CHAPTER 9

Impairment of assets
IFRS reference
IAS36 – Impairment of assets
 
IFRS for SMEs reference
Section 27 – Impairment of assets
Impairment loss

‘Amount by which the carrying amount of an asset or a

cash generating unit exceeds its recoverable amount’
(IAS36)

Impairment loss = carrying amount – recoverable

amount
Definition of an asset

Conceptual framework:
• Resource
• Controlled by the entity
• As a result of a past event
• From which future economic benefits are expected
to flow to the entity
Recognition criteria

Recognise = include in financial statements

• Can recognise asset only if:
 Receipt is PROBABLE (more likely than not)
 MEASURABLE (approximately determine
the cost)
• An asset should not be recognised unless it meets
definition and recognition criteria
Future economic benefits (FEB)

• If no future economic benefits, then no asset

• Maximum amount of asset = anticipated FEB
• If asset book value > FEB, then have to write asset
down to FEB
• Write-down = impairment loss
Recoverable amount

FEB = Recoverable amount

• Amount expect to recover in the future relating to the
asset
• IF USE ASSET = Present value of future cash flows
expected to be obtained from the asset
• IF SELL ASSET = Fair value less costs to sell
• FEB/RECOVERABLE AMOUNT is higher of value
from using or selling asset (maximum future eco-
benefits)
When to undertake an impairment test

At every reporting date, look for any indication that an

asset may be impaired
Circumstances that indicate impairment:

• Damages to an asset

• Financial difficulties

• Fashion trends

• Changes in production, etc.

Intangible assets

MUST test for impairment every year

Examples:
• Trademarks acquired
• Patents registered
• Development costs capitalised
• Goodwill acquired
Recognising an impairment loss

Impairment loss = recoverable amount less carrying

amount
Dr Impairment loss (P/L)
Cr Accumulated impairment (PPE)
Cr Accumulated impairment (intangible
assets)
Cr Allowances (debtors and inventory)
Reversal of previous impairment

• In subsequent period, when recoverable amount

larger than carrying amount = reverse prior
impairment losses (gain recognised in P/L)
• Reversal of impairment loss SHOULD NOT result in
carrying amount larger than amount had the asset not
been impaired
• Reversal therefore limited to balance of accumulated
impairment
Cash-generating unit (CGU)

Smallest identifiable group of assets that generates cash

inflows
• Identifying a CGU
• Calculating recoverable amount for CGUs
• Recognising impairment loss in CGUs
Goodwill

Goodwill acquired
• Allocating goodwill to CGU
• Testing CGU for goodwill impairment
• Reversal of impairment loss
Disclosure

Notes to the financial statements

For each class of assets:

• The amount of impairment loss in P/L (includes

impairment of inventory etc)

• The amount of reversals of impairments in P/L

• The amount of impairment loss in OCI

• The amount of reversals of impairments in OCI

Disclosure (continued)

For each material impairment or reversal:

• The events and circumstances

• The amount

• The nature of the asset or CGU

• Details about the recoverable amount