Impairment of asset

Impairment
An asset is impaired if its recoverable amount is below the value
currently shown on the statement of financial position – the asset's
current carrying amount.
Recoverable amount is taken as the higher of:
• fair value less costs to sell (net realisable value), and
• value in use.
• An impairment exists if:
Measurement of recoverable amount
Measurement of fair value less costs to sell
Measurement may be by way of:
• a binding sale agreement
• the current market price less costs of disposal (where an active market exists).
Measurement of value in use
• Value in use is determined by estimating future cash inflows and outflows to
be derived from the use of the asset and its ultimate disposal, and applying a
suitable discount rate to these cash flows.
• Cash flows relating to financing activities or income taxes should not be
included.
Illustration 1 – Recoverable amount
The following information relates to three assets:

What is the recoverable amount of each asset?

Calculate the impairment loss for each of the three assets.
Solution

The recoverable amounts for each asset are as follows:

A$120,000
B$130,000
C$100,000

The impairment loss for each asset is as follows:

ANil
B$20,000
C$20,000
Indicators of impairment

• IAS 36 requires that at each reporting date, an entity must assess

whether there are indications of impairment.
• Indications may be derived from within the entity itself (internal
sources) or the external market (external sources).
External sources of information
• The asset's market value has declined more than expected.
• Changes in the technological, market, economic or legal environment
have had an adverse effect on the entity.
• Interest rates have increased, thus increasing the discount rate used in
calculating the asset's value in use.
Internal sources of information
• There is evidence of obsolescence of, or damage to, the asset.
• Changes in the way the asset is used have occurred or are imminent.
• Evidence is available from internal reporting indicating that the
economic performance of an asset is, or will be, worse than expected.

If an indicator of impairment exists then an impairment review must be

performed.
Annual impairment reviews

Where there is no indication of impairment then no further action need

be taken.
An exception to this rule is:
• goodwill acquired in a business combination
• an intangible asset with an indefinite useful life
• an intangible asset not yet available for use.

IAS 36 requires annual impairment reviews for these assets irrespective

of whether there is any indication of impairment
Recognition and measurement of an impairment

Where there is an indication of impairment, an impairment review should be carried

out:
• the recoverable amount should be calculated
• the asset should be written down to recoverable amount and
• the impairment loss should be immediately recognised in the statement of profit or
loss.

The only exception to this is if the impairment reverses a previous gain taken to the
revaluation surplus.
In this case, the impairment will be taken first to the revaluation surplus (and so
disclosed as other comprehensive income) until the revaluation gain is fully exhausted,
then any excess is taken to the statement of profit or loss.
Test your understanding 1
Recoverable amount
An entity owns a car that was involved in an accident at the year end. It is
barely useable, so the value in use is estimated at $1,000. However, the car
is a classic and there is a demand for the parts. This results in a fair value
less costs to sell of $3,000. The opening carrying amount was $8,000 and
the car was estimated to have a life of eight years from the start of the year.
Identify the recoverable amount of the car and any impairment required.
• 8000-1000 = 7000
• 7000 – 3000 = 4000
Test your understanding 2
An entity owns a property which was revalued to $500,000 on 31
March 20X3 with a revaluation gain of $200,000 being recognised as
other comprehensive income and recorded in the revaluation surplus.
At 31 March 20X5 the property had a carrying amount of $460,000 but
the recoverable amount of the property was estimated at only
$200,000.
What is the amount of impairment and how should this be treated in
the financial statements?
Answer TYU2
• Impairment = $460,000 – 200,000 = $260,000
• Of this $200,000 is debited to the revaluation surplus to reverse the
previous upward revaluation (and recorded as other comprehensive
income) and the remaining $60,000 is charged to the statement of
profit or loss.
 Reversal of an impairment loss
The calculation of impairment losses is based on predictions of what may happen in the
future. Sometimes, actual events turn out to be better than predicted. If this happens,
the recoverable amount is re-calculated and the previous write-down is reversed.
• Impaired assets should be reviewed at each reporting date to see whether there are
indications that the impairment has reversed.
• A reversal of an impairment loss is recognised immediately as income in profit or loss.
If the original impairment was charged against the revaluation surplus, it is recognised
as other comprehensive income and credited to the revaluation surplus.
• The reversal must not take the value of the asset above its depreciated historical cost,
i.e. the amount it would have been if the original impairment had never been
recorded. The depreciation that would have been charged in the meantime must be
taken into account.
• The depreciation charge for future periods should be revised to reflect the changed
carrying amount.
• An impairment loss recognised for goodwill cannot be reversed in a
subsequent period. The reason for this is that once purchased
goodwill has become impaired, any subsequent increase in its
recoverable amount is likely to be an increase in internally generated
goodwill, rather than a reversal of the impairment loss recognised for
the original purchased goodwill. Internally generated goodwill cannot
be recognised.
Indicators of impairment reversal

External indicators of an impairment reversal are:

• Increases in the asset’s market value
• Favourable changes in the technological, market, economic or legal
environment
• Decreases in interest rates.

Internal indicators of an impairment reversal are:

• Favourable changes in the use of the asset
• Improvements in the asset’s economic performance.
 Illustration 2 – Reversal of impairment
Boxer purchased a non-current asset on 1 January 20X1 at a cost of $30,000.
At that date, the asset had an estimated useful life of ten years. Boxer does
not revalue this type of asset, but accounts for it on the basis of depreciated
historical cost. At 31 December 20X2, the asset was subject to an impairment
review and had a recoverable amount of $16,000.
At 31 December 20X5, the circumstances which caused the original
impairment to be recognised have reversed and are no longer applicable,
with the result that the recoverable amount is now $40,000.
Required:
Explain, with supporting computations, the impact on the financial
statements of the two impairment reviews.
 Solution Dr Impairment loss 8000
Cr Assets 8000

What is the new carrying amount of

the assets at 31 Dec 20X2?
The new carrying amount of the asset
on 1 Jan 20X3 is 16000 still has useful
balance of 8 years, so moving forward
the depreciation charges is 2000

The asset is written down to $16,000 and the impairment loss of $8,000 is charged to profit
or loss. The depreciation charge per annum in future periods will be $2,000 ($16,000 × 1/8).
 On 31 dec 20x5, the
recoverable amount is
40,000, the carrying amount
of the assets is 10,000, you
think you wish to increase
the value of the assets to
40,000 or reverse all the
impairment loss, no you
cannot, you can only
increase to the historical
carrying amount 15000

There has been no impairment loss. In fact, there has been a complete
reversal of the first impairment loss. The asset can be reinstated to its
depreciated historical cost i.e. to the carrying amount at 31 December
20X5 if there never had been an earlier impairment loss.
The reversal of the loss is recognised by increasing the asset by $5,000 ($15,000
– $10,000) and recognising a gain of $5,000 in profit or loss.
It should be noted that the whole $8,000 original impairment cannot be reversed.
The impairment can only be reversed to a maximum amount of depreciated
historical cost, based upon the original cost and estimated useful life of the asset.
Cash generating units (CGUs)
What is a CGU?
• When assessing the impairment of assets it will not always be possible to
base the impairment review on individual assets.
• The value in use calculation may be impossible on a single asset because
the individual asset does not generate distinguishable cash flows.
• In this case, the impairment calculation should be based on a CGU.
Definition of a CGU
A CGU is defined as 'the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash inflows
from other assets' (IAS 36, para 6).
Illustration 3 – CGUs
• In a restaurant chain, the smallest group of assets might be the assets
within a single restaurant, but with a mining company, all the assets
of the company might make up a single cash generating unit.
The impairment calculation

The impairment calculation is done by:

• assuming the cash generating unit is one asset
• comparing the carrying amount of the CGU to the recoverable amount of the CGU.

• As previously, an impairment exists where the carrying amount exceeds the

recoverable amount.
Impairment of a CGU

• Deal with any specifically impaired assets first, then impair the CGU.
IAS 36 requires that an impairment loss attributable to a CGU should
be allocated to write down the assets in the following order:
1 Purchased goodwill
2 The other assets (including other intangible assets) in the CGU on a
pro-rata basis based on the carrying amount of each asset in the CGU.

Note: No individual asset should be written down below its recoverable amount. This means that,
unless specifically impaired, current assets are unlikely to be impaired as part of a CGU, as they are
already likely to be carried at their recoverable amounts. Inventory, as noted above, is outside the
scope of IAS 36.
Test your understanding 3
Sebb Co runs a unit that suffers a massive drop in income due to the
failure of its technology on 1 January 20X8. The following carrying
amounts were recorded in the books immediately prior to the
impairment:
The recoverable value of the unit is estimated at $85 million. The
technology is worthless, following its complete failure.
The other net assets include inventory and receivables. It is considered
that the carrying amount of other net assets is a reasonable
representation of their net realisable value.
Show the impact of the impairment on 1 January 20X8.
Test your understanding 3 answer
As the other net assets are
held at a reasonable
representation of the
realisable value, no
impairment should be
allocated to these. No assets
should be written down to
below their recoverable
amount. On this basis, the
other net assets are left at
their current carrying amount.