IMPAIRMENT OF ASSETS

PAS 36
Objective

To ensure that assets are carried at no more

than their recoverable amount, and to define
how recoverable amount is determined.
IAS 36 applies to:
• Land
• Buildings
• Machinery and equipment
• Investment property carried at cost
• Intangible assets
• Goodwill
• Investments in subsidiaries, associates, and joint ventures carried at
cost
• Assets carried at revalued amounts under IAS 16 and IAS 38
Key definitions
• Impairment loss – the amount by which the carrying
amount of an asset or cash-generating unit exceeds its
recoverable amount.

• Carrying amount – the amount at which an asset is

recognized in the balance sheet after deducting
accumulated depreciation and accumulated
impairment losses
Key definitions
• Recoverable amount – the higher of an asset’s fair
value less costs of disposal (sometimes called net
selling price) and its value in use.

• Value in use – the present value of the future cash

flows expected to be derived from an asset or cash-
generating unit
Determining Recoverable Amount:
• If fair value less costs of disposal or value in use is
more than the carrying amount, it is not necessary to
calculate the other amount. The asset is not impaired.
• If fair value less costs of disposal cannot be
determined, then recoverable amount is value in use.
• For assets to be disposed of, recoverable amount is
fair value less costs of disposal.
Illustration
On December 31, 2018, an entity has a machinery with the following cost and accumulated
depreciation:
Machinery 5,000,000
Accumulated depreciation (5-year life) 2,000,000
Carrying amount 3,000,000
Due to obsolescence and physical damage, the machinery is found to be impaired. The
entity has determined the following information with respect to the machinery:
Fair value less cost of disposal 2,400,000
Value in use 2,200,000

Required:
a. Compute the impairment loss to be recognized in the 2018 profit or loss.
b. Prepare the journal entry to record the impairment loss.
c. What amount of depreciation expense with respect to the machinery should be
reported in 2019?
Do-it-yourself
TAYLOR Company determined that due to obsolescence an equipment
with an original cost of P900,000 and accumulated depreciation at
December 31, 2017 for P420,000 had suffered a permanent impairment
and as a result should have a recoverable amount of only P300,000.
In addition, the remaining useful life of the equipment was reduced from
8 to 3 years.

Required:
a. Compute the impairment loss to be recognized in the 2017 profit or
loss.
b. Prepare the journal entry to record the impairment loss.
c. In its 2018 statement of financial position, what amount should Taylor
report as accumulated depreciation?
Do-it-yourself
How to compute for the value in use?
(Refer to the illustration in the book)

Answer: Brandy Company

Illustration
The following data pertain to a revalued machinery on January 1, 2018:
Cost Replacement Cost
Machinery 7,500,000 9,000,000
Accumulated depreciation (6-year life) 3,750,000 4,500,000
Carrying amount 3,000,000 4,500,000

On January 1, 2019 an impairment is detected and the recoverable amount on this date of
the machinery is determined to be P1,200,000.

Required:
a. Prepare journal entries to record the revaluation, annual depreciation and realization
of the revaluation surplus.
b. Prepare the journal entry to record the impairment loss, if any.
Do-it-yourself
Impairment of revalued asset
SKIPTON Company bought land in 2009 at a cost of
P300,000. In 2012 the land was revalued to P350,000 and in
2015 it was revalued again to P400,000. At the end of 2018,
the land had a value in use of P270,000 and the fair value less
costs of disposal was P285,000.

How much of the impairment loss should be recognized in

profit or loss?
Do-it-yourself

In January 2015, Grapes Company purchased equipment

at a cost of P2,500,000. The equipment has a residual value of
P500,000, a useful life of 8 years and is depreciated by
straight-line method. Two years later, it became apparent that
this equipment suffered permanent impairment in value. In
January 2017, management determined the recoverable
amount of the equipment to be only P875,000 with a 2-year
remaining useful life and residual value of P125,000.
Do-it-yourself
On January 1, 2017, Wine Company has a machinery with the following
cost and accumulated depreciation.
Machinery 50,000,000
Accumulated Depreciation 15,000,000
The machinery was acquired on January 14, 2014 and has been
depreciated using the straight-line method with useful life of 10 years
and no residual value. On January 1, 2017, the entity has properly
tested the machinery to be impaired. The machinery has a remaining
life of 5 years and is expected to generate undiscounted net cash flows
of P8million per year. The appropriate discount rate of 8% for 5 periods
is 3.99. The fair value less cost of disposal of the machinery on January
1, 2017 is P30million.
Reversal of an impairment loss
• PAS 36 provides that an impairment loss recognized for an asset in
prior years shall be reversed if there has been a change in the
estimate of the recoverable amount.
• However, PAS 36 provides that the increased carrying amount of an
asset due to a reversal of an impairment loss shall not exceed the
carrying amount that would have been determined, had no
impairment loss been recognized for the asset in prior years.
• PAS 36 explicitly provides that an impairment loss recognized for
goodwill shall not be reversed in a subsequent period.
Sample Problem
On January 1, 2014, BUNGA Company purchased equipment with a
cost of P8,800,000, useful life of 20 years and no residual value. The
entity used straight line method as depreciation. At year-end this year
and the next year, the entity suspects that there is an impairment and a
subsequent recovery. Given below are the fair value and the value in
use of the equipment for 2014 and 2015 year-end:
Dec. 31, 2014 Dec. 31, 2015
Fair value 6,480,000 6,720,000
Value in use 6,840,000 6,560,000
Cash-generating units
The smallest identifiable group of assets that generate cash inflows from
continuing use that are largely independent of the cash inflows from other
assets or group of assets.

Recoverable amount should be determined for the individual asset, if possible.

PAS 36 provides that the carrying amount of the CGU does not include the
carrying amount of any recognized liability, unless the recoverable amount of
the CGU cannot be determined without consideration of this liability.
-estimates of future cash flows do not include cash outflows that relate to
obligations that have been recognized as liabilities by the CGU (ex. payables and
provisions)
Priority for impairment allocation:
• First, reduce the carrying amount of any goodwill allocated
to the cash-generating unit (group of units); and

• Second, reduce the carrying amounts of the other assets of

the unit (group of units) on a pro rata basis.
The carrying amount of an asset should not be reduced
below the highest of:

• Its fair value less cost of disposal (if measurable)

• Its value in use (if measurable)
• Zero

If the preceding rule is applied, further allocation of the

impairment loss is made pro rata to the other assets of
the group (group of units).
Illustration
At reporting date, the carrying amount of a cash-generating
unit was considered to have been impaired by P1,000,000.
The unit included the following assets:
Land 3,000,000
Building, net 2,000,000
Machinery, net 500,000
The fair value of land is reliably determined to be P2,800,000.
Determine the carrying amount of the assets after impairment
loss.
Illustration
At reporting date, the carrying amount of a cash-generating
unit was considered to have been impaired by P1,000,000.
The unit included the following assets:
Land 3,000,000
Building, net 2,000,000
Goodwill 500,000
The fair value of land is reliably determined to be P2,800,000.
Determine the carrying amount of the assets after impairment
loss.
Do-it-yourself
One of the cash-generating units of Twin Corporation is that associated with the
manufacture of wine barrels. At 31 December 2018, Twin Corporation believed, based on
an analysis of economic indicators, that the assets of the unit were impaired. The carrying
amounts the assets of the unit at 31 December 2018 were:
Cash 20,000
Receivables, net (allowance for doubtful accounts of P5,000) 35,000
Inventory 80,000
Building, net (depreciated at P60,000 per annum) 240,000
Machinery, net (depreciated at P45,000 per annum) 180,000
Goodwill 15,000
Twin Corporation determined the value in use of the unit to be P535,000. The receivables
were considered to be collectible, except those considered doubtful.
During 2019, Twin Corporation increased the depreciation charge on buildings to P65,000
per annum and to P50,000 per annum for factory machinery. The inventory on hand at 31
December 2018 was sold by the end of 2019. At 31 December 2019, Twin Corporation, due
to a return in the market to the use of traditional barrels for wines and an increase in wine
production, assessed the recoverable amount of the cash-generating unit to be P20,000
greater than the carrying amount of the unit.