In-depth notes on IAS 36, IFRS 5, and IAS 40

Assets Impairment and Investment Properties Notes

IAS 36: Impairments

Overview of IAS 36

• IAS 36 deals with the impairment of assets, ensuring that assets are recorded at no more than their recoverable amount, by recognizing losses when an asset's carrying amount exceeds its recoverable amount.

Scope of IAS 36

• Applies to:
  • Land, buildings, machinery, equipment
  • Goodwill
  • Intangible assets (e.g. patents, copyrights, customer lists)
• Does NOT apply to:
  • Inventory (covered by IAS 2)

Impairment Definition

• An impairment loss reduces the value of an asset in the Statement of Financial Position (SFP) when it is determined to be overstated. It functions similarly to a one-off depreciation charge.

Impairment Review Requirements

• Conducted annually for certain assets, particularly those with indefinite useful economic lives (UELs) such as goodwill.
• Triggered by indicators, which can be categorized as:
  • Internal indicators: Obsolescence, damage, re-organization, loss of key staff
  • External indicators: Fall in market value, technological advances, regulatory changes, changes in market conditions (e.g. interest rate fluctuations)

Performing an Impairment Review (IAS 36)

Steps to Perform an Impairment Review

1. Compare the asset's carrying amount (CA) against its recoverable amount (RA).
   • If CA > RA, an impairment is required.
   • Impairment Calculation:
     $ext{Impairment} = ext{CA} - ext{RA}$
   • Calculating RA:
     • Higher of:
     1. Fair value less costs to sell
     2. Value in use (present value of future cash flows generated by the asset)

Accounting for an Impairment (IAS 36)

• For assets under the IAS 16 cost model:
  • Recognize the full impairment immediately in the profit and loss (P&L):
    ext{Dr P&L expense} ext{ } x ext{ } ; ext{ Cr Asset} ext{ } x
• For assets under the IAS 16 revaluation model:
  • Reverse any previous revaluation to the extent it exists before recognizing additional impairment in the P&L.
  • Entries:
    $ext{Dr Revaluation reserve} ext{ } x ext{ } ; ext{ Cr Asset} ext{ } x$
    ext{Dr P&L} ext{ } x

Examples and Case Studies

Example: Danger Ltd Machine

• Scenario: Machine initially costing £100,000 with a UEL of 10 years was damaged, requiring an impairment review.

• Carrying Amount Calculation at 31 Dec X6:
  ext{Carrying Amount} = £100,000 - rac{£100,000}{10} imes 3 = £70,000

• Recoverable Amount:

  • Value in Use = £56,000
  • Fair Value = £61,000 (Selling costs 10% = £61,000 - £6,100 = £54,900)
  • So using Fair value - Costs to sell:
    $ext{RA} = ext{min}(£54,900, £56,000) = £54,900$

• Impairment Calculation:
  $ext{Impairment} = £70,000 - £54,900 = £15,100$

• Journal Entries:
  ext{Dr P&L} £15,100 ext{ } ; ext{Cr PPE } £15,100

IFRS 5: Assets Held for Sale and Discontinued Operations

Definition and Criteria for HFS

• A non-current asset may be classified as held for sale if it is:
  • Available for immediate sale in its present condition.
  • Highly probable that the sale will occur within 12 months.
  • Management is committed to the sale, actively seeking a buyer, and marketing the asset.

Accounting Treatment Overview

• If an asset meets the classification criteria:

1. Test for impairment: Measure at lower of CA and Fair Value less Costs to Sell (FV-CTS).
   • Recognize any impairment in the P&L:
     $ext{Dr Impairment expense} ext{ } ; ext{Cr Non-current asset}$
2. Reclassify Asset: From non-current to current asset held for sale.
   3. Stop Depreciation: No longer considered a non-current asset.
3. On disposal: Record profit/loss as normal:
   $ext{Profit or loss} = ext{Sale proceeds} - ext{CA}$

IAS 40: Investment Properties

Definition and Classification

• Investment properties are defined as land or buildings held for rental income or capital appreciation, or both.

Accounting Treatment under IAS 40

1. Initial Measurement:
   • Asset measured at cost plus any directly attributable costs:
     $ext{Dr Investment Property} ext{ } x ext{ } ; ext{Cr Cash } ext{ } x$
2. Subsequent Measurement Options:
   • Cost Model: Similar to IAS 16 – carry at cost minus accumulated depreciation.
   • Fair Value Model: Revalued to fair value at each year-end, with gain/loss recognized in the P&L without depreciation charge.

Fair Value Determination

• Fair value should reflect current prices for similar properties in active markets. If there is no active market, use adjustment methods or cash flow projections.

Comparison of Models

Cost Model vs. Fair Value Model

• Cost Model:
  • Predictable and has fewer estimates but doesn’t capture market gains/losses.
• Fair Value Model:
  • Captures market gains/losses, potentially leading to profits but involves more uncertainty and volatiles expenses.

Summary of Learning Objectives

• Understand and account for impairments using IAS 36.
• Recognize and classify assets held for sale under IFRS 5.
• Understand the accounting treatment for investment properties under IAS 40.