IAS 36 - Impairements

Question 0

What are external sources of impairment?

Answer 0

External sources include -

• A significant decline in the market value of the asset
• Significant changes in the technological, market or economic environment
• The carrying amount of the entity’s net assets being more than its market capitalisation

Question 1

What type of assets can become impaired? X

Answer 1

Assets such as PP&E , Intangible assets & some financial assets such as subsidiaries, associates and joint ventures.

Question 2

What are the internal sources of impairement?

Answer 2

Internal sources include -:

• Evidence of obsolescence or physical damage
• Significant changes with an adverse effect on the entity i.e asset becomes idle, plans to discontinue the operation to which the asset belongs.
• Evidence that asset performance is or will be worse than expected.

AN ENTITY SHOULD COMPARE THE CASH FLOWS ASSOCIATED WITH AN ASSET WITH THOSE BUDGETED.

• CASH OUTFLOWS WHICH EXCEED BUDGET MAY HAVE HIGHER THAN EXPECTED MAINTENANCE COSTS
• CASH INFLOWS WHICH ARE LOWER THAN BUDGETED MAYBE DUE TO INCREASED COMPETITION

Question 3

What assets require annual impairment tests?

Answer 3

• Goodwill acquired in a business combination
• Intangible assets with an indefinite useful life
• Intangibles not yet available for use

Question 4

What happens if there are indicators of an impairment?

Answer 4

Where there are indicators of an impairment in an entity the recoverable amount of the asset should be assessed.
Where the carrying amount exceeds the recoverable amount the asset is impaired.

Question 5

Assets should be carried at no more than what?

Answer 5

Assets should be carried at no more than their recoverable amount

Question 6

How is the recoverable amount calculated?

Answer 6

The recoverable amount is the higher of the fair value less cost to sell & the value in use

Question 7

What is the fair value less cost to sell?

Answer 7

The amount for which an asset could be exchanged or a liability settled between knowledgable , willing parties in an arms-length transaction.

Question 8

How is the fair value less cost to sell determined where there is a binding sale agreement?

Answer 8

The price in the agreement less incremental costs directly attributable to the disposal of the asset

Question 9

How is the fair value less cost to sell determined where there is no binding sale agreement but the asset is traded in an active market?

Answer 9

The market price less costs of disposal

Question 10

What are examples of costs of disposal?

Answer 10

Examples include : -

• Legal Costs
• Stamp Duty & transaction costs
• Costs of removing the asset
• Direct incremental costs to bring an asset into condition for its sale.

Question 11

What is the definition of value in use?

Answer 11

The present value of the future cash flows expected to be derived from an asset.

Question 12

What are the two steps for estimating the value in use of the asset?

Answer 12

1) Estimation of the future cashflows attributable to the asset
2) Application of the appropriate discount rate to those future cashflows

Question 13

What should future cashflows include?

Answer 13

Future cashflows should include : -

• Projected cash inflows and outflows
• Projected cashflows which will be received on the disposal of the asset

Question 14

How should the cashflows be discounted?

Answer 14

The cashflows should be discounted using the discount factor.

Question 15

If an asset is held under the cost model and the asset incurs an impairment loss how should the loss be recognised in the financial statements?

Answer 15

It is recognised immediately in the profit and loss

Question 16

How is an impairment loss on an individual asset held under the revaluation model, which has previously been revalued upwards be recognised?

Answer 16

Recognise in other comprehensive income against revaluation surplus, then any excess in profit & loss

Question 17

How is an individual asset held under the revaluation model that has NOT been previously revalued upwards be recognised?

Answer 17

Recognise in the profit and loss

Question 18

What is the definition of cash generating units?

Answer 18

The smallest identifiable group of assets with independent cashflows

Question 19

What happens if it is not possible to estimate the recoverable amount of the individual asset?

Answer 19

An entity shall determine the recoverable amount of the cash generating unit to which the asset belongs

Question 20

What is the carrying amount of a cash generating unit?

Answer 20

The carrying amount of a CGU is made up of the carrying amounts of the individual assets that can be directly attributed to it

Question 21

How is goodwill attributed to a cash generating unit?

Answer 21

Goodwill is allocated to the respective CGU expected to benefit from the synergy of the combination

Question 22

How often should a cash generating unit where goodwill is allocated be tested for impairment?

Answer 22

A CGU to which goodwill has been allocated should be tested for impairment annually.
The carrying amount of the unit (including goodwill) should be compared with the recoverable amount.
IF THE CARRYING AMOUNT OF THE UNIT EXCEEDS THE RECOVERABLE AMOUNT AN IMPAIRMENT LOSS SHOULD BE RECOGNISED

Question 23

If any impairment loss is recognised with a cash generating unit how should it be allocated?

Answer 23

It should be allocated between the assets in the CGU in the following order : -

1) To the goodwill allocated to the CGU then …
2) To all other assets in the CGU on a pro rata basis

Question 24

What is the annual procedure for where an entity has recognised an impairment loss?

Answer 24

An entity is required to assess at the end of each period end whether there is an indication that a previously recognised impairment loss has decreased or may no longer exist.

Question 25

How can an impairment loss be reversed?

Answer 25

CANNOT reverse an impairment loss for goodwill.

Other assets allocate on a pro-rata basis & write back to the lower of the recoverable amount & the carrying amount.

Question 26

What judgments are required for IAS 36?

Answer 26

• The extent to which indicators suggest that an impairment review is required
• The determination of fair value when there is no binding sale agreement
• The identification of CGU’s

Question 27

What are the comparisons for IAS 36 and FRS 11 under UK GAAP?

Answer 27

UNDER FRS 11 : -
Impairment losses on previously revalued assets are recognised in the p&l account where they relate to physical damage/deterioration etc.

UNDER IAS 36 : -
No such requirement

UNDER FRS 11 : - Impairment losses are allocated to the income statement in the following SET ORDER : >Goodwill, >Intangible Assets, >Tangible Assets

UNDER IAS 36 : - Impairment losses are allocated to the statement as follows : > Goodwill >Intangible & tangible assets on a pro rata basis