IAS 36 Nokulunga

Acknowledgement
First and foremost, praises and thanks to the God, the Almighty, for His shoIrs of blessings
throughout my research work to complete the research successfully.
I would also like to show my gratitude to Mr. Ibster Gobvu, Academic Manager, Transcollege for
sharing his pearls of wisdom with me during this research, and I also thank 3 “anonymous” revieIrs
for their insights into this research work. Any errors are my own and should not tarnish the
reputations of these esteemed persons.
Finally, my thanks go to all my family members who have supported me to complete the research
work directly or indirectly.
i
Abstract
Background and Discussion: IAS 36 seems to be a challenging area. Assessment of whether an
asset has declined in value may be highly subjective and impairments may look like a failure
and the management can therefore have incentives to report in a certain way. If the values of
assets are overestimated, impairment losses can be avoided, and the result is affected.
Purpose: The purpose of this thesis was to investigate the perceived strengths and Weakness of
IAS 36.
Methodology: Data collection was collected using a qualitative method from secondary sources.
Conclusions: Several studies have suggested that the adoption of IAS 36 enhances the quality of
financial reports, in turn improving their reliability and usefulness.
However, as noted, IAS 36 requires managers to make frequent assumptions on issues such as cash
flow projection periods, growth rates, discount rates, and events and circumstances leading to an
impairment loss. These assumptions are usually unverifiable and subjective and can thus hide
earnings management. However, the calculation of recoverable amounts may also be affected by
difficulties in estimating the abovementioned variables. In addition, testing goodwill for
impairment requires not only the application of detailed financial modeling, but also results in a
heavy compliance burden as firms reporting subject to IFRS are called upon to provide insight into
the assumptions used, benchmarks referred to and processes used in the formation of a judgment
on the value of the most vexed of all intangible assets.
Further research: The following area would be interesting for further research:
− Investigate why IASB has not changed or simplified IAS 36 in a higher extent and how
the regulation can be improved
Keywords: Impairment, Impairment test, Impairment loss, IFRS, IAS 36, Fixed asset,
Assessment, Recoverable amount, Value in use, Discount rate, Cash flows, Fair value, CGU
ii
Abbreviations
CGU – Cash Generating Unit
FRSC - Financial Reporting Standards Committee
HKFRS - Hong Kong Financial Reporting Standards
IAS – International Accounting Standard
IAS 36 – International Accounting Standard, Impairment of Assets
IASB – International Accounting Standard Board
IFRS – International Financial Reporting Standards
SQAB - Standards and Quality Accountability Board
iii
Table of contents
Chapter 1: IAS 36: Impairment of assets…………………………………………. 1
Chapter 2: Literature review………………………………………………………. 11
Chapter 3: Research methodology………………………………………………… 14
Chapter 4: Findings and evidence from Canada…………………………………... 16
Chapter 5: Findings and evidence from Singapore………………………………. 29
Chapter 6: Findings and evidence from Hong Kong……………………………… 39
Chapter 7: Summary and conclusion……………………………………………….. 48
References………………………………………………………………………….. 63
iv
LIST OF TABLES
Table 1.1: History of IAS 36…………………………………………………....... 3

Table 4.1: History of Canadian Section 3063, Impairment of Long-lived Assets … 17
Table 4.2: Impairment of assets: IAS 36 and Canadian Section 3063…………….. 18
Table 5.1: Differences between IAS 36 and Singapore FRS 36…………………… 30
Table 6.1: HKAS 36 Requirements at a Glance ……………………………………. 40
Table 7.1: Recommendations to improving Impairment of asset standard (IAS36)... 56
LIST OF FIGURES
Extract 4.1: Excerpt from Agrium Inc. 2017 Financial Statements…………. 21

Extract 4.2: Excerpt from Suncor 2017 Financial Statements………………. 22
Extract 4.3: Excerpt from Suncor 2017 Financial Statements………………. 24
Extract 5.1: Excerpt from Singapore Exchange 2017 Financial Statements
Note 20: Goodwill ……………………………………………… 32
Extract 5.2: Excerpt from Singapore Exchange 2017 Financial Statements
Note 2.10: Impairment of non-financial assets………………….. 33
Extract 6.1: Notes to the Financial Statements of Hong Kong Civil Aviation Authority,
2017…………………………………………………. 45
Extract 6.2: Henderson Land Development Company Limited Annual Report 2017
45
LIST OF ILLUSTRATIONS
6.1 Illustrative disclosures for goodwill……………………………………………… 42
v
CHAPTER 1
INTRODUCTION AND BACKGROUND
1.1 Introduction
During the 1990s a new generation of accounting standards on the impairment of fixed assets
appeared in leading market economies. The pioneer was the US standard SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , issued in
1995. It was succeeded in 1998 by IAS 36, Impairment of Assets, of the International Accounting
Standards Committee, and by the British standard FRS11, Impairment of Fixed Assets and
Goodwill. SFAS 121 was substituted in 2001 by SFAS 144,Accounting for the Impairment or
Disposal of Long-Lived Assets, and IAS 36 was materially revised in 2004. In many respects the
three standards have the same system for measuring impairments, although not for assessing
whether there is one. One common feature is the obligation, in certain circumstances, to measure
the asset, or group of assets, by the present value of the cash flows that it will generate. There is
one striking difference, though. The British and international standards, which are identical in most
respects, require that cash flows for the computation of present value exclude cash flows related
1.2 Qualitative characteristics of financial statements

The primary objective of accounting is to provide information about the economic resources of an
enterprise, the claims to those resources, and the effects of transactions, events, and circumstances
that change the resources and claims. It is therefore considered important to inform users of
financial statement of any asset or cash generating unit that lose its capacity to recover its cost.
1.2.1 Relevance
The fundamental quality requirement is that of relevance, meaning that the information should
have relevance for decision making such as to buy, keep or sell a stock. The information should
also be relevant so it can be used in forecasting. For it to be useful for predictive purposes there is
a minimum requirement that the information should be presented in an understandable way and
-1-
include topical figures and issues. Tightly associated with the primary requirement for relevance
of information are the secondary characteristics reliability and comparability (Smith, 2006).
1.2.2 Comparability
Comparability as a qualitative characteristic has two sides. Comparability on the one hand is about
the comparability in between firms and on the other hand it is concerned with the comparability of
one firm but over time. Comparability in between firms has the fundamental reason to make it
possible to compare firms with the use of ratios, say a profitability ratio between three firms and
see which of them is the most profitable. In principal every event, asset or liability of the same
kind should be reported identically in all firms (Smith, 2006).
1.2.3 Reliability
With the reader in mind a financial statement must provide information that is reliable. A financial
statement has achieved reliability if it “is free from material error and bias and can be depended
on by users to represent faithfully that which it either purports to represent or could reasonably be
expected to represent” (IFRS, 2009). A key to achieve reliability is to keep the information neutral.
Neutral means that the information is not influenced or directed to achieve any predetermined
result or outcome, so called “cosmetic” treatment to make the firm appear better than it is (Smith,
2006).
1.3 Choice of research topic

Impairment of assets is an area which has caught the attention of many researchers and I am not
an exception. My choice of the research topic was informed by my interest in over-valuation of
assets which has led to the demise of major companies such as Enron and Steinhoff.
-2-
1.4 Methodology
This research revieId studies on an impairment IAS 36 published in the 2004-2018 period. 2004
represents the year when an impairment-only approach was first issued by the IASB under the new
International Financial Reporting Standard (IFRS) 3 Business Combinations and the revised
International Accounting Standard (IAS) 36 Impairment of Assets.
The necessary data was collected from companies’ annual reports, which I accessed directly from
the companies’ official Ibsites. I also made use of previous published researches on the impairment
area.
1.5 Literature review

My approach to the literature review presented in this paper is consistent with Tranfield, Denyer,
and Smart (2003), who regard a literature review as a key tool in managing the diversity of
knowledge for a specific academic inquiry. First, I identified keywords and search terms for the
systematic search in the titles and abstracts of the papers in the selected journals and in Google
Scholar. The search string consisted of the journal name and the terms “IFRS 3, IAS 36, goodwill,
impairment, amortization/amortisation, business combination, discount rate” combined with an <
OR > syntax.
In a second step, I excluded editorials, book reviews, comments, replies, and papers that do not
apply an empirical research design from the sample. The third step involved assessment of the
quality of the studies. I selected only refereed papers from academic journals rated in quality
rankings to provide a measure of high quality as commonly understood in management
research(Tranfield et al., 2003).
-3-
1.5.1 Studies of determinants associated with goodwill recognition, impairment, and
disclosure
-4-
1.6 Limitations
The research is confined to answering the questions of what the positive and negative international
critique of IAS 36. It relies largely on published sources and annual company reports.
1.7 Conclusion
The chapter started by giving a background on impairment of assets. It also looked at the choice
of the research topic, research methodology and literature review. It ended with the limitations of
the research project.
-5-
CHAPTER 2
IAS 36: IMPAIRMENT OF ASSETS
2.1 Current developments regarding IAS 36

The Board met on 25 January 2018 to “discuss whether it can simplify the value in use calculation
without making the impairment test in IAS 36 Impairment of Assets less robust.”1 The Board
tentatively decided to consider removing the requirement for an entity to exclude from the value
in use calculation cash flows resulting from a future restructuring or a future enhancement.
In March 2004, IFRS 3 Business Combinations changed the accounting requirements for goodwill
and introduced an impairment-only model with no annual amortisation. This standard replaced the
previous amortisation-based model required by IAS 22 Business Combinations.
In January 2008, the IASB issued a revised version of IFRS 3. Although some potentially
significant differences remained, the publication of IFRS 3 led to a higher degree of convergence
between IFRS and US GAAP in the accounting for business combinations.
In June 2015, the IASB published its report and feedback statement on its PIR of IFRS 3. The
report identified that many respondents thought that the impairment test was complex, time-
consuming and expensive and involved significant judgement. In addition, investors identified
shortcomings in the information provided to them (e.g. timing of impairments)
To address these concerns, the IASB added a research project to its agenda that considers how to
address the following three areas of focus:
(a) Whether changes should be made to the existing impairment test for goodwill and other
non-current, non-financial assets;
1
Agenda Paper 4, p11
-6-
(b) Subsequent accounting for goodwill (including the relative merits of an impairment-
only approach and an amortisation and impairment approach); and
(c) The extent to which other intangible assets should be separated from goodwill.
2.2 History of IAS 36

2.2.1 Overview
IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than
their recoverable amount, that is, the higher of fair value less costs of disposal and value in use.
Except for goodwill and certain intangible assets for which an annual impairment test is required,
entities are required to conduct impairment tests where there is an indication of impairment of an
asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate
cash inflows that are largely independent of those from other assets.
IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in
business combinations for which the agreement date is on or after 31 March 2004, and for all other
assets prospectively from the beginning of the first annual period beginning on or after 31 March
2004.i
Table 1: History of IAS 362

Date Developments Comments
May 1997 Exposure Draft E55 Impairment of
assets
June 1998 IAS 36 Impairment of Assets Operative for financial statements
covering periods beginning on or after 1
July 1999
31 March 2004 IAS 36 Impairment of Assets revised Applies to goodwill and intangible assets
acquired in business combinations for
which the agreement date is on or after 31
2
www.iasplus.com/en/standards/ias/ias36
-7-
March 2004, and for all other assets
prospectively from the beginning of the
first annual period beginning on or after
31 March 2004
22 May 2008 Amended by Annual Improvements to Effective for annual periods beginning on
IFRSs 2007 (disclosure of estimates or after 1 January 2009
used to determine a recoverable
amount)
16 April 2009 Amended by Annual Improvements to Effective for annual periods beginning on
IFRSs 2009 (units of accounting for or after 1 January 2010
goodwill impairment testing using
segments under IFRS 8 before
aggregation)
29 May 2013 Amended by Recoverable Amount Effective for annual periods beginning on
Disclosures for Non-Financial or after 1 January 2014
Assets (clarification of disclosures
required)
2.3 Summary of IAS 36

2.3.1 Objective of IAS 36
To ensure that assets are carried at no more than their recoverable amount, and to define how
recoverable amount is determined.
2.3.2 Scope
IAS 36 applies to all assets except: [IAS 36.2]
− Inventories (IAS 2)
− Assets arising from construction contracts (IAS 11)
− Deferred tax assets (IAS 12)
− Assets arising from employee benefits (IAS 19)
− Financial assets (IAS 39)
-8-
− Investment property carried at fair value (IAS 40)
− Agricultural assets carried at fair value (IAS 41)
− Insurance contract assets (IFRS 4)
− Non-current assets held for sale (IFRS 5)
− Therefore, IAS 36 applies to (among other assets):
− Land buildings
− Machinery and equipment
− Investment property carried at cost
− Intangible assets
− Goodwill
− Investments in subsidiaries, associates, and joint ventures carried at cost
− Assets carried at revalued amounts under IAS 16 and IAS 38
2.3.3 Key definitions [IAS 36.6]

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit
exceeds its recoverable amount
2.3.3.1Carrying amount: the amount at which an asset is recognised in the balance sheet
after deducting accumulated depreciation and accumulated impairment losses
2.3.3.2Recoverable amount: the higher of an asset's fair value less costs of disposal*
(sometimes called net selling price) and its value in use
2.3.3.3Fair value: 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 (see
IFRS 13 Fair Value Measurement)
2.3.3.4 Value in use: the present value of the future cash flows expected to be derived from
an asset or cash-generating unit
-9-
2.3.4 Identifying an asset that may be impaired
At the end of each reporting period, an entity is required to assess whether there is any indication
that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount).
IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an
asset may be impaired, then the asset's recoverable amount must be calculated. [IAS 36.9]
2.3.5 Indications of impairment [IAS 36.12]
2.3.5.1External sources:
− Market value declines
− Negative changes in technology, markets, economy, or laws
− Increases in market interest rates
− Net assets of the company higher than market capitalisation
2.3.5.2Internal sources:
− Obsolescence or physical damage
− Asset is idle, part of a restructuring or held for disposal
− Worse economic performance than expected
2.3.6 Determining recoverable amount

If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary
to calculate the other amount. The asset is not impaired. [IAS 36.19] If fair value less costs of
disposal cannot be determined, then recoverable amount is value in use. [IAS 36.20]. For assets to
be disposed of, recoverable amount is fair value less costs of disposal. [IAS 36.21]
2.3.7 Fair value less costs of disposal

Fair value is determined in accordance with IFRS 13
Fair Value Measurement Costs of disposal are the direct added costs only (not existing costs or
overhead). [IAS 36.28]
- 10 -
2.3.8 Value in use
The calculation of value in use should reflect the following elements: [IAS 36.30]
− An estimate of the future cash flows the entity
− Expects to derive from the asset expectations about possible variations in the amount or
timing of those future cash flows
− The time value of money, represented by the current market risk-free rate of interest
− The price for bearing the uncertainty inherent in the asset
− Other factors, such as illiquidity, that market participants would reflect in pricing the future
cash flows the entity expects to derive from the asset
− Cash flow projections should be based on reasonable and supportable assumptions, the
most recent budgets and forecasts, and extrapolation for periods beyond budgeted
projections.
− Cash flow projections should relate to the asset in its current condition – future
restructurings to which the entity is not committed and expenditures to improve or enhance
the asset's performance should not be anticipated. [IAS 36.44]
− Estimates of future cash flows should not include cash inflows or outflows from financing
activities, or income tax receipts or payments. [IAS 36.50]
2.3.9 Discount rate

In measuring value in use, the discount rate used should be the pre-tax rate that reflects current
market assessments of the time value of money and the risks specific to the asset. [IAS 36.55]. The
discount rate should not reflect risks for which future cash flows have been adjusted and should
equal the rate of return that investors would require if they Ire to choose an investment that would
generate cash flows equivalent to those expected from the asset. [IAS 36.56]
For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity
would pay in a current market transaction to borrow money to buy that specific asset or portfolio.
If a market-determined asset-specific rate is not available, a surrogate must be used that reflects
the time value of money over the asset's life as Ill as country risk, currency risk, price risk, and
cash flow risk. The following would normally be considered: [IAS 36.57]
− The entity's own Weighted average cost of capital
- 11 -
− The entity's incremental borrowing rate
− Other market borrowing rates
2.3.10 Recognition of an impairment loss

An impairment loss is recognised whenever recoverable amount is below carrying amount. [IAS
36.59] The impairment loss is recognised as an expense (unless it relates to a revalued asset where
the impairment loss is treated as a revaluation decrease). [IAS 36.60] Adjust depreciation for future
periods. [IAS 36.63]
2.3.11 Cash-generating units

Recoverable amount should be determined for the individual asset, if possible. [IAS 36.66]
If it is not possible to determine the recoverable amount (fair value less costs of disposal and value
in use) for the individual asset, then determine recoverable amount for the asset's cash-generating
unit (CGU). [IAS 36.66] The CGU is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets. [IAS
36.6]
2.3.12 Impairment of goodwill

Goodwill should be tested for impairment annually. [IAS 36.96]
To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units,
or groups of cash-generating units, that are expected to benefit from the synergies of the
combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those
units or groups of units. Each unit or group of units to which the goodwill is so allocated shall:
[IAS 36.80].
Represent the lowest level within the entity at which the goodwill is monitored for internal
management purposes; and not be larger than an operating segment determined in accordance with
IFRS 8 operating segments
- 12 -
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 of the unit: [IAS 36.90]
If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the
goodwill allocated to that unit is not impaired
If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must
recognise an impairment loss.
The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of
units) in the following order: [IAS 36.104]
First, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of
units); and then, reduce the carrying amounts of the other assets of the unit (group of units) pro
rata on the basis.
The carrying amount of an asset should not be reduced below the highest of: [IAS 36.105]
Its fair value less costs of disposal (if measurable)
Its value in use (if measurable)
2.3.13 Reversal of an impairment loss

Same approach as for the identification of impaired assets: assess at each balance sheet date
whether there is an indication that an impairment loss may have decreased. If so, calculate
recoverable amount. [IAS 36.110] No reversal for unwinding of discount. [IAS 36.116]. The
increased carrying amount due to reversal should not be more than what the depreciated historical
cost would have been if the impairment had not been recognised. [IAS 36.117]. Reversal of an
impairment loss is recognised in the profit or loss unless it relates to a revalued asset [IAS 36.119].
Adjust depreciation for future periods. [IAS 36.121]. Reversal of an impairment loss for goodwill
is prohibited. [IAS 36.124]
- 13 -
2.3.14 Disclosure
Disclosure by class of assets: [IAS 36.126]
− Impairment losses recognised in profit or loss
− Impairment losses reversed in profit or loss which line item(s) of the statement of
comprehensive income
− Impairment losses on revalued assets recognised in other comprehensive income
− Impairment losses on revalued assets reversed in other comprehensive income
− Disclosure by reportable segment: [IAS 36.129]
− Impairment losses recognised
− Impairment losses reversed
− Other disclosures:
− If an individual impairment loss (reversal) is material disclose: [IAS 36.130]
− Events and circumstances resulting in the impairment loss
− Amount of the loss or reversal
− individual asset: nature and segment to which it relates
− Cash generating unit: description, amount of impairment loss (reversal) by class of assets
and segment
2.4 Conclusion
- 14 -
CHAPTER 3
RESEARCH FINDINGS FROM SINGAPORE AND JAPAN
3.1 Standard setting in Singapore

In 2002, the Singapore government created the Council on Corporate Disclosure and Governance
(CCDG) to “replace the (then) Institute of Certified Public Accountants of Singapore as the
accounting standard setter for all companies incorporated in Singapore.”3
The CCDG was replaced by the Accounting Standards Council (ASC) as of 1 November 2007.
The ASC was established by the Accounting Standards Act, passed in Parliament on 27 August
2007. In addition to prescribing accounting standards for companies, the ASC will also prescribe
accounting standards for charities, co-operative societies, and societies. The Singapore
Government believes that “creation of the ASC is a positive step towards ensuring consistency in
accounting standards, facilitating comparison of financial statements between different entities and
enhancing the credibility and transparency of financial reporting”.4
3.2 Summary of SFRS(I) 1-36 Impairment of Assets

This Standard is applicable for annual reporting period beginning on 1 January 2018. Singapore
Financial Reporting Standard (International) 1-36 Impairment of Assets (SFRS(I) 1-36) is set out
in paragraphs 1–141 and Appendices A–C. All the paragraphs have equal authority.
3.2.1 Objective
According to the Accounting Standards Council the objective of this Standard is to “prescribe the
procedures that an entity applies to ensure that its assets are carried at no more than their
recoverable amount.”5
3
https://www.iasplus.com/en/jurisdictions/asia/singapore
4
https://www.iasplus.com/en/jurisdictions/asia/singapore
5
SFRS(I) 1-36 Impairment of Assets, p6
- 15 -
3.2.2 Scope
The Standard is applied in accounting for “the impairment of all assets, other than: inventories,
deferred tax asset, assets arising from employee benefits, financial assets, investment property that
is measured at fair value, biological assets related to agricultural activity, deferred acquisition
costs, and intangible assets, arising from an insurer’s contractual rights under insurance contracts,
and non-current assets (or disposal groups) classified as held for sale”6
The standard however, does not apply to “ inventories, assets arising from construction contracts,
deferred tax assets, assets arising from employee benefits, or assets classified as held for sale (or
included in a disposal group that is classified as held for sale) because existing SFRS(I)s applicable
to these assets contain requirements for recognising and measuring these assets”7
In addition, this standard does not apply to “financial assets within the scope of SFRS(I) 9,
investment property measured at fair value within the scope of SFRS(I) 1-40, or biological assets
related to agricultural activity measured at fair value less costs to sell within the scope of SFRS(I)
1- 41.”8
3.2.3 Identifying an asset that may be impaired

Paragraphs 8–17 specify when recoverable amount shall be determined. These requirements use
the term ‘an asset’ but apply equally to an individual asset or a cash generating unit.
3.2.4 Measuring recoverable amount

This Standard defines recoverable amount as the higher of an asset’s or cash-generating unit’s fair
value less costs of disposal and its value in use. Paragraphs 19–57 set out the requirements for
measuring recoverable amount. These requirements use the term ‘an asset’ but apply equally to an
individual asset or a cash-generating unit.
6
7
8
- 16 -
3.2.5 Measuring the recoverable amount of an intangible asset with an indefinite
useful life
Paragraph 10 requires an intangible asset with an indefinite useful life to be tested for impairment
annually by comparing its carrying amount with its recoverable amount, irrespective of whether
there is any indication that it may be impaired. However, the most recent detailed calculation of
such an asset’s recoverable amount made in a preceding period may be used in the impairment test
for that asset in the current period.
3.2.6 Fair value less costs of disposal

Costs of disposal, other than those that have been recognised as liabilities, are deducted in
measuring fair value less costs of disposal. Examples of such costs are legal costs, stamp duty and
similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset
into condition for its sale. However, termination benefits (as defined in SFRS(I) 1-19) and costs
associated with reducing or reorganising a business following the disposal of an asset are not direct
incremental costs to dispose of the asset.
3.2.7 Value in use

According SFRS(I) 1-36 an estimate of the future cash flows the entity expects to derive from the
asset; expectations about possible variations in the amount or timing of those future cash flows;
the time value of money, represented by the current market risk-free rate of interest; the price for
bearing the uncertainty inherent in the asset; and other factors, such as illiquidity, that market
participants would reflect in pricing the future cash flows the entity expects to derive from the
asset shall be reflected in the calculation of an asset’s value in use.
3.2.8 Discount rate

SFRS(I) 1-36 explains that the discount rate (rates) shall be a pre-tax rate (rates) that reflect(s)
current market assessments of the time value of money; and the risks specific to the asset for which
the future cash flow estimates have not been adjusted.
- 17 -
3.2.9 Recognising and measuring an impairment loss
Paragraphs 59–64 of SFRS(I) 1-36 set out the requirements for recognising and measuring
impairment losses for an individual asset other than goodwill. Furthermore, recognising and
measuring impairment losses for cash-generating units and goodwill are dealt with in paragraphs
65–108
3.2.10 Cash-generating units and goodwill

Paragraphs 66–108 and Appendix C of SFRS(I) 1-36 set out the requirements for identifying the
cash generating unit to which an asset belongs and determining the carrying amount of, and
recognising impairment losses for, cash-generating units and goodwill.
3.2.10.1 Identifying the cash-generating unit to which an asset belongs

The recoverable amount of an individual asset cannot be determined if the asset’s value in use
cannot estimated to be close to its fair value less costs of disposal (for example, when the future
cash flows from continuing use of the asset cannot be estimated to be negligible); and the asset
does not generate cash inflows that are largely independent of those from other assets.
Example9
A mining entity owns a private railway to support its mining activities. The private railway could
be sold only for scrap value and it does not generate cash inflows that are largely independent
of the cash inflows from the other assets of the mine.
It is not possible to estimate the recoverable amount of the private railway because its value in
use cannot be determined and is probably different from scrap value. Therefore, the entity
estimates the recoverable amount of the cash-generating unit to which the private railway
belongs, ie the mine.
Paragraph 6 of SFRS(I) 1-36 defines an asset’s cash-generating unit is the smallest group of assets
that includes the asset and generates cash inflows that are largely independent of the cash inflows
from other assets or groups of assets. Identification of an asset’s cash-generating unit involves
9
SFRS(I) 1-36 Impairment of Assets(n.d.)., p17
- 18 -
judgement. If recoverable amount cannot be determined for an individual asset, an entity identifies
the lowest aggregation of assets that generate largely independent cash inflows.
Example 10
A bus company provides services under contract with a municipality that requires minimum
service on each of five separate routes. Assets devoted to each route and the cash flows from
each route can be identified separately. One of the routes operates at a significant loss.
Because the entity does not have the option to curtail any one bus route, the lowest level of
identifiable cash inflows that are largely independent of the cash inflows from other assets or
groups of assets is the cash inflows generated by the five routes together. The cash-generating
unit for each route is the bus company.
3.2.10.2 Recoverable amount and carrying amount of a cash generating

unit
The recoverable amount of a cash-generating unit is the higher of the cash-generating unit’s fair
value less costs of disposal and its value in use. Paragraph 75 explains that “the carrying amount
of a cash-generating unit shall be determined on a basis consistent with the way the recoverable
amount of the cash-generating unit is determined.”11
Example 12
A company operates a mine in a country where legislation requires that the owner must restore
the site on completion of its mining operations. The cost of restoration includes the replacement
of the overburden, which must be removed before mining operations commence. A provision
for the costs to replace the overburden was recognised as soon as the overburden was removed.
The amount provided was recognised as part of the cost of the mine and is being depreciated
10
11
SFRS(I) 1-36 Impairment of Assets, Paragraph 75, p19
12
- 19 -
over the mine’s useful life. The carrying amount of the provision for restoration costs is CU500,
(a) which is equal to the present value of the restoration costs.
3.2.10.3 Goodwill
Paragraph 80 of SFRS(I) 1-36 states that for the purpose of impairment testing, goodwill acquired
in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s
cash-generating units, or groups of cash-generating units, that is expected to benefit from the
synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are
assigned to those units or groups of units.
If goodwill has been allocated to a cash-generating unit and the entity disposes of an operation
within that unit, the goodwill associated with the operation disposed of shall be included in the
carrying amount of the operation when determining the gain or loss on disposal; and measured on
the basis of the relative values of the operation disposed of and the portion of the cash-generating
unit retained, unless the entity can demonstrate that some other method better reflects the goodwill
associated with the operation disposed of.
Example 13
An entity sells for CU100 an operation that was part of a cash-generating unit to which goodwill
has been allocated. The goodwill allocated to the unit cannot be identified or associated with an
asset group at a level lower than that unit, except arbitrarily. The recoverable amount of the
portion of the cash-generating unit retained is CU300.
Because the goodwill allocated to the cash-generating unit cannot be non-arbitrarily identified
or associated with an asset group at a level lower than that unit, the goodwill associated with the
operation disposed of is measured based on the relative values of the operation disposed of and
the portion of the unit retained. Therefore, 25 per cent of the goodwill allocated to the cash-
generating unit is included in the carrying amount of the operation that is sold.
13
- 20 -
However, according to paragraph 87, if an entity reorganises its reporting structure in a way that
changes the composition of one or more cash-generating units to which goodwill has been
allocated, the goodwill shall be reallocated to the units affected. This reallocation shall be
performed using a relative value approach like that used when an entity disposes of an operation
within a cash-generating unit, unless the entity can demonstrate that some other method better
reflects the goodwill associated with the reorganised units.
Example 14
Goodwill had previously been allocated to cash-generating unit A. The goodwill allocated to A
cannot be identified or associated with an asset group at a level lower than A, except arbitrarily.
A is to be divided and integrated into three other cash-generating units, B, C and D.
Because the goodwill allocated to A cannot be non-arbitrarily identified or associated with an
asset group at a level lower than A, it is reallocated to units B, C and D based on the relative
values of the three portions of A before those portions are integrated with B, C and D.
3.2.11 Corporate assets

According to paragraph 100, Corporate assets include group or divisional assets such as the
building of a headquarters or a division of the entity, EDP equipment or a research Centre. The
structure of an entity determines whether an asset meets this Standard’s definition of corporate
assets for a cash-generating unit. The distinctive characteristics of corporate assets are that they do
not generate cash inflows independently of other assets or groups of assets and their carrying
amount cannot be fully attributed to the cash-generating unit under review.
3.2.12 Impairment loss for a cash-generating unit

Paragraph 104 states that an impairment loss shall be recognised for a cash-generating unit if, and
only if, the recoverable amount of the unit (group of units) is less than the carrying amount of the
unit (group of units).
14
- 21 -
Example15
A machine has suffered physical damage but is still working, although not as Ill as before it was
damaged. The machine’s fair value less costs of disposal is less than its carrying amount. The
machine does not generate independent cash inflows. The smallest identifiable group of assets
that includes the machine and generates cash inflows that are largely independent of the cash
inflows from other assets is the production line to which the machine belongs. The recoverable
amount of the production line shows that the production line taken is not impaired.
Assumption 1: budgets/forecasts approved by management reflect no commitment of

management to replace the machine.
The recoverable amount of the machine alone cannot be estimated because the machine’s value
in use: (a) may differ from its fair value less costs of disposal; and (b) can be determined only
for the cash-generating unit to which the machine belongs (the production line).
The production line is not impaired. Therefore, no impairment loss is recognised for the
machine. Nevertheless, the entity may need to reassess the depreciation period or the
depreciation method for the machine. Perhaps a shorter depreciation period or a faster
depreciation method is required to reflect the expected remaining useful life of the machine or
the pattern in which economic benefits are expected to be consumed by the entity.
Assumption 2: budgets/forecasts approved by management reflect a commitment of

management to replace the machine and sell it soon. Cash flows from continuing use of the
machine until its disposal are estimated to be negligible.
The machine’s value in use can be estimated to be close to its fair value less costs of disposal.
Therefore, the recoverable amount of the machine can be determined, and no consideration is
given to the cash-generating unit to which the machine belongs (i.e. the production line).
15
- 22 -
Because the machine’s fair value less costs of disposal is less than its carrying amount, an
impairment loss is recognised for the machine.
3.2.13 Reversing an impairment loss

Paragraphs 110–116 set out the requirements for reversing an impairment loss recognised for an
asset or a cash-generating unit in prior periods.
3.2.13.1 Reversing an impairment loss for an individual asset

According to paragraph 119 A reversal of an impairment loss for an asset other than goodwill shall
be recognised immediately in profit or loss, unless the asset is carried at revalued amount in
accordance with another SFRS(I) (for example, the revaluation model in SFRS(I) 1-16). Any
reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase in
accordance with that other SFRS(I).
3.2.13.2 Reversing an impairment loss for a cash-generating unit

Paragraph 122 states that a reversal of an impairment loss for a cash-generating unit shall be
allocated to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those
assets. These increases in carrying amounts shall be treated as reversals of impairment losses for
individual assets and recognised in accordance with paragraph 119.
3.2.13.3 Reversing an impairment loss for goodwill

According to paragraph 124 an impairment loss recognised for goodwill shall not be reversed in a
subsequent period.
3.2.14 Disclosure
According to paragraph 126 an entity shall disclose the following for each class of assets the
amount of impairment losses recognised in profit or loss during the period and the line item(s) of
the statement of comprehensive income in which those impairment losses are included. In addition,
the amount of reversals of impairment losses recognised in profit or loss during the period and the
- 23 -
line item(s) of the statement of comprehensive income in which those impairment losses are
reversed. More so the amount of impairment losses on revalued assets recognised in other
comprehensive income during the period. Furthermore, the amount of reversals of impairment
losses on revalued assets recognised in other comprehensive income during the period.
3.3 Standard setting in Japan

3.3.1 Introduction
Japanese generally accepted accounting principles (GAAP) are one of the four sets of accounting
standards listed companies in Japan can currently choose to use to file their consolidated financial
statements. The other three sets of accounting standards are Designated IFRS, U.S. GAAP, and
Japan’s Modified International Standards (JMIS).
Accounting Standards are developed by the Accounting Standards Board of Japan (ASBJ) and are
designated as Japanese GAAP by the Financial Services Agency of Japan.
The ASBJ develops Accounting Standards in accordance with the “Rules on the Due Process for
the Development of Japanese GAAP and Japan’s Modified International Standards” (hereinafter
referred to as the “Due Process Rules”) set out by the Financial Accounting Standards Foundation
(FASF).
3.3.2 Setting the Agenda

The Standards Advisory Council, set up by the FASF, discusses matters related to the operations
of the ASBJ, including topics to be discussed by the ASBJ and their priorities. For items that are
of high importance or urgency, the Standards Advisory Council advises the ASBJ to add them on
the ASBJ’s agenda.
When the Standards Advisory Council advises the ASBJ on either the topics or their priorities, the
ASBJ generally respects such advice. In some cases, the ASBJ may request the Standards Advisory
Council to discuss a potential agenda item. In cases of emergency, the ASBJ may decide to put an
item on its agenda without the consultation of the Standards Advisory Council.
- 24 -
3.3.3 Standards Issued by the ASBJ
The types of Accounting Standards issued by the ASBJ after following the Due Process Rules can
be classified as follows:
Accounting Standards: Basic rules underlying the accounting and disclosures
Implementation Guidance: Interpretations of Accounting Standards and practical guidance when

applying Accounting Standards
Practical Solutions: Tentative treatment for areas where Accounting Standards do not exist and
practical treatment for areas where there is urgent need for guidance
3.3.4 Differences between IAS 36 and JGAAP.

The table below presents the most significant differences between IAS 36 and JGAAP 36.
Significant differences JGAAP IAS 36

Indicators of impairment of More precise numerical As the indicators are of a
long-lived assets indicators are used than in IAS broad nature, there is a
36 tendency for an indication of
impairment to be judged to
exist than would be the case
under JGAAP
One of the examples of

indicators of impairment
given is when a carrying value
of net assets is more than an
entity’s market capitalisation.
Impairment review process Recoverability test (the IAS 36.59
carrying value of the asset is 1 Step approach:
compared to the undiscounted When there is an indicator of
cash flows using the asset and impairment, an impairment
on final disposal). loss is determined as the
amount by which the carrying
- 25 -
As a result, if the carrying value value of an asset exceeds its
is higher than the undiscounted recoverable amount.
cash flows, the carrying value is
considered to be not recoverable.
Recoverable amount is the
higher of (i) fair value less
An impairment loss is then
costs to sell and (ii) value in
recognised for the difference
use ( the present value of
between the carrying value and
the amount of the discounted
future cash flows derived from
cash flows. using the asset, including its

residual value).
Reversal of impairment loss Reversal of impairment losses Reversals relating to goodwill
are prohibited for all fixed are prohibited however, for
assets other assets, at the end of each
period assessment must be
made as to whether there is
any indication that the
impairment no longer exists.
When appropriate, the
impairment loss is reversed to
the extent that it does not
exceed the carrying amount
that would have been
determined (net of
amortisation of depreciation)
had no previous impairment
been reversed.
Allocation of goodwill When judging the recognition IAS 36.80,84
of an impairment loss, Goodwill shall be allocated to
goodwill shall be included each of the acquirer’s cash
with several asset groups of generating units, or groups of
the business to which the cash-generating units.
- 26 -
goodwill relates, at a generally
higher level. Each unit or group of units to
which the goodwill is
If the carrying amount of allocated shall:
goodwill can be allocated to
asset groups of the related Represent the lowest level
business based on some within the entity at which the
reasonable criteria, goodwill is monitored for
recognition of an impairment internal management
loss can be judged after the purposes.
goodwill has been allocated to
each asset group. Not be larger than an
operating segment as defined
by paragraph 5 of IFRS 8
operating Segments before
aggregation.
If the initial allocation of

goodwill cannot be completed
before the end of the annual
period in which the business
combination is effected, that
initial allocation shall be
completed before the end of
the first annual period after the
acquisition date.
- 27 -
Smyce: IFRS-JGAAP comparison16
3.4 Practical application of IAS 36
3.4.1 Recoverable amount

Requirements of IAS 36: Both IAS 36.130(e) and IAS 36.134(c) require that it must be stated
whether the recoverable amount of the asset is its fair value less costs of disposal (fair value) or its
value in use.
Practical evidence of determination of recoverable amount: Figure 4.1 is an extract from the
financial statements of EFT Solutions for the 2017 financial year. The extract shows how EFT
Solutions determines recoverable amount.
Figure 4.1: Extract from the notes to the2017 financial statements of EFT Solutions
Smyce: EFT Solutions Holdings limited 2017 Annual report
3.4.2 Value in use (VIU)

Requirements of IAS 36: Value in use is the present value of the future cash flows expected to be
derived from an asset or cash-generating unit. The cash flow projections used in calculating value
in use are required to be based on reasonable and supportable assumptions that represent
management’s best estimate of the range of economic conditions that will exist over the remaining
16
https://www.eyjapan.jp/services/assurance/ifrs/issue/ifrs-others/other/pdf/ifrs-jgaap-comparison-v20-E.pdf.
Accessed 29/03/2019
- 28 -
useful life of the asset. However, in FVLCD calculations, an entity is required to use assumptions
that market participants would use when pricing the asset or liability, if market participants act in
their economic best interest.
Practical evidence on the value in use: Both the theoretical and the empirical material show that
value in use is often applied by companies, which is a challenging area due to its subjectivity and
estimation about the future. This process consists of several steps, which together shall reflect the
value of the asset to the company.
IAS 36 aims to define procedures to guarantee that assets are not registered at a higher book value
than the value that can be recovered through use or sale. If evidence exists of impaired assets in
the future, the entity should apply the test to check the possible loss and, if identified, the
devaluation should be recognized through the constitution of an allowance for impairment losses
Figure 4.2 shows the notes in the financial statements of VTech Holdings Limited regarding the
determination of value in use.
Figure 4.2: Extract from the notes to the2017 financial statements of VTech Limited
Smyce: VTech Limited 2017 Annual report
- 29 -
3.4.3 Determining a CGUs
Requirements of IAS 36: The CGU is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets. [IAS
36.6]
Practical evidence of determining a CGU:

Figure 1 shows the notes to the financial statements of Unilever for 2017 showing how impairment
charges Ire recognised as Ill as cash generating units.
Figure 1: Notes to the Consolidated Financial Statements Unilever Group, 2017
Perceived Weakness of IAS 36: When a company has clarified that strong indications occur and
thus conduct an impairment test; difficulties arise in the assessment of which asset or assets that
should be included. IAS 36 states that a CGU shall be defined on the lowest possible level.
(Anderson & Inzel 2014, p. 33)
Perceived Weakness of IAS 36: The determination of CGUs, which is the smallest group of
assets that generate independent cash flows (IAS 36:6), is according to Marton (2012) another
challenging area within IAS 36. According the Managerial Finance issue of 2010, “If CGUs are
determined at a higher level than necessary, impairments can be avoided. This can simply be
- 30 -
explained by combining a profitable asset with an unprofitable asset, and then the CGU will not
be a subject to impairment.”17
3.4.4 Impairment of goodwill and other intangible assets
17
Managerial Finance 2010b p.8
- 31 -
3.5 Analysis of the strengths and Weakness of IAS 36
3.5.1 Disclosure and compliance
Strengths of IAS 36:
Many users think that information required by IAS 36 Impairment of Assets is useful. Useful
disclosures include discount rates used, long-term growth rates, profit and capital expenditure
assumptions and sensitivities.
IAS 36 therefore, improves the accuracy of the information disclosed. The application of IAS 36
affects the quality and reliability of the information advertised. Impairment application improves
the credibility of accounting information and provides information that is more credible and
reliable for decision-making process. To be useful, accounting information needs to be reliable.
Weakness of IAS 36:

However, some users think that the disclosed information is boilerplate and insufficient for them
to assess whether the main inputs/assumptions are reasonable.
Many participants think that the impairment test is complex, time-consuming and expensive and
involves significant judgements. The main challenges identified are the following:
(a) Determining the cash flows from the cash generating unit to which the goodwill
has been allocated, the discount factor to be applied and the terminal value (growth
rate) of the cash flows can be very judgmental. Cash flows projections must be
prepared specifically for the purpose of impairment testing, as management
projections are not based on an ‘as is’ status, but also include management best
estimates of future cash flows derived from new investments and products.
(c) The allocation of goodwill to cash generating units (CGUs) for impairment testing.
Goodwill is allocated to the CGUs that are expected to benefit from the synergies
of the combination, which can be judgmental and difficult to apply in practice. After
the initial allocation, the carrying value of the goodwill is tested for impairment as
part of the respective GCUs, which might be merged or restructured in subsequent
- 32 -
years to a degree that they have little or no similarities to the originally acquired
business. Furthermore, the impairment test is performed based on the most recent
approved budgets, which over time can be substantially different from the business
plans at the acquisition date.
It is not clear what represents ‘the lowest level within the entity at which the goodwill is monitored
for internal management purposes’, as set out in paragraph 80 of IAS 36.
Practical difficulties related to the testing of a CGU for impairment when part of the recoverable
amount is attributable to non-controlling interest (NCI). If an entity is measuring NCI at its
proportionate share of net assets, this needs to be reflected in the impairment calculation. This
becomes more complicated when there have been transactions with NCI holders after the business
acquisition date, or if there is a group of CGUs to which goodwill is attributed that is partly
measured at fair value and partly on a proportionate basis.
The requirement to use a pre-tax discount rate when equity returns are always post-tax (meaning
there are not observable market inputs for a pre-tax cost of equity). Practically, this means that the
test is usually conducted on a post-tax basis with an additional iteration performed simply to derive
a pre-tax discount rate.
separating forecast capital expenditures between maintenance capital expenditures and

expansionary capital expenditures; particularly, how this separation impacts subsequent cash
flows, not just the exclusion of expansionary capital expenditures itself
- 33 -
Relevant academic evidence includes the following:
Petersen and Plenborg (2010) investigated compliance with IAS 36 for companies listed on the
Copenhagen Stock Exchange. They found some inconsistencies in application relating to defining
cash generating units and estimating recoverable amounts.
Kvaal (2007) noted complexity relating to the use of pre-tax discount rates in measuring an asset’s
recoverable amount under IAS 36. He recommended the use of company-specific after-tax cash
flows for value in use calculations, with deferred taxes considered in the impairment review.
Research based on archival data has generated mixed results as regards the decision usefulness of
financial information related to goodwill and impairment. With regard to goodwill at acquisition,
a study by Shalev (2009), based on US data, finds that preparers seek to avoid transparency in their
financial reporting when the acquisition premium is to a higher extent allocated to goodwill and
argues that this is consistent with a behaviour where acquirers downplay ‘bad news’ for investors
by trying to hide overstatement of goodwill in the purchase price allocation in order to avoid
amortisation. In a more recent study, Shalev et al. (2013) find that CEOs whose compensation
packages rely more on earnings-based components are more likely to over-allocate the purchase
price to goodwill.
About goodwill impairment tests, a review paper by Barone et al. (2015), reports that major
standard setters, i.e. FASB and IASB, support the impairment-only approach because impairment
test provides users of financial reports with a measure of goodwill that reflects firms’ underlying
economic value and investment opportunities.
3.5.2 Goodwill
Some users think that the information provided by the impairment test of goodwill is useful,
because it has confirmative value. However, they admit that impairment losses are often
recognised too late (ie they do not have predictive value).
- 34 -
Weakness of IAS 36:
A report18 published by KPMG in April 2014 finds that:
“(a) the high number of judgements and assumptions make the goodwill impairment testing a
complex and time-consuming exercise;
(b) it is not clear that the benefits of mandatory annual impairment testing outweigh the related
costs;
(c) the value relevance of impairment testing is in confirming instead of predicting value, and that
goodwill impairment charges do not act as a major signaling event for the market.”
According to the Research Group’s report titled “Should goodwill still not be amortised?
Accounting and disclosure for goodwill” (2014), also found that “although IAS 36 requires an
annual goodwill impairment test and a one-step impairment test, it still allows discretion in making
a number of choices in relation to impairment.”19
The surveys conducted by OIC-EFRAG, the ASBJ’s survey in 2014 also raised the following
shortcomings of IAS 36:
“(a) the impairment-only approach leaves significant room for managerial discretion,
interpretation, judgment and bias and in fact it may result in the entity failing to recognise an
incurred impairment loss; and
(b) the financial crisis has shown that an improvement of the current standard may be necessary.
Specifically, many respondents stated that the IASB should investigate whether the impairment
test could be improved to ensure that entities use robust and reliable assumptions so that
impairment losses are recognised on a timely basis.”20
18
Who cares about goodwill impairment? Available at:
http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/Who-cares-aboutgoodwill-
impairment-O-201904.pdf
19
Research Group, “Should goodwill still not be amortised? Accounting and disclosure for goodwill”, pp33 -34
20
Ibid
- 35 -
The allocation of goodwill to cash generating units (CGUs) for impairment testing. Goodwill is
allocated to the CGUs that are expected to benefit from the synergies of the combination, which
can be judgmental and difficult to apply in practice. After the initial allocation, the carrying value
of the goodwill is tested for impairment as part of the respective GCUs, which might be merged
or restructured in subsequent years to a degree that they have little or no similarities to the
originally acquired business. Furthermore, the impairment test is performed based on the most
recent approved budgets, which over time can be substantially different from the business plansat
the acquisition date.
Suggested improvements to IAS 36:

The Research Group suggested that the IAS 36 could be “ amended to require reassessing the
recoverable amount based on the conditions existing at the acquisition date, without considering
the subsequent changes in the business acquired.”21
Relevant academic findings

There are many concerns about goodwill accounting under IFRS 3ad IAS 36. Some state that
accounting for goodwill and impairment involves judgements and estimates and is therefore very
challenging and time consuming(e.g. Masters-Stout et al., 2008; Bloom,2009)
3.5.3 4.4.2 Cash generating units

Weakness of IAS 36:
The Global Preparers Forum (2017) states that “the identification of CGUs requires significant
judgment, as specifically acknowledged by IAS 36. Managers, however, can exploit discretion
such that reports of impairment charges are avoided, resulting in an overstatement of assets in
financial statements.”22
21
Ibid
22
Global Preparers forum
- 36 -
Practical difficulties related to the testing of a CGU for impairment when part of the recoverable
amount is attributable to non-controlling interest (NCI). If an entity is measuring NCI at its
proportionate share of net assets, this needs to be reflected in the impairment calculation. This
becomes more complicated when there have been transactions with NCI holders after the business
acquisition date, or if there is a group of CGUs to which goodwill is attributed that is partly
measured at fair value and partly on a proportionate basis.
Suggested improvements:
3.5.4 Value in Use

Weakness of IAS 36:
Anderson and Inzel (2014) state that both the “theoretical and the empirical material show that
value in use is often applied by companies, which is a challenging area due to its subjectivity and
estimation about the future.”
3.5.5 Discount Rate
IAS 36 states that the discount rate shall be a pre-tax rate; despite that, companies usually apply a
post-tax rate. Paragraph 55 of IAS 36 requires that an entity must use a pre-tax discount rate to
discount pre-tax cash flows so there is consistency between the discount rate and the cash flows.
Paragraph 94 of the Basis for Conclusions of IAS 36 states that, conceptually discounting post-tax
cash flows at a post-tax discount rate or discounting pre-tax cash flows at a pre-tax discount rate
should give the same results.
Weakness of IAS 36:
According to the findings of the Research Group “A significant area of judgement in the
calculation of the VIU is the determination of the discount rate. This could be understood as an
indirect equivalence between pre-tax and post-tax discount rates. However, if the expected future
cash flows are not evenly distributed over the period, the equivalence may not occur.
- 37 -
In addition, the Research Group (2014) states that” IAS 36 is not explicit as to how to estimate a
pre-tax discount rate, and implicitly suggests using an iterative process in certain cases (see
paragraphs 56, 57 and BCZ85). VIU could be estimated starting from a post-tax calculation to
arrive at an equivalent result through an iterative process.”23
The requirement to use a pre-tax discount rate when equity returns are always post-tax (meaning
there are not observable market inputs for a pre-tax cost of equity). Practically, this means that the
test is usually conducted on a post-tax basis with an additional iteration performed simply to derive
a pre-tax discount rate.
Relevant academic research includes:
Andersson & Inzel (2014) observe that “it is not important how many companies use a post-tax rate, but
important is the fact that a post-tax rate occurs in practice, which shows that there is a gap between the
regulation and the application of IAS 36.”
3.5.6 Identification of CGUs to which goodwill is allocated

IAS 36 paragraph 68 defines the cash generating unit as: “an asset’s cash generating unit is the
smallest group of assets that includes the asset and generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets. Identification of an asset’s
cash-generating unit involves judgment. If recoverable amounts cannot be determined for an
individual asset, an entity identifies the lowest aggregation of assets that generate largely
independent cash inflows.”
Weakness of IAS 36:
The Research Group (2014) reports that “size and composition of CGUs impacts the recognition
and measurement of impairment losses”. However, according to the Research Group “IAS 36
offers limited guidance in identifying them. If a CGU is too broad, it may result in non-recognition
of impairment because the gains of some units may offset the losses of another unit within the
same CGU.”
23
The Research Group, ‘ Should Goodwill Still not Be Amortised? Accounting and Disclosure For Goodwill, (2014,
p.37)
- 38 -
It is not clear what represents ‘the lowest level within the entity at which the goodwill is monitored
for internal management purposes’, as set out in paragraph 80 of IAS 36.
3.5.7 Recoverable amount

Paragraph 18 of IAS 36 states that the recoverable amount is the higher of its FVLCTS and its
VIU. To estimate VIU, paragraph 30 of IAS 36 requires applying the discounted cash flow model
(DCF), including its variants such as the dividend discount model (DDM).
Weakness of IAS 36:
The Research Group (2014) states that “the method applied to determine the recoverable amount
should reflect the expected manner of recovery, and if the entity intends to recover the value by
operating the unit, the recoverable amount should only be based on VIU.”
3.5.8 Sensitivity analysis

Requirements of IAS 36: IAS 36.134(f) requires that the effect of changes in the assumptions used
for the calculation of the recoverable amount of a cash-generating unit must be disclosed.
Strength of IAS 36:
According to the Netherlands Authority for the Financial Markets (2012) the “full application of
the provisions of IAS 36.134(f) gives investors a good understanding of the factors involved in the
determination of the recoverable amount of a cash-generating unit and the decision as to whether
recognition of an impairment loss is necessary or not.”24
3.5.9 Usefulness of information

The Global Preparers Forum (2017) noted that “IAS 36 helps preparers and users to deal with the
problems of the historical cost principle. IAS 36 thus improves the quality of accounting
information by giving a clear picture of the companies’ positions. By applying impairment loss
financial reports become clearer, more accurate, describe reality, and provide relevant information
24
The Netherlands Authority for the Financial Markets 2012
- 39 -
which indicates an increase in credibility to satisfy the users’ needs and wants by improving the
information content and reporting, if the valuation of fair value relies on objective measurements.
Impairment presents equitable treatment and fairness for all parties, thus promoting public trust in
the company. It locates the financial position of the company accurately and objectively. Any small
piece of information may affect the users’ decisions either positively or negatively, or even amend
them. This information should be displayed for various user groups of financial information.”25
3.5.10 Comparability of financial statements

Comparability is one of the key qualities which accounting information must possess. Accounting
information is comparable when accounting standards and policies are applied consistently from
one period to another and from one region to another. The characteristic of comparability
of financial statements is important because it allows us to compare a set of financial statements
with those of prior periods and those of other companies.26
3.5.11 Risk and uncertainty
Value in use should reflect risk and uncertainty to the extent that these would be reflected in the
price of an arm’s length transaction. Risk may be reflected by adjusting either the cash flows or
the discount rate, but not both. Determining an appropriate discount rate that reflects current
market assessments and the appropriate risks will often be difficult and will require consideration
and input from financial management, line management and, perhaps, valuation professionals.
Input from these parties will also be required to formulate assumptions regarding growth rates used
to project cash flows until the end of the asset’s useful life, which will also require significant
judgment to formulate.27
3.5.12 Cash flow projections

Determining the cash flows from the cash generating unit to which the goodwill has been allocated,
the discount factor to be applied and the terminal value (growth rate) of the cash flows can be very
judgmental. Cash flows projections must be prepared specifically for the purpose of impairment
25
Global Preparers Forum 2017
26
Ibid
27
Ibid
- 40 -
testing, as management projections are not based on an ‘as is’ status, but also include management
best estimates of future cash flows derived from new investments and products.
4.5 Conclusion
The chapter illustrated that the debate about impairment of assets (IAS 36) is full of arguments
that are in support and against the standard. This research has managed to highlight the
controversies surrounding the IAS 36 standard. According to the positive and negative
international critiques of IAS 36 the concept of impairment of assets, it is obvious and clear that
this concept is far from being perfect.
There are a number of areas for possible improvements of IAS 36 in order to reduce the operational
challenges. This applies to calculation of VIU and its relationship with fair value as well as the
determination of the discount rate.
- 41 -
CHAPTER 5
SUMMARY AND CONCLUSION
5.1 Introduction
In this chapter, I draw my conclusions based upon the discussion in the analysis. The conclusion
will provide an answer to the research problem. Suggestions for further research are also provided
in areas related to the thesis subject.
5.2 Goodwill and Impairment

This section presents the analysis of goodwill and impairment sieving through comments and
remarks made during the goodwill and impairment research project. The analysis is based on four
criteria: simplification, effectiveness, better and timely information, and reduction of costs and
complexity.
5.2.1 Simplifying the IAS 36 impairment test
5.2.2 Improving the effectiveness of the IAS 36 impairment test
5.2.3 Providing better and timely information about goodwill and impairment to
investors
5.3 Different approaches to goodwill and impairment

5.3.1 Relief from the mandatory annual quantitative impairment test
According to IASB relief from the mandatory annual quantitative impairment test “might reduce
the cost and complexity of testing goodwill for impairment’28. However, the IASB admits that this
approach “might also reduce both the rigmy of the impairment test and the number of useful
disclosures currently required by IAS 36.”29
28
Agenda ref 18D, p5
29
Agenda ref 18D, p5
- 42 -
In addition, the IASB feels that this approach “moderately contributes to achieving the
simplification objective”. However, it also notes that the approach “detracts from achieving the
effectiveness objective and providing better and timely information.”30
5.3.2 Allowing goodwill to be tested at an entity-level or at the level of a reportable

segment
The IASB does not believe that “an entity should be given an option to test goodwill at the entity-
level or at the level of a reportable segment because it could lead to loss of information about
impairment.”31
The IASB explains that for example, if goodwill impairment exists at the lower level at which the
goodwill is monitored, “that impairment might not be recognised if a unit that contains goodwill
is aggregated with other units that contain sufficient headroom to offset the impairment loss.”32
The IASB also believes that this approach moderately “contributes to achieving the simplification
objective but significantly detracts from achieving the effectiveness objective and providing better
and timely information”33
5.3.3 Removing restrictions on cash flow projections used in calculating value in use
The IASB does not believe this will make impairment testing more effective. However, it believes
it “might mitigate some possible concerns about the costs of applying the updated headroom
approach; and enhances the relevance of the disclosure of headroom.”34
30
Agenda ref 18D, p5
31
Paragraphs B24–B28 of Appendix B of Agenda Paper 18E
32
Paragraphs B24–B28 of Appendix B of Agenda Paper 18E
33
Agenda ref 18D, p6
34
Agenda ref 18D, p4
- 43 -
5.3.4 A single method as the sole basis for determining recoverable amount
The IASB argues that this approach might not significantly simplify impairment testing “because
an entity does not need to calculate both value in use and fair value less costs of disposal of a cash-
generating unit in all situations. It needs to do this only when calculating one of these amounts has
shown that there may be an impairment.”35
The IASB, similarly, this approach might not in itself make impairment testing more effective.
However, “it might mitigate some possible concerns about the costs of applying the updated
headroom approach.”36
According to the IASB this approach “might also improve the information provided to investors.
For example, if value in use is used as the sole basis for measuring recoverable amount, some
investors may find value in use more useful than fair value less costs of disposal because value in
use reflects the way an entity expects to use the asset”.37
5.3.5 Requiring an entity to disclose reasons for payment of a premium

The IASB believes that investors would support a possible requirement to disclose more
information about the acquired business. However, the IASB is afraid that preparers would express
concerns that “for those disclosures to be meaningful an entity would have to disclose
commercially sensitive information”.38
This approach according to the IASB will “significantly contribute to providing better and timely
information and moderately contributes to achieving the effectiveness objective but imposes undue
costs that significantly outweigh the benefits.”39
35
Agenda ref 18D, p4
36
Agenda ref 18D, p4
37
Agenda ref 18D, p5
38
Paragraphs B1–B15 of Appendix B of Agenda Paper 18F
39
Paragraphs B1–B15 of Appendix B of Agenda Paper 18F
- 44 -
5.4 Recommendations for improving the application of IAS 36
Goodwill and Impairment research project considered improving the application of IAS 36 by:
Simplifying the test without making it less robust; and/or making the test more effective at timely
recognition of impairments of goodwill? The board considers improving the application of IAS 36
by “amending the calculation of value in use of an asset (or a cash-generating unit) by removing
the requirement to exclude from the calculation of value in use those cash flows that would result
from a future restructuring or from a future enhancement”40
In addition, considered “making impairment testing of goodwill more effective by using the
unrecognized headroom of a cash-generating unit (or groups of units) as an additional input in the
impairment testing of goodwill”41
The other recommendation that the board considered was “removing the explicit requirement to
use pre-tax inputs in calculating value in use, and to disclose pre-tax discount rates used. Instead,
an entity would be required to use internally consistent assumptions about cash flows and discount
rates, and to disclose the discount rate(s) actually used.”42
5.4.1 Calculation of value-in-use

The board is conserving “simplifying the calculation of value in use by removing the explicit
requirement to use pre-tax inputs”43
According to the board, the calculation of the value in use can also be simplified by” the prohibiting
including estimated cash flows from uncommitted future restructuring; and improving or
enhancing the asset’s performance.”44
40
Goodwill and Impairment research project, p4
41
42
43
Agenda ref 18D, p9
44
Agenda ref 18D, p9
- 45 -
5.4.2 Using headroom approach
The IASB believes that using the headroom approach will “significantly contributes to achieving
the effectiveness objective and providing better and timely information while imposing some
costs.”45
In addition, the board is of the view that “using single method for determining recoverable amount
and removing the prohibition on cash flows used in calculating value in use might to some extent
mitigate the costs of applying the updated headroom approach by resolving the concern that the
current measurement basis of IAS 36 does not produce a single point estimate of recoverable
amount”.46
According to the board to remove the shielding effect from internally generated goodwill, “the
updated headroom approach would introduce the amount of unrecognised headroom as an
additional input into the impairment testing model.”47
The unrecognised headroom is a proxy for a measurement of internally-generated goodwill and is

measured as the difference between “the recoverable amount of the unit and the carrying amount
of the unit including acquired goodwill.”48
5.4.3 Reducing the use of judgment in the current requirements

Academic research (e.g. Glaum et al., 2013; Peterson et al., 2010) confirms that there is uncertainty
as to how IAS 36’s requirements are applied in practice.
45
Agenda ref 18D, p10
46
Agenda ref 18D, p10
47
48
- 46 -
5.4.4 Inputs and methods for estimating the recoverable amount of CGUs
5.5 Areas for further research

The current study exceeds prior studies in asset impairment by offering some innovative
suggestions to improve impairment of assets. Thus, this research forms an important addition to
the current knowledge in accounting. In addition, and as a part of the current study
recommendations to enhance asset impairment, a set of future research avenues are also offered.
The following areas would be interesting for further research:

− Accomplish a similar study, but focusing on intangible assets, such as goodwill.
− Investigate why IASB has not changed or simplified IAS 36 in a higher extent and how the
regulation can be improved
− Find out how stakeholders react to impairment losses
5.6 Conclusions
According to my results full compliance with IAS 36, paragraph 134 has yet to be achieved. This
raises several questions regarding the actual efficiency of the standard. What is an acceptable
compliance level according to the standard setters, and do they reckon that full compliance will be
achieved one day or are they satisfied with a slightly lower compliance level?
- 47 -
BIBLIOGRAPHY
Andrews, L., Higgins, A., Andrews, M. W., & Lalor, J. G. (2012). Classic grounded theory to
analyse secondary data: Reality and reflections. The Grounded Theory Review, 11(1), 12-
26.
Appendix A: Extracts from the Basis for Conclusions on IAS 36
Barth, M.E.; Clinch G. (2008). Re-valued financial, tangible, and intangible assets: associations
with share prices and non-market-based value estimates. Journal of Accounting Research,
Vol. 36 (Special issue), (Apr. 2008), pp. 199-233, ISSN 1475- 679X
Beatty, A., and Iber J. (2010). Accounting Discretion in Fair Value Estimates: An Examination of
SFAS 142 Goodwill Impairments. Journal of Accounting Research, 44(2), 257-288.
Bignon, V., Biondi, Y. and Ragot, X. An economic analysis of fair value: The evolution of
accounting principles in European Legislation, Saint – Gobain Centre for Economic
Studies, 2004; France.
Carlin, T.M. and Finch, N. (2009). Discount Rates in Disarray: Evidence on FlaId Goodwill
Impairment Testing, Australian Accounting Review, Vol. 19, No. 51, pp. 326-336.
Carlin, T.M., Finch, N. and Ford, G. (2008). Fair Value Impairment Testing under IFRS:
Examining Australia’s Disclosure Quality, Financial Reporting, Regulation and
Governance, Vol. 7, No. 1, p. 1- 25.
- 48 -
Clarke, S. P., & Cossette, S. (2000). Secondary analysis: Theoretical, methodological and practical
considerations. Canadian Journal of Nursing Research, 32(3), 109-129.
Dale, A., Arbor, S., & Procter, M. (1988). Doing secondary analysis. London, UK: Unwin Hyman.
Domingues, J.C.M & Godoy, C.M. (2012). Impairment of Assets: A Study in Global Crude-Oil
Companies. Journal of Education and Research in Accounting, Vol. 6, No. 1, p. 329-343
Doolan, D. M., & Froelicher, E. S. (2009). Using an existing data set to ansIr new research
questions: A methodological review. Research and Theory for Nursing Practice: An
International Journal, 23(3), 203-215. doi:10.1891/1541-6577.23.3.203
Epstein, Barry J. Mirza, Abbas Ali (2002). IAS 2002 – Interpretation and Application of
International Accounting Standards. John Wiley & Sons, Inc, New York
Everhart, N., Mardis, M., & Johnston, M. P. (2012). National IASB-Certified school librarians’
leadership in technology integration: Results of a national survey. School Library Media
Research, 14.
Glaser, B. G. (1963). Retreading research materials: The use of secondary analysis by the
independent researcher. The American Behavioural Scientist, 6(10), 11-14.
Hakim, C. (1982). Secondary analysis in social research: A guide to data sources and method
examples. London, UK: George Allen & Uwin.
Heaton, J. (2008). Secondary analysis of qualitative data: An overview. Historical Social Research,
33(3), 33-45.
https://www.findanaccountant.co.za/content_reporting-standards-interpretations
https://www.volvogroup.com/content/dam/volvo/volvo-group/markets/global/en-
en/investors/reports-and-presentations/annual-reports/annual-and-sustainability-report-
2017.pdf
IFRS Staff papers 2018
KMPG. (2014). Who cares about goodwill? A collection of stakeholder views. United Kingdom:
KMPG. Available via
The Netherlands Authority for the Financial Markets, Impairment of Assets Supervision of
Financial Reporting (2012)
i
Source: https://www.iasplus.com/en/standards/ias/ias36
- 49 -

IAS 36 Nokulunga

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IAS 36 Nokulunga

Uploaded by

Copyright:

Available Formats

Acknowledgement

Table 1.1: History of IAS 36…………………………………………………....... 3

Extract 4.1: Excerpt from Agrium Inc. 2017 Financial Statements…………. 21

INTRODUCTION AND BACKGROUND

1.2 Qualitative characteristics of financial statements

1.3 Choice of research topic

1.5 Literature review

IAS 36: IMPAIRMENT OF ASSETS

2.1 Current developments regarding IAS 36

2.2 History of IAS 36

Table 1: History of IAS 362

2.3 Summary of IAS 36

2.3.3 Key definitions [IAS 36.6]

2.3.5 Indications of impairment [IAS 36.12]

2.3.6 Determining recoverable amount

2.3.7 Fair value less costs of disposal

2.3.9 Discount rate

2.3.10 Recognition of an impairment loss

2.3.11 Cash-generating units

2.3.12 Impairment of goodwill

2.3.13 Reversal of an impairment loss

RESEARCH FINDINGS FROM SINGAPORE AND JAPAN

3.1 Standard setting in Singapore

3.2 Summary of SFRS(I) 1-36 Impairment of Assets

3.2.3 Identifying an asset that may be impaired

3.2.4 Measuring recoverable amount

3.2.6 Fair value less costs of disposal

3.2.7 Value in use

3.2.8 Discount rate

3.2.10 Cash-generating units and goodwill

3.2.10.1 Identifying the cash-generating unit to which an asset belongs

3.2.10.2 Recoverable amount and carrying amount of a cash generating

3.2.11 Corporate assets

3.2.12 Impairment loss for a cash-generating unit

Assumption 1: budgets/forecasts approved by management reflect no commitment of

Assumption 2: budgets/forecasts approved by management reflect a commitment of

3.2.13 Reversing an impairment loss

3.2.13.1 Reversing an impairment loss for an individual asset

3.2.13.2 Reversing an impairment loss for a cash-generating unit

3.2.13.3 Reversing an impairment loss for goodwill

3.3 Standard setting in Japan

3.3.2 Setting the Agenda

Accounting Standards: Basic rules underlying the accounting and disclosures

Implementation Guidance: Interpretations of Accounting Standards and practical guidance when

3.3.4 Differences between IAS 36 and JGAAP.

Significant differences JGAAP IAS 36

One of the examples of

cash flows. using the asset, including its

If the initial allocation of

3.4 Practical application of IAS 36

3.4.1 Recoverable amount

Smyce: EFT Solutions Holdings limited 2017 Annual report

3.4.2 Value in use (VIU)

Smyce: VTech Limited 2017 Annual report

Practical evidence of determining a CGU:

Figure 1: Notes to the Consolidated Financial Statements Unilever Group, 2017

3.4.4 Impairment of goodwill and other intangible assets

Weakness of IAS 36:

separating forecast capital expenditures between maintenance capital expenditures and

A report18 published by KPMG in April 2014 finds that:

Suggested improvements to IAS 36:

Relevant academic findings