Module 2

IMPAIRMENT OF ASSETS

Chapter 30 Impairment of Assets

Valix, Peralta, Valix

CHAPTER 30 IMPAIRMENT OF ASSETS
Technical Knowledge:
•  To know the basic principle for the recognition of impairment.
•  To define fair value less cost of disposal, value in use, and
recoverable amount.
•  To know the proper accounting for an impairment loss.
•  To know the recognition of a reversal of an impairment loss.
•  To understand the concept of a cash generating unit.
•  To measure the impairment of a cash generating unit.
•  To allocate the impairment loss across the assets of a cash
generating unit.
CHAPTER 30: IMPAIRMENT OF ASSET
Topics:
1.  Measurement of Impairment
2.  Recoverable Amount
a.  Fair Value less Cost of Disposal
b.  Value in Use
3.  Cost Model
4.  Revaluation Model
5.  Cash Generating Unit
a.  Without Goodwill
b.  With Goodwill
6.  Corporate Assets
Impairment of Asset

Impairment of Asset
•  PAS 36
•  Impairment / Writedown
•  Fall in the Market Value of an asset
•  Carrying Value (CV) > Recoverable Amount (RA)
•  An Asset shall not be carried at above the recoverable
amount.
Impairment of Asset

Accounting for Impairment

•  3 main accounting issues:
1.  Indication of Possible Impairment
2.  Measurement of the Recoverable Amount
3.  Recognition of Impairment Loss
Impairment of Asset

Indication of Possible Impairment

•  Assess at each reporting date
•  Indication exists
•  Estimate the recoverable amount of the asset.
•  Indication exists or Not
•  Intangible assets w/ indefinite useful life or not yet
available for use
•  Test annually (CV vs. RA)
•  External and Internal source of information
Impairment of Asset

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

•  Significant change in the technological, market, legal,

or economic environment of the business in which the
asset is employed.
Impairment of Asset

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

•  The carrying amount of net assets of the entity is more

than the “market capitalization” or FV of net assets of the
entity.
Impairment of Asset

Internal Source
•  Evidence of obsolescence or physical damage of an
asset.
•  Significant change in the manner or extent in which the
asset is used with an adverse effect on the entity.
(Part of restructuring, Held for sale, Idle)
•  Evidence that the economic performance of an asset
will be worse than expected.

Note: Sources above are not exhaustive. Identify other

indications.
Impairment of Asset

Measurement of Recoverable Amount

•  Recoverable Amount (RA)
•  Whichever is Higher between Fair Value Less Cost
of Disposal (FV-COD) and Value in Use (VIU)

FV – COD
Recoverable Amount = > Higher
Value in Use
Impairment of Asset

Fair Value Less Cost of Disposal (FV-COD)

•  Fair Value
•  Exit Price or Selling Price

•  Cost of Disposal
•  Incremental cost directly attributable to the disposal of
an asset or cash generating unit.
•  Exclude Finance Cost and Income Tax Expense.
•  Examples:
•  Legal cost, Stamp duty, similar transaction tax, removal
cost, direct cost of bringing the asset into condition for
sale.
Impairment of Asset

FV Hierarchy (PFRS 13)

1. Level 1 inputs Quoted Prices in an active market for identical assets.
•  Most reliable evidence of FV and shall be used w/o
adjustments.

2. Level 2 inputs Observable either directly or indirectly.

•  Quoted prices for similar assets in an active market.
•  Quoted prices for identical or similar assets in not
active market.

3. Level 3 inputs Unobservable inputs for the asset.

•  Developed by the entity using best available
information from the entity’s own data.
Impairment of Asset

Active Market and Principal Market

•  Active Market
•  Market in which transactions for the asset or liability
takes place with sufficient regularity and volume
to provide pricing information on an ongoing basis.
Impairment of Asset

Active Market and Principal Market

•  Principal Market
•  Market with greatest volume and level of activity for
the asset or liability.
•  Market Participants = Buyers and sellers in the
principal market:
•  Independent or unrelated parties
•  Knowledgeable or having reasonable
understanding of the transaction
•  Willing or motivated but not forced and compelled.
Impairment of Asset

Value in Use (VIU)

•  Present value or discounted value of total Future
Net Cash Flows (Inflows – Outflows) expected to be
derived from an asset.
•  Cash Flows:
•  Pretax net cash flows
•  Pretax discount rate (PV)
Impairment of Asset

Calculation of Value in Use (VIU)

•  Possibility that an entity might come up with
“Overoptimistic” estimates of cash flows.
•  The following should be considered in determining VIU:
•  Cash Flow Projections shall be based on reasonable and
supportable assumptions.
•  Cash Flow Projections shall be based on the most recent
budgets on financial forecasts, usually up to maximum of
5 years, unless a longer period can be justified.
•  Cash Flow Projections beyond the 5-year period shall be
estimated by extrapolating the 5-year projections using a
steady or declining growth rate each subsequent year,
unless an increasing rate can be justified.
Impairment of Asset

Composition of Estimates of Future Cash Flows

•  Include:
•  Projections of Cash Inflows from the continuing use
of the asset.
•  Projections of Cash Outflows necessarily incurred to
generate the cash inflows from the continuing use of
the asset.
•  Net Cash Flows received or paid on the disposal of
the asset at then end of its useful life in an arm’s
length transaction.
Impairment of Asset

Value in Use (VIU)

Cash flows from operations: Year 1 to 4 Year 5
Cash Inflows XXX XXX
Cash Outflows -XXX -XXX
Net Cash from Disposal of Asset XXX
Net Cash Flows XXX XXX
PV Factor 0.XXX 0.XXX
PV or Discounted Value of
XXX XXX
Future Net Cash Flows
Impairment of Asset

Value in Use (VIU)

•  Exclude:
•  Future cash flows relating to restructuring to which
the entity is not yet committed.
•  Future costs of improving or enhancing the asset’s
performance.
•  Cash inflows or outflows from financing activities.
•  Income tax receipts or payments.
Impairment of Asset

Value in Use (VIU)

Discount Rate
•  Current Pretax, Risk-free Rate
•  Not adjusted
•  Used in estimating future cash flows
•  Reflects the current assessment of the TVM and
risks specific to the asset.
Impairment of Asset

Summary:
1.  Cost Model
a.  Recognition of Impairment Loss
b.  Reversal of Impairment Loss

2.  Revaluation Model

a.  Recognition of Impairment Loss
b.  Reversal of Impairment Loss

Illustration – Impairment of Assets:

REFER TO BOOK PAGE 863 to 867.
Impairment of Asset

Recognition of Impairment Loss (Cost Model)

•  Impairment Loss (RA < CV)
•  Expense (P/L), Separately presented
•  Accumulated Depreciation or Accum. Impairment Loss
CV XXX
Recoverable Amount (Higher):
FV - COD XXX
Value in Use XXX -XXX
Impairment Loss XXX

Illustration – Recognition of Impairment Loss (Cost Model):

REFER TO BOOK PAGE 863 to 864.
Impairment of Asset

Recognition of Impairment Loss (Cost Model)

FV XXX PPE XXX
COD -XXX Accum. Depreciation -XXX
FV - COD XXX CV XXX
HIGHER
Value in Use XXX

Recognition of Impairment Impairment Loss XXX

Accumulated Depreciation XXX

FV-COD Value in Use

•  Usually provided in problems. •  Compute for PV of future cash flows
Impairment of Asset

Recognition of Impairment Loss (Cost Model)

Costs, excluding
Revenue Depreciation Net Cash Flows PV of 1 PV of FCF
Year 1 XXX XXX XXX 0.XXX XXX
Year 2 XXX XXX XXX 0.XXX XXX
Year 3 XXX XXX XXX 0.XXX XXX
Year 4 XXX XXX XXX 0.XXX XXX
XXX XXX XXX XXX
Impairment of Asset

Recognition of Impairment Loss (Cost Model)

PPE XXX
Accumulated Depreciation -XXX
CV XXX
Accumulated Depreciation/Impairment Loss -XXX
Revised CV XXX
Residual Value -XXX
Depreciable Amount XXX
Remaining Useful Life /XX
New Annual Depreciation XXX

Annual Depreciation Depreciation XXX

(over remaining useful life) Accumulated Depreciation XXX
Impairment of Asset

Reversal of an Impairment Loss (Cost Model)

•  Impairment Loss previously recognized
•  Reverse if there is a change in accounting estimate
(RA > CV)
•  CV Increased to New RA
•  LIMIT on Reversal
•  “The increased CV of an asset due to a reversal of an
impairment loss shall not exceed the CV that would have
been determined, had no impairment loss has been
recognized for the asset in prior years.”
•  Income (P/L)
Impairment of Asset

Illustration – Reversal of an Impairment Loss

(Cost Model): REFER TO BOOK PAGE 865 to 867.

FV XXX PPE XXX

COD -XXX Accum. Depreciation -XXX
FV - COD XXX CV XXX
HIGHER
Value in Use XXX

Recognition of Impairment Impairment Loss XXX

Accumulated Depreciation XXX
 Impairment of Asset

Reversal of an Impairment Loss (Cost Model)

Reversal
1.  Determine the Lower amount between Recoverable
Amount vs. CV of Asset (would have been w/o the
Impairment Loss)
Recoverable Amount (Higher):
FV - COD XXX
Value in Use XXX XXX
CV at Date of Reversal w/o Impairment Loss (LIMIT)
LOWER
PPE XXX
Accumulated Depreciation -XXX XXX
Impairment of Asset

Reversal of an Impairment Loss (Cost Model)

Reversal
2.  Determine CV w/ Impairment at Date of Reversal
PPE XXX
Accumulated Depreciation -XXX
CV w/ Impairment Loss at Date of Reversal XXX

3.  Determine Gain on Reversal of Impairment Loss

Lower: Recoverable Amount or CV w/o Impairment Loss XXX
CV w/ Impairment at Date of Reversal -XXX
Gain on Reversal of Impairment Loss XXX
Impairment of Asset

Reversal of an Impairment Loss (Cost Model)

Reversal of Impairment Accumulated Depreciation XXX
Gain on Reversal of Impairment XXX

Note: Always check for LIMIT.

Impairment Loss (Cost Model)

Recognition of Impairment Impairment Loss XXX
Accumulated Depreciation XXX
Annual Depreciation Depreciation XXX
(over remaining useful life) Accumulated Depreciation XXX
Reversal of Impairment Accumulated Depreciation XXX
(Limit) Gain on Reversal of Impairment XXX
Impairment of Asset

Recognition of Impairment Loss (Revaluation Model)

•  Impairment is charged first against Revaluation Surplus
•  Balance to Impairment Loss (Expense)
Cost Replacement Cost Appreciation
PPE XXX XXX XXX
Accumulated Depreciation -XXX -XXX -XXX
CV / SV / RS XXX XXX XXX
Revaluation PPE XXX
Accumulated Depreciation XXX
Revaluation Surplus XXX
Annual Depreciation Depreciation Expense XXX
Accumulated Depreciation XXX
Piecemeal Realization of Revaluation Surplus XXX
Revaluation Surplus Retained Earnings XXX
Impairment of Asset

Recognition of Impairment Loss (Revaluation Model)

Impairment
Per Book Adjusted Decrease
Replacement Cost XXX XXX XXX
Accumulated Depreciation % -XXX -XXX -XXX
CV XXX XXX XXX

Recognition of Impairment Revaluation Surplus XXX

Impairment Loss XXX
Accumulated Depreciation XXX
PPE XXX
Annual Depreciation Depreciation XXX
(over remaining useful life) Accumulated Depreciation XXX
Impairment of Asset

Reversal of an Impairment Loss (Revaluation Model)

•  Credited to Gain on Reversal (income) extent of the
amount of impairment loss previously recognized.
•  Balance to Revaluation Surplus
Per Book Replacement Cost Increase
PPE XXX XXX XXX
Accumulated Depreciation % -XXX -XXX -XXX
CV XXX XXX XXX
Reversal of Impairment PPE XXX
Accumulated Depreciation XXX
Gain on Reversal of Impairment XXX
Revaluation Surplus XXX
Impairment of Asset

Reversal of an Impairment Loss (Revaluation Model)

Impairment Loss (Revaluation Model)

Recognition of Impairment Revaluation Surplus XXX
Impairment Loss XXX
Accumulated Depreciation XXX
PPE XXX
Annual Depreciation Depreciation XXX
(over remaining useful life) Accumulated Depreciation XXX
Reversal of Impairment PPE XXX
Accumulated Depreciation XXX
Gain on Reversal of Impairment XXX
Revaluation Surplus XXX
 Impairment of Asset

Summary
Impairment Reversal of Impairment
Cost Impairment Loss (RA< CV) Gain on Reversal of Impairment (RA>CV)
Model RA = Higher: Limit: Lower:
FV-COD Recoverable Amount
Value in Use CV (would have been if no Impairment Loss)

CV Lower: RA or CV w/o Impairment Loss

-Recoverable Amount -CV w/ Impairment at Date of Reversal
Impairment Loss Gain on Reversal of Impairment Loss

Revaluation Impairment Loss (RA< CV) Gain on Reversal of Impairment (RA>CV)

Model 1.  Revaluation Surplus 1.  Gain on Reversal (P/L) extent of
2.  Impairment Loss (Expense) Previously Recognized Impairment Loss
2.  Revaluation Surplus
Impairment of Asset (CGU)

Cash Generating Unit

•  Smallest identifiable group of assets
(smallest aggregation) that generate cash inflows from
continuing use that are largely independent of the
cash inflows from other assets or group of assets.

•  Output of product and the input of raw materials, labor

and overhead can be identified.
•  Department
•  Product Line
•  Factory
Impairment of Asset (CGU)

Impairment of Assets
•  RA shall be determined for the asset
•  General Rule: Individually
•  Exception: Cash Generating Unit
Impairment of Asset (CGU)

Accounting for Impairment of Assets (CGU)

1.  Determine Impairment Loss for a Cash Generating Unit

CV of CGU XXX
Recoverable Amount (RA) -XXX
Impairment Loss XXX

Note:
CV of CGU: Liabilities are ignored. Only consider Assets of the CGU.
More often the RA = Value in Use because it is not to be disposed of.
Impairment of Asset (CGU)

Accounting for Impairment of Assets (CGU)

2.  The Impairment Loss shall be allocated across the
assets of CGU in the following order:
a.  First: Goodwill
b.  Balance: Noncash Assets (Pro-rata based on their
CV)
Impairment of Asset (CGU)

Accounting for Impairment of Assets (CGU)

3.  Check if FV-COD > Value in Use.
Reallocate Impairment Loss to other assets of CGU
•  The CV of an asset shall not be reduced below the
Highest of FV-COD, Value in Use, and Zero.
•  Reallocate the impairment loss to other assets of
CGU (Pro-rata)

REFER TO BOOK PAGE 869 to 874.

Impairment of Asset (CGU)

Cash Generating Unit w/o Goodwill

Illustration 1 – w/o Reallocation of Impairment Loss:
REFER TO BOOK PAGE 869.
CV of CGU XXX
Recoverable Amount (RA) -XXX
Impairment Loss XXX

CV Fraction Impairment Loss

PPE (Depreciable) XXX XX/XX XXX
PPE (Depreciable) XXX XX/XX XXX
PPE (Nondepreciable) XXX XX/XX XXX
Inventory XXX XX/XX XXX
XXX XXX
Impairment of Asset (CGU)

Cash Generating Unit w/o Goodwill

Illustration 2 – With Reallocation of Impairment Loss:
REFER TO BOOK PAGE 870.

•  Check each asset:

•  If FV-COD > Value in Use, the excess Impairment
Loss shall be reallocated.

•  Basis of Reallocation (Pro-rata)

•  CV of remaining noncash assets
Impairment of Asset (CGU)

Cash Generating Unit w/o Goodwill

Illus. 2: With Reallocation of Impairment Loss
CV of CGU XXX
Recoverable Amount (RA) -XXX
Impairment Loss XXX

Impairment Impairment
CV Fraction Loss Reallocate Loss
PPE (Depreciable) XXX XX/XX XXX -XXX XXX
PPE (Depreciable) XXX XX/XX XXX XXX XXX
PPE (Nondepreciable) XXX XX/XX XXX XXX XXX
Inventory XXX XX/XX XXX XXX XXX
XXX XXX - XXX
Impairment of Asset (CGU)

Cash Generating Unit w/o Goodwill

Illus. 2: With Reallocation of Impairment Loss

Recognition of Impairment Loss XXX

Impairment of Accumulated Depreciation-PPE XXX
CGU w/o Goodwill Accumulated Depreciation-PPE XXX
Land XXX
Inventory XXX
Impairment of Asset (CGU)

Cash Generating Unit with Goodwill

•  Goodwill
•  Does not generate cash flows independently.
•  RA as an individual asset cannot be determined.

Determination of Impairment
•  CGU with Goodwill shall be tested for impairment at
least annually.
•  No Impairment: CGU w/ GW < RA
•  Impairment Loss: CGU w/ GW > RA
Impairment of Asset (CGU)

Illustration – Cash Generating Unit w/ Goodwill:

REFER TO BOOK PAGE 872 to 874.

Determination of Impairment
Total CV of CGU* XXX
Value in Use -XXX
Total Impairment Loss XXX
Applicable to Goodwill (Extent) -XXX
Excess Impairment Loss XXX
*Including Cash and Goodwill

Excess Impairment Loss

•  Allocated to other Noncash assets (Pro-rata)
 Impairment of Asset (CGU)

Cash Generating Unit with Goodwill

Impairment Impairment
Total
Loss Loss
I/L
CV First: GW CV Fraction Balance
Goodwill XXX -XXX - XXX
PPE (Depreciable) XXX XXX XX/XX XXX XXX
PPE (Nondepreciable) XXX XXX XX/XX XXX XXX
Intangible Asset XXX XXX XX/XX XXX XXX
Receivable XXX XXX XX/XX XXX XXX
Inventory XXX XXX XX/XX XXX XXX
XXX -XXX XXX XXX XXX
Impairment of Asset (CGU)

Cash Generating Unit with Goodwill

Recognition of Impairment Loss XXX
Impairment of CGU Goodwill XXX
w/ Goodwill Accumulated Depreciation-PPE XXX
Land XXX
Intangible Asset XXX
Inventory XXX
Receivable XXX

Reversal of Impairment Loss on Goodwill

•  No Reversal in subsequent period.
Impairment of Asset (CGU)

Corporate Assets
•  Assets other than goodwill that contribute to the future cash
flows of both the CGU under review and other CGU.
•  Group or Divisional Assets
•  Head office building, EDP Equipment or Research
Center
•  Do not generate cash inflows independently.
•  Use Value in Use unless to be disposed of.
•  If there is indication, compare CV and RA.

Illustration–Corporate Assets: REFER TO BOOK PAGE 876.

Impairment of Asset (CGU)

Corporate Assets
CGU 1 CGU 2
CV of CGU XXX XXX
Corporate Asset:
XXX x CV CGU 1 / Total CV CGU XXX
XXX x CV CGU 2 / Total CV CGU XXX
Total CV XXX XXX
Value in Use -XXX -XXX
Impairment Loss XXX XXX

CGU 1 CV Fraction Impairment Loss

Other Assets XXX XX/XX XXX
Corporate Assets XXX XX/XX XXX
XXX XXX
Assignment / Exercises
Answer the following Textbook problems (10pts):
•  30-3
•  30-11
END OF CHAPTER 30
J