IAS 16 – PROPERTY, PLANT AND EQUIPMENT

Compiled by: Murtaza Quaid

PROPERTY, PLANT AND EQUIPMENT SCOPE

PPE are tangible items that:
 are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
 are expected to be used during more than one period.
RECOGNITION
Recognize cost of PPE when:
 It is probable that future economic benefits associated with the asset
will flow to the entity; &
 The cost of the asset can be reliably measured.
IAS 16 does not apply to:
 PPE classified as held for sale in accordance with IFRS 5: Non-
current assets held for sale and discontinued operations;
 Biological assets related to agricultural activity - refer IAS 41:
Agriculture;
 Recognition and measurement of exploration and evaluation
assets - refer IFRS 6: Exploration for and evaluation of mineral
resources;
 Mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources.
DEPRECIATION

INITIAL MEASUREMENT  Depreciation is the systematic allocation of depreciable amount of

an asset over its useful life.
 Initially recorded at cost.  Depreciation method reflects the pattern in which future
economic benefits are expected to be consumed.
Cost comprises:
 The residual value, the useful life and the depreciation method of
 Purchase price plus import duties and non-refundable taxes, after
an asset are reviewed annually at reporting date.
deducting trade discounts and rebates.
 Changes in residual value, depreciation method and useful life are
 Any costs directly attributable to bringing the asset to the location and
changes in estimates are accounted for prospectively in
condition necessary for it to be capable of operating in a manner
accordance with IAS 8.
intended by management. For e.g:
 Significant parts/components are required to be depreciated
o Employee costs arising directly from the installation or
separately over their estimated useful life.
construction of the asset;
 Depreciation is charged to profit or loss, unless it is included in the
o Cost of site preparation;
carrying amount of another asset.
o Delivery costs (‘carriage inwards’);
 Depreciation commences when the asset is available for use.
o Installation and assembly costs;
 Depreciation ends at the earlier of when asset is classified as held
o Testing costs to assess whether the asset is functioning properly
for sale in accordance with IFRS 5 and when it is derecognized.
(net of sale proceeds of items produced during the testing phase).
 Revenue based depreciation is prohibited.
o Professional fees directly attributable to the purchase.
 Initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located. RULES FOR REVALUATION
Deferred Payment
 If payment is deferred beyond normal credit terms, the difference  If an asset is revalued, the entire class of assets to which that asset
between the cash price equivalent and the total payment is belongs is required to be revalued
recognized as interest over the period of credit unless such interest is  An increase in value of PPE is credited to revaluation surplus.
capitalized in accordance with IAS 23. However, the increase shall be credited in profit or loss to the
Not part of cost extent that it reverses a revaluation decrease of the same asset
 Costs of opening a new facility; previously debited in profit or loss.
 Costs of introducing a new product or service (including costs of  A decrease in value of PPE is debited to profit or loss. However,
advertising and promotional activities); the decrease shall be debited to revaluation surplus to the extent
 Costs of conducting business in a new location or with a new class of of any credit balance existing in the revaluation surplus in respect
customer (including costs of staff training); and of that asset.
 Administration and other general overhead costs.  The net carrying amount of the asset is adjusted to the revalued
amount by one of the following ways:
o Restate accumulated depreciation proportionately with the
EXCHANGE TRANSACTION change in the gross carrying amount of the asset so that the
An asset may be acquired in exchange for another asset. The cost of carrying amount of the asset after revaluation equals its
acquired asset is measured at: revalued amount; or
i. the fair value of the asset given up; o Eliminate accumulated depreciation against the gross
ii. the fair value of the asset received, if it is more clearly evident; carrying amount and then change the carrying amount of the
iii. the carrying amount of the asset given, if assets to the revalued amount.
o the exchange transaction lacks commercial substance or Depreciation of revalued asset
o fair value of neither the asset received nor the asset given up is  Revalued assets are depreciated the same way as under the cost
reliably measurable. model. However, an amount equal to incremental depreciation
must be transferred from “Revaluation Surplus” to accumulated
profit/retained earning through statement of changes in equity.
SUBSEQUENT MEASUREMENT Frequency of revaluation
 Revaluations should be carried out regularly to ensure that
COST MODEL REVALUATION MODEL carrying amount of an asset should not differ materially from its
fair value at the reporting date.
Asset is carried at cost Asset is carried at a revalued amount, being its  Revaluation frequency depends upon the changes in fair value of
less accumulated fair value at the date of the revaluation, less the items measured (annual revaluation for volatile items or
depreciation and subsequent depreciation, provided that fair intervals between 3 - 5 years for items with less significant
impairment losses. value can be measured reliably. changes)
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 IAS 16 – PROPERTY, PLANT AND EQUIPMENT
BEARER PLANT
 A bearer plant is a living plant that:
a. is used in the production or supply of agricultural produce;
b. is expected to bear produce for more than one period; and
c. has a remote likelihood of being sold as agricultural produce,
except for incidental scrap sales.
 Bearer plants are used solely to grow produce. The only significant
future economic benefits from bearer plants arise from selling the
agricultural produce that they create. Therefore, bearer plants meet
the definition of property, plant and equipment in IAS 16 and their
operation is similar to that of manufacturing. Accordingly, bearer
plants are included within the scope of IAS 16, instead of IAS 41.
SUBSEQUENT EXPENDITURE
 Subsequent expenditure are recognized as an asset if it meets the
recognition criteria.
 In practice, subsequent expenditure is capitalised if it:
o improves the asset (for example, by enhancing its performance
or extending its useful life); or
o is for a replacement part (provided that the part that it replaces
is treated as an item that has been disposed of).
 Repairs and maintenance expenditure is revenue expenditure thus
recognised as an expense as it is incurred.
OTHER CONCEPTS
 Costs of replacing components are required to be capitalized
 Continued operation of an item of property, plant and equipment
(PPE) may require regular major inspections for faults. The cost of
such major inspection is recognized in the carrying amount of the item
of PPE as a replacement if the recognition criteria are satisfied.
 Spare parts, stand-by or servicing equipment are classified as PPE
when they meet the definition of PPE, and are classified as inventory
when definition is not met.
DERECOGNITION
 Carrying amount of an item of property, plant and equipment shall be
derecognized:
o on disposal; or
o when no future economic benefits are expected from its
use or disposal.
 Gain or loss on disposal is the difference between the proceeds and
the carrying amount and is recognized in profit or loss
 When a revalued asset is disposed of, any revaluation surplus may be
transferred directly to retained earnings. The transfer to retained
earnings is not made through profit or loss.
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Compiled by: Murtaza Quaid
IMPORTANT DEFINITIONS
Cost is the amount of cash or cash equivalents paid or the fair value of
the other consideration given to acquire an asset at the time of its
acquisition or construction or, where applicable, the amount attributed
to that asset when initially recognised in accordance with the specific
requirements of other IFRSs. (For example assets held under finance
leases).
Carrying amount is the amount at which an asset is recognised after
deducting any accumulated depreciation and accumulated impairment
losses. Net book value (NBV) is a term that is often used instead of
carrying amount.
Useful life is:
a) the period over which an asset is expected to be available for use
by an entity; or
b) the number of production or similar units expected to be obtained
from the asset by an entity.
Recoverable amount the higher of an asset’s net selling price or its value
in use.
Depreciable amount is the cost of an asset, or other amount substituted
for cost, less its residual value
Residual value of an asset is the estimated amount that an entity would
currently obtain from its disposal, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition
expected at the end of its useful life.
DISCLOSURE REQUIREMENTS
Disclosures include but are not limited to:
 Measurement bases used for determining the gross carrying
amount.
 Depreciation methods used.
 Useful lives or the depreciation rates used.
 Gross carrying amount and the accumulated depreciation at the
beginning and end of the period.
 A reconciliation of the carrying amount at the beginning and end of
the period showing:
o Additions
o Assets classified as held for sale or included in a disposal
group classified as held for sale
o Other disposals
o Acquisitions through business combinations
o Changes resulting from revaluations recognized or
reversed
o Impairment losses recognized/reversed in profit or loss
o Depreciation
o Exchange differences and other changes.
 Existence and amounts of restrictions on title, and PPE pledged as
security for liabilities
 Contractual commitments for the acquisition of PPE.
 IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance
SCOPE GOVERNMENT GRANT GOVERNEMENT ASSISTANCE

IAS 20 deals with all types of government grant except:  Assistance by government
 Government assistance in the form of tax reliefs (tax  In the form of transfers of resources to
holidays, tax credits etc.) an entity
 Government participation in the ownership of an entity  In return for past or future compliance
 Government grants covered by IAS 41 Agriculture. with certain conditions relating to the
operating activities of the entity
RECOGNITION  Exclude forms of government
assistance which cannot reasonably
Grants are recognized when both: have a value placed on them and
 There is reasonable assurance the entity will comply with which cannot be distinguished from
the conditions attached to the grant the normal trading transactions of the
 The grant will be received. entity.
 Action by government designed to
provide an economic benefit specific
to an entity or range of entities
qualifying under certain criteria.
 Government assistance does not
include benefits provided only
indirectly through action affecting
general trading conditions, such as
the provision of infrastructure in
development areas or the imposition
of trading constraints on
competitors.

TYPES OF GOVERNMENT GRANT

GRANTS RELATED TO INCOME (Compensation of cost) GRANTS RELATED TO ASSETS

Definition

Government grants other than those related to assets. Government grants whose primary condition is that an entity qualifying for
them should purchase, construct or otherwise acquire long-term assets.

Recognition and presentation in Financial statement

“Income approach’ should be used, and the grant should be taken to There are 2 options to present grant relating to assets in financial
income over the periods necessary to match the grant with the costs that statements:
the grant is intended to compensate.  As deferred income (and recognize it as income on a systematic basis
There are 2 options to present grant relating to income in financial over the useful life of the asset)
statements:  By deducting the grant from the asset’s carrying amount. Depreciate the
 Separately as ‘other income’ net amount of asset over its useful life.
 Deduction from the related expense..

If the grant is provided to If grant is provided to reimburse costs

reimburse costs already incurred to be incurred, then it is recognized in
in the past, then it is recognized profit or loss in the periods when the
immediately in profit or loss. costs are incurred.

Repayment of government grants: Govt. grant might become repayable by the entity (e.g. when underlying conditions for the grant are not met).
Repayment of government grant is accounted for as a change in accounting estimate

Repayment of government grant is  If grant was accounted for as reduction in carrying amount of asset, its
• First applied against any unamortized deferred credit recognized in repayment is recognised by increasing the carrying amount of asset. The
respect of such grant. cumulative additional depreciation that would have been recognised in
• If the repayment exceeds any such deferred credit any excess is profit or loss to date in the absence of the grant shall be recognised
recognized as expense immediately in profit or loss. immediately in profit or loss. (Repayment of grant might indicate the
possible impairment of the new carrying amount of the asset)
 If grant was accounted for as deferred income, its repayment is
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OTHER GOVERNMENTS GRANTS Definition Accounting Treatment

Forgivable loans Forgivable loans are loans which the lender A forgivable loan from government is treated as a government
undertakes to waive repayment of under grant when there is reasonable assurance that the entity will meet
certain prescribed conditions the terms for forgiveness of the loan.

Loans at below market rates of The benefit of a government loan at a below- The benefit of below-market rate of interest is measured as the
interest market rate of interest is treated as a difference between the initial carrying value of loan determined in
government grant. accordance with IAS 39 (IFRS 9) and the proceeds received.

Non-monetary grants A government grant may take the form of a Usually such grant is accounted for at fair value, although
transfer of a non-monetary asset, such as land recording both the asset and the grant at a nominal amount is
or other resources, for the use of the entity permitted.

DISCLOSURE

 Accounting policy adopted for grants, including method of presentation in statement of financial position
 Nature and extent of grants recognized in the financial statements
 An indication of other forms of government assistance from which the entity has directly benefited
 Unfulfilled conditions and contingencies attaching to recognized grants.

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 IAS 23 – BORROWING COSTS
Compiled by: Murtaza Quaid
DEFINITIONS

BORROWING COSTS QUALIFYING ASSET

 Borrowing costs are interest and other costs incurred by an entity in  A qualifying asset is an asset that necessarily takes a substantial
connection with the borrowing of funds period of time to get ready for its intended use or sale
 Borrowing costs may include:  Examples include:
 Interest on bank overdrafts and short-term and long-term  Inventories (that are not produced over a short period of
borrowings (including intercompany borrowings) time)
 Amortisation of discounts or premiums relating to borrowings  Property, plant and equipment
 Amortisation of ancillary costs incurred in connection with the  Power generation facilities
arrangement of borrowings  Intangible assets
 Finance charges in respect of finance leases  Investment properties.
 Exchange differences arising from foreign currency borrowings to  Assets that are ready for their intended use or sale when acquired
the extent that they are regarded as an adjustment to interest are not qualifying assets. Qualifying assets are usually self-
costs. constructed non-current assets.

RECOGNITION

 Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset are required to be capitalised as part of the cost of that asset
 Other borrowing costs are recognised as an expense when incurred.

SPECIFIC BORROWING GENERAL BORROWING

 If funds are borrowed specifically, the amount of borrowing costs
eligible for capitalisation are the actual borrowing costs incurred on
that borrowing less any investment income on the temporary
investment of any excess borrowings not yet used
 If funds are borrowed generally, the amount of borrowing
costs eligible for capitalisation are determined by applying a
capitalisation rate (weighted average of borrowing costs
applicable to the general borrowings) to the expenditures on
that asset
 The amount of the borrowing costs capitalised during the
period cannot exceed the amount of borrowing costs incurred
during the period.
 The capitalisation rate is applied from the time expenditure on
the asset is incurred.

Commencement of capitalization Suspension of capitalization Cessation of capitalization

Capitalisation of borrowing costs commences
when:
 Expenditures for the asset are being incurred;
 Borrowing costs are being incurred; and
 Activities necessary to prepare the asset are in
progress.
Capitalisation of borrowing
costs is suspended if
development of the asset is
suspended for an extended
period of time.
Capitalisation of borrowing costs should cease when the asset
is substantially complete. When the construction of a qualifying
asset is completed in parts and each part is capable of being
used while construction continues on other parts, capitalisation
of borrowing costs ceases when substantially all the activities
necessary to prepare that part for its intended use or sale are
completed.

DISCLOSURE For your valuable feedback, any

update, error or query, kindly let me
 Amount of borrowing cost capitalised during the period
 Capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation. know at emquaid93@gmail.com

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 IAS-40: INVESTMENT PROPERTY
RECOGNITION
Investment property is recognized as an asset when:
 it is probable that future economic benefits associated with
the property will flow to the entity; &
 Cost of the property can be reliably measured.
INITIAL MEASUREMENT
 Investment property is initially measured at cost, including
the transaction cost.
 The cost of investment property includes:
- Its purchase price and
- Any directly attributable expenditure, such as legal fees or
professional fees, property taxes, etc.
 Such cost does include:
- Start-up expenses;
- Operating losses incurred before investment property
achieves the planned occupancy level; &
- Abnormal waste.
 When payment for investment property is deferred, discount
it to its present value to set cash price equivalent.
SUBSEQUENT MEASUREMENT
 After initial recognition, an entity can choose between fair
value and cost model.
 The accounting policy choice must be applied to all
investment property (with few exception).
COST MODEL
 Investment property is measured in accordance with
requirements set out for that model in IAS 16.
FAIR VALUE MODEL
 The entity shall measure all of its investment property at
fair value, except in the extremely rare cases where this
cannot be measured reliably. In such cases it should
apply the IAS 16 cost model.
 Fair value is the price that would be received to sell the
investment property in an orderly transaction between
market participants at the measurement date (see IFRS
13 Fair Value Measurement)
 Gain or loss arising from changes in fair value of
investment property is recognized in profit or loss for the
period in which it arises.
 In rare exceptional circumstances, if fair value cannot be
determined (e.g. active market ceased existing), the cost
model in IAS 16 is used to measure the investment
property.
SWITCHING THE MODELS – CHANGE IN POLICY
 Switching from cost model to fair value or vice versa is
allowed but only if the change results in the financial
statements providing reliable and more relevant information.
 Switching from cost model to fair value model would
probably meet the condition and is therefore allowed.
 However, switch from fair value model to cost model is highly
unlikely to result in more reliable presentation.
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Compiled by: Murtaza Quaid, ACA
INVESTMENT PROPERTY - DEFINITION
Investment property is
 a land or building (or a part of it) or both;
 that is held (by the owner or by the lessee as a right-of-use asset);
 to earn rentals or for capital appreciation or both.
INCLUDES
 Land held for long-term capital appreciation
 Land held for undetermined future use
 Building leased out under an operating lease
 Vacant building held to be leased out under operating lease
 Property being constructed/developed for future use as investment
property.
EXCLUDES
 Property held for production or supply of goods or services (IAS 16);
 Property held for administrative purposes (IAS 16);
 Property held for sale in the ordinary course of business or in the
process of construction or development for such sale (IAS 2);
 Property being constructed or developed on behalf of 3rd parties
(IAS 11/IFRS 15);
 Owner-occupied property (IAS 16);
 Property occupied by employees whether or not the employees pay
rent at market rates (IAS 16); or
 Property leased to another entity under a finance lease (IFRS 16).
EXCEPTION TO THE RULE
An entity may:
(a) choose either fair value or cost model for all investment property
backing liabilities that pay a return linked directly to the fair value of, or
returns from, specified assets including that investment property; and
(b) choose either fair value or cost model for all other investment
property, regardless of the choice made in (a).
INABILITY TO MEASURE FAIR VALUE RELIABLY
If fair value of investment property under construction is not reliably
measurable but the fair value of the property is expected to be reliably
measurable when construction is complete, the entity shall measure that
property at cost until either its fair value becomes reliably measurable or
construction is completed (whichever is earlier).
 In exceptional cases, there is clear evidence that fair value of investment
property is not reliably measurable on a continuing basis. This arises
only when the market for comparable properties is inactive and
alternative reliable measurements of fair value are not available.
 In such case, the entity shall measure that investment property using
cost model in IAS 16.
 Residual value of the investment property shall be assumed to be zero.
 The entity shall apply IAS 16 until disposal of the investment property.
If an entity has previously measured an investment property at fair value, it
shall continue to measure the property at fair value until disposal even if
comparable market transactions become less frequent or market prices
become less readily available.
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 IAS-40: INVESTMENT PROPERTY
Compiled by: Murtaza Quaid, ACA
TRANSFER TO / FROM INVESTMENT PROPERTY

Transfers to / from investment property can be made only when there is a change in the use of the property.

FOR INVESTMENT PROPERTY AT COST MODEL

Transfers between investment property, owner-occupied property and inventories do not change the carrying amount of the property transferred
and they do not change the cost of that property for measurement or disclosure purposes.

FOR INVESTMENT PROPERTY AT FAIR VALUE MODEL

Circumstance Transfer Accounting treatment

Commencement of owner From IAS 40  Revalue the property as per IAS 40 and then transfer it to IAS 16
occupation to IAS 16  Fair value at the date of transfer becomes the deemed cost for future accounting
purposes.

Commencement of development From IAS 40  Revalue the property as per IAS 40 and then transfer it to IAS 2
with a view to sale to IAS 2  Fair value at the date of transfer becomes the deemed cost for future accounting
purposes.

End of owner occupation & From IAS 16  Revalue the property to its fair value as per the rules of IAS 16 and then transfer it to
commencement of operating lease to IAS 40 IAS 40

End of inventory & From IAS 2  Transfer the property at carrying amount and then revalue it as per IAS 40
commencement of operating lease to IAS 40  Fair value at the date of transfer and any difference between previous carrying amount
is recognized in P/L

DERECOGNITION OF INVESTMENT PROPERTY OTHER CONCEPTS

When an investment property is derecognized, a gain or loss on
disposal should be recognized in P/L. This gain or loss should
normally be determined as the difference between the net disposal
proceeds and the carrying amount of the asset.
SUMMARY OF DISCLOSURE REQUIREMENTS
An entity shall disclose:
 Whether it has follow the fair value model or cost model
 Whether property interest held as operating lease are included
in investment property
 Criteria for classification as investment property
 Assumptions in determining fair value
 Use of independent professional valuer (encouraged but not
required)
 Rental income and expenses
 Any restrictions or obligations
Fair value model – additional disclosures
An entity that adopts this must also disclose a reconciliation of the
carrying amount of the investment property at the beginning and
end of the period.
Cost model – additional disclosures
These relate mainly to the depreciation method, rates and useful
lives used as well as a reconciliation of the carrying amount at the
beginning and end of the period. In addition, an entity which adopts
the cost model must disclose the fair value of the investment
property.
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Partial own use
 Some properties comprise a portion that is held to earn rentals or for
capital appreciation and another portion that is held for own use.
 If these portions could be sold separately (or leased out separately
under a finance lease), they are accounted for the portions separately.
The part that is rented out is investment property.
 If the portions cannot be sold or leased out separately, the property is
investment property only if the owner-occupied (property, plant and
equipment) portion is insignificant.
Provision of ancillary services to occupants
 If those services (e.g. security or maintenance services) are a relatively
insignificant component of the arrangement as a whole, then the
entity may treat the property as investment property.
 Where the services provided are more significant (such as in the case
of an owner-managed hotel), the property should be classified as
owner-occupied property, plant and equipment.
Inter-company rentals
 Property rented to a parent, subsidiary, or fellow subsidiary is not
investment property in consolidated financial statements that include
both the lessor and the lessee, because the property is owner-
occupied from the perspective of the group.
 However, such property will be investment property in the separate
financial statements of the lessor, if it meets the definition of
investment property.
Property held under an operating lease
A property interest that is held by a lessee under an operating lease may
be classified and accounted for as investment property if:
 The rest of the definition of investment property is met;
 The operating lease is accounted for as if it were a finance lease in
accordance with IFR 16 Leases; and
 The lessee uses the fair value model set out in IAS 40 for all investment
properties.

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 IAS 36 – IMPAIRMENT OF ASSETS
Compiled by: Murtaza Quaid
SCOPE IMPORTANT DEFINITIONS

IAS 36 applies to all assets except:
 Inventories (IAS 2);
 Assets arising from contracts with customer IFRS 15;
 Deferred tax assets (IAS 12);
 Assets arising from employee benefits (IAS 19);
 Financial assets (IAS 39/IFRS 9);
 Investment property measured at FV (IAS 40);
 Biological assets measured at FV less CTS (IAS 41);
 Insurance contract (IFRS 4); and
 Non-current assets or disposal groups held for sale
(IFRS 5);
IAS 36 does apply to
 Land, building , machinery (IAS 16);
 Investment property at cost (IAS 40);
 Intangible assets (IAS 38);
 Goodwill;
 Financial assets classified as:
o Subsidiaries (IFRS 10);
o Associates (IAS 28); and
o Joint ventures (IFRS 11).
Recoverable amount of an asset is defined as the higher of its fair value minus costs
of disposal, and its value in use.
Fair value (FV) is 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.
Costs of disposal are incremental costs directly attributable to the disposal of an
asset or cash-generating unit, excluding finance costs and income tax expense.
Value in use is the present value of future cash flows from using an asset, including
its eventual disposal.
Impairment loss is the amount by which the carrying amount of an asset (or a cash-
generating unit) exceeds its recoverable amount.
Cash-generating unit 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.
Corporate assets are assets other than goodwill that contribute to the future cash
flows of both the CGU under review and other CGUs.

IMPAIRMENT TESTING

ANNUAL TESTING INDICATION BASED TESTING

Annual impairment testing is compulsory for: An entity shall estimate the recoverable amount of the assets, when there is an indicator
 Intangible assets with an indefinite useful life of impairment. Indicators are assessed at each reporting date.
(such as trademarks);
 Intangible assets not yet available for use;
 Goodwill acquired in a business combination;
 CGUs to which goodwill has been allocated. INTERNAL INDICATORS EXTERNAL INDICATORS

 Obsolescence or physical damage of  Significant decline in market value of

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IMPAIRMENT
Asset is impaired If :
Carrying amount (CA) > Recoverable amount (RA)
Impairment = CA – RA
 An impairment loss shall be recognized
- To P/L account or
- As a revaluation decrease if the asset is
carried at revalued amount in line with
other IFRS.
 Adjust the depreciation in the future periods
in order to reflect the asset’s new carrying
amount.
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an asset.
 Significant changes with an adverse
effect on the entity related to the use
of an asset, for e.g.
- The asset becoming idle,
- Plans to discontinue or restructure
the operation to which an asset
belongs,
- Plans to dispose of an asset before
the previously expected date,
- Reassessing useful life of asset as
finite rather than indefinite.
 Evidence from internal reporting
indicating that economic
performance of an asset is, or will be,
worse than expected.
the assets below that would be
expected as a result of the passage of
time or normal use.
 Significant changes with an adverse
effect on the entity in the
technological, market, economic or
legal environment in which the entity
operates or in the market to which an
asset is dedicated.
 Increased market interest rates or
other market rates affecting discount
rate used in calculating asset’s value
in use and decrease the asset’s
recoverable amount materially.
 Carrying amount of the net assets of
the entity is higher than its market
capitalization.

7
 IAS 36 – IMPAIRMENT OF ASSETS
Compiled by: Murtaza Quaid
RECOVERABLE AMOUNT REVERSAL OF IMPAIRMENT

Recoverable amount is the higher of asset’s or CGU’s:
VALUE IN USE
Value in use is the PV of the future cash flows expected to be derived
from an asset or CGU.
Step 1: Estimate your future cash flows
To measure value in use, base cash flow projections on:
 Reasonable and supportable assumptions that represent
management’s best estimate of the economic conditions that will
exist over the remaining useful life of the asset.
 The most recent financial budgets/forecasts but for a maximum
period of 5 years.
 Extrapolation of cash flow projections for the periods beyond 5
years using a steady or declining growth rate for subsequent years.
Include the following in cash flows estimations:
 Projections of cash inflows from continuing use of asset.
 Projections of cash outflows necessarily incurred to generate the
cash inflows from continuing use of the asset.
 Net cash flows for disposal of the asset at the end of its useful life.
DO NOT include the following in cash flows estimations:
 Cash flows from receivables/payables.
 Cash outflows expected from future restructurings which is not yet
committed.
 Cash outflows expected from improving or enhancing the asset’s
performance.
 Cash flows from financing activities.
 Income tax receipts and payments.
 At the end of each reporting period, the entity should determine
whether an impairment loss recognized in prior periods for an asset
(other than goodwill) may no longer exist or may have decreased.
 An impairment loss may be reversed only if there has been a
change in the estimates used to determine the asset’s recoverable
amount.
 However, the CA of an asset is not increased above the lower of:
- Its recoverable amount;
- Its historical cost i.e. depreciated carrying amount had no
impairment loss originally been recognized.
INDIVIDUAL ASSETS
 Reversal of impairment is recognized in the profit or loss unless it
relates to a revalued asset.
 However, the CA of an asset is not increased above the lower of:
- Its recoverable amount;
- Its historical cost i.e. depreciated carrying amount had no
impairment loss originally been recognized.
For your valuable feedback, any update, error or
query, kindly let me know at emquaid93@gmail.com

Be consistent in projecting cash flows & selecting discount rate.

Either:
 Adjust future cash flows by the inflation and use the nominal
discount rate; or
 Alternatively, project future cash flows in the real terms and use
real discount rate.

Step 2: Determine discount rate

Discount rate shall be a pre-tax rate that reflects current market

assessment of:
 Time value of money; &
 Risks specific to the asset for which future cash flow estimates have
not been adjusted.

FAIR VALUE LESS COST TO SELL

 Rules and guidelines for measuring the fair value of any assets are
set by the standard IFRS 13 Fair Value Measurement.
 Costs of disposal are for example legal costs, stamp duties and
similar transaction taxes, costs of removing the asset and direct
incremental costs to bring an asset into condition for its sale.

IQ School of Finance