2022/04/20

IAS 36
Impairment of
assets

Lecture 2

Contents – IAS 36 Gripping GAAP:

Chapter 11

1. Introduction and important definitions (par. 1)

2. Impairment indicator review (par. 2)
3. Recoverable amount (par. 3)
4. Recognition and measurement (par. 4)
5. Reversal of impairment losses (par. 5)
6. Disclosure (par. 8)
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5. 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 CA)

5. Reversal of impairment loss

• IAS 36 provides indicators for in assessing whether
impairment losses may have reversed:
NB!
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.
NB!
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.
Links to IAS 8
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5. Reversal of impairment loss

Measurement

Cost model Revaluation model

• When reversing an
For BAC 200 we will not do
impairment, the CA must
impairments or reversal of
never increase above the CA
impairments on revalued assets
it would have been, had the
IGNORE par. 5.3
asset never been impaired.

• Thus, we may not increase

the asset’s CA above its
historical CA Original cost LESS
Accumulated depreciation

5. Reversal of impairment loss

• 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: NB!

• 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 that what the carrying amount of the assets would
have been if no impairments were calculated in the past.
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5. Reversal of impairment loss

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. NB!

5. Reversal of impairment loss

Step 4
Compare the recoverable amount to the carrying amount without
impairment.
 If the recoverable amount of an asset at year end is more than
the carrying amount without impairment.

 Recoverable amount is limited to

carrying amount without impairment.

 Recognise the increase in the value of the asset (reversal of

impairment loss) in the SFP and SPLOCI.

Step 5
Depreciation in subsequent periods calculated using new
depreciable amount (recoverable amount), residual value and
remaining useful life (can change)
Links to IAS 8
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5. Reversal of impairment losses

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

Write both in tests Limited to CA without

and conclude impairment
NB!
which is higher

NEW RECOVERABLE
AMOUNT > CARRYING AMOUNT

Higher of: Per accounting records

• FV less costs of
disposal
• Value in use
Recoverable amount - Carrying amount = Reversal of
impairment loss

5. Reversal of impairment losses

A reversal of an impairment loss is recognised in the SPLOCI
& SFP:
Dr Cr
Accumulated depreciation and impairment loss: XXX
asset (SFP)
Reversal of impairment loss (SPLOCI) XXX
Reversal credited to decrease other expenses OR cost of sales

NB! The depreciation expense is calculated in future periods as follows:

Revised carrying amount (recoverable amount) less residual value over

its remaining useful life.
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Class example 4
Information and required:

The following information for an asset is available:

Measurement model R
Cost (1 January 20X0) 50 000
Depreciation expense recognised in P/L for the year ended
31 December 20X1 10 000
Impairment loss recognised in P/L for the year ended
31 December 20X1 3 000
Recoverable amount for the year ended 31 December 20X2 22 000

At 31 December 20X2, there were indications that the circumstances that

originally caused the impairment in 20X1 have reversed. Depreciation is
provided using the straight-line method over the asset’s useful life. The
asset has no residual value.

Calculate the impairment loss reversal at 31 December 20X2.

Class example 4
Solution:

Step 1: 31 December 20X2

An entity must assess, at the end of each reporting period, whether there is
any indication for a reversal of impairment loss. Circumstances that caused
impairment have reversed

Step 2:
If there is an indication of reversal of impairment loss an entity must
calculate the recoverable amount. R22 000
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Class example 4
Solution:

Step 3: Compare recoverable amount to the carrying amount

R Given
Cost (1 January 20X0) 50 000 R50 000 / R10 000 =
Depreciation (20X0 and 20X1) (50 000 / 5 x 2 years) (20 000) 5 years estimated
useful life
Carrying amount on 31 December 20X1 30 000
Impairment loss recognised during 20X1 (given) (3 000) Given

Revised carrying amount on 31 December 20X1 27 000 Recoverable amount 20X1

Depreciation (20X2) (27 000 / 3) Remaining useful life (9 000)

Carrying amount on 31 December 20X2 18 000 RA > CA
Recoverable amount 22 000

Class example 4
Solution:

Step 3 (cont.): Calculate the carrying amount WITHOUT impairment.

R
Cost (1 January 20X0) 50 000
Depreciation (20X0 to 20X2) (50 000 / 5 x 3 years) (30 000) Recoverable amount of
Carrying amount on 31 December 20X2 Historical CA 20 000 R22 000 is LIMITED to
R20 000
NB!

Impairment calculation
R
Carrying amount on 31 December 20X2 (slide 13) 18 000
Recoverable amount (historical CA) (20 000)
Impairment loss reversal at 31 December 20X2 (2 000) Step 4

Revised CA and amount to use to calculate future depreciation

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GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

Information

Raingo Limited applies the cost model to its PPE. An item of plant
was purchased on 1 January 20X1 at a cost of R100 000.

• Details of the plant’s estimated recoverable amount are as

follows:
Date R
31/12/20X1 70 000
31/12/20X2 65 000
31/12/20X3 30 000

• Depreciation is provided using the straight-line method over its

useful life. The estimated useful life of the plant is 5 years with no
residual value.

GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

Information

• The drop in the plant’s value at the end of 20X3 was due to
damage caused during a riot on the factory premises in 20X3.
Similar damage was caused during a similar riot in 20X1. The
damage incurred during the 20X1 riots was repaired in 20X2.

Required:
a) Show the journals for each of the years ended 31 December
20X1, 20X2 and 20X3.

b) Disclosure – Class example 6.

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GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

Solution: 20X1
31 December 20X1
Step 1: An entity must assess, at the end of each reporting period, whether
there is any indication that an asset may be impaired. Riot = external indicator

Step 2: If there is an indication of impairment an entity must calculate the

recoverable amount. Given = R70 000

Step 3: Compare the recoverable amount to the carrying amount.

R
Cost (1 January 20X1) 100 000
Depreciation (20X1) (100 000 / 5) (20 000)
Carrying amount on 31 December 20X1 80 000
Recoverable amount (given) (70 000) Revised CA

Impairment loss 10 000 Step 4

GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

a) Journals for the year ended 20X1

Dr Cr
Plant: cost (or PPE) (SFP) Plant purchased 100 000
in 20X1
Bank (SFP) 100 000
Increase other
expenses
Dr Cr
Depreciation (SPLOCI) (slide 17) 20 000
Accumulated depreciation and 20 000
impairment loss: Plant (SFP)
Increase other Dr Cr
expenses
Impairment loss (SPLOCI) (slide 17) 10 000
Accumulated depreciation and 10 000
impairment loss: Plant (SFP)
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GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

Solution: 20X2
31 December 20X2
Step 1: An entity must assess, at the end of each reporting period, whether
there is any indication that an asset may be impaired or possible reversal of
impairment. Damage repaired

Step 2: If there is an indication of impairment or reversal of impairment an

entity must calculate the recoverable amount. Given = R65 000

Step 3: Compare recoverable amount to the carrying amount

R
Carrying amount on 31 December 20X1 70 000 Revised CA
(slide 17)
Depreciation (20X2) (70 000 / 4) Remaining useful life (17 500)
Carrying amount on 31 December 20X2 52 500 RA > CA
Recoverable amount (given) 65 000

GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

Solution: 20X2

Step 3 (cont.): Calculate the carrying amount WITHOUT impairment.

R
Cost (1 January 20X1) 100 000
Depreciation (20X1 & 20X2) (100 000 / 5 x 2 years) (40 000) Recoverable amount of
Carrying amount on 31 December 20X2 Historical CA 60 000 R65 000 is LIMITED to
R60 000
NB!
Impairment calculation
R
Carrying amount on 31 December 20X1 70 000 Revised CA
(slide 17)
Depreciation (20X2) (70 000 / 4) Remaining useful life (17 500)
Carrying amount on 31 December 20X2 52 500
Recoverable amount (historical CA) (60 000)
Impairment loss reversal (7 500) Step 4
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GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

a) Journals for the year ended 20X2

Increase other
expenses
Dr Cr
Depreciation (SPLOCI) (slide 20) 17 500
Accumulated depreciation and 17 500
impairment loss: Plant (SFP)

Dr Cr
Accumulated depreciation and impairment
loss: Plant (SFP) (slide 20) 7 500
Impairment loss reversal (SPLOCI) 7 500
Decrease other
expenses

GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

Solution: 20X3
31 December 20X3
Step 1: An entity must assess, at the end of each reporting period, whether
there is any indication that an asset may be impaired or possible reversal of
impairment. Riot = external indicator

Step 2: If there is an indication of impairment or reversal of impairment an

entity must calculate the recoverable amount. Given = R30 000

Step 3: Compare recoverable amount to the carrying amount

R
Carrying amount on 31 December 20X2 60 000 Revised CA
(slide 20)
Depreciation (20X3) (60 000 / 3) Remaining useful life (20 000)
Carrying amount on 31 December 20X3 40 000
CA > RA
Recoverable amount (given) (30 000)
Impairment loss 10 000 Step 4
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GAAP Graded questions:

Class example 5 Q7.15, Part A (adapted)

a) Journals for the year ended 20X3

Increase other
expenses
Dr Cr
Depreciation (SPLOCI) (slide 22) 20 000
Accumulated depreciation and 20 000
impairment loss: Plant (SFP)

Increase other Dr Cr
expenses
Impairment loss (SPLOCI) (slide 22) 10 000
Accumulated depreciation and 10 000
impairment loss: Plant (SFP)

Ch 7: Ch 7: Ch 7:
Textbook examples Ex 30 Ex 31 Ex 32

You can work through the following examples in Gripping

GAAP to capture your knowledge:

• Chapter 7: Example 30
• Chapter 7: Example 31
• Chapter 7: Example 32
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6. Disclosure
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).

6. 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
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6. Disclosure
NOTES TO THE FINANCIAL STATEMENTS

Descriptive information (cont.):

• Is the recoverable amount based on the 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)

6. Disclosure
NOTES TO THE FINANCIAL STATEMENTS

TAKE NOTE

• If one of the abovementioned notes are required (Profit

before taxation OR Property, plant and equipment OR
Intangible asset), 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 profit before tax note OR
the relevant asset note.
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6. Disclosure – Example

• Refer to detailed disclosure example on clickUP .

GAAP Graded questions:

Class example 6 Q7.15, Part A (adapted)

Information

Use the same information and solution for part (a) in class example 5.

Required:
Disclose the “Profit before tax” and “Property, plant and equipment”
note to the financial statements of Raingo Limited for the years ended
31 December 20X1, 20X2 and 20X3.

Notes:
• Accounting policies are not required.
• Descriptive information is required.
• Assume all amounts are material.
• Round all amounts to the nearest Rand.
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GAAP Graded questions:

Class example 6 Q7.15, Part A (adapted)

RAINGO LIMITED
NOTES FOR THE YEAR ENDED 31 DECEMBER 20X3

2. Profit before tax

Profit before tax is stated after taking the following into account:
Slide 23 Slide 21 Slide 18
R R R
20X3 20X2 20X1
Income:
Line-item
Reversal of impairment loss (included in other expenses -
line-item) - 7 500

Expenses:
Line-item
Depreciation (included in other expenses line-item) 20 000 17 500 20 000
Impairment loss (included in other expenses line-item) 10 000 - 10 000
Line-item

RAINGO LIMITED
NOTES FOR THE YEAR ENDED 31 DECEMBER 20X3

4. Property, plant and equipment Slide 23 Slide 21 Slide 18

R R R
20X3 20X2 20X1
Carrying amount on 1 January 60 000 70 000 -

Gross carrying amount 100 000 100 000 -

Accumulated depreciation and impairment losses (40 000) (30 000) -

Movements during the year:

Additions - - 100 000

Depreciation (included in other expenses) Line-item (20 000) (17 500) (20 000)
Line-item
Impairment loss recognised in profit or loss (included in other expenses) (10 000) - (10 000)

Reversal of impairment loss recognised in profit or loss (included in other

expenses) - 7 500 -
Line-item

Carrying amount on 31 December 30 000 60 000 70 000

Gross carrying amount 100 000 100 000 100 000

Accumulated depreciation and impairment losses (70 000) (40 000) (30 000)
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GAAP Graded questions:

Class example 6 Q7.15, Part A (adapted)

RAINGO LIMITED
NOTES FOR THE YEAR ENDED 31 DECEMBER 20X3

4. Property, plant and equipment

1 3
The impairment loss of R10 000 in 20X1 and R10 000 in 20X3 is as a result
2
of damage during a riot on the factory premise. The reversal of impairment
of R7 500 in 20X2 is as a result of repairs to the plant carried out during
20X2. The recoverable amount was based on … (value in use or fair value
4 5
less costs of disposal) and amounted to R70 000 in 20X1, R65 000 in 20X2
and R30 000 in 20X3.

Descriptive information disclosed in either

of two notes – required will guide you