IAS 36 : Impairment Part 1

Question 1

INTRODUCTION

Answer 1

INTRODUCTION

Question 2

In principle an asset is impaired when an entity will not be able to recover that asset’s carrying value, either through using it or selling it. If circumstances arise which indicate assets might be impaired, a review should be undertaken of their cash generating abilities either through use or sale.

Answer 2

This review will produce an amount which should
be compared with the assets’ carrying value, and if the carrying value is higher, the difference must be written off as an impairment in the statement of comprehensive income. The provisions within IAS 36 – Impairment of Assets – that set out exactly how
this is to be done, and how the figures involved are to be calculated, are detailed and quite complex.

Question 3

The theory behind the impairment review

The purpose of the impairment review is to ensure that intangible assets, including goodwill, and tangible assets are not carried at a figure greater than their recoverable amount (RA).

Answer 3

This recoverable amount is compared with the carrying value (or carrying amount (CA)) of the asset to determine if the asset is impaired.

Question 4

The theory behind the impairment review 1

Recoverable amount is defined as the higher of fair value less costs of disposal (FVLCD) and value in use (VIU); the underlying concept being that an asset should not be carried at more than the amount it could raise, either from selling it now or from using it.

Answer 4

Fair value less costs of disposal essentially means what the asset could be sold for, having deducted costs of disposal (incrementally incurred direct selling costs). Value in use is defined in terms of discounted future cash flows, as the present value of the cash flows expected from the future use and eventual
sale of the asset at the end of its useful life. As the recoverable amount is to be expressed as a present value, not in nominal terms, discounting is a central feature of the impairment test.

Question 5

The theory behind the impairment review 2

Diagrammatically, this comparison between carrying value and recoverable amount, and the definition of recoverable amount, can be portrayed as follows: see OneNote

Answer 5

It may not always be necessary to identify both VIU and FVLCD, as if either of VIU or FVLCD is higher than the carrying amount then there is no impairment and no write down is necessary. Thus, if FVLCD is greater than the carrying amount then no further consideration need be given to VIU, or to the need for an impairment write down. The more complex issues arise when the FVLCD is not greater than the carrying value, and so a VIU calculation is necessary

Question 6

Key features of the impairment review 1

Although an impairment review might theoretically be conducted by looking at individual assets, this will not always be possible. Goodwill does not have a separate FVLCD at all. Even if FVLCDs can be obtained for individual items of property, plant and equipment, estimates of VIUs usually cannot be. This is because the cash flows necessary for the VIU calculation are not usually generated by single assets, but by groups of assets being used together. Often, therefore, the impairment review cannot be done at the level of the individual asset and it must be applied to a group of assets.

Answer 6

IAS 36 uses the term cash generating unit (CGU)
for the smallest identifiable group of assets that together have cash inflows that are largely independent of the cash inflows from other assets and that therefore can be the subject of a VIU calculation. This focus on the CGU is fundamental, as it has the effect of making the review essentially a business-value test. Goodwill cannot always be allocated to a CGU and may therefore be allocated to a group of CGUs. IAS 36 has detailed guidance in respect of the level at which goodwill is tested for impairment which is discussed at IMPAIRMENT OF GOODWILL below.

Question 7

Key features of the impairment review 2

Most assets and CGUs need only be tested for impairment if there are indicators of impairment. The ‘indications’ of impairment may relate to either the assets themselves or to the economic environment in which they are operated. IAS 36 gives examples of
indications of impairment, but makes it clear this is not an exhaustive list, and states explicitly that the entity may identify other indications that an asset is impaired, that would equally trigger an impairment review.
[IAS 36.13]. There are more onerous requirements for goodwill, intangible assets with an indefinite useful life and intangible assets that are not available for use on the reporting date.

Answer 7

These must be tested for impairment at least on an annual basis, irrespective of whether there are any impairment indicators. This is because the first two, goodwill and indefinite-lived intangible assets, are not subject to annual amortisation while it is argued that intangible assets are intrinsically (natural way) subject to greater uncertainty before they are brought into use. Impairment losses are recognised as expenses in profit or loss except in the case of an asset carried at a revalued amount where the impairment loss is recorded first against any previously recognised revaluation gains in respect of that asset in other comprehensive income.

Question 8

Key features of the impairment review 3

The entity assesses, at each reporting date, whether an impairment assessment is required and acts accordingly:

• If there is an indication that an asset may be impaired, an impairment test is required.
• For goodwill, intangible assets with an indefinite useful life and intangible assets that are not available for use on the reporting date an annual impairment
test is required irrespective of whether there are any impairment indicators
• An asset is assessed for impairment either at an individual asset level or the level of a CGU depending on the level at which the recoverable amount can be determined, meaning the level at which independent cash inflows are generated.

Answer 8

• If the impairment test is performed at a CGU level then the entity needs to be divided into CGUs.
• After the identification of the CGUs, the carrying amount of the CGUs is determined.
• If goodwill is not monitored at the level of an individual CGU, then it is allocated to the group of CGUs that represent the lowest level within the entity at which
goodwill is monitored for internal management purposes, but not at a level that is larger than an operating segment.

Question 9

Key features of the impairment review 4

•The recoverable amount of the asset or CGU assessed for impairment is established and compared with the carrying amount.
• The asset or CGU is impaired if its carrying amount exceeds its recoverable amount, defined as the higher of FVLCD and VIU.
• For assets carried at cost, any impairment loss is recognised as an expense in profit or loss.
• For assets carried at revalued amount, any impairment loss is recorded first against any previously recognised revaluation gains in other comprehensive income in
respect of that asset.

Answer 9

• Impairment losses in a CGU are first recorded against goodwill and second, if the goodwill has been written off, on a pro-rata basis to the carrying amount of other assets in the CGU. However, the carrying amount of an asset should not be reduced below the highest of its fair value less costs of disposal, value in use or zero. If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units).
• Extensive disclosure is required for the impairment test and any impairment loss that has been recognised.
• An impairment loss for an asset other than goodwill recognised in prior periods must be reversed if there has been a change in the estimates used to determine the asset’s recoverable amount.

Question 10

Scope 1

The standard is a general impairment standard and its provisions are referred to in other standards, for example IAS 16 – Property, Plant and Equipment, IAS 38 – Intangible Assets – and IFRS 3 – Business Combinations – where impairment is to be considered. The standard has a general application to all assets, but the following are outside its scope:
• inventories (IAS 2 – Inventories);
• contract assets and assets arising from costs to obtain or fulfil a contract that are recognised in accordance with IFRS 15;
• deferred tax assets (IAS 12 – Income Taxes);
• assets arising from employee benefits under IAS 19 – Employee Benefits;

Answer 10

• financial assets that are included in the scope of IFRS 9 – Financial Instruments;
• investment property that is measured at fair value under IAS 40 – Investment Property;
• biological assets under IAS 41 – Agriculture, except bearer plants, e.g. apple trees, which are in the scope of IAS 16 and therefore fall under the IAS 36
impairment guidance;
• non-current assets (or disposal groups) classified as held for sale in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations.
[IAS 36.2]

Question 11

Scope 2

This, the standard states, is because these assets are subject to specific recognition and measurement requirements. [IAS 36.3]. The effect of these exclusions is to reduce the scope of IAS 36. While investment properties measured at fair value are exempt,
investment properties not carried at fair value are in the scope of IAS 36. The standard applies to assets carried at revalued amounts, e.g. under IAS 16 (or rarely IAS 38). [IAS 36.4]. A lessee shall apply IAS 36 to determine whether the right-of-use asset is impaired and to account for any impairment loss identified.
[IFRS 16.33].

Answer 11

Financial assets classified as subsidiaries as defined in IFRS 10 – Consolidated Financial Statements, joint ventures as defined in IFRS 11 – Joint Arrangements – and associates as defined in IAS 28 – Investments in Associates and Joint Ventures – are within its scope.
[IAS 36.4]. This will generally mean only those investments in the separate financial statements of the parent. Interests in joint ventures and associates included in the consolidated accounts by way of the equity method are brought into scope by IAS 28.
[IAS 28.42].

Question 12

WHEN AN IMPAIRMENT TEST IS REQUIRED

Answer 12

WHEN AN IMPAIRMENT TEST IS REQUIRED

Question 13

There is an important distinction in IAS 36 between assessing whether there are indications of impairment and actually carrying out an impairment test. The standard has two different general requirements governing when an impairment test should be
carried out:

• For all other classes of assets within the scope of IAS 36, the entity is required to assess at each reporting date (year-end or any interim period end) whether there
are any indications of impairment. The impairment test itself only has to be carried out if there are such indications. [IAS 36.8-9].

Answer 13

• For goodwill and all intangible assets with an indefinite useful life the standard requires an annual impairment test. The impairment test may be performed at any time in the annual reporting period, but it must be performed at the same time every year. Different intangible assets may be tested for impairment at different times. [IAS 36.10].

In addition, the carrying amount of an intangible asset that has not yet been brought into use must be tested at least annually. This, the standard argues, is because
intangible assets are intrinsically subject to greater uncertainty before they are brought into use.
[IAS 36.11].

Question 14

The particular requirements of IAS 36 concerning the impairment testing of goodwill and of intangible assets with an indefinite life are discussed separately at 8 (goodwill) and 10 (intangible assets with indefinite useful life) below, however the methodology used is identical for all types of assets.

Answer 14

For all other assets, an impairment test, i.e. a formal estimate of the asset’s recoverable amount as set out in the standard, must be performed if indications of impairment exist. [IAS 36.9]. The only exception is where there was sufficient headroom in a previous
impairment calculation that would not have been eroded by subsequent events or the asset or CGU is not sensitive to a particular indicator; the indicators and these exceptions are discussed further in the following section. [IAS 36.15].

Question 15

Indicators of impairment 1

Identifying indicators of impairment is a crucial stage in the impairment assessment process. IAS 36 lists examples of indicators but stresses that they represent the minimum indicators that should be considered by the entity and that the list is not exhaustive.
[IAS 36.12-13]

Answer 15

They are divided into external and internal indicators.

Question 16

Indicators of impairment 2

External sources of information:

(a) A decline in an asset’s value during the period that is significantly more than would be expected from the passage of time or normal use.
(b) Significant adverse changes that have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.

Answer 16

(c) An increase in the period in market interest rates or other market rates of return on investments if these increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.
(d) The carrying amount of the net assets of the entity exceeds its market capitalisation.

Question 17

Indicators of impairment 3

Internal sources of information:
(e) Evidence of obsolescence or physical damage of an asset.
(f) Significant changes in the extent to which, or manner in which, an asset is used or is expected to be used, that have taken place in the period or soon thereafter and that will have an adverse effect on it. These changes include the asset becoming idle, plans
to dispose of an asset sooner than expected, reassessing its useful life as finite rather than indefinite or plans to restructure the operation to which the
asset belongs.

Answer 17

(g) Internal reports that indicate that the economic performance of an asset is, or will be, worse than expected. [IAS 36.12].

Question 18

Indicators of impairment 4

The standard amplifies and explains relevant evidence from internal reporting that indicates that an asset may be impaired:

(a) cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, are significantly higher than originally budgeted;
(b) operating profit or loss or actual net cash flows are significantly worse than those budgeted;

Answer 18

(c) a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss; or
(d) operating losses or net cash outflows for the asset, if current period amounts are aggregated with budgeted amounts for the future. [IAS 36.14].

Question 19

Indicators of impairment 5

The presence of indicators of impairment will not necessarily mean that the entity has to calculate the recoverable amount of the asset in accordance with IAS 36. A previous calculation may have shown that an asset’s recoverable amount was significantly greater
than its carrying amount and it may be clear that subsequent events have been insufficient to eliminate this headroom. Similarly, previous analysis may show that an asset’s recoverable amount is not sensitive to one or more of these indicators. [IAS 36.15].

Answer 19

If there are indications that the asset is impaired, it may also be necessary to examine the remaining useful life of the asset, its residual value and the depreciation method
used, as these may also need to be adjusted even if no impairment loss is recognised. [IAS 36.17].

Question 20

Indicators of impairment Market capitalisation

If market capitalisation is lower than the carrying value of equity, this is a powerful indicator of impairment as it suggests that the market considers that the business
value is less than the carrying value. However, the market may have taken account of factors other than the return that the entity is generating on its assets. For
example, an individual entity may have a high level of debt that it is unable to service fully. A market capitalisation below equity will not necessarily be reflected in an equivalent impairment loss. An entity’s response to this indicator depends very much on facts and circumstances.

Answer 20

Most entities cannot avoid examining their CGUs
in these circumstances unless there was sufficient headroom in a previous impairment calculation that would not have been eroded by subsequent events or
none of the assets or CGUs is sensitive to market capitalisation as an indicator. If a formal impairment review is required when the market capitalisation is below equity, great care must be taken to ensure that the discount rate used to calculate VIU is consistent with current market assessments. IAS 36 does not require a formal reconciliation between market capitalisation of the entity, FVLCD and VIU. However, entities need to be able to understand the reason for the shortfall and consider whether they have made sufficient disclosures describing those factors that
could result in an impairment in the next periods.
[IAS 36.134(f)].

Question 21

Indicators of impairment - (Future) performance

Another significant element is an explicit reference in (b), (c) and (d) above to internal evidence that future performance will be worse than expected. Thus IAS 36 requires an impairment review to be undertaken if performance is or will be significantly below that
previously budgeted.

Answer 21

In particular, there may be indicators of impairment even if the asset is profitable in the current period if budgeted results for the future indicate that there will be losses or net cash outflows when these are aggregated with the current period results.

Question 22

Indicators of impairment - Individual assets or part of CGU?

Some of the indicators are aimed at individual fixed assets rather than the CGU of which they are a part, for example a decline in the value of an asset or evidence that it is obsolete or damaged. Such indicators may also imply that a wider review of the business or CGU is required. However, this is not always the case. For example, if there is a slump in property prices and the market value of the entity’s new head office falls below its carrying value this would constitute an indicator of impairment and trigger a review. At the level of the individual asset, as FVLCD is below carrying amount, this might indicate
that a write-down is necessary.

Answer 22

However, the building’s recoverable amount may have
to be considered in the context of a CGU of which it is a part. This is an example of a situation where it may not be necessary to re-estimate an asset’s recoverable amount because it may be obvious that the CGU has suffered no impairment. In short, it may be irrelevant to the recoverable amount of the CGU that it contains a head office whose market value has fallen.

Question 23

Indicators of impairment - Interest rates

Including interest rates as indicators of impairment could imply that assets are judged to be impaired if they are no longer expected to earn a market rate of return, even though they may generate the same cash flows as before. However, it may well be that an upward movement in general interest rates will not give rise to a write-down in assets because they may not affect the rate of return expected from the asset or CGU itself. The standard indicates that this may be an example where the asset’s recoverable amount is not sensitive to a particular indicator.

Answer 23

The discount rate used in a VIU calculation should be based on the rate specific for the asset. An entity is not required to make a formal estimate of an asset’s
recoverable amount if the discount rate used in calculating the asset’s VIU is unlikely to be affected by the increase in market rates. For example the recoverable amount for an asset that has a long remaining useful life may not be materially affected by
increases in short-term rates. Further an entity is not required to make a formal estimate of an asset’s recoverable amount if previous sensitivity analyses of the recoverable amount showed that it is unlikely that there will be a material decrease in the recoverable amount because future cash flows are also likely to increase to compensate for the increase in market rates. Consequently, the potential decrease in the recoverable amount may simply be unlikely to result in a material impairment loss. [IAS 36.16].

Question 24

DIVIDING THE ENTITY INTO CASH-GENERATING UNITS (CGUS)

Answer 24

DIVIDING THE ENTITY INTO CASH-GENERATING UNITS (CGUS)

Question 25

A cash-generating unit is the smallest group of assets that independently generates cash flow and whose cash flow is largely independent of the cash flows generated by other assets.

Answer 25

If an impairment assessment is required, one of the first tasks will be to identify the individual assets affected and if those assets do not have individually identifiable and independent cash inflows, to divide the entity into CGUs. The group of assets that is
considered together should be as small as is reasonably practicable, i.e. the entity should
be divided into as many CGUs as possible and an entity must identify the lowest aggregation of assets that generate largely independent cash inflows.
[IAS 36.6, 68].

Question 26

It must be stressed that CGUs are identified from cash inflows, not from net cash flows or indeed from any basis on which costs might be allocated (this is discussed further below).

The existence of a degree of flexibility over what constitutes a CGU is obvious. Indeed, the standard acknowledges that the identification of CGUs involves judgement. [IAS 36.68].

Answer 26

The key guidance offered by the standard is that CGU selection will be influenced by ‘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’. [IAS 36.69]. While monitoring by management may help identify CGUs, it does not
override the requirement that the identification of CGUs is based on the lowest level at which largely independent cash inflows can be identified.

Question 27

Example 20.1: Identification of cash-generating units and largely independent cash inflows

An entity obtains a contract to deliver mail to all users within a country, for a price that depends solely on the
weight of the item, regardless of the distance between sender and recipient. It makes a significant loss in
deliveries to outlying regions. Because of the entity’s contractual service obligations, the CGU is the whole
region covered by its mail services

Answer 27

The division should not go beyond the level at which each income stream is capable of being separately monitored. For example, it may be difficult to identify a level below an individual factory as a CGU but of course an individual factory may or may not be a CGU.

An entity may be able to identify independent cash inflows for individual factories or other assets or groups of assets such as offices, retail outlets or assets that directly generate revenue such as those held for rental or hire.

Question 28

Intangible assets such as brands, customer relationships and trademarks used by an entity for its own activities are unlikely to generate largely independent cash inflows and will therefore be tested together with other assets at a CGU level. This is also the case with intangible assets with indefinite useful lives and those that have not yet been brought into use, even though the carrying amount must be tested at least annually for impairment (see WHEN AN IMPAIRMENT TEST IS REQUIRED above and CGUs
and intangible assets below.

Answer 28

It is likely that many right-of use assets recorded under IFRS 16 will be assessed for impairment on a CGU level rather than on individual asset level (see When to test right-of-use assets for impairment below). While there might be instances where leased assets generate largely independent cash inflows, many leased assets will be used by an entity as an input in its main operating activities whether these are service providing or production of goods related.

Question 29

Focusing on cash inflows avoids a common misconception in identifying CGUs. Management may argue that the costs for each of their retail outlets are not largely independent because of purchasing synergies and therefore these outlets cannot be
separate CGUs. In fact, this will not be the deciding feature. IAS 36 explicitly refers to the allocation of cash outflows that are necessarily incurred to generate the cash inflows.

Answer 29

If they are not directly attributed, cash outflows can be ‘allocated on a reasonable and consistent basis’.
[IAS 36.39(b)]. Goodwill and corporate assets may also have to be allocated to CGUs as described in Goodwill and its allocation to cash-generating units and Corporate assets below.

Question 30

Management may consider that the primary way in which they monitor their business is for the entity as a whole or on a regional or segmental basis, which could also result in CGUs being set at too high a level. It is undoubtedly true, in one sense, that management monitors the business as a whole but in most cases they also monitor at a lower level that can be identified from the lowest level of independent cash inflows. For
example, while management of a chain of cinemas will make decisions that affect all the cinemas such as the selection of films and catering arrangements, it will also monitor individual cinemas.

Answer 30

Management of a chain of branded restaurants will monitor both the brand and the individual restaurants. In both cases, management may also monitor at an intermediate level, e.g. a level based on regions. In most cases, each restaurant or cinema will be a CGU, as illustrated in Example 20.2 Example B below, because each will generate largely independent cash inflows, but brands and goodwill may be tested at a higher level.

Question 31

In Example 20.2 below Example A illustrates a practical approach which involves working down to the smallest group of assets for which a stream of cash inflows can be identified. These groups of assets will be CGUs unless the performance of their cash
inflow-generating assets is dependent on those generated by other assets, or their cash inflows are affected by those of other assets. If the cash inflows generated by the group of assets are not largely independent of those generated by other assets, other assets should be added to the group to form the smallest collection of assets that generates largely independent cash inflows.

Answer 31

Example 20.2: Identification of cash-generating units, see OneNote

Question 32

Management in Example B may consider that the primary way in which they monitor their business is on a regional or segmental basis, but cash inflows are monitored at the level of an individual store. Individual stores generate independent cash inflows in most circumstances and the overriding requirement under IAS 36 is that the identification of CGUs is based on largely independent cash inflows.

Answer 32

However, the business models of some retailers have significantly changed over the last years and with the increased importance of internet sales will probably further change in the years ahead. The following example illustrates a new evolving omni-channel
business model and its potential impact on the identification of CGUs in the retail sector.

Example 20.3: Omni-channel business model

Question 33

As explained above, IAS 36 states that the identification of CGUs involves judgment and that in identifying CGUs an entity should consider various factors including how
management monitors the entity’s operations (such as by product line, business, individual location, district or regional area) or how management makes decisions about continuing or disposing of the entity’s assets and operations. [IAS 36.68-69].

Answer 33

Applying this guidance, the following quantitative and qualitative criteria might be considered in determining the appropriate CGUs in an omni-channel business model for impairment testing purposes:

• Whether the interdependency of the revenues from different sales channels (online, stores) is evidenced in the business model.
• Whether the retailer is able to measure the interdependencies of the revenues (i.e. online and stores).

Question 34

• Whether the business model provides evidence that the sales channels are monitored together (e.g. on the level of customers allocated based on ZIP-Codes to stores in an area).
• Whether the profitability as well as the remuneration system are monitored/assessed on the combined basis of online and store revenues on a regional level (e.g. cities in Example 20.3 above).

Answer 34

• Whether in deciding about store openings and closures, the revenues of the online business in the region (city in the example above) are considered.

• Whether online revenues are reaching a significant quantitative proportion of the overall revenues of the retailer’s CGUs. It is important to note that IAS 36 does not give any specific guidance on when cash inflows are largely independent and therefore judgement is required. The level of interdependent online sales in
Example 20.3 above is not meant to be a bright line but rather part of the specific fact pattern in the example and in practice the determination of CGUs will have to be made in the context of the overall facts and circumstances.

Question 35

As illustrated in Example 20.4 below, it may be that the entity is capable of identifying individual cash inflows from assets but this is not conclusive. It may not be the most relevant feature in determining the composition of its CGUs which also depends on whether cash inflows are independent from cash inflows of other assets and on how cash inflows are monitored. If, however, the entity were able to allocate VIU on a
reasonable basis, this might indicate that the assets are separate CGUs.

Answer 35

Example 20.4: Identification of cash-generating units – grouping of assets

Example 20.5: Identification of cash-generating units – single product entity

Question 36

As a result of applying the methodology illustrated in Example 20.2 above, an entity could identify a large number of CGUs. However, the standard allows reasonable approximations and one way in which entities may apply this in practice is to group
together assets that are separate CGUs, but which if considered individually for impairment would not be material.

Answer 36

Retail outlets, usually separate CGUs, may be
grouped if they are in close proximity to one another, e.g. all of the retail outlets in a city centre owned by a branded clothes retailer, if they are all subject to the same economic circumstances and grouping rather than examining individually will have an immaterial effect. However, the entity will still have to scrutinise the individual CGUs to ensure that those that it intends to sell or that have significantly underperformed are not supported by the others with which they are grouped. They would need to be identified and dealt with individually.

Question 37

In practice, different entities will inevitably have varying approaches when determining their CGUs. There is judgement to be exercised in determining an income stream and in determining whether it is largely independent of other streams. Given this, entities
may tend towards larger rather than smaller CGUs, to keep the complexity of the process within reasonable bounds. IAS 36 also requires that identification of cash generating units be consistent from period to period unless the change is justified; if changes are made and the entity records or reverses an impairment, disclosures are required. [IAS 36.72, 73].

Answer 37

Assets held for sale cannot remain part of a CGU. They generate independent cash inflows being the proceeds expected to be generated by sale. Once they are classified as held for sale they will be accounted for in accordance with IFRS 5 and carried at an amount that may not exceed their FVLCD (see Impairment of assets held for sale below and Chapter 4 for a further discussion of IFRS 5’s requirements).

Question 38

CGUs and intangible assets 1

IAS 36 requires certain intangible assets to be tested at least annually for impairment (see WHEN AN IMPAIRMENT TEST IS REQUIRED above). These are intangible assets with an indefinite life and intangible assets that have not yet been brought into use.
[IAS 36.10-11].

Answer 38

Although these assets must be tested for impairment at least once a year, this does not mean that they have to be tested by themselves. The same requirements apply as for all other assets. The recoverable amount is the higher of the FVLCD or VIU of the individual asset or of the CGU to which the asset belongs (see DIVIDING THE ENTITY INTO CASH-GENERATING UNITS (CGUS) above). If the individual intangible asset’s FVLCD is lower than the carrying amount and it does not generate largely independent cash flows then the CGU to which it belongs must be reviewed
for impairment.

Question 39

CGUs and intangible assets 2

Many intangible assets do not generate independent cash inflows as individual assets and so they are tested for impairment with other assets of the CGU of which they are part. A trade mark, for example, will generate largely independent cash flows if it is licensed to a third
party but more commonly it will be part of a CGU.

Answer 39

If impairment is tested by reference to the FVLCD or VIU of the CGU, impairment losses, if any, will be allocated in accordance with IAS 36. Any goodwill allocated to the CGU has to be written off first. After that, the other assets of the CGU, including the
intangible asset, will be, reduced pro rata based on their carrying amount (see Impairment losses and CGUs below). [IAS 36.104]. However, the carrying amount of an asset should not be reduced
below the highest of its fair value less costs of disposal, value in use or zero. If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group
of units).

Question 40

CGUs and intangible assets 3

If the intangible asset is no longer useable then it must be written off, e.g. an in-process research and development project that has been abandoned, so it is no longer part of the larger CGU and its own recoverable amount is nil.

Answer 40

Intangible assets held for sale are treated in the same way as all other assets held for sale – see 5.1 below.

Question 41

Active markets and identifying CGUs 1

The standard stresses the significance of an active market for the output of an asset or group of assets in identifying a CGU. An active market is a market in which transactions take place with sufficient frequency and volume to provide pricing information on an
ongoing basis. [IFRS 13 Appendix A]. If there is an active market for the output produced by an asset or group of assets, the assets concerned are identified as a cash-generating unit, even if some or all of the output is used internally. [IAS 36.70]

Answer 41

The reason given for this rule is that the existence of an active market means that the assets or CGU could
generate cash inflows independently from the rest of the business by selling on the active market. [IAS 36.71]. There are active markets for many metals, energy products (various grades of oil product, natural gas) and other commodities that are freely traded.

Question 42

Active markets and identifying CGUs 2

When estimating cash inflows for the selling CGU or cash outflows for the buying CGU, the entity will replace internal transfer prices with management’s best estimate of the price in a future arm’s length transaction. Note that this is a general requirement for all assets and CGUs subject to internal transfer
pricing.

Answer 42

Example A below, based on Example 1B in IAS 36’s accompanying section of illustrative examples, illustrates the point. Example B describes circumstances in which the existence of an active market does not necessarily lead to the identification of a separate CGU.

Example 20.6: Identification of cash-generating units – internally-used products

Question 43

IDENTIFYING THE CARRYING AMOUNT OF CGU ASSETS

Answer 43

IDENTIFYING THE CARRYING AMOUNT OF CGU ASSETS

Question 44

After an entity has established its CGU(s) for the impairment assessment, it needs to determine the carrying amount of the CGU(s). The carrying amount must be determined on a basis that is consistent with the way in which the recoverable amount is determined.
[IAS 36.75].

Answer 44

The carrying amount of a CGU includes only those assets that can be attributed directly, or allocated on a reasonable and consistent basis. These must be the assets that will generate the future cash inflows used in determining the CGU’s recoverable amount. It
does not include the carrying amount of any recognised liability, unless the recoverable amount of the cash-generating unit cannot be determined without taking it into account. Both FVLCD and VIU of a CGU are determined excluding cash flows that relate to assets that are not part of the cash-generating unit and liabilities that have been recognised. [IAS 36.76].

Question 45

The standard emphasises the importance of completeness in the allocation of assets to CGUs. Every asset used in generating the cash flows of the CGU being tested must be included in the CGU; otherwise an impaired CGU might appear to be unimpaired, as its
carrying value would be understated by having missed out assets. [IAS 36.77].

Answer 45

There are exceptions to the rule that recognised liabilities are not included in arriving at the CGU’s carrying value or VIU. If the buyer would have to assume a liability if it acquired an asset or group of assets, then the fair value less costs of disposal would be the price to sell the assets or group of assets and the liability together. The liability would then need to be deducted from the CGU’s carrying amount and VIU. This will enable a meaningful comparison between carrying amount and recoverable amount, whether the
latter is based on FVLCD or VIU. [IAS 36.78].

Question 46

For practical reasons the entity may determine the recoverable amount of a CGU after taking into account assets and liabilities such as receivables or other financial assets, trade payables, pensions and other provisions that are outside the scope of IAS 36 and
therefore not part of the CGU. [IAS 36.79]. If the value in use calculation for a CGU or its FVLCD are determined taking into account these sorts of items, then it is essential that the carrying amount of the CGU is determined on a consistent basis. However, this
frequently causes confusion in practice, as described at Consistency and the impairment test below.

Answer 46

Other assets such as goodwill and corporate assets may not be able to be attributed on a reasonable and consistent basis and the standard has separate rules regarding their treatment. The allocation of goodwill is dealt with separately at Goodwill and its allocation to cash-generating units below and corporate
assets at Corporate assets below.

Question 47

Consistency and the impairment test 1

Consistency is a very important principle underlying IAS 36. In testing for impairment entities must ensure that the carrying amount of the CGU is consistent for VIU and FVLCD calculations. In calculating VIU, or using a discounted cash flow methodology for FVLCD, entities must ensure that there is consistency between the assets and liabilities of the CGU and the cash flows taken into account, as there must also be between the cash flows and discount rate.

Answer 47

The exceptions to the rule that recognised liabilities are not included in arriving at the CGU’s carrying value. If the buyer would have to assume a liability if it acquired an asset or group of assets (CGU), then the fair value less costs of disposal of the CGU would be the price to sell the assets of the CGU and the liability together, less the costs of disposal. [IAS 36.78]. To provide a meaningful comparison this liability should then be deducted as well from the VIU and the carrying amount of the asset or group of assets (CGU).

Question 48

Consistency and the impairment test 2

The standards requirement to deduct the liability from both the CGU’s carrying amount and from its VIU avoids the danger of distortion that can arise when cash flows that will be paid to settle the contractual obligation are included in the VIU discounted cash flow calculation. If the liability cash flows are included in the VIU discounted cash flow calculation, they
would potentially be discounted using a different discount rate to the rate used to calculate the carrying value of the liability causing distortion.

Answer 48

From a practical point of view an entity could simply calculate the VIU of a CGU excluding the liability cash outflows and compare that to the CGU carrying amount
excluding the liability. While this would mean that the VIU is not comparable to the FVLCD, this would not cause an issue as long as the calculated VIU is above the CGU’s
carrying amount, therefore providing evidence that the CGU is not impaired.

Question 49

Consistency and the impairment test 3

It is also accepted in IAS 36 that an entity might for practical reasons determine the recoverable amount of a CGU after taking into account assets and liabilities such as receivables or other financial assets, trade payables, pensions and other provisions that are outside the scope of IAS 36.

Answer 49

In all cases:
• the carrying amount of the CGU must be calculated on the same basis for VIU and FVLCD, i.e. including the same assets and liabilities; and
• it is essential that cash flows are prepared on a consistent basis to the assets and liabilities within CGUs.

In addition, some of these assets and liabilities have themselves been calculated using discounting techniques. Therefore a danger of distortion arises resulting from differing discount rates, as discussed above.

Question 50

Corporate assets 1

An entity may have assets that are inherently incapable of generating cash inflows independently, such as headquarters buildings or central IT facilities that contribute to more than one CGU. IAS 36 calls such assets corporate assets. Corporate assets are
defined as ‘…assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units’.

Answer 50

The characteristics that distinguish corporate assets are that they do not generate cash inflows independently of other assets or groups of assets and their carrying amount cannot be fully attributed to the CGU under review. [IAS 36.100]. Nevertheless, in order to test properly for impairment, the corporate asset’s carrying value has to be tested for impairment
along with the CGUs. Corporate assets therefore have to be allocated to the CGUs to which they belong and then tested for impairment along with those CGUs. [IAS 36.101].

Question 51

Corporate assets 2

This presents a problem in the event of those assets themselves showing indications of impairment. It also raises a question of what those indications might actually be, in the absence of cash inflows directly relating to this type of asset. Some, but not all, of these assets may have relatively easily determinable fair values but while this is usually true of a headquarters building, it could not be said for a central IT facility.

Answer 51

We have already noted at Individual assets or part of CGU? above that a decline in value of the asset itself may not trigger a need for an impairment review and it may be obvious that the CGUs of which corporate assets are a part are not showing any indications of impairment – unless, of course, management has
decided to dispose of the asset. It is most likely that a corporate asset will show indications of impairment if the CGU or group of CGUs to which it relates are showing indications and this is reflected in the methodology by which corporate assets are tested.

Question 52

Corporate assets 3

If possible, the corporate assets are to be allocated to individual CGUs on a ‘reasonable and consistent basis’. [IAS 36.102]. This is not expanded upon and affords some flexibility, although plainly consistency is vital; the same criteria must be applied at all times. If the carrying value of a corporate asset can be allocated on a reasonable and consistent basis
between indvidual CGUs, each CGU has its impairment test done separately and its carrying value includes its share of the corporate asset. If the corporate asset’s carrying value cannot be allocated to an individual CGU, there are three steps to consider. As noted above, indicators of impairment for corporate assets that cannot be allocated to individual CGUs
are likely to relate to the CGUs that use the corporate asset as well.

Answer 52

First the CGU is tested for impairment and any impairment is recognised. Then the group of CGUs is identified to which, as a group, all or part of the carrying value of the corporate asset can be allocated. This group must include the CGU that was the subject of the first test. Finally, all CGUs in this group have to be tested to determine if the group’s carrying value (including the allocation of the corporate asset’s carrying value)
is in excess of the group’s recoverable amount.
[IAS 36.102]. If it is not sufficient, the impairment loss will be allocated pro-rata, subject to the limitations of paragraph 105 of IAS 36, to all assets in the group of CGUs and the allocated portion of the corporate
asset, as described at Impairment losses and CGUs below.

Question 53

Corporate assets 4

If such an allocation is not possible, then you go so-called bottom-up direction:

1. You shall test the CGU without corporate asset for impairment first and recognize any impairment loss.
2. Identify the smallest group of CGUs that includes the CGU under review and to which a portion of the carrying amount of the corporate asset can be allocated on a reasonable and consistent basis.
3. Compare the carrying amount of that group of CGUs including the allocated portion of a corporate asset with the recoverable amount of the group of CGUs.
4. Recognize impairment loss in line with the next paragraph.

Answer 53

In IAS 36’s accompanying section of illustrative examples, Example 8 has a fully worked example of the allocation of corporate assets and calculation of a VIU. [IAS 36.IE69-IE79]. The table below is included in it, and serves to illustrate the allocation of the corporate
asset to CGUs:

Example 20.9: Allocation of corporate assets

Question 54

Corporate assets 5

The allocation need not be made on carrying value or financial measures such as revenue – employee numbers or a time basis might be a valid basis in certain circumstances.

Answer 54

One effect of this pro-rata process is that the amount of the head office allocated to each CGU will change as the useful lives and carrying values change. In the above example, the allocation of the head office to CGU A will be redistributed to CGUs B and C as A’s remaining life shortens. Similar effects will be observed if the sizes of any other factor on which the allocation to the CGUs is made change relative to
one another.

Question 55

RECOVERABLE AMOUNT

Answer 55

RECOVERABLE AMOUNT

Question 56

The standard requires the carrying amount of the asset or CGU to be compared with the recoverable amount, which is the higher of VIU and FVLCD. [IAS 36.18]. If either the FVLCD or the VIU is higher than the carrying amount, no further action is necessary as
the asset is not impaired. [IAS 36.19]. Recoverable amount is calculated for an individual asset, unless that asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the CGU to which the asset belongs. [IAS 36.22].

Answer 56

Recoverable amount is the higher of FVLCD and VIU.
IAS 36 defines VIU as the present value of the future cash flows expected to be derived from an asset or CGU. FVLCD is the fair value as defined in IFRS 13 – Fair Value Measurement, 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, less the costs of disposal. [IAS 36.6].

Question 57

Estimating the VIU of an asset involves estimating the future cash inflows and outflows that will be derived from the use of the asset and from its ultimate disposal, and discounting them at an appropriate rate. [IAS 36.31]. There are complex issues involved in
determining the cash flows and choosing a discount rate and often there is no agreed methodology to follow (see 7.1 and 7.2 below for a discussion of some of these difficulties).

Answer 57

It may be possible to estimate FVLCD even in the absence of quoted prices in an active market for an identical asset but if there is no basis for making a reliable estimate then the value of an asset must be based on its VIU. [IAS 36.20].

Question 58

There are two practical points to emphasise.
First, IAS 36 allows the use of estimates, averages and computational shortcuts to provide a reasonable approximation of FVLCD or VIU. [IAS 36.23].
Second, if the FVLCD is greater than the asset’s carrying value, no VIU calculation is necessary. It is not uncommon for the FVLCD of an asset to be readily obtainable while the asset itself does not generate largely independent cash inflows, as is the case with many property assets held by entities.

Answer 58

If the FVLCD of the asset is lower than its carrying value then the recoverable amount will have to be calculated by reference to the CGU of which the asset is a part. However, as explained at Individual assets or part of CGU? above, it may be obvious that the CGU to which the property belongs has not suffered an impairment. In such a case it would not be necessary to assess the recoverable amount of the CGU.

Question 59

Impairment of assets held for sale 1

The standard describes circumstances in which it may be appropriate to use an asset or CGU’s FVLCD without calculating its VIU, as the measure of its recoverable amount. There may be no significant difference between FVLCD and VIU, in which case the
asset’s FVLCD may be used as its recoverable amount. This is the case, for example, if management is intending to dispose of the asset or CGU, as apart from its disposal proceeds there will be few if any cash flows from further use. [IAS 36.21].

Answer 59

The asset may also be held for sale as defined by IFRS 5, by which stage it will be outside the scope of IAS 36, although IFRS 5 requires such assets to be measured immediately before their initial classification as held for sale ‘in accordance with applicable IFRSs’. [IFRS 5.18].
A decision to sell is a triggering event for an impairment review, which means that any existing impairment will be recognised at the point of classification and not be
rolled into the gain or loss on disposal of the asset.

Question 60

Impairment of assets held for sale 2

Clearly IFRS 5’s requirement to test for impairment prior to reclassification is intended to avoid impairment losses being recognised as losses on disposal. However, one effect is that this rule may require the recognition of impairment losses on individual assets that form part of a single disposal group subsequently sold at a profit

Answer 60

IAS 36 does not allow an asset to be written down below the higher of its VIU or FVLCD. [IAS 36.105]. An entity might, however, expect to sell a CGU for less than the apparent aggregate FVLCD of individual assets, e.g. because the potential buyer expects further losses. If this happens, the carrying amount of the disposal group under IFRS 5 is capped
at its FVLCD so the impairment loss is allocated to all non-current assets, even if their carrying amounts are reduced below their FVLCD.

Question 61

FAIR VALUE LESS COSTS OF DISPOSAL

Answer 61

FAIR VALUE LESS COSTS OF DISPOSAL

Question 62

IFRS 13 specifies how to measure fair value, but does not change when fair value is required or permitted under IFRS.
The standard defines fair value as 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. It is explicitly an exit price. [IFRS 13.2].

Answer 62

When measuring FVLCD, fair value is measured in accordance with IFRS 13. Costs of disposal are calculated in accordance with IAS 36.

Question 63

IFRS 13 specifically excludes VIU from its scope.
[IFRS 13.6]. Fair value, like FVLCD, is not an entity-specific measurement but is focused on market
participants’ assumptions for a particular asset or liability. [IFRS 13.11]. For non-financial assets, fair value has to take account of the highest and best use by a market participant to which the asset could be put. [IFRS 13.27]. An entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a
different use by market participants would maximise the value of the asset. [IFRS 13.29].

Answer 63

Entities are exempt from the disclosures required by IFRS 13 when the recoverable amount is FVLCD.
[IFRS 13.7(c)]. IAS 36’s disclosure requirements are broadly aligned with those of IFRS 13. See IAS 36’s disclosure requirements at 13 below.

Question 64

While IFRS 13 makes it clear that transaction costs are not part of a fair value measurement, in all cases, FVLCD should take account of estimated disposal costs. These include legal costs, stamp duty and other transaction taxes, costs of removing the asset and other direct incremental costs. Business reorganisation costs and employee termination costs (as defined in IAS 19, see Chapter 31) may not be treated as costs of disposal. [IAS 36.28]

Answer 64

If the disposal of an asset would requires the buyer assuming a liability and there is only a single FVLCD for both taken together, then, to enable a meaningful comparison, the obligation must also be taken into account in calculating VIU and the carrying value of
the asset. This is discussed at Consistency and the impairment test above. [IAS 36.29, 78].

Question 65

Estimating FVLCD 1

IFRS 13 does not limit the types of valuation techniques an entity might use to measure fair value but instead focuses on the types of inputs that will be used. The standard requires the entity to use the valuation technique that ‘maximis[es] the use of relevant observable inputs and minimis[es] the use of unobservable inputs’. [IFRS 13.61]. The objective is that the best available inputs should be used in valuing the assets. These inputs could be used in any valuation technique provided they are consistent with (one
of) the three valuation approaches in the standard: the market approach, the cost approach and the income approach. [IFRS 13.62]

Answer 65

IFRS 13 does not place any preference on the techniques that are used as long as the entity achieves the objective of a fair value measurement, which means it must use the best available inputs. In some cases, a single valuation technique will be appropriate, while in other cases, multiple valuation techniques will need to be used to meet this objective. An entity must apply the
valuation technique(s) consistently. A change in a valuation technique is considered a change in an accounting estimate in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. [IFRS 13.66]

Question 66

Estimating FVLCD 2

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business. [IFRS 13.B5]. For items within scope of IAS 36, market techniques will usually involve market transactions in comparable assets or, for certain assets valued as businesses, market multiples derived from comparable transactions. [IFRS 13.B5, B6].

Answer 66

The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (i.e. current replacement cost). It is based on what a market participant buyer would pay to acquire or construct a substitute asset of comparable
utility, adjusted for obsolescence. Obsolescence includes physical deterioration, technological (functional) and economic obsolescence so it is not the same as
depreciation under IAS 16. [IFRS 13.B8, B9].

Question 67

Estimating FVLCD 3

The income approach converts future amounts (e.g. cash flows or income and expenses) to a single discounted amount. The fair value reflects current market expectations about those future amounts. This will usually mean using a discounted cash flow technique or one of the other techniques that fall into this classification (e.g. option pricing and multiperiod excess earnings methods). [IFRS 13.B10, B11].
See Chapter 14 for a further discussion of these valuation approaches.

Answer 67

The inputs used in these valuation techniques to measure the fair value of an asset have a hierarchy. Those that are quoted prices in an active market for identical assets (Level 1) have the highest priority, followed by inputs, other than quoted prices, that are
observable (Level 2). The lowest priority inputs are those based on unobservable inputs (Level 3). [IFRS 13.72]. The valuation techniques, referred to above, will use a combination of inputs to determine the fair value of the asset.

Question 68

Estimating FVLCD 4

An active market is a market in which transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis. [IFRS 13 Appendix A]. Using the IFRS’s approach, most estimates of fair value for IAS 36 purposes will use Level 2 inputs that are directly or indirectly observable and Level 3 inputs that are not based on observable market data but reflect assumptions used by market participants, including risk

Answer 68

If Level 2 information is available then entities must take it into account in calculating FVLCD because this is a relevant observable input, and cannot base their valuation only on Level 3 information.

Question 69

Estimating FVLCD 5

IFRS 13 allows entities to use unobservable inputs, which can include the entity’s own data, to calculate fair value, as long as the objectives (an exit price from the perspective of a market participant) and assumptions about risk are met. [IFRS 13.87-89]. This means that a discounted cash flow technique may be used if this is commonly used in that industry to estimate fair value. Cash flows used when applying the model may only reflect cash flows that market participants would take into account when assessing fair value. This includes the type, e.g. future capital expenditure, as well as the estimated amount of
such cash flows.

Answer 69

For example, an entity may wish to take into account cash flows relating to future capital expenditure, which would not be permitted for a VIU calculation. These cash flows can be included if, and only if, other market participants would consider them when evaluating the asset. It is not permissible to include assumptions about cash flows or benefits from the asset that would not be available to or considered by a typical market participant.

Question 70

Estimating FVLCD 6

The entity cannot ignore external evidence. It must use the best information that is available to it and adjust its own data if ‘reasonably available information indicates that other market participants would use different data or there is something particular to the entity that is not available to other market participants such as an entity-specific synergy’. An entity need not undertake exhaustive efforts to obtain information about market participant assumptions. ‘However, an entity shall take into account all information about market participant assumptions that is reasonably available.’
[IFRS 13.89]

Answer 70

This means using a relevant model, which requires consideration of industry practice, for example, multiples based on occupancy, revenue and EBITDA might be
inputs in estimating the fair value of a hotel but the value of an oil field would depend on its reserves. The fair value of an oil field would include the costs that would be incurred in accessing those reserves based on the costs a market participant expects to incur instead of the entity’s own specific cost structure.

Question 71

Estimating FVLCD 7

IAS 36 notes that sometimes it is not possible to obtain reliable evidence regarding the assumptions and techniques that market participants would use (IAS 36 uses the phrase ‘no basis for making a reliable estimate’); if so, the recoverable amount of the asset must be based on its VIU. [IAS 36.20].

Answer 71

Therefore, the IASB accepts that there are some
circumstances in which market conditions are such that it will not be possible to calculate a reliable estimate of the price at which an orderly transaction to sell the asset would take place under current market conditions. [IAS 36.20]. IFRS 13 includes guidance for identifying transactions that are not orderly.
[IFRS 13.B43]

Question 72

DETERMINING VALUE IN USE (VIU)

Answer 72

DETERMINING VALUE IN USE (VIU)

Question 73

IAS 36 defines VIU as the present value of the future cash flows expected to be derived from an asset or CGU. IAS 36 requires the following elements to be reflected in the VIU calculation:

(a) an estimate of the future cash flows the entity expects to derive from the asset;
(b) expectations about possible variations in the amount or timing of those future cash flows;

Answer 73

(c) the time value of money, represented by the current market risk-free rate of interest;
(d) the price for bearing the uncertainty inherent in the asset; and
(e) other factors, such as illiquidity that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. [IAS 36.30].

Question 74

The calculation requires the entity to estimate the future cash flows and discount them at an appropriate rate. [IAS 36.31]. It also requires uncertainty as to the timing of cash flows or the market’s assessment of risk in those assets ((b), (d) and (e) above) to be taken into
account either by adjusting the cash flows or the discount rate. [IAS 36.32]. The intention is that the VIU should be the expected present value of those future cash flows.

Answer 74

If possible, recoverable amount is calculated for the individual asset. However, it will frequently be necessary to calculate the VIU of the CGU of which the asset is a part. [IAS 36.66]. This is because the single asset may not generate sufficiently independent cash inflows,
[IAS 36.67], as is often the case.

Question 75

Goodwill cannot be tested by itself so it always has to be tested as part of a CGU or group of CGUs. Where a CGU is being reviewed for impairment, this will involve calculation of the VIU of the CGU as a whole unless a reliable estimate of the CGU’s FVLCD can be made and the resulting FVLCD is above the total carrying amount of the CGU’s net assets.

Answer 75

VIU calculations at the level of the CGU will thus be required when no satisfactory FVLCD is available or FVLCD is below the CGU’s carrying amount and:

• the CGU includes goodwill, indefinite lived intangibles or intangibles not yet brought into use which must be tested annually for impairment;
• a CGU itself is suspected of being impaired; or
• intangible assets or other fixed assets are suspected of being impaired and individual future cash flows cannot be identified for them.

Question 76

The standard contains detailed requirements concerning the data to be assembled to calculate VIU that can best be explained and set out as a series of steps. The steps also contain a discussion of the practicalities and difficulties in determining the VIU of an asset. The steps in the process are:

1: Dividing the entity into CGUs (see DIVIDING THE ENTITY INTO CASH-GENERATING UNITS (CGUS) above).
2: Allocating goodwill to CGUs or CGU groups (see Goodwill and its allocation to cash-generating units below).

3: Identifying the carrying amount of CGU assets
(see IDENTIFYING THE CARRYING AMOUNT OF
CGU ASSETS above).

Answer 76

4: Estimating the future pre-tax cash flows of the CGU under review (see Estimating the future pre-tax cash flows of the CGU under review below).

5: Identifying an appropriate discount rate and discounting the future cash flows (see Identifying an appropriate discount rate and discounting the future
cash flows below).

6: Comparing carrying value with VIU (assuming FVLCD is lower than carrying value) and recognising impairment losses (if any) (see Impairment losses on individual assets and Impairment losses and CGUs below).

Question 77

Although this process describes the determination of the VIU of a CGU, steps 3 to 6 are the same as those that would be applied to an individual asset if it generated cash inflows independently of other assets. Impairment of goodwill is discussed at below.

Answer 77

…..

Question 78

Emile

Value in use is calculated by:

 estimating future (pre-tax) cash flows from the use of the asset (including those from ultimate disposal)
 discounting them to present value.

Answer 78

Estimates of future cash flows should be based on reasonable and supportable assumptions that represent management’s best estimate of the economic conditions that will exist over the
remaining useful life of the asset.

The net present value is derived by discounting back the future operating cash flows at an appropriate
(pre-tax) risk adjusted discount rate.

Question 79

Estimating the future pre-tax cash flows of the CGU under review 1

In order to calculate the VIU the entity needs to estimate the future cash flows that it will derive from its use and consider possible variations in their amount or timing. [IAS 36.30]. In estimating future cash flows the entity must:

Answer 79

(a) Base its cash flow projections on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that
will exist over the remaining useful life of the asset. Greater weight must be given to external evidence.

Question 80

Estimating the future pre-tax cash flows of the CGU under review 2

(b) Base cash flow projections on the most recent financial budgets/forecasts approved by management, excluding any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset’s performance. These projections can only cover a maximum period of five years, unless a longer
period can be justified.

Answer 80

(c) Estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating them using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate must not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified. [IAS 36.33].

Question 81

IMPAIRMENT OF INTANGIBLE ASSETS WITH AN

INDEFINITE USEFUL LIFE

Answer 81

IMPAIRMENT OF INTANGIBLE ASSETS WITH AN

INDEFINITE USEFUL LIFE

Question 82

IAS 38 makes the point that ‘indefinite’ does not mean ‘infinite’, and unforeseeable factors may affect the entity’s ability and intention to maintain the asset at its standard of performance assessed at the time of estimating the asset’s useful life. [IAS 38.91]. The
requirements of IAS 36 for this type of asset can be summarised as follows :

Answer 82

1. all intangible assets with indefinite useful lives must be tested for impairment at least once per year and at the same time each year; [IAS 36.10]
2. any intangible asset with an indefinite useful life recognised during the reporting period must be tested for impairment before the end of the period;
   [IAS 36.10]

Question 83

3. any intangible asset (regardless of whether it has an indefinite useful life or not) that is not yet available for use recognised during the reporting period must be
   tested for impairment before the end of the period; [IAS 36.10-11]
4. if an intangible asset that has an indefinite useful life or is not yet available for use can only be tested for impairment as part of a CGU, then that CGU must be tested for impairment at least annually; [IAS 36.89]

Answer 83

5. if there are indicators of impairment a period end test must also be performed; [IAS 36.9] and
6. for an intangible asset that has an indefinite useful life that is part of a CGU, there are specific concessions, discussed below, allowing an impairment test in a
   previous period to be used if that test showed sufficient headroom. [IAS 36.24].

Question 84

Any intangible asset not yet ready for use must be tested annually because its ability to generate sufficient future economic benefits to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after it is available for use. [IAS 36.11].

Answer 84

This will obviously affect any entity that capitalises development expenditure in accordance with IAS 38 where the period of development may straddle more than one accounting period. The requirement will also apply to in-process research and development costs recognised in a business combination

Question 85

An intangible asset with an indefinite useful life may generate independent cash inflows as an individual asset, in which case the impairment testing procedure for a single asset as set out at DETERMINING VALUE IN USE (VIU) above applies. Most intangible assets form part of the assets within a CGU, in which case the procedures relevant to testing a CGU as set out above apply. In particular IAS 36 makes it clear that if an intangible asset with an indefinite useful life,
or any intangible asset not yet ready for use, is included in the assets of a CGU, then that CGU has to be tested for impairment annually. [IAS 36.89]

Answer 85

As with other assets, it may be that the FVLCD of the intangible asset with an indefinite useful life can be ascertained but the asset itself does not generate largely independent cash flows. If its individual FVLCD is lower than the carrying amount, this does not necessarily mean that the asset is impaired. The impairment test is still based on the CGU of which the asset is a part,
and if the recoverable amount of the CGU is higher than the carrying amount of the CGU, there is no impairment loss.

Question 86

IAS 36 allows a concession that applies to those intangible assets with an indefinite useful life that form part of a CGU, which is similar to the concession for goodwill. It allows the most recent detailed calculation of such an asset’s recoverable amount made in a preceding period to be used in the impairment test in the current period if all of the following criteria are met :

Answer 86

(a) if the intangible asset is part of a CGU, the assets and liabilities making up that unit have not changed significantly since the most recent recoverable amount calculation;
(b) that calculation of the asset’s recoverable amount exceeded its carrying amount by a substantial margin; and
(c) the likelihood that an updated calculation of the recoverable amount would be less than the asset’s carrying amount is remote, based on an analysis of events and circumstances since the most recent calculation of the recoverable amount. [IAS 36.24].

Question 87

Thus if there was sufficient headroom on the last calculation and little has changed in the CGU to which the asset belongs, it can be revisited and re-used rather than having to be entirely started from scratch, which considerably reduces the work involved in
the annual test.

Answer 87

The impairment test cannot be rolled forward forever, of course, and an entity will have to take a cautious approach to estimating when circumstances have
changed sufficiently to require a new test.

Question 88

Impairment losses experienced on intangible assets with an indefinite useful life are recognised exactly as set out at RECOGNISING AND REVERSING IMPAIRMENT LOSSES below, either as an individual asset or as part of a CGU, depending upon whether the intangible concerned is part of a CGU or not.
Note that there is an important distinction concerning the allocation of losses in a CGU between the treatment of goodwill and that of intangible assets with an indefinite useful life. If goodwill forms part of the assets of a CGU, any impairment loss first reduces the goodwill and thereafter the remaining assets
are reduced prorata.

Answer 88

However, if an intangible asset is part of a CGU that is impaired, there is no requirement to write down the intangible before the other assets in the CGU, rather
all assets are written down pro-rata. For the pro-rata allocation it is important to keep in mind that the carrying amount of an asset should not be reduced below the highest of its fair value less costs of disposal, value in use or zero. If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units).

Question 89

RECOGNISING AND REVERSING IMPAIRMENT

LOSSES

Answer 89

RECOGNISING AND REVERSING IMPAIRMENT

LOSSES

Question 90

If the carrying value of an individual asset or of a CGU is equal to or less than its calculated VIU, there is no impairment. On the other hand, if the carrying value of
the CGU is greater than its recoverable amount, an impairment write-down should be recognised.

Answer 90

There are three scenarios: an impairment loss on an individual asset, an impairment loss on an individual CGU and an impairment loss on a group of CGUs. The last of these may occur where there are corporate assets (see Corporate assets above) or goodwill (see Impairment losses and CGUs below) that have been allocated to a group of CGUs rather than to individual ones.

Question 91

Impairment losses on individual assets 1

For individual assets IAS 36 states:

‘If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss. [IAS 36.59].

Answer 91

‘An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for
example, in accordance with the revaluation model in IAS 16). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard’. [IAS 36.60].

Question 92

Impairment losses on individual assets 2

If there is an impairment loss on an asset that has not been revalued, it is recognised in profit or loss. An impairment loss on a revalued asset is first used to reduce the revaluation surplus in other comprehensive income for that asset. Only when the impairment loss exceeds the amount in the revaluation surplus for that same asset is any further impairment loss recognised in profit or loss.

Answer 92

IAS 36 does not require impairment losses to be shown in any particular position in the income statement, although the requirements of IAS 1 – Presentation of Financial Statements – should always be considered. It may be necessary to add an appropriate line item in profit or loss if it is relevant for an understanding of the entity’s financial performance. [IAS 1.85].

Question 93

Impairment losses on individual assets 3

Any amounts written off a fixed asset should be shown as part of the accumulated depreciation when an entity discloses the gross carrying amount and the accumulated depreciation at the beginning and the end of the period. [IAS 16.73(d)]. In the reconciliation
required by IAS 16.73(e) any impairment recognised or reversed through profit and loss should be shown in a separate line item. If the asset is held at revalued amount then any impairment losses recognised or reversed should be shown in the reconciliation in one
line item together with the revaluations.
[IAS 16.73(e)(iv)].

Answer 93

An impairment loss greater than the carrying value of the asset does not give rise to a liability unless another standard requires it, presumably as this would be equivalent to providing for future losses. [IAS 36.62]. An impairment loss will reduce the depreciable amount of an asset and the revised amount will be depreciated or amortised prospectively over the remaining life.
[IAS 36.63]. However, an entity ought also to review the useful life and residual value of its impaired asset, as both of these may need to be revised. The circumstances that give rise to impairments frequently
affect these as well.

Question 94

Impairment losses on individual assets 4

Finally, an impairment loss will have implications for any deferred tax calculation involving the asset. The standard makes clear that if an impairment loss is recognised then any related deferred tax assets or liabilities are determined in accordance with
IAS 12, by comparing the revised carrying amount of the asset with its tax base. [IAS 36.64]. Example 3 in the standard’s accompanying section of illustrative examples, on which the following is based, illustrates the possible effects.

Answer 94

Example 20.32: Recognition of an impairment loss creates a deferred tax asset

Question 95

Impairment losses and CGUs 1

Impairment losses in a CGU can occur in two ways:

(i) an impairment loss is incurred in a CGU on its own, and that CGU may or may not have corporate assets or goodwill included in its carrying value; and

Answer 95

(ii) an impairment loss is identified that must be allocated across a group of CGUs because a corporate asset or goodwill is involved whose carrying value could only be allocated to a group of CGUs as a whole, rather than to individual CGUs (the allocation of corporate assets to CGUs is discussed at above, and goodwill is discussed at IMPAIRMENT OF GOODWILL above). Note that if there are indicators of impairment in connection with a CGU with which goodwill is associated, i.e. the CGU is part of a CGU group
to which the goodwill is allocated, this CGU should be tested and any necessary impairment loss taken, before goodwill is tested for impairment (see Sequence of impairment tests for goodwill and other
assets above). [IAS 36.88].

Question 96

Impairment losses and CGUs 2

The relevant paragraphs from the standard deal with both instances but are readily understandable only if the above distinction is appreciated. The standard lays down that impairment losses in CGUs should be recognised 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 CGU or group of units; and

Answer 96

(b) second, if the goodwill has been written off, to reduce the other assets of the CGU (or group of CGUs) pro rata to their carrying amount, subject to the limitation that the carrying amount of an asset should not be reduced to the highest of fair value less costs of disposal, value in use or zero. [IAS 36.104, 105].

Question 97

Impairment losses and CGUs 3

The important point is to be clear about the order set out above. Goodwill must be written down first, and if an impairment loss remains, the other assets in the CGU or
group of CGUs are written down pro-rata to their carrying values subject to the limitation stated at (b) above.

Answer 97

This pro-rating is in two stages if a group of CGUs is involved:

(i) the loss reduces goodwill (which by definition in this instance is unallocated to individual CGUs in the group); and
(ii) any remaining loss is pro-rated between the carrying values of the individual CGUs in the group and within each individual CGU the loss is again pro-rated between the individual assets’ carrying values.

Question 98

Impairment losses and CGUs 4

Unless it is possible to estimate the recoverable amount of each individual asset within a CGU, it is necessary to allocate impairment losses to individual assets in such a way that the revised carrying amounts of these assets correspond with the requirements of the standard.
Therefore, the entity does not reduce the carrying amount of an individual asset below the highest of its FVLCD or VIU (if these can be established), or zero.

Answer 98

The amount of the impairment loss that would otherwise have been allocated to the asset is then allocated prorata to the other assets of the CGU or CGU group. [IAS 36.105]. The standard argues that this
arbitrary allocation to individual assets when their recoverable amount cannot be individually assessed is appropriate because all assets of a CGU ‘work together’. [IAS 36.106]

If corporate assets are allocated to a CGU or group of CGUs, then any remaining loss at (ii) above (i.e. after allocation to goodwill) is pro-rated against the allocated share of the corporate asset and the other assets in the CGU.

Question 99

Impairment losses and CGUs 5

This process, then, writes down the carrying value attributed or allocated to a CGU until the
carrying value of the net assets is equal to the computed recoverable amount. Due to the restriction of not reducing the carrying amount of an asset below its FVLCD or VIU, it is logically possible, after all assets and goodwill are either written off or down to their FVLCD or VIU, for the carrying value of the CGU to be higher than the computed recoverable amount. There is no suggestion that the net assets should be reduced any further because at this point the FVLCD would be the relevant impairment figure. The remaining amount will only be recognised as a liability if that is a requirement of another standard.
[IAS 36.108].

Answer 99

IAS 36 includes in the standard’s accompanying section of illustrative examples Example 2 which illustrates the calculation, recognition and allocation of an impairment
loss across CGUs.

However, the standard stresses that no impairment loss should be reflected against an individual asset if the CGU to which it belongs has not been impaired, even if its (individual asset) carrying value exceeds its FVLCD. This is expanded in the following example, based on that in paragraph 107 of the standard :

Question 100

Impairment losses and CGUs 6

Example 20.33: Individually impaired assets within CGUs

Answer 100

Note that it is assumed that the asset is still useable (otherwise it would not be contributing to the cash flows of the CGU and would have to be written off) and that it is not held for sale as defined by IFRS 5. If the asset is no longer part of the CGU, it will have to be tested for impairment on a stand-alone basis. For IFRS 5’s requirements when an asset is held for sale, see 5.1 above.

Question 101

Reversal of impairment loss relating to goodwill prohibited

As mentioned at Reversal of impairment loss for goodwill prohibited, IAS 36 does not permit an impairment loss on goodwill to be reversed under any circumstances. [IAS 36.124]. The standard justifies this on the grounds that such a reversal would probably be an increase in internally generated goodwill,
rather than a reversal of the impairment loss recognised for the acquired goodwill, and that recognition of internally generated goodwill is prohibited by IAS 38. [IAS 36.125].

Answer 101

Example 20.34: Impairment of goodwill

Question 102

Reversal of impairment losses relating to assets other than goodwill 1

For all other assets, including intangible assets with an indefinite life, IAS 36 requires entities to assess at each reporting date whether there is any indication that an
impairment loss may no longer exist or may have decreased. If there is any such indication, the entity has to recalculate the recoverable amount of the asset.
[IAS 36.110]

Answer 102

Therefore if there are indications that a previously recognised impairment loss has disappeared or reduced, it is necessary to determine again the recoverable amount (i.e. the higher of FVLCD or VIU) so that the reversal can be quantified. The standard sets out examples of what it notes are in effect ‘reverse indications’ of impairment. [IAS 36.111].
These are the reverse of those set out in paragraph 12 of the standard as indications of impairment (see 2.1 above). [IAS 36.112]. They are arranged, as in paragraph 12, into two categories: [IAS 36.111]

Question 103

Reversal of impairment losses relating to assets other than goodwill 2

External sources of information:

(a) A significant increase in the asset’s value.
(b) Significant changes during the period or expected in the near future in the entity’s technological, market, economic or legal environment that will have a favourable effect.
(c) Decreases in market interest rates or other market rates of return on investments and those decreases are likely to affect the discount rate used in calculating the asset’s value in use and increase the asset’s recoverable amount materially.

Answer 103

Internal sources of information:

(d) Significant changes during the period or expected in the near future that will affect the extent to which, or manner in which, the asset is used. These changes include costs incurred during the period to improve or enhance the asset’s performance or restructure the operation to which the asset belongs.
(e) Evidence from internal reporting that the economic performance of the asset is, or will be, better than expected.

Question 104

Reversal of impairment losses relating to assets other than goodwill 3

The standard also reminds preparers that a reversal, like an impairment, is evidence that the depreciation method or residual value of the asset should be reviewed and may need to be adjusted, whether or not the impairment loss is reversed. [IAS 36.113]

Answer 104

A further restriction is that impairment losses should be reversed only if there has been a change in the estimates used to determine the impairment loss, e.g. a change in cash flows or discount rate (for VIU) or a change in FVLCD. The ‘unwinding’ of the discount
will increase the present value of future cash flows as they become closer but IAS 36 does not allow the mere passage of time to trigger the reversal of an impairment. In other words the ‘service potential’ of the asset must genuinely improve if a reversal is to
be recognised. [IAS 36.114-116]

Question 105

Reversal of impairment losses relating to assets other than goodwill 4

In the event of an individual asset’s impairment being reversed, the reversal may not raise the carrying value above the figure it would have stood at taking into account depreciation, if no impairment had originally been recognised. [IAS 36.117]. Any increase above this figure would really be a revaluation, which would have to be accounted for in accordance with the standard relevant to the asset concerned. (balance reversal impairment losses goes to OCI). [IAS 36.118].

Answer 105

All reversals are to be recognised in the income statement immediately, except for revalued assets which are dealt with at Reversals of impairments – revalued assets below. [IAS 36.119]. If an impairment loss is reversed against an asset, its depreciation or amortisation is adjusted to allocate its revised carrying amount less residual value over its remaining useful life. [IAS 36.121].

Question 106

Reversal of impairment losses relating to assets other than goodwill : Reversals of impairments – cash-generating units

Where an entity recognises a reversal of an impairment loss on a CGU, the increase in the carrying amount of the assets of the unit should be allocated by increasing the carrying amount of the assets, other than goodwill, in the unit on a pro-rata basis. However, the carrying amount of an individual asset should not be increased above the lower of its recoverable amount (if determinable) and the carrying amount that would have resulted had no impairment loss been recognised in prior years.

Answer 106

Any ‘surplus’ reversal is to be allocated to the remaining assets pro-rata, always remembering that goodwill, if allocated to an individual CGU, may not be increased under any circumstances. [IAS 36.122, 123].

Question 107

Reversal of impairment losses relating to assets other than goodwill : Reversals of impairments – revalued assets

If an asset is recognised at a revalued amount under another standard any reversal of an impairment loss should be treated as a revaluation increase under that other standard. Thus a reversal of an impairment loss on a revalued asset is credited to other comprehensive income. However, to the extent that an impairment loss on the same revalued asset was previously recognised as an expense in the income statement, a reversal of that impairment loss is recognised as income in the income statement. [IAS 36.119, 120].

Answer 107

As with assets carried at cost, after a reversal of an impairment loss is recognised on a revalued asset, the depreciation charge should be adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. [IAS 36.121].