Lecture 3 - Impairment and Leases Flashcards
Impairment of Assets
Impairment Loss Formula
= CA - RA
CA = amount at which the asset is recognized after deducting any accumulated depreciation and impairment losses
RA = Higher of 1) FV - cost to sell; 2) Value in Use
Impairment of Assets
RA Measurment
Higher of:
1) FV - Cost to sell: selling price minus the cost of disposal. R
- Requires an active market
- Traded items are homogeneous
- Public prices
- Available buyers and sellers at any time
2) Value in Use
- PV of future net CFs
Impairment of Assets
Determination of Value in Use
- Estimate the future cash flows from continuing the use and the ultimate disposal
- Elements NOT considered: inflows from other assts, flows form financing activities, flows from taxes, or future improvements, extensions, restructuring
- Apply the appropriate discount rate
- Pre-tax rated that relfect the current market assessment of the time value of money and risks speicif to the asset
- As a starting point: WACC determined with CAPM, entity’s borrowing rate, other market borrowing rates
Impairment of Assets
Identification of Impaired Assets
1) All Assets covered by IAS 36
- At each B/S date, assess if there are any indications
- From External sources of information (unusual delcine in market value, changes in the technological, economic, or legal environments, increases in interest rates or other ROIs, or if CA net assets > entity market cap)
- From Internal sources of information (evidence of obsolescence or damage, plans to discontinue or restructure, evidence of worsened economical performance)
2) Intangible assets with indefinite useful life or not yet available for use and goodwill
- annual imparment test!
Impairment of Assets
Loss Recognition
Recognize a loss if: RA < CA
- immediately recognized as expense in the IS
- Any impairment loss of a revalued asset should be treated as a revaluation decrease under another Standard
Impairment of Assets
Reversal of Loss
- At each reporting date, assess with external/internal info the need for impairment
- Formal requirements to reverse impairment (excl. goodwill)
- ONLY if there has been a change in the estimated used to determine the asset’s RA since the last impairment loss recognized - If formal requirement fulfilled, CA increased to RA
- Cost model: new CA should not exceed the CA that would have been determined with no prior impairment
- Revaluation model: reversal recognized in OCI
- unless previous revaluation was previously recognized in P/L
Cash-Generating Units (CGU)
The Approach (3 steps)
- Define the CGUs
= The smallerst identifiable group of assets that includes the asset that generated cash inflows from continuing use that are alrgely indepdendent from inflows of other groups - Determine and compare the RA and CA of that unit
- must be consistently determined the same way - Goodwill?
By definition, GW does not generate cash flow independently from other assets.
- the RA of goodwill cannot be determined
- if there is an indication that goodwill my be impaired, the RA is determined for the CGU to which the GW belongs
- If RA<CA of this CGU, Impairment loss first attributed to goodwill
Cash-Generating Units (CGU)
Order of Impairment Loss
- Goodwill (if any)
- Then, to other assets on a pro rata basis
BUT! Do not reduce the value of an asset below the higher of:
- FV - Cost to sell
- Value in Use
- Zero
Cash-Generating Units (CGU)
Corporate Asset
= assets other than goodwill that contribute to the future Cfs of both the CGU under review and CGUs
= used by multiple CGUs and do not generate cash flows independently. Examples include corporate headquarters, research and development facilities, or centralized IT systems. Because these assets support multiple CGUs, their impairment testing requires special consideration.
- if there is an indication that a corporate asset may be impaired, the RA is determined for the CGU to which the corporate asset belongs
- in testing a CGU for impairment, an entity shall identify all the corporate assets that relate to the CGU under review
Leases
Definition (3 key, 2 types)
A lease is a, or is part of a, contract,
- that conveys the right to use an asset
- for a period of time
- in exchange for consideration
2 types:
Finance lease: lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset
Operating lease: other than a finance lease
Leases
Economic / Useful / Lease life
Economic Life: A building may have an economic life of 50 years in the market.
Useful Life: A company might plan to use that building for 30 years.
Lease Term: The company may lease the building for 10 years.
Lease
Payments
Fixed payments
- lease incentives
+ variable lease payments
+ exercise price of purchas option is lessee reasonably certain to exercise
+ paymentsof penalties for terminating lease
+ residual value
Lease
Identification
Reporting by Lessees
Recognition
At the commencement date oa a lease, a lessee shall recognize:
a) a Right-of-use and
b) a Lease liability
The lessee may elect not to apply the requirements for recognition, measurment, and presentation to:
- short-term leases and
- underlying assets of low value (e.g. printers)
Reporting by Lessees
Initial Measurement
Reporting by lessees
Subsequent Measurement
Reporting by Lessees
ROU asset vs. Lease Liability
Reporting by Lessors
Classification
Operating vs. finance lease
- depends on the transfer of risks and rewards incidental to ownership
- has to be made at the inception of the lease
- depends on the substance of the transaction rather than the form of the contract
Reporting by Lessors
Fianance Lease Criteria
Reporting by Lessors
Finance Lease Initial and Subsequent recognition
Reporting by Lessors
Operating Lease
