MONASH

BUSINESS

Topic 6

Property, Plant and Equipment- Impairment

of Assets
Chapter 13
AASB 136 / IAS 36 Impairment of Assets
 Learning objectives

• Explain the purpose of impairment test for assets

• Assess when to undertake an impairment test
• Explain how to undertake an impairment test for an individual asset
• Identify a cash-generating-unit (CGU) and account for an
impairment loss for a CGU (with and without goodwill)
• Account for the reversal of impairment loss
• Apply the disclosure requirements of AASB 136/ IAS 36

2 ACW2491/Impairment of Assets
 Recall..

• Subsequent to initial recognition, PPE can be measured using:

– Revaluation model – where an asset’s fair value can be
measured reliably, an entity can elect to carry an item of PPE at
its revalued amount (FV) less any subsequent accumulated
depreciation and impairment losses (topic 5)
– Cost model – requires an asset to be carried at its cost less
accumulated depreciation and impairment losses (now)

3 ACW2491/Impairment of Assets
 Property, Plant, and Equipment

• The cost model requires assets to be tested for impairment (AASB 136)
• The purpose of impairment testing is to ensure that assets are not
carried at amounts that exceed their recoverable amounts
– i.e. that assets are not overstated
• Specific exclusions such as inventory, deferred tax assets, financial
assets etc

4 ACW2491/Impairment of Assets
 Impairment testing

• When to undertake an impairment test?

– Any asset where at reporting date there is an indication that the
asset may be impaired, i.e. where carrying amount exceeds
recoverable amount (CA > RA)
– Intangible assets with indefinite lives and those not yet
available for use, and goodwill, must be tested for impairment
each year
– Note: impairment relates to the recoverability of the asset and
is not a feature of the depreciation process

5
ACW2491/Impairment of Assets
 Collecting evidence of impairment

• External sources of information include:

– Market value
– Entity’s environment and or market
– Interest rates
– Market capitalisation
• Internal sources of information include:
– Obsolescence or physical damage
– Changed use within the entity
– Economic performance of the asset

6 ACW2491/Impairment of Assets
 Impairment testing- definitions of values

• Recoverable amount – is the higher of its fair value less costs to sell
and its value in use
• Fair value less costs to sell – is the amount obtainable from sale in an
arm’s length transaction between knowledgeable willing parties, less
cost of disposal
• Costs to sell – incremental costs directly attributable to the disposal,
excluding costs of finance and income tax expense
• Value in use – the present value of the future cash flows expected to
be derived from the asset, requires an estimation of future cash flows
and selection of appropriate discount rate

7 ACW2491/Impairment of Assets
 (Discounted) Value In Use

• An asset is expected to generate the following cash

inflows for the next 2 years:
– Year 1- $40 000
– Year 2- $50 000

Assuming a discount rate of 8%, the value in use of the

asset is calculated as:
= (40,000 x (1/(1+0.08)1) + (50,000 x (1/(1+0.08)2)
= (40,000 x 0.9259) + (50,000 x 0.8673)
= $80,401

8 ACW2491/Impairment of Assets
 Impairment test for an individual asset

• Compare carrying amount with recoverable amount to

determine whether an impairment loss needs to be
recognised…
• CA > RA
– need to write down the asset and record an
impairment loss
• CA < RA
– no entry needed (unless there is a reversal of a
previous impairment loss)

9
ACW2491/Impairment of Assets
 Impairment test for an individual asset

• Impairment loss is recognised immediately in profit or loss

• No need to write off accumulated depreciation or create a
separate accumulated impairment account
– Impairment loss is included in accumulated
depreciation
• Once an impairment loss is recognised, subsequent
depreciation/amortisation is based on the new recoverable
amount
• Refer Example 1

10
ACW2491/Impairment of Assets
 Accounting for impairment for individual asset

Steps:
• 1. Determine CA vs RA of the individual asset, impairment loss
• 2. Prepare journal entry

ACW2491/Impairment of Assets
 Cash Generating Unit (CGU)

• Where assets do not individually generate cash flows, but are part of a
group that does, the group of assets may be considered a cash-generating
unit (CGU)
• Identifying a cash-generating unit:
– Smallest identifiable group of assets that creates independent cash
flows from continuing use
– Identification is arbitrary

12 ACW2491/Impairment of Assets
 CGU

• Impairment occurs when the carrying amount of the cash-

generating unit exceeds its recoverable amount (CA>RA)
• Note: the carrying amount of a cash-generating unit does not
include the carrying amount of any recognised liability

13 ACW2491/Impairment of Assets
 Accounting for impairment for CGU (without goodwill)

Steps:
• 1. Determine CA vs RA of the CGU, impairment loss
• 2. Pro-rate impairment loss to assets that can be impaired
• 3. Check for restriction
• 4. Pro-rate balance to other assets (if applicable)
• 5. Prepare journal entry (ies)

ACW2491/Impairment of Assets
 CGU without goodwill

• Need to allocate the impairment loss by reducing the carrying amount

of the assets of the unit on a pro rata basis (based on the assets’
carrying amounts)
• Limits: no asset is to be reduced below the highest of:
– its fair value less costs to sell
– its value in use
– zero
• Eg if there is impairment loss allocated to an asset, but it would reduce
the asset below say its fair value less costs to sell, then that impairment
amount is allocated on a pro rata basis across the other assets in the
unit
• Refer Illustrative Example 1 Shepherd Ltd

15 ACW2491/Impairment of Assets
 CGU with goodwill

• Goodwill is only recognised when acquired as part of a

business combination, and is then allocated to one or
more cash-generating units
• A cash generating unit that has goodwill allocated to it
must be tested for impairment annually
• An impairment loss is applied firstly to any goodwill
allocated to the unit, and then to the other assets on a
pro rata basis

16 ACW2491/Impairment of Assets
 Accounting for impairment for CGU with goodwill

Steps:
• 1. Determine CA vs RA of the CGU, impairment loss
• 2. Charge impairment loss to goodwill
• 3. Pro-rate balance of impairment to assets that can be impaired
• 4. Check for restriction
• 5. Pro-rate balance to other assets (if applicable)
• 6. Prepare journal entry (ies)

ACW2491/Impairment of Assets
 Reversal of Impairment Loss

• An entity must assess at each reporting date whether there

is evidence for a reversal of a previous impairment loss
• Reversal of a previous impairment loss requires adjusting
the carrying amount of the asset to the recoverable amount
– Limit: the recoverable amount cannot be greater than
the carrying amount that would have been determined if
no impairment had been recognised (hypothetical
amount)
• The increase in carrying amount is recognised immediately
in profit or loss

18 ACW2491/Impairment of Assets
 Reversal of Impairment Loss

• For a cash-generating unit:

– Any reversal is allocated on a pro rata basis to the assets of the
unit with the carrying amounts of those assets
• Goodwill:
– An impairment loss recognised for goodwill is not to be
reversed in a later period
– i.e. goodwill cannot be reinstated
• Refer Illustrative Example 2 Reacher Ltd

19
ACW2491/Impairment of Assets
 Accounting for reversal of CGU (with goodwill)

Steps:
• 1. Determine CA vs RA of the CGU, reversal of impairment loss
• 2. Pro-rate reversal of impairment to assets that can be reversed (goodwill
cannot be reversed)
• 3. Check for restriction (actual CA vs hypothetical CA)
• 4. Pro-rate balance to other assets (if applicable)
• 5. Prepare journal entry (ies)

ACW2491/Impairment of Assets
 Disclosure requirements

• AASB 136/ IAS 36 Para 126

• AASB 116/ IAS 16 Para 73(e)

ACW2491/Impairment of Assets
 Tutorial questions

Chapter 13 (Impairment of Assets) Text 10th ed.:

• RQ1, 3, 4, 5, 7, 10
• PQ1, 4, 9*

22
ACW2491/Impairment of Assets