PRINTED BY: Sept. ye@gmail com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. In its notes to the 2014 consolidated financial statements, Nokia provided details of the factors that trigger an impairment review for the entity (See figure 15.1). Assessment of the recoverability of long-lived assets, intangible assets and goodwill ‘The Group assesses the carrying value of goodwill annually or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. The carrying value of identifiable intangible assets and long-lived assets is assessed if events or changes in circumstances indicate that such carrying value may not be recoverable. Factors that trigger an impairment review include, but are not limited to, underperformance relative to historical or projected future results, significant changes in the manner of the use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. FIGURE 15.1 Indicators of impairment for Nokia Corporation ‘Source: Nokia Corporation (2014, p. 133). 15.3 IMPAIRMENT TEST FOR AN INDIVIDUAL ASSET The impairment test involv recoverable amount. To understand the nature of this test, it is ne understand a number of definitions given in paragraph 6 of IAS 36: The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use. Fair value 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. (See IFRS 13 Fair Value Measurement.) 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 the future cash flows expected to be derived from an asset or cash-generating unit. Note the phrase ‘an asset or cash-generating unit’ in the above definitions. The discussion in this section focuses on an individual asset, and it is assumed that, for the asset being tested for impairment, there are specific cash flows that can be associated with the asset. Cash-generating units are discussed in section 15.4.From the definition of recoverable amount, there are two possible amounts against which the carrying amount can be tested for impairment: (1) fair value less costs of disposal and (2) value in use. Although the definition of recoverable amount refers to the ‘higher’ of these two amounts, an impairment occurs if the carrying amount exceeds recoverable amount (paragraph 8). However, it is not always necessary to measure both amounts when testing for impairment. If either one of these amounts is greater than carrying amount, the asset is not impaired (paragraph 19). Where there are active markets, determining fair value less costs of disposal is probably easier than calculating value in use. However, where the carrying amount exceeds the fair value less costs of disposal, it is necessary to calculate the value in use. Figure 15.2 is a diagrammatic representation of the impairment test. sephora eqqual to the higher of Fair value less. costs of disposal Stop 2: Compare Recaverahle amount | wa Carrying amount | recoverable amount < carrying amount, an impairment loss has occurred IFrecoverable amount > carrying amount, no further action is required. and Value in use FIGURE 15.2 The impairment test PRINTED BY: Sept. ye@gmail com, Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. In calculating either fair value less costs of disposal or value in use, paragraph 23 of LAS 36 notes that in ‘some cases, estimates, averages and computational shortcuts may provide reasonable approximations’, rather than an entity having to perform in-depth calculations annually. It is also possible to use the most recent detailed calculation of recoverable amount made in a preceding year (paragraph 24) in the case of an intangible asset with an indefinite useful life. The latter is possible if all the following criteria are met: + for the intangible asset, if tested as part of a cash-generating unit (see section 15.4), the other assets and liabilities in the unit have not changed significantly + in the preceding year's calculation, the difference between the carrying amount and recoverable amount was substantial + ananalysis of all evidence relating to events affecting the assct suggests that thelikelihood of the recoverable amount being less than carrying amount is remote. 15.3.1 Calculating fair value less costs of disposal There are two parts to the determination of fair value less costs of disposal, namely fair value and costs of disposal, Fair value is measured in accordance with IFRS 13 Fair Value Measurement and is discussed in detail in chapter 3. Fair value is defined as an exit price and can be measured using a number of valuation techniques using various observable or unobservable inputs. Paragraph 28 of IAS 36 provides the following examples of costs of disposal: legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct ineremental costs to bring the asset into condition for sale. The costs must be directly sociated with either the sale of the asset or getting the asset ready for sale. Any costs arising after the sale of the asset, even if arising as a result of the sale, are not regarded as costs of disposal. Paragraph § of IAS 36 provides guidance where an asset is measured at a revalued amount (ie. fair value). Fair value as a measure does not include a consideration of disposal costs. Hence, if an asset's fair value is equal to its market value, the difference between fair value and fair value less costs of disposal is the disposal costs of the asset. If the disposal costs are immaterial, then there is no significant difference between fair value and fair value less costs of disposal. If the fair value is up to date then the asset could only be impaired if the disposal costs were material. When that is the case, the entity will have to determine the asset's value in use because the asset will not be impaired if its value in use exceeds its carrying value. Figure 15.3 describes how Nokia calculated the fair value less costs of disposal of one of its cash-generating units. Note that the purpose of the calculation was to determine a disposal price. Carrying value of the HERE cash-generating unit The recoverable amount of the HERE CGU is determined using the fair value less costs of disposal method. Estimation and judgment are required in determining the components of the recoverable amount calculation, including the discount rate, the terminal growth rate, estimated revenue growth rates, profit margins, costs of disposal and the cost level of operational and capital investment. The discount rate reflects current assessments of the time value of money, relevant market risk premiums, and industry comparisons. Risk premiums reflect risks and uncertainties for which the future cash flow estimates have not been adjusted. Terminal values are based on the expected life of products and forecasted life cycle, and forecasted cash flows over that period, In 2014, the Group recorded an impairment loss of EUR 1209 million to reduce the carrying amount of the HERE CGU to its recoverable amount. The remaining carrying amount of the HERE goodwill is EUR 2273 million. As the carrying amount of the HERE CGU has been written down to its recoverable amount, any increase in the discount rate, any deercase in the terminal growth rate, or any material change in other valuation assumptions could result in further impairment. FIGURE 15.3 Calculation of fair value less costs of disposal Source: Nokia Corporation (2014, p. 138). 15.3.2 Calculating value in useValue in use is the present value of future cash flows relating to the asset being measured. These should be discounted at an appropriate rate that takes account of the risks inherent in future cash flows from the asset. Paragraph 53A of IAS 36 Impairment of Assets notes that fair value differs from value in use because of factors that are likely to be specific to the entity: a, additional value derived from the grouping of assets (such as the creation of a portfolio of investment properties in different locations); b. synergies between the asset being measured and other assets; © PRINTED BY: Sept ye@gmail com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission, Violators will be prosecuted legal rights or legal restrictions that are specific only to the current owner of the asset; and d. tax benefits or tax burdens that are specific to the current owner of the asset. Determining future cash flows Paragraphs 33-54 of LAS 36 provide guidance in measuring future cash flows. Some important guidelines are: * Cash flow projections should be based on management's best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. These should be modified by an analysis of past cash flows and management's success in the past in predicting future cash flows accurately. Where external evidence is available, this should be given greater weight than simple reliance on management's expectations. * Cash flow projections should be based on the most recent financial budgets and forecasts. These projections should cover a maximum period of 5 years unless a longer period can be justified. For most entities, a detailed analysis of future operations rarely extends beyond § years. + Expectations concerning growth rate should be realistic and in line with observable rates. The cash inflows should include those from continuing use of the asset over its expected useful life as well as those expected to be received on disposal of the asset. Further, any cash outflows necessary to achieve the projected inflows must be taken into account. * Projected cash flows must be estimated for the asset in its current condition (paragraph 44). Where there is an expected restructuring of the entity in future periods, or where there are possibilities for improving or enhancing the performance of the asset by subsequent expenditure, projections of cash flows will not take these possible events into consideration. Such enhancements can only be taken into consideration once the entity is committed to the restructure. Day-to-day servicing costs are included in the outflows used to measure value in use, as are the costs of major inspections. * Cash flows relating to financing activities or income tax are not included in the calculations of future cash flows. As the discount rate is based on a pre-tax basis, the future cash flows must also be on a pre-tax basis.+ Inassessing cash flows from disposal, the expected disposal price will take into account specific future price increases /decreases, and be based on an analysis of prices prevailing at the date ofthe estimate for similar assets in conditions similar + Appendix A to TAS 36, described as an ‘integral part of the standard’, contains guidance on the use of present value techniques in measuring value in use. Essentially, expected values may be used when probabilities can be estimated. Determining the discount rate Paragraph 55 of LAS 36 notes that the discount rate should: * reflect the time value of money * reflect the risks specific to the asset for which the future cash flow estimates have not been adjusted. ‘The rate may be determined by viewing rates used for similar assets in the market, or from the weighted average cost of capital of a listed entity that has a single asset, or portfolio of assets, similar to the asset under review (paragraph 56). Figure 15.4 contains information provided in Note 19 to the financial statements in the 2014 annual report of Amcor Ltd. Note in particular the information provided about the calculation of the recoverable amount using value-in-use calculations. FIGURE 15.4 Calculation of value in use Source: Amcor Ltd (2014, p. 115). (b) Impairment tests for goodwill For the purpose of impairment testing, goodwill acquired in a business combination is allocated to cash generating units or groups of cash generating units (CGUs) according to the level at which management monitors goodwill. The goodwill amounts allocated below are tested annually or semi-annually if there are indicators of impairment, by comparison with the recoverable amount of each CGU or group of CGU’s assets. Recoverable amounts for CGUs are measured at the higher of fair value less costs of disposal and value in use. Value in use is calculated from cash flow projections for five years using data from the consolidated entity's latest internal forecasts. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. The forecasts used in the value in use calculations are management's estimates in determining income, expenses, capital expenditure and cash flows for each asset and CGU. Changes in selling prices and direct costs are based on past experience and management's expectation of future changes in the markets in which the consolidated entity operates. Cash flows beyond the five year period are extrapolated using estimated growth rates. The following table presents a summary of the goodwill allocation and the key assumptions used in determining the recoverable amount of each CGU:Goodwill Pre-Tax Growth Allocation Discount Rate Rate cGu 2014$ | 20138 |2014 % 2013 % |2014/2013 million | million % | % Continuing Operations Rigid Plastics Rigid Plastics 712.7 | 7252 | 11.8 | 122 | 1) — Flexibles Flexibles Europe & 515.3 500.1 7.6 7.6 -—|- Americas Tobacco Packaging 321.0 303.7 7.6 7.6 —|- Flexibles Asia Pacific 246.2 1924 9.6 99 3.0 3.0 Discontinued Operations ‘Australasia and Packaging Distribution Australasia — 85.6 — 9a —|- Packaging Distribution — 1166 0 — 89 — 30 1795.2 1923.6 ‘The discount rate used in performing the value in use calculations reflects the consolidated entity's weighted average cost of capital, as adjusted for specific risks relating to each geographical region in which the CGUs operate. The pre-tax discount rates are disclosed above. The growth rate represents the average rate applied to extrapolate CGU cash flows beyond the five year forecast period. These growth rates are determined with regard to the long-term performance of each CGU in their respective market and are not expected to exceed the long-term average growth rates in the applicable market. PRINTED BY: Sept ye@gmail. com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission, Violators will be prosecuted, 15.3.3 Recognition and measurement of an impairment loss for an individual asset Paragraphs 58-64 of IAS 36 provide the principles for recognition and measurement of an impairment loss for an individual asset. If the recoverable amount of an asset is less than its carrying amount, an impairment loss occurs, and the asset must be written down from its carrying amount to the recoverable amount. Where an asset is measured using the cost model, according to paragraph 60 of IAS 36 an impairment loss is recognised immediately in profit or loss. In relation to the other side of the accounting entry to the loss, reference should be made to paragraph 73(4) of IAS 16 Property, Plant and Equipment. According to this paragraph, for items of property, plant and equipment ‘the gross carrying amount and the accumulateddepreciation (aggregated with accumulated impairment losses) at the beginning and end of the period’ should be disclosed. When impairment occurs, there is no need to. write off any existing accumulated depreciation or create a separate accumulated impairment account. The impairment write-down can be included in accumulated depreciation, preferably referred to as ‘Accumulated Depreciation and Impairment Losses’, Hence, if an asset having a carrying amount of $100 (original cost $160) has a recoverable amount of $90, the appropriate journal entry to account for the impairment oss is: Impairment Loss Dr 10 ‘Accumulated Depreciation and Impairment Losses Cr 10 (Impairment loss on asset) Where an asset is measured using the revaluation model (ie. at fair value), according to paragraph 60 of IAS 36 any impairment loss is treated as a revaluation increase and accounted for as set out in IAS 16. If an asset at the end of an accounting period has a carrying amount of $100, being previously calculated as fair value of $120 less accumulated depreciation of $20, and the asset's recoverable amount (and possibl fair value) at the end of the period is determined to be $90, the accounting entry is Accumulated Depreciation Dr 20 Asset cr 20 (Write-down of asset) Loss — Downward Revaluation of Asset (P/L) Dr 10 Asset cr 10 (Revaluation of asset) PRINTED BY: Sept ye@gmail com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted If the revalued asset had a previous revaluation increase of $20, giving rise to a revaluation surplus of $14 and a deferred tax liability (using a tax rate of 30%) of $6, then the entry to write the asset down to a recoverable amount of $90 requires an adjustment directly against the revaluation surplus: ‘Accumulated Depreciation Dr|20 Asset Revaluation Surplus Dr 7 Deferred Tax Liability Dr 3 Asset Cr 30 (Write-down of asset to recoverable amount) Regardless of whether the cost model or the revaluation model is used, once the impairment loss is recognised, any subsequent depreciation/amortisation is based on the new recoverable amount. In accordance with paragraph 63 of IAS 36, the depreciation charge is that necessary to allocate the asset's revised carrying amount (the recoverable amount) less its residual value (if any) on a systematic basis over its remaining useful life, which may have to be reviewed in light of the circumstancesleading to the impairment. It is possible that the recoverable amount is negative owing to large expected future cash outflows relating to the asset, so the impairment loss could be greater than the carrying amount of the asset. According to paragraph 62 of IAS 16, a liability for the excess should be raised only if another standard requires it. Figure 15.5 contains information disclosed in Note 10 to the 2014 financial statements of Nokia Corporation relating to its impairment of specific assets. FIGURE 15.5 Impairment of assets Source: Nokia Corporation (2014, p. 149). 10. Impairment Impairment charges by asset category are: EURm 2014|2013|2012 Continuing operations Goodwill 1209 Other intangible assets - -| 8 Property, plant and equipment — 12 23 Investments in associated companies. —| — 8 Available-for-sale investments 15 8 aL Total 122. 20 Zo: Goodwill Goodwill impairment assessment for the HERE CGU was carried out at September 30, 2014. The previous assessment date was October 1, 2013. The assessment date was brought forward to September 30, 2014 due to an adjustment to the HERE strategy and the related new long-range plan, which incorporates the slower than expected increase in net sales directly to consumers, and the Group's plans to curtail its investment in certain higher-risk and longer-term growth opportunities. This represented a triggering event resulting in an interim impairment test to assess if events or changes in circumstances indicate that the carrying amount of HERE goodwill may not be recoverable. The goodwill impairment assessment for the HERE CGU was rolled forward to October 1, 2014 to align with the annual assessment date. The goodwill impairment assessment for the Nokia Networks Radio Access Networks group of CGUs in Mobile Broadband and Global Services group of CGUs was carried out at November 30, 2014 (November 30 in 2013). The carrying value of goodwill allocated to each of the Group's CGUs at each of the respective years’ impairment testing dates is:EURm 2014/2013 HERE) 2273 3219 Global Services 106 91 Radio Access Networks in Mobile Broadband 96-88 Devices & Services (Discontinued operations) | — 1417 (The carrying value of goodwill after the 2014 impairment charge. PRINTED BY: Sept.ye@gmail.com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission, Violators will be prosecuted. The recoverable amounts of the Group's CGUs were determined using the fair value less costs of disposal method. In the absence of observable market prices, the recoverable amounts were estimated based on an income approach, specifically a discounted cash flow model. The valuation method is in line with previous years, with the exception that the cash flow forecast period is five years in comparison with ten years previously. The cash flow projections used in calculating the recoverable amounts are based on financial plans approved by management covering an explicit forecast period of five years and reflect the price that would be received to sell the CGU in an orderly transaction between market participants at the measurement date. The level of fair value hierarchy within which the fair value measurement is categorized is level 3. Refer to Note 19, Fair value of financial instruments for the fair value hierarchy. ‘The recoverable amount of the HERE CGU at September 30, 2014 was EUR 2,031 million, which resulted in an impairment charge of EUR 1,209 million. The impairment charge is the result of an evaluation of the projected financial performance and net cash flows of the HERE CGU and was allocated entirely against the carrying value of HERE goodwill. The evaluation incorporates the slower than expected increase in net sales directly to consumers, and the Group's plans to curtail its investment in certain higher-risk and longer-term growth opportunities. It also reflects the current assessment of risks related to the growth opportunities that management plans to continue pursuing, as well as the related terminal value growth assumptions. After consideration of all relevant factors, management reduced the net sales projections for the HERE CGU, particularly in the latter years of the valuation. The HERE CGU corresponds to the HERE operating and reportable segment. Refer to Note 2, Segment information. ‘The key assumptions applied in the impairment testing analysis for each CGU are:2014 2013 2014 2013 2014 | 2013 Key HERE CGU Radio Access Networks Global assumption group of CGUs in Mobile Services group % Broadband of CGUs Terminal 12017 2.6 15 16 | 05 growth rate @ Post-tax 11.0 10.6 9.4 10.8 9.1 10.1 discount rate G)Based on a five-year forecast period (ten-year forecast period in 2013). Terminal growth rates reflect long-term average growth rates for the industry and economies in which the CGUs operate. The discount rates reflect current assessments of the time value of money and relevant market risk premiums. Risk premiums reflect risks and uncertainties for which the future cash flow estimates have not been adjusted. Other key variables in future cash flow projections include assumptions on estimated sales growth, gross margin and operating margin. All cash flow projections are consistent with external sources of information, wherever possible. Management has determined the recoverable amount of the HERE CGU to be most sensitive to changes in both the discount rate and the terminal growth rate. As the carrying value of the HERE CGU has been written down to its recoverable amount, any increase in the discount rate or any decrease in the terminal growth rate would result in further impairment. Management's estimates of the overall automotive volumes and market share, customer adoption of the new location- based platform and related service offerings, and assumptions regarding industry pricing are the main drivers for the HERE net cash flow projections. The Group's cash flow forecasts reflect the current strategic views that license fee-based models will remain important in both the near and long term. Management expects that when license fee-based models are augmented with software and services, transactions fees will grow in the future as more customers demand complete, end-to-end location solutions and as cloud computing and cloud-based services gain greater market acceptance. Actual short- and long-term performance could vary from management's forecasts and impact future estimates of recoverable amount. Management has determined the discount rate and the terminal growth rate to be the key assumptions for the Nokia Networks Radio Access Networks group of CGUs and the Global Services group of CGUs. The recoverable amounts calculated based on the sensitized assumptions do not indicate impairment in 2014 or 2013. Further, no reasonably possible changes in other key assumptions on which the Group has based its determination of the recoverable amounts would result in impairment in 2014 or 2013. In 2013, the recoverable amount of the Devices & Services CGU was determined using the fair value less costs of disposal method, based on the agreed purchase price, excluding any consideration attributable to patents or patent applications. Other intangible assetsPRINTED BY: Sept. ye@gmail.com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission, Violators will be prosecuted Property, plant and equipment In 2013, Nokia Networks recognized an impairment charge of EUR 6 million (EUR 23 million in 2012) following the remeasurement of the Optical Networks disposal group at fair value less cost of disposal. In 2013, the Group recognized impairment losses of EUR 6 million relating to certain properties attributable to Group Common Funetions. Investments in associated companies In 2012, the Group recognized an impairment charge of EUR 8 million to adjust the Group's investment in associated companies to the recoverable amount. These charges were recorded in Other operating expenses and included in Group Common Functions. Available-for-sale investments ‘The Group recognized an impairment charge of EUR 15 million (EUR 8 milion in 2013 and EUR 31 million in 2012) as ecrtain equity and interest-bearing securities held as available-for-sale suffered a significant or prolonged decline in fair value. These charges are recorded in Other expenses and Financial income and expenses. 15.4 CASH-GENERATING UNITS — EXCLUDING GOODWILL The discussion above (section 15.3) focuses on individual assets and whether they have been impaired. The impairment test in such cases involves the determination of recoverable amount, and this requires the measurement of fair value less costs of disposal and value in use of the asset being tested for impairment. However, for some assets, fair value less costs of disposal may be determinable, because the asset is separable and a market for that asset exists, but it may be impossible to determine the value in use. Value in use requires determining the expected cash flows to be received from an asset. Some assets do not individually generate cash flows because the cash flows generated are the result of a combination of several assets. For example, a machine in a factory works in conjunction with the rest of the assets in the factory to produce sellable goods. For such asscts, if the carrying amount execeds the fair valuc less costs of disposal, some other measure relating to value in use must be used. Paragraph 66 of IAS 36 requires that, where there is any indication an asset may be impaired, if possible the recoverable amount should be estimated for the individual asset. However, if this is not possible, the entity should ‘determine the recoverable amount of the cash-generating unit to which the asset belongs’. In other words, the impairment test is applied toa cash-generating unit rather than to an individual asset. Paragraph 6 contains the following definition of a cash-generating unit:‘A 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. 15.4.1 Identifying a cash-generating unit The identification of a cash-generating unit requires judgement. As is stated in the definition, the key is to determine the ‘smallest identifiable group of assets’, and this group must create ‘independent’ cash flows from continuing use. Guidelines given in paragraphs 67-73 of IAS 36 include the following: * Consider how management monitors the entity's operations, such as by product lines, businesses, individual locations, distriets or regional areas. + Consider how management makes decisions about continuing or disposing of the entity's assets and operations. + Ifanactive market exists for the output of a group of. acash-generating unit. ets, this group constitutes + Even if some of the output of a group is used internally, if the output could be sold externally, then these prices can be used to measure the value in use of the group of assets. + Cash-generating units should be identified consistently from period to period for the same group of assets. For example, an entity owns eight shops, spread across the same city. Head office sets selling prices and designs shop layout. Alll inventory is purchased centrally. Factors that would indicate that each store is a cash generating unit include the follow’ * Does management monitor the profitability of each store separately? + Does the location of the store suggest that each will have its own unique customer base? PRINTED BY: Sept ye@gmail com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Or consider a steel mill that manufactures a particular grade of steel that is transferred to another factory owned by the entity. If the steel could be sold on the open market (even if all output is transferred internally) then the mill is likely to be a separate cash- generating unit. If there is no external market then the mill and the factory may have tobe combined into a single cash-generating unit. ‘The identification of cash-generating units can be a little arbitrary. That leaves scope for the identification of cash-generating units in such a way that assets that are likely to decrease in value are combined with others that are likely to increase, so that impairment losses are unlikely to be recognised. One alternative to the cash-generating unit is the segment concept as in IFRS 8 Operating Segments. Although determination of segments is also arbitrary, an accounting standard covers the identification of segments, which should improve the comparability across entities, and the identified segments are reported to the public. Note, however, that IAS 36 allows a segment to be used as the cash-generating unit only if the segment equates to the smallest identifiable group of assets that generate independent cash flows. Figure 15.6 shows how in Lafarge Malaysia Berhad Note 15 to.its 2014 financial statements reported the company’s allocation of goodwill to its cash- generating units. Goodwill acquired in a business combination ts allocated, at acquisition, to the cash-generating unit ((CGU") that is expected to benefit from that business combination. Before recognition of any impairment losses, the carrying amount of goodwill has been allocated to the following business segments as independent CGUs: Group 2014 2013 RM‘000 RM’000 Cement 1149458 7151 285 ‘Agaregates and concrete 54219 54219 i it 121 FIGURE 15.6 Allocation of goodwill to cash-generating units Source: Lafarge Malaysia Berhad (2014, p. 98). 15.4.2 Impairment loss for a cash-generating unit — excluding goodwill An impairment loss occurs when the carrying amount of the assets of a cash-generating unit exceeds their recoverable amount. Determining the impairment loss In determining the carrying amount of the assets, all those assets that are directly attributable to the cash-generating unit and that contribute to generating the cash flows used in measuring recoverable amount must be included. There must be consistency between what is being measured for recoverable amount — namely cash flows relating to a group of assets — and the measurement of the carrying amount of those assets. The principles for determining the recoverable amount of a cash-generating unit are the same as those previously described for an individual asset (section 15.3). However, note that paragraph 76(b) of [AS 36 requires that the carrying amount of a cash- generating unit does not include the carrying amount of any recognised liability. This is because, as stated in paragraph 43(b), the calculation of the future cash flows of the cash- generating unit does not include cash outflows that relate to obligations that have been recognised as liabilities, such as payables and provisions. Accounting for an impairment loss in a cash-generating unit Ifan impairment loss is recognised in a cash-generating unit that has not recorded any goodwill, paragraph 104 of IAS 36 states that the impairment loss should be allocated toreduce the carrying amount of the assets of the unit by allocating the impairment loss pro rata based on the carrying amount of each asset in the unit. The reduction in each carrying amount relates to each specific asset, and should be treated as an impairment of each asset, even though the impairment loss was based on an analysis of a cash-generating unit. The loss is accounted for in the same way as that for an individual asset as described in section 15.2, with losses relating to an asset measured at cost being recognised immediately in profit or loss. Paragraph 105 of LAS 36 places some restrictions on an entity's ability to write down assets as a result of the allocation of the impairment loss across the carrying amounts of the assets of the cash-generating unit. For each asset, the carrying amount shouldnot be reduced below the highest of: a. its fair value less costs of disposal (if measurable); D. its value in use (if determinable); and . zero. PRINTED BY: Sept ye@gmail. com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted If there is an amount of impairment loss allocated to an asset, but a part of it would reduce the asset below, say, its fair value less costs of disposal, then that part is allocated across the other assets in the cash-generating unit on a pro rata basis (see illustrative example 15.1). However, as paragraph 106 notes, if the recoverable amount of each of the assets cannot be estimated without undue costs or effort, then an arbitrary allocation of the impairment loss between the assets of the unit will suffice because all the assets of a cash-generating unit work together.A cash-generating unit has been assessed for impairment and it has been determined that the unit has incurred an impairment loss of $12 000. The carrying amounts of the assets and the allocation of the impairment loss on a proportional basis are as shown below. Carrying |Proportion| Allocationof | Net carrying amount impairment loss amount Buildings $ 500000 5/12 $ 5000 $495 000 Equipment 300 000 3/12 3.000 297 000 Land 250 000 25/12 2500 247 500 Fittings 150 000 15/12 1500 148 500 $1200 000 $12.000 However, if the fair value less costs of disposal of the buildings was $497 000, then this is the maximum to which these assets could be reduced. Hence, the balance of the allocated impairment loss to buildings of $2000 (i.e. $5000 — [$500 000 — $497 000]) has to be allocated across the other assets: Carrying |Proportion| Allocationof _| Net carrying amount impairment loss amount Buildings $497 000 Equipment) $297000 297/693 S$ 857 296 143, Land 247500 247.5/693 714 246 786 Fittings 148500 148.5/693 429 148 071 $693 000 $2000 ‘he journal entry to reflect the recognition of the impairment loss is: Impairment Loss Dr 12 000 Accumulated Depreciation and Impairment Losses — Buildings cr Accumulated Depreciation and Impairment Losses ~ Equipment cr Land cr Accumulated Depreciation and Impairment Losses — Fittings cr Corporate assets One problem that arises when dividing an entity into separate cash-generating units is dealing with corporate assets. Corporate assets, such as the headquarters building or the information technology support centre, are integral to all cash-generating units generating cash flows but do not by themselves independently generate cash flows.Paragraph 102 of IAS 36 sets out how corporate assets should be dealt with in determining impairment losses for an entity: Step 1:1f any corporat. can be allocated on a reasonable and consistent basis to cash-generating units, then this should be done. Each unit is then, where appropriate, tested for an impairment loss, Where a loss occurs in a cash-generating unit, the loss is allocated pro rata across the assets including the portion of the corporate asset allocated to the unit. Step 2:If some corporate assets cannot be allocated across the cash-generating, units, the entity: + compares the carrying amount of each unit being tested (excluding the unallocated corporate asset) with its recoverable amount and recognises any impairment loss by allocating the loss across the assets of the unit PRINTED BY: Sept.ye@gmail.com. Printing is for personal, private use only. No part of this, book may be reproduced or transmitted without publisher's prior permission, Violators will be prosecuted identifies the smallest cash-generating unit that includes the unit under review and to which a portion of the unallocated corporate asset can be allocated on a reasonable and consistent basis + compares the carrying amount of the larger cash-generating unit, including the portion of the corporate asset, with its allocated amount. Any impairment loss is then allocated across the assets of the larger cash-generating unit. Illustrative example 15.2 provides the accounting for corporate asse Singapore Engineering has two cash generating units, A and B. The assets of the two units are as follows: Unit A|Unit B Plant $500 $400 Land 300) 220 Singapore Engineering has two corporate assets: the headquarters building and a research centre. The headquarters is assumed to be used equally by both units. ‘The carrying amount of the research centre cannot be allocated on a reasonable basis to the two units. The headquarters building has a carrying amount of $160. ‘The research centre's assets consist of furniture of $100 and equipment of $160. Neither of the corporate asscts produces cash flows for Singapore Engincering. The recoverable amounts of the two cash-generating units are: Unit A $900 Unit B $665 ‘The first step is to calculate the impairment losses for each of the cash generating units. To do this, the carrying amount of the headquarters building is allocated equally between the two units as it is used equally by those units. Impairment losses are then as follows:Unit A Unit B Plant $ 500 $400 Land 300 220 Headquarters building _80 _80 880, 700 Recoverable amount | _900 665 Impairment loss $_o $35 The impairment loss of $35 for Unit B is then allocated across all non-excluded in that unit: Carrying | Proportion of [Loss| Adjusted carrying amount loss amount Plant $400 400/700 $20 $380 Land 220 220/700 11 209 Headquarters 80 80/700, _4 76 building $35, The second step is to deal with the research centre. This requires the determination of any impairment loss for the smallest cash-generating unit that includes the research centre. In this case, the smallest cash-generating unit is the entity as a whole. The impairment loss is calculated as follows: Unit A Plant $ 500 Land 300 Headquarters building [$80 + $76] 156 Unit B Plant 380 Land 209 Research Centre Furniture 40 Equipment 30 1615 Recoverable amount [$900 + $665] 1565 Impairment loss $__50 PRINTED BY: Sept.ye@gmail.com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.