IAS 36 and IFRS 5

Question 1

What is impairment?

Answer 1

The difference that exists if the carrying amount of an asset is greater than its recoverable amount

Question 2

What does IAS 36 do?

Answer 2

IT ensures that the true value of assets is faithfully represented in the financial statements

Question 3

How do we identify impairment?

Answer 3

Assets need to be regularly reviewed to identify any indicators of impairment. An impairment will occur if there’s evidence of impairment, with the asset’s value updated to reflect its true value

Question 4

What are external sources of information re impairment?

Answer 4

Environmental changes = sig change ins tech / market/ eco / legal environment

Market rates = changes in market interest rates or rate of return on investments that may impact value of asset

Increased decline = observable evidence that an assets value has declined more than anticipated due to the passage of time or regular use

Market capitalisation = CA of net assets may be higher than market cap

Question 5

What are internal sources of info re impairment?

Answer 5

Condition = indications of physical damage or obsolescence

Performance = Internal evidence that the asset will perform worse than expected

Expected use = when there are changes in the expected use of the asset due to adverse effects on the entity

Question 6

How do you record the recoverable amount of an asset under IAS 36?

Answer 6

If impaired, an assets recoverable amount is the greater of:

Fair value less costs to sell (FVLCTS) = how much the entity would receive if it sold the asset less cost to sell

Value in use = the PV of future cash flows expected to be derived from the asset

Question 7

Calculate the assets carrying value:

• Non-current asset was purchased 01/01/X1 for £25,000
• 7 year useful life
• £4,000 residual value
• Straight-line depreciation
• Valued at £12,000 at impairment review 31/12/X3
• Asset generates £4,000 for next 4 years
• Cost of capital is 15% (annuity factor 2.855)
• Cost of selling the asset is £750

Answer 7

Carrying value = cost of asset - dep’cn

£25k - (£3k dep’cn * 3 yrs) = £16k

Question 8

Calculate the fair value less cost to sell:

• Non-current asset was purchased 01/01/X1 for £25,000
• 7 year useful life
• £4,000 residual value
• Straight-line depreciation
• Valued at £12,000 at impairment review 31/12/X3
• Asset generates £4,000 for next 4 years
• Cost of capital is 15% (annuity factor 2.855)
• Cost of selling the asset is £750

Answer 8

£12k - £750 = £11,250

Valuation of asset - cost to sell = FVLCTS

Question 9

Calculate the VIU:

• Non-current asset was purchased 01/01/X1 for £25,000
• 7 year useful life
• £4,000 residual value
• Straight-line depreciation
• Valued at £12,000 at impairment review 31/12/X3
• Asset generates £4,000 for next 4 years
• Cost of capital is 15% (annuity factor 2.855)
• Cost of selling the asset is £750

Answer 9

£4k * 2.855 = £11,420

Future cash flow per yr * annuity factor = VIU i.e. present value of future cash flows

Question 10

Calculate the impairment?

FVLCTS = £11,250
VIU = £11,420

Carrying value at point of impairment = £16,000

Answer 10

Record at greater of FVLCTS or VIU

£16,000 - £11,420 = £4,580 impairment

Question 11

How do you record an impairment in the financial statements?

Answer 11

Record the asset at it’s impaired amount in the SOFP

Calculate the dep’cn on the new amount over assets remaining useful life

Impairment will remove the residual value of an asset

Charge the impairment loss to the income statement (P&L) as an expense – OR in the OCI if it is a revaulation decrease under IAS 16 or IAS 38

Question 12

What are cash generating units?

Answer 12

Cash generating units may be used during an impairment review. They are the smallest identifiable group of assets to which independent cash flows can be allocated

e.g. a store out of a chain of stores

Question 13

What are the steps of allocating impairment losses to a CGU?

Answer 13

1. Allocate specific impairment losses
2. Allocate to goodwill - Impair goodwill until either there is no more goodwill to impair, or impairment to allocate
3. Allocate to the outstanding assets on pro-rata basis - split the remaining amount between outstanding assets on a proportional basis

Question 14

When would we use a CGU?

Answer 14

We use this to avoid attempting to calculate the fair value and value in use of every single asset across all stores (for example). e.g. valuing individual knives, ovens etc etc

Therefore, we use a CGU and determine the recoverable amount of the CGU i.e. the store

Question 15

What disclosures does IAS 36 require?

Answer 15

Impairment losses recognised in the P&L and the lines where these have been recorded

Reversals of impairment losses recognised in the P&L and the lines where these have been recorded

Impairment losses on revalued assets recognised in OCI

Reversals of impairment losses on revalued assets recognised in OCI

Question 16

When would IFRS 5 come into play?

Answer 16

When a non-current asset needs to be retired or disposed of. This may be due to wear and tear of the asset or a replacement

Question 17

What conditions must be met to classify an asset as held for sale?

Answer 17

Management is committed to a plan to sell

The asset is available for immediate sale

An active programme to locate a buyer is in place

The asset is being actively marketed at a reasonable price

The sale is highly probable (within 12 months)

It is unlikely that plan will be significantly changed or withdrawn

Question 18

Can a subsidiary be held for sale?

Answer 18

Yes - if it qualifies all of the assets and liabs of that sub would be recognised as held for sale

Question 19

What is a disposal group?

Answer 19

A group of assets and associated liabs to be disposed of in a single transaction. This group will also include the goodwill acquired in a business combo

Question 20

What are discontinued operations?

Answer 20

A component of an entity that represents a separate major line of business, geographical area of operation or a sub acquired with the intention to sell

Question 21

How is the non-current asset held for sale valued?

Answer 21

The lesser of:

The carrying amount of the asset

Fair value of the asset (less expected cost to sell)

Question 22

How should discontinued operations be recorded in the financial statements?

Answer 22

The info should be separately disclosed in the SOFP under ‘discontinued operations’ and the resulting gains or losses in the SOCI as a line under profit from continued operations called discontinued operations followed by profit or loss from discontinued operations

Question 23

How should assets held for sale be recorded in the financial statements?

Answer 23

A separate line in the SOFP - assets held for sale which shows the value of the item and the resulting gain or loss in the P&L

Question 24

What are the SOFP disclosure requirements for IFRS 5?

Answer 24

SOFP:
Description of the non-current asset or disposal group

Description of the facts and circumstances of the sale (disposal) and the expected timing

Impairment losses if any and where these are assigned in the SOCI

The reportable segment if applicable

Question 25

What are the SOCI disclosure requirements for IFRS 5?

Answer 25

The post tax profit or loss of the discontinued operation

The post tax gain or loss recognised on the measurement of FVLCTS

The post tax gain or loss on the disposal of the assets or disposal groups

Question 26

What are the notes disclosure requirements for IFRS 5?

Answer 26

The revenue, expenses and pre tax profit or loss of discontinued operations

The related income tax expense (as acquired by IAS 12)

The gain or loss recognsied on the FVLCTS

The gain or loss on the disposal of assets or disposal groups and the related income tax expense

The net cash flows attributable to the activities of a discontinued operation is separately presented in the cash flow or disclosed in the notes