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Impairment of Assets – IAS36 – Part 3

IMPAIRMENT PROCESS:

The impairment test involves estimating the asset’s recoverable amount. The recoverable amount is the higher
of ‘fair value less cost to sell’ and ‘value in use’.

Estimating Fair Value

According to IFRS 13, fair value is the price that would be received to sell an asset or be paid to transfer a
liability in an orderly transaction between market participants at the measurement date.

Many assets have readily available fair values. For example, used cars are traded in secondary markets.

Other items are difficult to value. For example, appraisers and surveyors value industrial equipment and
buildings respectively.

Estimating Value in Use

Value in use is the present value of future cash flows expected to be derived from the asset. Not all assets
generate independent cash flows. This problem is solved by grouping assets into cash generating units.

CASH GENERATING UNIT (CGU):

According to IAS 36, a CGU is the smallest identifiable group of assets that generates cash inflows largely
independent of other assets. Since CGUs generate independent cash flows, their value in use can be estimated.

Illustration 1

Imagine a manufacturer having large numbers of assets. These include production equipment, plants, delivery
vehicles, office furniture and personal computers, among other assets. All of these assets are unlikely to
generate cash flows. Therefore, the value in use of these assets cannot be estimated.
However, if these assets are grouped together with the assets of the sales department, thereby forming a single
unit, the value in use of the entire unit can be ascertained.

Illustration 2

Imagine a retail chain with numerous stores. The retail manager in each store is allowed to make all decisions in
relation to product range, pricing and marketing. However, purchasing and other support services are
centralised. Is each store an independent CGU?

The answer is ‘Yes’. The definition in IAS 36 emphasises ‘cash flows’ and not ‘net cash flows’. Therefore, the
support services should be ignored and each store should be considered an independent CGU.

TREATMENT OF CORPORATE ASSETS AND GOODWILL:

Certain corporate assets contribute to future cash flows of more than one CGU. Therefore, their value needs to
be allocated to each CGU before an impairment test is carried out.
Similarly, the value of purchased goodwill is allocated to CGUs that expect to benefit from the acquisition
synergies.