ACYFARP: Impairment of Assets

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Impairment

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Is the fall in the market value of an asset so that the recoverable amount is now less than the carrying amount in the statement of financial position.

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Carrying Amount

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Is the amount at which an asset is recognized in the statement of financial position after deducting accumulated depreciation and accumulated impairment losses.

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41 Terms

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Impairment

Is the fall in the market value of an asset so that the recoverable amount is now less than the carrying amount in the statement of financial position.

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Carrying Amount

Is the amount at which an asset is recognized in the statement of financial position after deducting accumulated depreciation and accumulated impairment losses.

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Basic Principle of Impairment

The principle that states that an asset shall not be carried at above the recoverable amount. An entity shall write down the carrying amount of an asset to the recoverable amount if the carrying amount is not recoverable in full.

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Impairment Loss

Happens when the carrying amount of an asset is higher than the recoverable amount.

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Every Reporting Date

The frequency of an entity to assess the impairment of every asset.

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Intangible Asset with an Indefinite Useful Life or an Intangible Asset Not Yet Available for Use

Assets that are required to be tested for impairment annually.

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External Sources of Impairment

Include the following:

a. Significant decrease or decline in the market value of the asset as a result of passage of time or normal use or a new competitor entering the market.

b. Significant change in the technological, market, legal or economic environment of the business in which the asset is employed. This could be as simple as a change in customer taste.

c. An increase in the interest rate or market rate of return on investment which will likely affect the discount rate used in calculating the value in use.

d. The carrying amount of net assets of the entity is more than the market capitalization

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Market Capitalization

Simply means the fair value of the net assets of the entity.

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Internal Sources of Impairment

Include the following:

a. Evidence of obsolescence or physical damage of an asset.

b. Significant change in the manner or extent in which the asset is used with an adverse effect on the entity. For example, the asset is part of a restructuring or held for sale or the asset is idle.

c. Evidence that the economic performance of an asset will be worse than expected. For example, the undiscounted net cash flows from the asset are significantly worse than those budgeted.

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Recoverable Amount of an Asset

An asset is the fair value less cost of disposal or value in use, whichever is higher.

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Fair Value less Cost of Disposal

Is equal to the exit price or selling price of an asset minus cost of disposal.

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Fair Value

Is the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date.

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Cost of Disposal

Is an incremental cost directly attributable to the disposal of an asset or cash generating unit, excluding financing cost and income tax expense.

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Cost of Disposal

Includes legal cost, stamp duty and similar transaction tax, cost of removing the asset, and direct cost in bringing the asset into condition for sale.

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Value in Use

Is measured at the present value or discounted value of future net cash flows (inflows minus outflows) expected to be derived from an asset. The cash flows are pretax cash flows and pretax discount rate.

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Calculation of Value in Use

The following should be considered in determining value in use:

a. Cash flow projections shall be based on reasonable and supportable assumptions

b. Cash flow projections shall be based on the most recent budgets on financial forecasts, usually up to a maximum period of 5 years, unless a longer period can be justified.

c. Cash flow projections beyond the 5-year period shall be estimated by extrapolating the 5-year projections using a steady or declining growth rate each subsequent year, unless an increasing rate can be justified.

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Estimates of Future Cash Flows

Include the following:

a. Projections of cash inflows from the continuing use of the asset.

b. Projections of cash outflows necessarily incurred to generate the cash inflows from the continuing use of the asset.

c. Net cash flows received on the disposal of the asset at the end of the useful life in an arm's length transaction.

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Estimate of Future Cash Flows Do not Include

Such as:

a. Future cash flows relating to restructuring to which the entity has not yet determined.

b. Future costs of improving or enhancing the asset's performance.

c. Cash inflows or outflows from financing activities.

d. Income Tax

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True

(True or False) The impairment loss is adjusted through the accumulated depreciation account in accordance with European and American practice. After the recognition of an impairment loss, the depreciation charge for the asset shall be adjusted in future periods to allocate the revised carrying amount less residual value on a systematic basis over the remaining useful life.

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Reversal of an Impairment Loss

A situation wherein an impairment loss in prior years shall be reversed if there has been a change in the estimate of the recoverable amount.

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Reversal of an Impairment Loss

Happens if the recoverable amount of an asset that has been previously impaired turns out to be higher than the current carrying amount. The carrying amount shall be increased to the new recoverable amount.

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True

(True or False) The increased carrying amount of an asset due to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years.

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Increase in Carrying Amount (Impairment Loss Recovery)

It is the carrying amount had no impairment loss been recognized or the recoverable amount, whichever is lower.

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Reversal of Impairment Loss

Shall be recognized immediately as income in the income statement.

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Reversal of Impairment Loss (Revaluation Model)

Shall be credited to income to the extent that it reverses a previous revaluation decrease and any excess credited directly to revaluation surplus.

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Cash Generating Unit

Is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets. As a basic rule, the recoverable amount of an asset shall be determined for the asset individually. However, if it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash generating unit to which the asset belongs.

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Cash Generating Unit

Must be the smallest aggregation of assets for which cash flows can be identified and which are independent of cash flows from other assets or group of assets.

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True

(True or False) Most often, the recoverable amount of a cash generating unit is equal to the value in use because the unit is not to be disposed of or sold.

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Impairment Loss of CGU Allocation Order

The loss shall be allocated to the assets of the unit in the following order:

a. First to goodwill.

b. Then to all other noncash assets of the unit prorata based on their carrying amount.

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True

(True or False) The carrying amount of an asset shall not be reduced below the highest of fair value less cost of disposal, value in use, and zero. The amount of impairment loss that would otherwise have been allocated to the asset shall be allocated prorata to the other assets of the CGU.

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Goodwill

Does not generate cashflows independently from other assets or group of assets, and therefore, the recoverable amount of such an asset, individually, cannot be determined.

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Cash Generating Unit with Goodwill

If there is an indication that goodwill may be impaired, recoverable amount is determined for the cash generating unit to which goodwill belongs.

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Determination of Impairment of CGU with Goodwill

A cash generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount.

a. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit shall be regarded as not impaired.

b. If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognize an impairment loss.

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True

(True or False) Impairment loss recognized for goodwill shall not be reversed in a subsequent period.

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True

(True or False) The liabilities of CGU are ignored in determining the carrying amount of the CGU.

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True

(True or False) The carrying amount of a CGU includes only the carrying amount of only those assets that can be attributed directly or allocated on a reasonable and consistent basis to the CGU and can generate the future cash inflows used in determining the value in use of the CGU.

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True

(True or False) The carrying amount of the CGU does not include the carrying amount of any recognized liability, unless the recoverable amount of the CGU cannot be determined without consideration of the liability.

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Corporate Assets

Are assets other than goodwill that contribute to the future cash flows of both the CGU under review and other CGUs.

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Corporate Assets

Are group or divisional assets such as head office building, EDP, equipment or a research center. These are assets that do not generate cash inflows independently from other assets. Thus, the recoverable amount of these assets cannot be determined unless management has decided to dispose of such assets.

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Corporate Assets

Assets that, if there is an indication that such are impaired, the recoverable amount of the cash generating unit to which the assets belong is determined and compared with the carrying amount of the cash generating unit.

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True

(True or False) When computing for the carrying amount of the CGU, assets such as cash and inventories that have their FVCTS greater than carrying amount, which are not undergoing impairment, shall still be included in the total carrying amount of the CGU. But in terms of the allocation of impairment, such assets are excluded.