answer 12

It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount

Question 13

What should entity do when it is not possible to measure the FV less CTS?

Answer 13

When Sometimes it will not be possible to measure fair value less costs of disposal, In this case, the entity may use the asset’s value in use as its recoverable amount

Question 14

What is likely to be the case for assets held for disposal ?

Answer 14

If an asset’s value in use is not expected to exceed its fair value less costs of disposal, the asset’s fair value less costs of disposal may be used as its recoverable amount. This will often be the case for an asset that is held for disposal.

Question 15

What to do if RA can not be determined for an individual asset? detailed

Answer 15

If recoverable amount cannot be determined for an individual asset because it does not generate cash inflows that are largely independent of those from other assets or groups of assets, then recoverable amount is determined for the cash‑generating unit to which the asset belongs unless either:
(a) the asset’s fair value less costs of disposal is higher than its carrying amount; or
(b) the asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair value less costs of disposal can be measured.

Question 16

What is Fair Value?

Answer 16

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 participants at the measurement date. (See IFRS 13 Fair Value Measurement.)

Question 17

What are cost of disposals?

Answer 17

Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash‑generating unit, excluding finance costs and income tax expense.
Costs of disposal, other than those that have been recognized as liabilities, are deducted in measuring fair value less costs of disposal.
Examples
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.
However, termination benefits (as defined in IAS 19) and costs associated with reducing or reorganizing a business following the disposal of an asset are not direct incremental costs to dispose
of the asset.

Question 18

For Exam tip only, what things should be considered

Answer 18

1. The only difference between “fair value” and “fair value less cost of disposal” is the direct incremental costs attributable to the disposal of asset.
2. If cost of disposal is negligible then recoverable amount of asset must be equal to or greater than fair value. Therefore, when both fair value and value in use are known, then asset is only revalued
   to “fair value” and there is no need for impairment.
3. If cost of disposal is not negligible then “fair value less cost of disposal” is necessarily less than “fair value”. Therefore, such asset is first revalued to “fair value” and then it is tested for impairment.
4. If fair value is not known and only value in use is known then asset is impaired if value in use is less than carrying amount.
5. Although charging of impairment loss as per IAS 36 and revaluation loss as IAS 16/38 are same, but accumulated depreciation is eliminated only at the time of revaluation as per IAS 16/38 and not at the time of impairment as per IAS 36.

Question 19

What is value in use , how to estimate it?

Answer 19

1. Value in use is the present value of the future cash flows expected to be derived from an asset or cash‑generating unit.
2. Estimating the value in use of an asset involves the following steps:
   (a) estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and
   (b) applying the appropriate discount rate to those future cash flows.

Question 20

should cash flow reflect probable variation or possible variation in amount or timing?

Answer 20

1. cash flowsshould reflect all possible variations in the amount or timing of future cash flows, the result shall be to reflect the expected present value of the future cash flows, i.e. the weighted average of all possible outcomes [Ʃpx].

Question 21

How much period future cash flow will cover ?

Answer 21

2. Base cash flow projections on budgets/forecasts which shall cover a maximum period of five years, unless a longer period can be justified. Extrapolate the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.

Question 22

What factors shall be included in estimates of future cash flow?

Answer 22

3. Estimates of future cash flows shall include:
   (a) projections of cash inflows from the continuing use of the asset;
   (b) projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and
   (c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
   Net disposal value at the end of its useful life is determined in a similar way to fair value less costs of disposal, except that, it now also includes adjustments for future price increases.

Question 23

What should not be included in estimates of future of cash flows to avoid double counting?

Answer 23

(a) cash inflows from other recognized assets (for example, financial assets such as receivables); and
(b) cash outflows for recognized liabilities (for example, payables, pensions or provisions).

Question 24

What shall not be included in future cash flows which are expected to arise from?

Answer 24

Future cash flows shall be estimated for the asset in its current condition. Therefore, future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from:
(a) a future restructuring to which an entity is not yet committed; or
Once the entity is committed to the restructuring:
its estimates of future cashflows reflect the cost savings and other benefits from the restructuring; and
its estimates of future cash outflows for the restructuring are included in a restructuring provision in accordance with IAS 37.
(b) improving or enhancing the asset’s performance.
Projections of cash outflows include those for the day‑to‑day servicing of the asset as well as future cash outflows (e.g. future part replacements in a single asset and replacement of short lived assets in CGU) necessary to maintain the level of economic benefits expected to arise from the asset in its current condition.
In case of capital work-in-progress, the future cash flows shall also include necessary capital expenditure to get the asset ready for use or sale

Question 25

Which shall not include in future cash flows?

Answer 25

6. Estimates of future cash flows shall not include:
   (a) cash inflows or outflows from financing activities; or
   (b) income tax receipts or payments.

Question 26

What to do if IAS 21 is mixed in future cash flows?

Answer 26

Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for that currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation.

Question 27

What two things discount rate will reflect ?

Answer 27

1. The discount rate (rates) shall be a pre‑tax rate (rates) that reflect(s) current market assessments of:
   (a) the time value of money; and
   (b) the risks specific to the asset for which the future cash flow estimates have not been adjusted

Question 28

Accounting for impairment loss:
If asset is carried at cost model?

Answer 28

Impairment loss shall be recognized in profit and loss immediately.
Dr. Impairment loss (P&L)
Cr. Accumulated impairment loss

Question 29

Accounting for impairment loss:
If asset is carried at revaluation mode

Answer 29

Impairment loss shall be treated as a revaluation decrease in accordance with relevant IAS (e.g. IAS 16, 38)
Dr. Revaluation surplus
Dr. P&L
Cr. Accumulated impairment loss

Question 30

What is meant is Recoverable amount in negative ?

Answer 30

• When impairment loss is greater than carrying amount (i.e. when recoverable amount is negative),then entity shall recognize a liability if and only if required by another IAS

Question 31

What is CASH GENERATING UNITS [CGU]?

Answer 31

A cash‑generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Question 32

Identifying the CGU to which asset belongs:
Example
A mining entity owns a private railway to support its mining activities. The private railway could be sold only for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from the other assets of the mine.

Answer 32

It is not possible to estimate the recoverable amount of the private railway because its value in use cannot be determined and is probably different from scrap value. Therefore, the entity estimates the recoverable amount of the cash‑generating unit to which the private railway belongs, ie the mine as a whole.

Question 33

How CGU is identified ?

Answer 33

Identification of an asset’s cash‑generating unit involves judgement. If recoverable amount cannot be determined for an individual asset, an entity identifies the lowest aggregation of assets that generate largely independent cash inflows.

Question 34

Example
A bus company provides services under contract with a municipality that requires minimum service on each of five separate routes. Assets devoted to each route and the cash flows from each route can be identified separately. One of the routes operates at a significant loss.

Answer 34

Because the entity does not have the option to curtail any one bus route, the lowest level of identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets is the cash inflows generated by the five routes together. The cash‑generating unit for each route is the bus company as a whole.

Question 35

How an entity identifies that an asset or a group of asset are largely independent ?

Answer 35

In identifying whether cash inflows from an asset (or group of assets) are largely independent, an entity considers various factors including how management monitors the entity’s operations (such as by product lines, businesses, individual locations, districts or regional areas) or how management makes decisions about continuing or disposing of the entity’s assets and operations.

Question 36

What are the implications of identifying an asset as a cash-generating unit (CGU) despite internal usage, according to IAS 36? How does internal transfer pricing impact future cash flow estimation for the asset and other internal departments?

Answer 36

If an active market exists for the output produced by an asset or group of assets, that asset or group of assets shall be identified as a cash‑generating unit, even if some or all of the output is used internally. If such cash inflows are affected by internal transfer pricing, an entity shall use management’s best estimate of future price(s) that could be achieved in arm’s length transactions in estimating:
(a) the future cash inflows of giving asset or CGU; and
(b) the future cash outflows of receiving asset or CGU.

Question 37

HOw impairment loss of CGU is allocated ?
Practice Q3 and Q4

Answer 37

1. The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:
   (a) first, to reduce the carrying amount of any goodwill allocated to the cash‑generating unit (group of units); and
   (b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in the unit (group of units).
2. These reductions in carrying amounts shall be treated as impairment losses on individual assets.
3. In allocating an impairment loss as above, an entity shall not reduce the carrying amount of an asset below the highest of:
   (a) its fair value less costs of disposal (if measurable);
   (b) its value in use (if determinable); and
   (c) zero.
   The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit (group of units).
4. After allocating impairment loss as above, a liability shall be recognised for any remaining amount of an impairment loss for a cash‑generating unit if, and only if, that is required by another IFRS.

Question 38

Describe timings of impairment testing of a CGU .(two points)

Answer 38

1. At the time of impairment testing a cash‑generating unit to which goodwill has been allocated, there may be an indication of an impairment of an asset within the unit containing the goodwill. In such circumstances, the entity tests the asset for impairment first, and recognises any impairment loss forthat asset before testing for impairment the cash‑generating unit containing the goodwill.
2. Similarly, there may be an indication of an impairment of a cash‑generating unit within a group of units containing the goodwill. In such circumstances, the entity tests the cash‑generating unit for impairment first, and recognises any impairment loss for that unit, before testing for impairment the group of units to which the goodwill is allocated.

Question 39

If an asset is to be sold then what will be its FV less CTS and VIU?

Answer 39

Both will be Same

Question 40

When figuring out the value of a cash-generating unit (CGU) for impairment testing, should we include the cost of everything the company owns, even things not used by that specific CGU?

Answer 40

The carrying amount of CGU should include carrying amounts of only those assets that can be attributed directly or allocated on a reasonable basis to that CGU and does not include the carrying amount of any recognized liability unless recoverable amount of the CGU cannot be determined without consideration of this liability (for example inclusion of provision for dismantling will reduce the carrying amount CGU for fair comparison with recoverable amount).

Question 41

What is the exception for including Assets and liabilties that are not part of CGU but even then they are used to determie the recoverable amount of the CGU?

Answer 41

For practical reasons, the recoverable amount of a CGU is sometimes determined after consideration of assets that are not part of the CGU (for example, receivables or other financial assets) or liabilities
that have been recognised (for example, payables, pensions and other provisions). In such cases, the carrying amount of the CGU shall also include such assets and liabilities only for calculating impairment loss.