Impairment Of Assets Flashcards
Which assets ?
All assets including :
Goodwill
Intangible assets
PPE
BUT EXCLUDING
Inventory
Financial assets (loans, stocks)
Assets must be tested for impairment at the end of each reporting period, if there are indicators of impairments.
IAS 36
Impairment of assets seeks to ensure that an entity’s assets are not carried at more than their recoverable amount
An impairment loss is “ the amount by which the carrying amount of an asset or cash generating unit exceeds its recoverable amount “
Broadly, the recoverable amount of an asset is the amount that can be obtained by either using it or selling it
Recoverable amount
The higher of :
-The fair value less cost of disposal (selling costs)
Or
- value in use (present value of future cash flows discounted)
Fair value
“The price that would be received to sell an asset…in an orderly transaction between market participants at the measurement date”
Value in use
Value in use is calculated by estimating and discounting the income stream which :
1) should be based on reasonable and supportable assumptions
2) should be consistent with the most up to date budgets
3) should be projected cash flows discounted at a rate of return expected for a similarly risky investment
External indicators of impairment
Decline in the market value of the asset
Adverse technological,economical or legal changes
Increase in the discount rate used when computing value in use
Internal indicators of impairment
Evidence of obsolescence or physical damage to the asset
The asset has become idle
Plans to discontinue the operation in which the asset is used
Plans to dispose of the asset
Useful life of the asset reassessed as finite
Evidence that the asset’s economic performance will be worse than expected
Impairment loss
If the recoverable amount of an asset is less than its carrying amount, the assets carrying amount should be reduced to its recoverable amount
The reduction is an impairment loss
In general, an impairment loss is recognised as an expense
The revised carrying amount is then depreciated over the remaining useful economic life
Impairment of revalued assets
1) the impairment loss is first debited to the revaluation reserve to the extent of any credit balance previously existing in that reserve in respect of the same asset (and is shown as a negative figure in other comprehensive income)
2) any excess is then recognised as an expense
IAS36 cash generating units (CGUs)
“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”
If the recoverable amount of the CGU to which the asset belongs should be determined instead and
2) an impairment loss should be recognised if the CGUs recoverable amount is less than its carrying amount
Impairment loss in CGUs
An impairment loss for a CGU is recognised by reducing the carrying amount of the CGUs assets, the loss is allocated between assets as follows :
1) first, to any goodwill which has been allocated to the CGU
2) then, to other assets if the CGU, in proportion to their carrying amounts
Reversal of an impairment loss
Entities must assess whether there are any indications that previous impairment losses have decreased or no longer exist
These indications are generally the opposite of the indications of impairment
If any of these indications exist, the recoverable amount of the asset or CGU must be determined again and and all or part of the original impairment is reversed
However, IAS 36 states that “ an impairment loss recognised for goodwill shall not be reversed in a subsequent period”
Disclosure under IAS 36
For each class of asset disclosure the amount of impairment losses (or reversals) recognised as expenses (or income ) during the period
