Impairment of Assets b pass a ln PAS 36 Impairment of Assets fearning Objectives 1, State the core principle of PAS 36, », Account for the impairment of indi ian 7 of individual | generating units. jal assets and cash [3. Account for the reversal of impairment. Introduction PAS 36 prescribes the procedures necessary to ensure that assets are not carried in excess of their recoverable amount. PAS 36 applies in accounting for the impairment of the following assets: a. Property, plant, and equipment , Investment property measured under the cost model Investments in associates, joint ventures and subsidiaries |. Intangible assets Goodwill eeaos G/ Observe that the assets within the scope of PAS 36 are noncurrent assets. Core principle The carrying amount of amount. If the carrying amo" amount, the asset is impairet impairment loss. an asset shall not exceed its recoverable unt of an asset exceeds its recoverable d, The excess shall be written-off as * If carrying amount is greater than recoverable amount, the asset is impair i i t loss. °O impaired. The excess is impairment wile ocjine amount is equal to or less than recoverable amount, d. No accounting problem. © the asset is not impaire~ 374 ~ PAS 36 SPAS > Carrying amount is “the amount at which an asset is recognizeq after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon.” (PAS 36.6) > Recoverable amount is the amount expected to be recovered from the sale or use of an asset. It is the higher of an asset's: a. Fair value less costs of disposal, and b. Value in use. e Fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (PAS 366) * Costs of disposal are “incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.” (PAS 36.6) ¢ Value in use is “the present value of the future cash flows expected to be derived from an asset or cash-generating unit.” (PAS 36.6) Illustration: On December 31, 20x1, Entity A determines that its building is impaired. The following information is gathered: Building 1,000,000 Accumulated depreciation 300,000 Fair value less costs of disposal (FVLCD) 600,000 Value in use (VIL) 580,000 > The impairment loss is computed as follows: Recoverable amount (higher of FVLCD and VIN) 600,000 Less: Carrying amount (1,000,000 - 300,000) (700,000) Impairment loss (100,000, Identifying an asset that may be impaired The entity assesses at the end of each reporting period whether there is an indication that an asset may be impaired. Cech oaIn = y - In nit of Assets pair - 5 yf such an indication exists, recoverable amount of the asset, the entity estimates the If no such indication exists, thi . , the enti . recoverable amount of the asset ity need not estimate the dications of impairment Anentity shall consider the following indications of impairment: 1 IL that the remaining use Method, or the residual val External sources of information: a. Significant decline in the asset's (market) value b. Significant changes in technological, market, economic, or legal environment that adversely affect the recoverable amount of an asset. c. Increase in market interest rates that adversely affect the discount rate used in calculating an asset's value in use, and consequently, its recoverable amount. d. The carrying amount of the entity's net assets exceeds its market capitalization. Internal sources of information e. Obsolescence or physical damage of an asset. f. Significant changes in the expected use of an asset that ble amount (eg, the asset adversely affect its recovera becomes idle, plan to discontinue or restructure the operation to which an asset belongs, plan to dispose of the asset earlier than expected, and reassessment of an asset's useful life from indefinite to finite). formance of an asset is, or 8. Indications that the economic pe! e will be, worse than expected (eg-, the maintenance costs of the asset are significantly higher than expected; or the cash inflows from the asset are significantly lower than expected). impaired may signify ion or amortization ds to be reviewed ‘An indication that an asset may bei n ful life, the depreciati Jue of the asset nee376 PG and adjusted even if no impairment loss is recognized for the asset. Required testing for impairment The following assets are required to be tested for impairment a) least annually even if there are no indications for impairment; a. Intangible asset with indefinite useful life b. Intangible asset not yet available for use ©. Goodwill acquired in a business combination These assets may be tested for impairment at any time during the annual period provided it is performed at the same time every year. Concurrent testing is not required for dissimilar assets. Such an asset recognized during the year must be tested for impairment before the end of that year. Goodwill is tested for impairment in relation to the cash-generating unit to which it has been allocated (we will discuss this momentarily). Measuring recoverable amount Recoverable amount is the higher of an asset's FVLCD and VIU. PAS 36 provides the following guidance when measuring an asset's recoverable amount: © It is not always necessary to determine both the FVLCD and VIU. If one of them exceeds the asset’s carrying amount, the asset is mot impaired, and the other amount need not be computed. If it is not possible to determine the FVLCD, the VIU is used as the recoverable amount. If there is no reason to believe that the VIU exceeds the FVLCD, the FVLCD is used as the recoverable amount. This is normally the case if the asset is held for disposal.gainer 9f S808 cE ir value less costs of disposal Fan tity uses PERS 13 Fa (FVLcD) an asset's fair value. Costs of disposal, except those that have been ed recogniz abilities, are deducted i as liabilities, in measurin sosal. Examples of such costs are: ig fair value less costs of disp Legal aN, stamp duty and similar transaction taxes p. Casts of removing the asset e irect incremental cost: - t. os 's to bring an asset into condition for its sal ir Ve alue Measurement when measuring Termination benefits and costs associated with reducing or reorganizing a business following the disposal of an asset are not regarded as costs of disposal. value in use (VIU) VIU is the present value of the future net cash flows expected to be derived from the continuing use of an asset and from its disposal at the end of its useful life. VIU is computed using the following steps: 1, Estimate the future cash inflows and outflows expected to be derived from continuing use of the asset and from its final disposal. 2. Apply an appropriate discount rate to those future cash flows. Estimates of future cash flows * Cash flow projections are based on management's best estimates. When making the estimates, management gives greater weight to external evidence. * Cash flow projections are based on budgets/forecasts approved by management. / * Cash flow projections are based on the asset’s current condition and exclude and include the following: the most recent financialie. 378 Pas ag AB Exclude cash flows arising from: | Include cash flows arising fro, L. Future restructurings not yet | 1. Revenues to be derived tron, | committed the continuing use of i. 2. Improving or enhancing the | asset i asset's performance | 2. Day-to-day costs of using the asset 3, Any residual value of the |__ asset and disposal costs | * Cash flow projections cover a maximum period of 5 years, unless a longer period can be justified. Projections beyond the 5-year period are extrapolated using a steady or declining growth rate (e.g., Zero or negative), unless an increasing rate can be justified. 3. Income taxes | i 4. Financing activities | ° “To avoid double-counting, estimates of future cash flows do not include: a. Cash inflows from assets that generate cash inflows that are largely independent of the cash inflows from the asset under “review (for example, financial assets such as receivables); and b. Cash outflows that relate to obligations that have been recognized as liabilities (for example, payables, pensions or provisions).” (PAS 36.43) * Cash flow projections based on a foreign currency ate translated using the spot exchange rate at the date the VIUis calculated. Discount rate The discount rate is a pre-tax rate that reflects current assessmen"* of the time value of money and risks for which the future (a flow estimates have not been adjusted. VIU computation takes into account the effect of inflation However, to avoid double-counting, either the estimates of future feelarment of Assets bie we a 379 cash flows or the discount rate is adjusted for inflation, but not poth recognizing and measuring an impairment loss yfthe carrying, amount of an asset exceeds its tecoverabl the carrying amount is reduced to the recoverable ae oe The reduction is impairment loss, onnt The Impairment loss is recognized immediately in profit or Joss, unless the asset is carried at revalued amount, fi moms yeoaluation surplus is decreased first and any oeess is recognized in profit or loss. The decrease in the revaluation surplus is recognized in other comprehensive income. If the impairment loss exceeds the carrying amount of the asset, a liability is recognized if this is required by another PFRS. For example, this would be the case for a leased asset for which the lessee guarantees a residual value. After impairment, the subsequent depreciation (amortization) for the asset is based on the asset's recoverable amount. Illustration: On December 31, carrying amount of recoverable amount, information: * Fair value less costs 0) + Projected cash flows: Year Future cash inflows Future cash outflows 100,000 20x0, ABC Co. identifies that its building with a 600,000 is impaired. In estimating the Entity A determines the following f disposal, 400,000 xd 300,000 20x2 280,000 100,000 0x3 260,000 50,000 * The discount rate is 10%. The following are the relevant Present value factors: PV of 1 @10%, n=l 0.909091 PV of 1 @10%, n=2 0.826446 : 0.751315 PV of 1 @10%, n=1380 i es oe > The value in use is computed as follows: Year Cash inflows Cash outflows Net cash flows PV factors Pas cs @) ) ()=()-@) (a) W=@rn 20x1 300,000 700,000 200.000 0so0s1 —~ agra 20x2 280,000 100,000 180,000 0826446 hag 6p 20x3 260,000 80,000 180,000 0.751315 1353, Value in use 465,815 » The impairment loss is computed as follows: Recoverable amount (VIU - higher) 465,815 Less: SS: Carrying, amount (600,000) Impairment loss (134,185) ——s » If the building has a remaining useful life of 10 years and a zero residual value, the depreciation in subsequent periods using the straight line method is computed as follows: Recoverable amount Divide by: Revised depreciation 465,815 10 46,582 Cash-generating units and Goodwill Recoverable amount is normally determined for an individu asset, except when the asset belongs to a cash-generating uti (CGU), in which case, recoverable amount is determined for the CGU to which the asset belongs. * Cash-generating unit (CGU) is “the smallest identifiable a of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups assets.” (PAS 36.6) For example, a CGU may be a retail store of a fast chain, a bookstore of a school, a convenient store of 2 345 station, a supermarket of a_mall,.a- product. line, etc:381 irmentt of 4 npc e ——_ er amples generate cash flows that are ind le ows of the entity as a whole. If these se. 5 mntfiable group of assets, then they a ements are the smallest i Assets are generally tested lor considered as CGUs. : impai indivi sccorngly Ge Gveabie uae individually. widely are determined However, when it is i 5 lot possible to determi individual asset’s recoverable amount, the secdrerable ainda cof the CGU to which that individual asset belongs is dlerrined This would be the case if the asset’s VIU cannot be estimated to be dose to its EVLCD and the asset does not independently generate jts own cash inflows. In such cases, the asset is tested for impairment, not on its own, but together with the other assets in the CGU as a whole. As an exception, an asset for which management is committed tp dispose is tested for impairment separately even if it belongs to a GU. pendent from the cash Recoverable amount and Carrying amount of a CGU The recoverable amount of a CGU is the higher of the CGU’s FVLCD and VIU. The CGU’s carrying amount is determined in a manner that is consistent with how the CGU’s recoverable amount is determined. Accordingly, the carrying amount of a CGU includes only those assets and liabilities that are directly attributable to the CCU or are allocated to the CGU on a reasonable basis and will generate the future cash flows used in determining the CGU’s value in use. (PAS 36.76 (a)) ; — The carrying amount of a CGU does not include financial assets, such as receivables, and recognized liabilities, such as Payables, pensions or provisions, just as these items are excluded mount, (PAS 3643and 28) indetermining the CGU’s recoverable a However, for practical reasons, the recoverable amount of ACCU is sometimes determined by considering financial —_ Sich as receivables, and recognized liabilities, such as payables,382 FAS35 a pensions or provisions. In such case, these items are also includeg in the CGU’s carrying amount. (PAS 36.79) Goodwill 7 z For purposes of impairment testing, goodwill recognized in a business combination is allocated to each of the acquirer’s CCU, in the year of business combination. If the allocation cannot be completed before the end of that year, it must be completed before the end of the immediately following year. Goodwill does not generate its own cash flows but it often contributes to the cash flows of multiple CGUs. Goodwill is an unidentifiable asset; thus, it can only be tested for impairment if it is allocated to the CCUs that are expected to benefit from the synergies of the combination. The CGUs to which goodwill is allocated represent the lowest levels within the entity at which the goodwill is monitored for internal management purposes and are not larger than an Operating segment. If a CGU to which goodwill is allocated is partially disposed, the allocated goodwill is reallocated to the portions sold and unsold based on their relative values for purposes of determining the gain or loss on the disposal. Similarly, if an entity reorganizes its reporting structure in a manner that changes the composition of CGUs to which goodwill has been allocated, the goodwill is reallocated to the CGUs affected based on their relative values, Impairment of a CGU A CGU to which goodwill has been allocated or contains an intangible asset with indefinite useful life or an intangible asset not yet available for use is tested for impairment at least annually whether or not there are indica tions of impairment. A CGU is tested for impairment by comparing the CGU's carrying amount, including any allocated goodwill, with the CGU’s recoverable amount te« wgirmentt of A: inp 383 The CGU is impaired if its car i tying amount, includi located goodwill, exceeds its recoverable amount, In such ¢ m eimpairment loss on the CGU is allocated as follows: case, First, toany goodwill included in the CGU; , to the other assets of U p, Then. of the CG! i Oger pro rata based on their When allocating the impairment lo: fi ofan asset belonging to the CGU shall Gl cadet lees highest of: a. its fair value less costs of disposal (if determinable); p. its value in use (if determinable); and c. Zet0. Any amount that cannot be allocated to an asset because ofthe limitation above is allocated to the other assets of the CGU prorata based on their carrying amounts. If the recoverable amount of an individual asset cannot be determined, no impairment loss is recognized for that asset if the CCU to which it belongs is not impaired. This applies even if the individual asset’s fair value less costs of disposal is less than its carrying amount. Illustration: Entity A determines that one of its cash-generating units is impaired. The following information was gathered: *_Camying amount of CGU: Assets_ Carrying amount Inventory Sao lnvestment # cost model) 400,000 ing emer 600,000 Soodwi 300,000 1,500,000 * Be 7 I }0,000 Fair value less costs of disposal of CGU: be a0 Value in use of CGU:384 See > The impairment loss is computed as follows: Recoverable amount (value in use - higher) 1,000,000 Carrying amount (1,500,000) Impairment loss (500,000) —_—— kL » The impairment loss is allocated as follows: First, to goodwill: Impairment loss (500,000) Allocation to goodwill 300,000 Excess impairment loss (200,000) Then, to the other noncurrent assets in the CGU: ‘Assets carrying amounts Fractions Allocation of Excess Impairment Loss Inventory NA N/A N/A - Investment property 400,000 400/1,000 (-200K x 400/1,000) (80,000) Building 600,000 __600/1,000_(-200K x 600/1,000)__ (120,000) 1,000,000 __1,000/1,000 (200,000), ———— ee 000)/_ Notes: No impairment loss is allocated to the inventory because inventories are outside the scope of PAS 36. (PAS 362 and PFRSS, Part B, Example 10) The impairment loss on a CGU is allocated only to the asse’s that are within the scope of PAS 36. (See introduction to this chapter) The fractions above are derived from the carrying amounts of the noncurrent assets. > The carrying amount of the CGU after impairment is analyzed below:pi Carrying emounts ~Alfoca ion: 385 BEFO) i sopatenen of impairment amounts AFTER _ 0 _ i : St 200,000 —— eis ent property 4 ’ Investmen property pe (80,000) 320,000 adding 1,000 (120,000) 480,000 sos 300,000 (300,000) Z 1,500,000 (500,000) __ 1,000,000 The procedure illustrated above is called the “bottom-up st.” This is performed when goodwill can be allocated to individual CGUs on a reasonable and consistent basis. However, if goodwill cannot be allocated to individual CGUs but only to groups of CGUs, the entity performs both a “bottom-up test” and a “top-down test,” as follows: Compare the carrying amounts of the CGUs comprising the smallest unit (i.e., the group of CCUs) to which goodwill can be allocated, excluding the goodwill, with their respective recoverable amounts. Recognize any impairment loss. >. Compare the carrying amount of the unit as a whole after recognizing any impairment loss from procedure (a) above with. the unit's recoverable amount (“top-down test”). Recognize any additional impairment loss. a Corporate assets Corporate assets are assets of several departments or indude Electronic Data Processing ( mainframe computer used by sever! the entity’s headquarters pbuilding or a resear Corporate assets do not independently generat sh inflows, Thus, to test 4 corporate asset for imp : ing that asset. Needs t various CGUs using ¢ 10 be allocated to the va 7 applied to the impairment The accounting procedures PI i ‘sting of a porate asset are similar t0 those applied to Soodwill, that contribute to the future cash flows divisions within an entity. Examples EDP) equipment, such as a | divisions within an entity, ch center. (PAS 36.100) e their own airment, it386 PAS 36 i Reversal of impairment loss The entity assesses at the end of each reporting period whethe, there is an indication that an impairment loss recognized in Prior periods for an asset may no longer exist or may have decreased, It such indication exists, the entity estimates the recoverable amount of that asset. In making the assessment, the entity considers the exact opposites of the indications of impairment provided earlier eg, significant increase in the asset's market value — rather than decline, significant changes in technological.......that favorably affect the recoverable amount of an asset - rather than adversely, etc.). If the recoverable amount of the previously impaired asset exceeds its carrying amount, the carrying amount is increased to equal the recoverable amount. The increase is the reversal of impairment loss. However, this is subject to the following limitations: a. The reversal of impairment loss shall not result to a carrying amount in excess of the asset’s would-be carrying amount had no impairment loss been recognized in prior periods; and b. Impairment loss on goodwill is never reversed. The reversal of impairment loss is recognized in profit or loss, unless the asset is carried at revalued amount, in which case, revaluation surplus is increased for the portion representing @ revaluation increase. The revaluation increase is recognized in other comprehensive income. The portion that represents a reversal of an amount that was previously recognized in profit or loss is also recognized in profit or loss. After reversal of impairment, the subsequent depreciation (amortization) for the asset is based on the asset's revised carrying amount. An indication that a previously recognized impairment loss may no longer exist or may have decreased may signify tha! the remaining useful life, the depreciation or amortizationé 387 ¢ the residual value method, oF alue of the asset need i reni Is te 1 and adjusted ne Teversal of impairment loss is coated! ra CGU, i = fer a“ : Teversal of impairment loss is allocated as ancrease: ty!ng amounts of the assets in the CGU, except Modwill,prO rata based on their carrying amount, In making this allocation, the carrying amount of an asset shall not te increased above the lower of; mes a. its recoverable amount (if determinable); and b. its would-be carrying amount had no impairment loss been recognized in prior periods Illustration: OnJanuary 1, 20x1, Entity A acquires a building for a total cost of 1,200,000. The building is estimated to have a 30-year useful life and a 5% residual value. Entity A uses the straight-line method of depreciation. > The annual depreciation is 38,000 [(1.2M x 95%) +30). On December 31, 20x5, Entity A determines that the building is impaired and makes the following estimates: [ssaweune seeesP650,000 Fair value less costs to sell. : e+e+P750,000 Value in use > The impairment loss is computed as follows: Recoverable amount (VIU - higher) 750,000 Carrying amount [1.2M - (38,000 x 5 yrs.)] 1,010,000 Inpairment loss (260,000) Following the impairment, Entity A revises the building’s kesidual value to 5% of the recoverable amount. n in subsequent periods is > The revised annual depreciation 7 emaining}. 28,500 [(750K x 95%) * 25 years *388 PAS 36 ir On December 31, 20x8, Entity A determines an indication that the impairment loss recognized in the prior period May no longer exist. Entity A makes the following estimates and computations: Fair value less costs to sell..........00+++ 800,000 Value in use - ---B900,000 > The new recoverable amount is P900,000 (higher). » The actual carrying amount on December 31, 20x8 is computed as follows: Carrying amount (C.A) - 12/31/x5 750,000 Accumulated depreciation (28,500 x 3 yrs.) (85,500) Carrying amount (C.A.) - 12/3Ux8 664,500 at » The would-be carrying amount had no impairment loss been recognized in the prior period is computed as follows: Historical Cost 1,200,000 Accumulated (original) depreciation (38,000 x 8 yrs.) (304,000) Carrying amount had no impairment loss been recognized in prior period - 12/31/x8 896,000 » The reversal of impairment loss is computed as follows:. 389 New Recoretable Amount ‘900,000 Difference is Revaluation Increase CA hal 0 1b epi in pr eid 896,000 Diterence is gain on Reveral of Impairment CA at date of impairment reversal rere From the graph above, the components of the reversal are analyzed as follows: C.A had no impairment loss been recognized in prior pd. 896,000 C.A. at date of reversal 664,500 Gain on reversal of impairment loss (profit or loss) 231,500 New recoverable amount 900,000 CA had no impairment loss been recognized in prior pd. _896,000 Revaluation increase (other comprehensive income) 4,000 Total increase in carrying amount 235,500,390 PAS 36 Summary: 2 An asset is impaired if its carrying amount exceeds j,] recoverable amount. The excess represents the impairment loss. | Recoverable amount is the higher of an asset's (a) fair valve less costs of disposal and its (b) value in use. | An asset is tested for impairment only when an indication of impairment exists, except for certain intangible assets that are required to be tested for impairment at least annually. It is not always necessary to compute both the FVLCD and the VIU. If any one of them exceeds the carrying amount, the asset | is not impaired and the other one need not be computed. If the | FVLCD cannot be determined, the VIU is used as the recoverable amount. If the asset is held for disposal, its recoverable amount is the FVLCD. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset (or CGU) and from its disposal at the end of its useful life. Impairment loss is recognized in profit or loss, unless it represents a revaluation decrease. , After impairment, the subsequent depreciation (amortization) for the asset is based on the asset’s recoverable amount. If an asset's recoverable amount can be determined reliably, it is tested for impairment on its own. If its recoverable amount | cannot be determined reliably, the CGU to which that asset | belongs is the one tested for impairment. For purposes of impairment, goodwill and corporate assets ate allocated to CGUs. The impairment loss on a CGU is allocated first to any goodwill in the CGU. The excess is allocated to the other assets of the CGU pro rata based on their carrying amounts. The reversal of impairment loss shall not result to a carrying amount in excess of the asset’s would-be carrying amount had no impairment loss been recognized in prior periods. Impairment loss on goodwill is never reversed.“ npairmentof Assets pROBLEMS pROBLEM 1: MULTIPLE CHOICE 1. Which of the following assets is not i 7 9 accordance with PAS 36? not tested for impairment in a, Investment property measured und b. Investment in associate exithescost model c. Goodwill d. Accounts receivable 2, According to PAS 36, an asset is impaired if its carrying amount exceeds its recoverable amount. Recoverable amount is the asset’s a. fair value less costs of disposal. b. value in use. c. higher of aandb d. lower of aandb 3, Entity A uses a calendar year accounting period. On May 21, 20x1, Entity A acquires an intangible asset with an indefinite useful. According to PAS 36, the first impairment testing of the asset is a. on May 21, 20x2. anytime between May 21, 20x1 to May 21, 20x2. on or before December 31, 20x1. when an indication of impairment i the asset. b. © d. is assessed to exist for 4, The impairment loss on which of the following assets is never reversed? ; a, Intangible assets with indefinite useful life b. Goodwill c. Intangible assets not yet available for use d. |. All of these392 PAS 36 ee PROBLEM 2: FOR CLASSROOM DISCUSSION Use the following information for the next two questions: 1, On December 31, 20x1, Entity A determines that its building is impaired. Entity A gathers the following information: Building 2,000,000 Accumulated depreciation 600,009 Fair value less costs of disposal (FVLCD) 900,000 Value in use (VIU) 1,080,000 After the impairment, the building is assessed to have a Temaining useful life of six years and no residual value. How much is the impairment loss? a. 320,000 cc. 500,000 b. 180,000 d. 270,000 2. On December 31, 20x2, Entity A determines an indication that the impairment loss recognized in the prior period may no longer exist. The revised recoverable amount of the building on December 31, 20x2 is #1,280,000. If no impairment loss had been recognized in the prior period, the carrying amount of the building on December 31, 20x2 would have been 1,200,000. How much is the gain on reversal of impairment on December 31, 20x2? a. 314,351 ¢. 303,315 b, 312,156 d. 300,000