IAS 36 Impairment of Assets (Vocabulary Flashcards)

Definition

• Impairment aim: ensure carrying amount on the balance sheet does not exceed recoverable amount.

• Recoverable amount (RA): the higher of the asset's fair value less costs to sell and its value in use.

  • $RA = \max\left( FV_{to\,sell}, VIU \right)$

• Carrying amount (CA): the asset’s book value after depreciation/amortization and any previous impairment losses.

• Impairment trigger: if CA > RA, recognize impairment loss.

• Impairment loss: the amount by which CA exceeds RA.

  • Impairment\,loss = CA - RA\quad\text{if } CA > RA

• Treatment: impairment reduces carrying amount and is charged to the income statement.

Scope

• IAS 36 applies to all assets unless specifically excluded.

• Assets that are consistently listed as out of scope in the slide (per transcript):

  • OUT OF SCOPE ASSETS

  • inventories

  • contract assets and assets arising from construction contracts

  • deferred tax assets

  • assets arising from employee benefits

  • financial assets within the scope of IFRS 9

  • investment property measured at fair value

  • biological assets related to agricultural activity measured at fair value less costs

  • deferred acquisition costs

  • non-current assets or disposal groups classified as held for sale

• IN SCOPE ASSETS (per transcript’s placement):

  • intangible assets including goodwill and brands

  • property, plant and equipment

  • subsidiaries, investment in associates and joint ventures

• Note: In standard IFRS practice, goodwill and most intangible assets are within scope; the slide’s wording presents a labeled contrast that should be reconciled with the standard.

Recognition

• Recognition trigger: assess at each reporting date (including interim) whether there are indications of impairment.

• Triggering event review timing: balance sheet date.

• Indicators to consider (external):

  • decline in market value of the asset due to technology or demand shifts.

  • significant adverse changes in technological, market, economic, or legal environment affecting the asset or its market.

  • significant increases in interest rates or other market rates of return.

  • carrying amount of net assets > market capitalization.

• Indicators to consider (internal):

  • obsolescence or physical damage to the asset.

  • adverse changes in how the asset is used or expected to be used (idle, restructuring, disposal plans).

  • deterioration in expected performance of the asset.

  • management forecasts showing a significant decline in future net cash inflows or operating profits.

• For assets with indefinite useful life (e.g., goodwill, capitalized brands not amortized, intangibles not yet available for use): impairment tests are required if a triggering event occurred and at least annually at the same time each year.

• For other assets (e.g., amortized distribution rights, PPE, investments in associates): impairment reviews are required only if an impairment indicator is identified.

• Impairment test trigger: if indicators exist, perform impairment test to determine recoverable amount.

Recognition – Impairment test flow (Goodwill/indefinite life vs other assets)

• Triggering event review → impairment test → recoverable amount (RA) and carrying amount (CA) → impairment decision.

• RA is the higher of:

  • VIU (value in use)

  • FV to sell (fair value less costs to sell)

• Carrying amount versus recoverable amount comparison determines impairment.

• For Goodwill and indefinite life intangibles: impairment tests are required when triggers exist; otherwise at least annually.

• For other assets: impairment reviews only if indicators exist.

Measurement

• Value in use (VIU): present value of the asset’s expected pre-tax future cash flows to the entity.

• VIU interpretation: the internal value from using the asset.

• Calculation approach (as per transcript):

  • $VIU = \text{PV of forecast pre-tax future earnings of the CGU} + \text{PV of disposal (salvage) value at end of its economic life}$

• Fair value less costs to sell (FVLCTS): amount obtainable from sale minus disposal costs.

• FVLCTS calculation: if fair value is observable, then

  • $FVLCTS = FV - \text{cost of disposal}$

• Use of FVLCTS is preferred when fair value is observable (recent transaction, market price, etc.).

• Basis for recoverable amount: the greater of VIU and FVLCTS.

• Summary equation: recoverable amount RA = max( VIU, FVLCTS ). If CA > RA, impairment loss = CA − RA.

Basis of recoverable amount calculation

• Individual asset basis: calculate RA for each asset on its own.

• If not possible on an individual basis, calculate RA for the cash-generating unit (CGU) to which the asset belongs.

• CGU definition: the smallest group of assets that generates largely independent cash flows.

• Allocation rule (goodwill allocation): goodwill is allocated to CGUs; recoverable amount is assessed for each CGU.

• CGU recoverable amount is the higher of VIU and FVLCTS for the CGU.

• CGU VIU: present value of forecast pre-tax future earnings of the CGU.

• Assets included in a CGU: typically only those assets that directly or reasonably can be attributed to the CGU and that will generate future cash inflows used in determining the CGU’s VIU.

Six steps for allocation of impairment to a CGU

1) Identify the recoverable amount of the CGU.
2) Compare the carrying value of the CGU with its recoverable amount.
3) Write off goodwill first (allocate impairment to goodwill within the CGU).
4) Determine the maximum write-down for the assets in the CGU (the total impairment that can be allocated to all assets within the CGU).
5) Initial allocation to remaining assets in the CGU not exceeding the maximum write-down for the CGU.
6) Subsequent allocations to other assets in the CGU (in proportion to their relative carrying amounts) until the maximum impairment is exhausted.

Example – CGU impairment allocation (from transcript)

• Given: CGU carrying amount = CU 20,000; recoverable amount = CU 15,000.

• PPE fair value less costs to sell (FVLCTS) = CU 8,000.

• Asset carrying amounts within CGU:

  • Goodwill: CU 2,000

  • PPE: CU 9,000

  • Intangible asset: CU 6,000

  • Other asset: CU 3,000

• Impairment to recognize (total CU 5,000).

• Allocation rule applied (as per solution):

  • Write off Goodwill first: CU 2,000 impairment on Goodwill.

  • Remaining impairment to allocate: CU 3,000.

  • PPE can at most be written down to its FVLCTS of CU 8,000. Since its CA is CU 9,000, the maximum impairment allowable for PPE is CU 1,000 (not CU 1,500 as would be per pro-rata).

  • After allocating CU 1,000 to PPE, remaining impairment to allocate is CU 2,000.

  • Allocate remaining CU 2,000 pro-rata among the remaining assets (Intangible asset and Other asset) based on their relative carrying amounts:

  • Intangible asset CA 6,000 → impairment 1,333

  • Other asset CA 3,000 → impairment 667

• Resulting allocations (per the transcript’s “A” option):

  • Total impairment = CU 5,000; impairment by asset: Goodwill 2,000; PPE 1,000; Intangible asset 1,333; Other asset 667.

• Key takeaway: impairment must not reduce any asset below its recoverable amount; goodwill impairment is required to be recognized first; allocations to other assets are constrained by the CGU’s recoverable amount and, where relevant, by the asset’s FVLC (if applicable).

Reversing an impairment loss

• IAS 36 permits reversals of impairment losses for all assets within its scope except for goodwill (and some specific intangible assets where a reversal is prohibited).

• Reversal eligibility: annual assessment of indicators that impairment might no longer exist or its adverse impact may have weakened.

• Reversal amount limitations:

  • Reversal is recognised only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized previously.

  • Reversal cannot create an amount higher than the asset’s recoverable amount at the reversal date.

• For brand or other intangible assets, reversal is permitted only if it reflects a clear reversal of the event that caused the initial impairment.

• For goodwill, reversals are prohibited.

Reversing impairment – example

• Example: PP&E, CU 100 cost at end of 20X0; straight-line depreciation over 10 years, residual value 0.

• End of 20X2:

  • NBV = CU 48 after recognizing impairment of CU 32 from cost 100.

  • New depreciation charge from 20X3 onward = CU 6 per year (to reflect adjusted useful life/amount).

• End of 20X4:

  • NBV before reversal = CU 36.

  • Reversal of impairment is recognised, but the amount cannot exceed the reversal corresponding to the scenario where impairment had not occurred.

  • Maximum reversal allowed is CU 24 (since without prior impairment, NBV at end of 20X4 would have been CU 60).

  • Therefore, reversal of CU 24 is recognised.

  • New NBV after reversal: CU 60 (which equals the NBV that would have occurred if no impairment had been recognized).

• Result: the reversal increases profits by CU 24 (through the income statement) and restores the asset to its pre-impairment trajectory up to the no-impairment carrying amount.

Measurement – Summary notes

• For impairment testing, the recoverable amount is the higher of:

  • VIU (Value in Use)

  • FVLCTS (Fair Value Less Costs to Sell)

• VIU specifics (per transcript): present value of forecast pre-tax future earnings from the asset or CGU.

• Calculation of VIU (per transcript):

  • $VIU = \text{PV of forecast pre-tax future earnings} + \text{PV of disposal (salvage) value at end of its economic useful lifetime}$

• FVLCTS specifics (per transcript): take the market value minus the cost of disposal.

  • $FVLCTS = FV - \text{cost of disposal}$

• In practice:

  • If CA > RA, recognize impairment for the amount CA − RA.

  • In CGUs, impairment is allocated to assets within the CGU following the six-step process, with goodwill written off first and consideration of FVLC limits for other assets.

Practical calculations – key formulas

• Recoverable amount:

  • $RA = \max\left( VIU, FVLCTS \right)$

• Impairment loss (if occurs):

  • $Impairment\,loss = \max\left(0, CA - RA\right)$

• Value in use (VIU) structure:

  • $VIU = PV\left( forecast\; pre-tax\; cash\; inflows \right) + PV\left( disposal\; (salvage)\; value \right)$

• Fair value less costs to sell:

  • $FVLCTS = FV - \text{cost of disposal}$

• Reversal rules (conceptual):

  • Reversal amount ≤ previously recognized impairment.

  • New carrying amount ≤ carrying amount that would have been determined had no impairment loss been recognized previously.

• CGU impairment allocation steps (condensed):

  • Identify RA for CGU.

  • Compare CGU CA with RA.

  • Write off goodwill first.

  • Determine maximum total write-down for CGU.

  • Initial allocation to remaining assets not exceeding the maximum.

  • Pro-rata allocations to other assets until the maximum impairment is exhausted.

Quick takeaway table (conceptual)

• Impairment trigger: CA > RA → impairment loss = CA − RA.

• RA = max(VIU, FVLCTS).

• VIU: PV of future cash inflows + PV of end-of-life disposal value.

• FVLCTS: current market value less costs of disposal.

• Reversals: allowed for most assets except goodwill; limited to prior impairment amount and not exceeding no-impairment carrying amount.

• CGU approach: allocate impairment after writing off goodwill, with potential pro-rata allocation to other assets within the CGU.

• The aim of impairment is to ensure the carrying amount (CA) on the balance sheet does not exceed the recoverable amount (RA).

• Recoverable amount (RA): the higher of the asset's fair value less costs to sell (FVLCTS) and its value in use (VIU). Explicitly: $RA = \max\left( FV_{\text{to sell}}, VIU \right)$ If CA > RA, an impairment loss is recognized for the amount $CA - RA$.

Scope

• IAS 36 applies to most assets including intangible assets (goodwill, brands), property, plant and equipment (PPE), and investments in subsidiaries/associates.

• It specifically excludes inventories, deferred tax assets, financial assets, investment property at fair value, and assets classified as held for sale.

Recognition

• At each reporting date, assess for indicators of impairment (external like market value decline, adverse economic changes; internal like obsolescence, physical damage).

• Assets with indefinite useful lives (e.g., goodwill, certain intangibles) require impairment tests annually and when triggers exist. Other assets are reviewed only if indicators are identified.

Measurement

• Recoverable amount (RA) is the greater of Value in Use (VIU) and Fair Value Less Costs to Sell (FVLCTS).

• Value in use (VIU): present value of the pre-tax future cash flows expected from the asset or Cash-Generating Unit (CGU), including disposal value. Explicitly: $VIU = \text{PV of forecast pre-tax future earnings} + \text{PV of disposal (salvage) value}$

• Fair value less costs to sell (FVLCTS): amount from a sale minus disposal costs. Explicitly: $FVLCTS = FV - \text{cost of disposal}$

Basis of Recoverable Amount and CGUs

• RA is calculated for individual assets or, if not possible, for the smallest group of assets that generates largely independent cash flows, known as a Cash-Generating Unit (CGU). Goodwill is allocated and tested at the CGU level.

CGU Impairment Allocation (Six Steps)

1. Identify the CGU's recoverable amount.

2. Compare the CGU's carrying value with its recoverable amount to determine total impairment.

3. Write off goodwill first.

4. Allocate any remaining impairment pro-rata to other assets within the CGU, ensuring no asset's carrying amount falls below its individual recoverable amount (e.g., FVLCTS).

Reversing an Impairment Loss

• Reversals are permitted for all assets within scope except goodwill.

• A reversal is recognized if indicators show impairment no longer exists or its impact has weakened.

• The reversal amount is limited: it cannot exceed the carrying amount that would have been determined had no prior impairment loss been recognized, nor can it exceed the asset’s recoverable amount at the reversal date.

• For certain intangible assets, reversal is permitted only if it reflects a clear reversal of the event that caused the initial impairment.