CONCEPTUAL FRAMEWORK

&
ACCOUNTING STANDARDS
2019 Edition

Lecture Aid
By: Zeus Vernon B. Millan

1
PAS 36 Impairment of Assets

Learning Competencies

 
• State the core principle of PAS 36.
• Account for the impairment of individual assets
and cash-generating units.
• Account for the reversal of impairment.

FAR PART 1B: Zeus Vernon B. Millan

Core Principle
• If the carrying amount of an asset is greater than its
recoverable amount, the asset is impaired. The excess
is impairment loss.

FAR PART 1B: Zeus Vernon B. Millan

Computation of Impairment loss
Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx

• Recoverable amount is the amount to be recovered through

use or sale of an asset. It is the higher of an asset’s:
a. Fair value less costs of disposal, and
b. Value in use

Value in use is the present value of the future cash flows

expected to be derived from an asset or cash-generating unit.

FAR PART 1B: Zeus Vernon B. Millan

Identifying an asset that may be impaired

• An entity shall assess at the end of each reporting period

whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall
estimate the recoverable amount of the asset.

• If there is no indication that an asset may be impaired, an

entity is not required to estimate the recoverable amount of
the asset.

FAR PART 1B: Zeus Vernon B. Millan

Indications of impairment

I. External sources of information

a. Significant decline in the asset’s value more than what is expected as a result of passage
of time of normal use.
b. Significant changes in technological, market, economic or legal environment in which
the entity operates or in the market to which an asset is dedicated.
c. Increase in market interest rates or other market rates of return on investments which
are likely to affect discount rates used in calculating asset’s value in use and decrease
asset’s recoverable amount materially.
d. Carrying amount of the net assets is more than its market capitalization.

II. Internal sources of information

e. Evidence of obsolescence or physical damage
f. Significant change with adverse effect to the entity has taken place or will take place,
which will affect expected use of asset, e.g., discontinuance, disposal, restructuring plans.
g. Evidence is available from internal reporting that indicates that the economic
performance of an asset is, or will be, worse than expected.
FAR PART 1B: Zeus Vernon B. Millan
Required testing for impairment

• The following assets are required to be tested for

impairment at least annually, whether or not there are
indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination

FAR PART 1B: Zeus Vernon B. Millan

Measuring recoverable amount

• Recoverable amount is the higher of the asset’s fair

value less costs of disposal and value in use.
• However, if there is no reason to believe that an asset’s
value in use materially exceeds its fair value less costs of
disposal, the asset’s fair value less costs of disposal may
be used as its recoverable amount. This will often be the
case for an asset that is held for disposal.

FAR PART 1B: Zeus Vernon B. Millan

Value in use
• Value in use is the present value of the future cash flows
expected to be derived from an asset or cash-generating unit.
 Any residual value of the asset and disposal costs
should be included in estimating future cash inflows and
outflows.
 Cash flow projections shall cover a maximum period of 5
years.
 Projections beyond 5 years are extrapolated.
The discount rate to be used shall be a pre-tax rate

FAR PART 1B: Zeus Vernon B. Millan

Value in use - continuation
 When making estimates of future cash flows for purposes of
computing value in use:
Exclude cash flows arising Include cash flows arising
from: from:

1. Future restructurings not 1. Revenues to be derived

yet committed from the continuing use of
2. Improving or enhancing the asset
the asset’s performance 2. Day-to-day costs of using
3. Income taxes the asset
4. Financing activities 3. Any residual value of the
asset and disposal costs
FAR PART 1B: Zeus Vernon B. Millan
Recognizing and measuring an impairment loss

• Impairment loss is recognized in profit or loss, unless

the asset is carried at revalued amount, in which case
revaluation surplus is decreased first and any excess is
recognized in profit or loss. The decrease in the
revaluation surplus is recognized in other
comprehensive income.

FAR PART 1B: Zeus Vernon B. Millan

Depreciation after impairment

• After the recognition of an impairment loss, the

depreciation (amortization) charge for the asset shall be
adjusted in future periods to allocate the asset’s revised
carrying amount, less its residual value (if any), on a
systematic basis over its remaining useful life.

FAR PART 1B: Zeus Vernon B. Millan

Cash-generating unit (CGU)

• Cash-generating unit (CGU) 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.

FAR PART 1B: Zeus Vernon B. Millan

Impairment of individual assets included in a
CGU
• Assets whose recoverable amount can be determined
reliably are tested for impairment individually.
• Assets whose recoverable amount cannot be determined
reliably (e.g., assets that do not generate their own cash
flows) are included in a CGU. The CGU is the one tested
for impairment.

FAR PART 1B: Zeus Vernon B. Millan

Allocating goodwill to CGU’s

• For purposes of impairment testing, goodwill acquired in

a business combination shall be allocated to each of
the acquirer’s CGU in the year of business combination.

FAR PART 1B: Zeus Vernon B. Millan

Impairment loss for a CGU

• The impairment loss on a CGU shall be allocated

1. First, to any goodwill allocated to the CGU
2. Then, to the other assets of the unit pro rata on the basis
of the carrying amount of each asset in the unit.

FAR PART 1B: Zeus Vernon B. Millan

Reversal of Impairment loss
             

Recoverable amount on date of

    d reversal
 

CA if no IL had been recognized

c
  previously
 

  b CA on date of reversal
             

• (d) – (c) = Reversal of impairment loss recognized in other

comprehensive income
• (c) – (b) = Reversal of impairment loss recognized in profit or
loss
 

FAR PART 1B: Zeus Vernon B. Millan

 APPLICATION OF CONCEPTS
 

PROBLEM 2: FOR CLASSROOM DISCUSSION

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 18

OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

Conceptual Framework & Acctg.

19
Standards (by: Zeus Vernon B. Millan)
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Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 20