Impairment of assets:

Important definitions:

→ Impairment loss: amount by which the carrying amount of an asset exceeds its recoverable
amount

→ Carrying amount: amount at which an asset is recognised in the SFP

˗ Cost price – (accumulated depreciation + impairment losses)

→ Fair value: price that would be received to sell an asset

˗ In an orderly transaction
˗ Between market participants
˗ At the measurement date

→ Cost of disposal: incremental costs directly attributable to the disposal of the asset excluding
finance costs and income tax expense
˗ Includes:
 Legal costs
 Costs of removal of asset
 Stamp duty
 Transaction taxes
 Costs to bring asset into condition for its sale
˗ Excludes:
 Termination benefits
 Advertising costs
 Costs associated with reducing or reorganising the entity as a result of the sale
and costs for which a provision has already been recognised

→ Value in use(always given): present value of the future cash flows expected to be derived from an
asset

→ Fair value less costs of disposal: selling price of an asset in an orderly transaction between
market participants at measurement date, less the incremental costs directly attributable to
the disposal of an asset

→ Recoverable amount: higher of fair value less costs of disposal and value in use
˗ If recoverable amount is lower than its carrying amount
 Impairment loss
˗ If recoverable amount is now higher than its carrying amount
 Impairment loss reversal
˗ If either of the abovementioned amount > carrying amount
 No impairment
˗ If the fair value less costs of disposal cannot be determined
 Value in use should be used as the recoverable amount
˗ Write both in tests and conclude which is higher
Introduction
→ Purpose of IAS 36 is to provide procedures that the entity must apply to ensure that its
assets are not overstated
→ Carrying amount must reflect the economic benefits the entity expects it to produce
→ Two options for an asset:
˗ Dispose it now
 Fair value less costs of disposal
˗ Continue to use it and then dispose it
 Value in use
Higher of these two amounts is the recoverable amount
→ If an asset’s recoverable amount is lower than its carrying amount, the asset’s carrying amount
is overstated and must be reduced
˗ This reduction is called an impairment loss
Expense recognised in profit/loss
→ After reducing an asset’s carrying amount and recognising an impairment loss, conditions that
caused this impairment loss may change
E.g. damaged asset is repaired etc
→ If an asset’s recoverable amount is now higher than its carrying amount, the asset’s carrying
amount needs to increase
˗ This is an impairment loss reversal
Income recognised in profit/loss
→ Entities must perform an annual indicator review to assess whether asset might be impaired
→ IAS 36:
˗ Addresses when impairment losses must be recognised or reversed
˗ Prescribes the disclosure requirements for impairment losses and the reversal of
impairment losses
˗ Applies to both assets carried at cost and at a revalued amount
BAC 200 – only cost model
˗ Applies mainly to tangible assets (property, plant and equipment [IAS 16]) and
intangible assets (IAS 38)
 The standard does not apply to inventories as the recoverability of inventories
is dealt with in IAS 2

Indicator review
→ Procedure that involves looking for evidence that carrying amount may be overstated
→ Not easy to identify which assets are impaired and it is not cost effective to assess all assets
for impairments on an annual basis
→ At the end of the reporting period, an indicator review must be performed to assess whether
an impairment may have occurred
→ Indicator review test should consider the following:
˗ External information
˗ Internal information
˗ Materiality
˗ Reassessment of the variables of depreciation
External information:

→ Asset’s value has declined more than expected

→ Significant changes in the market with adverse effect on entity
˗ New competitor may have entered the market
→ Market interest rates have increased
→ Net asset value per share is greater than market value per share

Internal information:

→ Evidence is available of obsolescence, or physical damage to asset

→ Asset becoming idle or plan to dispose asset because of significant changes from external
sources of information
→ Evidence is available from internal reporting that indicates that economic performance of an
asset is worse than expected
˗ Low budgeted cash flow

Materiality:

→ Amount must be material

→ But, irrespective of whether the amount is material or if there’s an indicator of impairment:
˗ The following is always tested for impairments annually:
 An intangible asset with an indefinite useful life
 An intangible asset not yet available for use

If there is an indication of impairment (or not), the:

→ Remaining useful life, or

→ Residual value, or
→ Depreciation method

may also be affected and could be adjusted

Reassessment of the variables of depreciation

Recoverable amount
The recoverable amount is the higher of the:

→ Fair value less costs of disposal

→ Value in use

An asset is impaired when carrying amount > recoverable amount

→ Therefore, if either of the abovementioned amounts > carrying amount

No impairment
Thus not always necessary to calculate both values
→ If the fair value less costs of disposal cannot be determined:
 Value in use should be used as the recoverable amount

Recognition and measurement

Test for impairment:

→ Step 1: An entity must assess, at the end of each reporting period, whether there is any
indication that an asset may be impaired
→ Step 2: If there is an indication of impairment an entity must calculate the recoverable
amount
→ Step 3: Compare the recoverable amount to the carrying amount
→ Step 4: If the carrying amount of an asset at year end is more than the recoverable amount of
the asset at year end
˗ Recognise the impairment loss in the SFP and SPLOCI
˗ Carrying amount – recoverable amount = impairment loss
 Write both in tests and conclude which is higher
→ Step 5: Depreciation in subsequent periods calculated using new depreciable amount
(recoverable amount), residual value and remaining useful life (can change)
˗ The depreciation expense is calculated in future periods as follows:
 Revised carrying amount (recoverable amount) less residual value over its remaining useful life

An asset is impaired at year end when:

Carrying amount > recoverable amount

→ Carrying amount
˗ Per accounting records
→ Recoverable amount
˗ Higher of:
 Fair value less costs of disposal
 Value in use
Write both in tests and conclude which is higher

Carrying amount – Recoverable amount = Impairment loss

Reversal of impairment loss

Overview

→ An entity must assess, at the end of each reporting period, whether there is any indication
that an impairment loss recognised in prior periods may no longer exist or has decreased
˗ Recoverable amount > carrying amount
→ Impairment loss may be reversed but only if circumstances that originally caused the
impairment have reversed
→ Carrying amount will be increased
˗ CA before reversal + impairment loss reversal = new carrying amount

Recognise an impairment loss reversal:

Indicator review:

IAS 36 provides indicators for assessing whether impairment losses may have reversed:
External information:

→ Indications that asset’s value has increased

→ Significant changes with a favourable effect on entity
˗ Technological, market, economic or legal environment
→ Market interest rates have decreased
→ Market value per share is greater than net asset value per share

Internal information:

→ Capital expenditure incurred to improve asset’s performance

˗ Favourable effect on entity
→ Evidence is available from internal reporting that indicates that economic performance of an
asset is better than expected

Remaining depreciation variables (useful life etc.) may also be affected and could be adjusted

Measurement:
(Cost model)

When reversing an impairment, the carrying amount must never increase about the carrying amount it
would have been had the asset never been impaired

→ Thus, we may not increase the asset’s carrying amount above its historical carrying amount
Original cost – accumulated depreciation

With a reversal of an impairment loss, the carrying amount of the asset is increased to the new
recoverable amount

→ But, the reversal is subject to a calculated maximum amount

Maximum amount:

→ The previous impairment loss is reversed to the extent that it does not exceed the carrying
amount that would have been determined for the asset if there had been no impairments
→ Thus, the new value of the asset (after reversal) should not be more than what the carrying
amount of the assets would have been if no impairments were calculated in the past

Test for reversal:

→ Step 1: An entity must assess, at the end of each reporting period, whether there is any
indication for a reversal of impairment loss
→ Step 2: If there is an indication of reversal of impairment loss an entity must calculate the
recoverable amount
 → Step 3: If the recoverable amount of an asset at year end is more than the carrying amount of
the asset at year end
˗ Calculate the carrying amount without impairment
→ Step 4: Compare the recoverable amount to the carrying amount without impairment
˗ Recoverable amount is limited to carrying amount without impairment
˗ Recognise the reversal of impairment loss in the SFP and SPLOCI
˗ Recoverable amount – carrying amount = reversal of impairment loss
 Write both in tests and conclude which is higher
→ Step 5: Depreciation in subsequent periods calculated using new depreciable amount
(recoverable amount), residual value and remaining useful life (can change)
˗ Depreciation expense is calculated in future periods as follows:
 Revised carrying amount (recoverable amount) less residual value over its
remaining useful life

A reversal takes place when there was a previous impairment on the asset and now the:

New recoverable amount > Carrying amount

→ New recoverable amount

˗ Higher of:
 Fair value less costs of disposal
 Value in use
˗ Limited to carrying amount without the impairment
→ Carrying amount
˗ Per accounting records
Write both in tests and conclude which is higher

Recoverable amount – Carrying amount = Reversal of impairment loss

Relevant journal entries:

Recognise impairment loss:
Impairment loss (SPLOCI)
Accumulated depreciation and impairment loss: Asset (SFP)
Impairment loss is debited to increase other expenses/cost of sales (asset used in manufacturing process)
Accumulated depreciation and impairment loss is credited to reduce the carrying amount

Recognise a reversal:
Accumulated depreciation and impairment loss: Asset (SFP)
Reversal of impairment loss (SPLOCI)
Reversal credited to decrease other expenses/cost of sales

Recognise depreciation:
Depreciation (SPLOCI)
 Accumulated depreciation and impairment loss: Asset (SFP)

Buying an asset:
Asset: Cost (SFP)
Bank (SFP)

Disclosure:
Notes to the financial statements

The following descriptive information relating to material impairments (or the reversal thereof)
should be disclosed in the “Profit before taxation” note or the “Property, plant and equipment note or
Intangible asset note”.

→ Events and circumstances that led to the recognition or reversal of the impairment loss
→ Amount of impairment loss recognised or reversed
→ Nature of the asset
→ Is the recoverable amount based on fair value less costs of disposal or the value in use
˗ If fair value less costs of disposal
 Discuss the basis used to determine the amount
 For example, reference to quoted prices in active market
˗ If value in use
 State discount rate used
 Previously and currently

If one of the abovementioned notes are required, you must provide the
descriptive information as part of that particular note
If the three notes are required, you must provide the descriptive
information as part of the profit before tax note OR the relevant asset note

The impairment loss occurred because a new machine, which had a higher manufacturing capacity than
Machine A entered the market during the year. Therefore, an impairment loss of Rxxx was
recognised. The recoverable amount was based on (value in use / fair value less costs of disposal) and
it amounted to Rxxx.

Statement of profit or loss and other comprehensive income:

An entity shall disclose the following for each class of asset:

→ The amount of impairment losses recognised in SPLOCI during the period and the line item(s)
in which impairment losses are included
˗ Debited to other expenses / cost of sales
→ The amount of reversals of impairment losses recognised in SPLOCI during the period and the
line item(s) in which reversals are included
˗ Credited to other expenses / cost of sales