Impairment of Assets

Adeeb Hassan

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 Scope exclusions

 Inventories
 Assets arising from construction contracts
 Financial asset IAS 39
 Investment property @ fair value
 IAS 16
 Other assets of standards with impairment

provisions e.g. financial instruments

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 Impairment

Definition
 A (sudden) loss in the value of an asset over and
above the systematic recognition of the loss of the
asset’s value through depreciation.
--Loss = recoverable amount < carrying value
--In net surplus or deficit
--After impairment adjust depreciation charge
--Recognize a liability if required by another standard

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 Recoverable amount

Definition
Higher of
 Fair value less costs to sell and value in use
 Recoverable service amount

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 Cash-generating assets

Definition
 Assets held with the primary objective of
generating a commercial rate of return
–Cash incidental
–Indistinguishable
–Consistency with for-profit entities
–May not meet that objective every year
–Primary purpose
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 Non-cash-generating assets

 Assets other than cash-generating assets.

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 Value in use

Definition
 Present value of the estimated future cash flows
expected to be derived from the continuing use of an
asset and from its disposal at the end of its useful life
--Estimate of future cash flows
--Expectations about variations in timing and amount of
cash flows
--Time value of money (risk free rate of int.)
--Uncertainty inherent in asset
--Other factors e.g. illiquidity incl. in price

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 Discount rate

 Pre-tax
– Asset specific or surrogate
– Time value of money
– Risks specific to the assets for which the
cash flows have not been adjusted

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 Other Key Terms

 Carrying value of asset

 Active market
 Costs of disposal / selling
 Fair value
 Useful / Estimated life
 Exit Value

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 Indicators of impairment

 Cash-generating Units
– External Indicators / factors
1. Unexpected decline in market value
2. Significant adverse changes in technology,
market, economic or legal environment
3. Increase in market rates of interest or rate of
return

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 Indicators of impairment

Internal
1. Obsolete or physical damage
2. Significant adverse changes in entity and
way in which asset will be used
3. Economic performance worse than expected

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 Indicators of impairment

Non-cash-generating
– External
1. Cessation (near) of demand for services
2. Significant adverse changes in technology,
market, economic or legal environment

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 Indicators of impairment

Internal
1. Obsolete or physical damage
2. Significant long term adverse changes in
entity and way in which asset will be used
3. Halt construction before finish
4. Service performance worse than expected

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 Measuring recoverable amount

Fair value
– Active market
– Binding arrangement
 Value in use
 Individual assets
 – Unless dependent on cash flows from other

assets or group of assets

– Recoverable amount of cash-generating unit

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 Intangible asset with an indefinite useful life

 Test annually for impairment

 Irrespective of any indicator of impairment
 Test even if it belongs to a CGU where there has
been no significant changes
 Most recent calculation of recoverable amount
exceeded carrying value by a substantial amount
 Analysis of events and circumstances indicate
impairment is remote

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 Accounting Procedures

Cost 1,000 Cost 1,000

Accumulated Accumulated dep. 400
depreciation 400 Carrying amount 600
Carrying amount 600
Recoverable amount 400
Recoverable amount 900
Asset is impaired
Asset is not impaired
Reduce carrying amount

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 Flowcharts

 Is an Asset Impaired?
 How is an Impairment Loss Recognized?

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 When do you test for impairment?

At each reporting date

 If an indicator has been triggered.
 If no trigger, no further work required on
impairment

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 Identify CGU to which an asset belongs

Assess individual asset first

 If asset does not generate cash flows
independently from other assets
 Smallest group of assets which generates
cash flows largely independent from other
assets or groups of assets
 Consistency from period to period for the
same assets( unless change is justified)

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 Impairment loss for CGU

 Recoverable amount of CGU < carrying amount of

CGU
 Allocate loss to assets in unit on a pro-rata basis
 Carrying amount of an asset shall not be20reduced
below the highest of:
– Fair value less costs to sell
– Value in use (if determinable)
–Zero

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 Reversal of impairment loss
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 • Only if indicators of impairment no longer
 exists
 • Reverse only if there has been a change
 in the estimates
 • Increase carrying amount to recoverable
 amount
 • Increase shall not exceed carrying amount
 if no impairment existed
 • Adjust depreciation

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 Disclosure
 Criteria to distinguish between cash & non-cash
Impairment losses and reversals per class of asset
 And Also for each segment
 For each material loss:
– Event & circumstances
– Amount
– Nature of asset or CGU
– Basis used to determine FV
– Discount rate used for value in use
 Assumptions used (optional)

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 Your Turn

Questions?

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THANK YOU

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