IAS 36

1. Impairment of Assets:
IAS 36

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6. Impairment of Assets
• Related standards
• IAS 36
• Current GAAP comparisons
• IFRS financial statement disclosures
• Looking ahead
• End-of-chapter practice
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7. Related Standards
• FAS 157 Fair value measurements
• FAS 144 Accounting for the impairment or
disposal of long-lived assets
• FAS 142 Goodwill and other intangible assets
• FAS 141 Business combinations
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8. Related Standards
• IFRS 3 Business combinations
• IAS 16 Property, plant and equipment
• IAS 17 Leases
• IAS 27 Consolidated and separate financial
statements
• IAS 28 Investments in associates
• IAS 31 Interests in joint ventures
• IAS 38 Intangible assets
• IAS 40 Investment property
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9. IAS 36 – Overview
• Objective and scope
• Identifying an asset that might be impaired
• Recognizing and measuring an impairment
loss for an individual asset
• Recognizing and measuring an impairment
loss for cash-generating units and goodwill
• Reversing an impairment loss
• Disclosure
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10. IAS 36 – Objective and Scope
• IAS 36 ensures that assets are reported on the
statement of financial position at no more
than the entity can recover from their use or
sale.
• May be an impairment loss—“the amount by
which the carrying amount of an asset or a
cash-generating unit (CGU) exceeds its
recoverable amount”
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11. IAS 36 – Objective and Scope
• IAS 36 excludes:
– inventories
– assets arising from construction contracts
– employee benefit assets
– deferred tax assets
– financial assets under IAS 39
– non-current assets or disposal groups held-for-sale
– investment property, biological assets based on FV
measurements
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12. IAS 36 – Objective and Scope
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13. IAS 36 – Identifying an Asset that
May Be Impaired• Assets
– end of each reporting period
– assess for indications of impairment
– if indications of impairment, test for impairment
• Intangibles with indefinite lives, those not yet
ready for use, and goodwill
– annually
– test for impairment regardless of indications of
impairment
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14. IAS 36 – Identifying an Asset that
May Be Impaired
Indication of impairment? Consider:
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15. IAS 36 – Identifying an Asset that
May Be Impaired
Testing for impairment:
• Estimate asset/CGU’s recoverable amount. If
recoverable amount is greater than the
carrying amount – no impairment.
• Recoverable amount - higher of:
– fair value less costs to sell, and
– value in use 15

16. IAS 36 – Identifying an Asset that
May Be Impaired
• For assets that do not generate
independent cash flows on their own –
group into cash-generating units (CGUs)
• CGU – “the smallest identifiable group of
assets that generates cash flows that are
largely independent of the cash flows from
other assets or groups of assets”
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17. IAS 36 – Identifying an Asset that
May Be Impaired
• Fair value less costs to sell = proceeds from arm’s-length sale
of an asset/CGU between knowledgeable willing parties less
incremental direct costs of its disposal
• Best measure: arm’s-length bargained price in a binding sales
agreement in an active market.
• Hierarchy of appropriate methods to establish fair value
• Disposal costs: e.g., legal costs, transaction taxes, removal
costs, costs to put in condition for sale
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18. IAS 36 – Identifying an Asset that
May Be Impaired
• Value in use = present value of the future cash
flows expected from asset/CGU’s use and
ultimate disposal
• Two approaches:
1. Most likely cash flows from use and disposal
discounted using risk-adjusted discount rate.
2. Probability-weighted cash flows from use and
disposal discounted using remaining risk-adjusted
discount rate.
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19. IAS 36 – Identifying an
Asset that May Be Impaired
• Estimated cash flows with a 40% probability they will be £120
and a 60% probability they will be £80. Value in use?
• Method 1: Most likely cash flows = £80. This amount is
discounted using a rate that takes into account all risks
including the uncertainty of the cash flow amounts.
• Method 2: Expected value of cash flows = (120 × 40%) + (80 ×
60%) = £96. This amount is discounted using a rate that
includes remaining risks.
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20. IAS 36 – Recognizing and Measuring an Impairment
Loss for an Individual Asset
• If recoverable amount < carrying amount:
Dr. Impairment loss £
Cr. Accumulated impairment losses £
• Recalculate depreciation rate.
• If recoverable amount > carrying amount: no
impairment
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21. IAS 36 – Recognizing and Measuring an Impairment
Loss for CGUs and Goodwill
CGU’s carrying amount
= carrying amount of all assets used to generate
the relevant stream of cash flows
• Includes assets
– directly involved, and
– those allocated to the CGU on a reasonable basis
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22. IAS 36 – Recognizing and Measuring an Impairment
Loss for CGUs and Goodwill
• Goodwill allocated to a CGU or group of CGUs
not larger than an “operating segment” that
is:
– expected to benefit from synergies of a
combination
– at lowest level in organization that manages the
goodwill
– not on an arbitrary basis
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23. IAS 36 – Recognizing and Measuring an Impairment
Loss for CGUs and Goodwill
• If part of CGU with allocated goodwill is sold:
– allocate goodwill between portion sold and
portion remaining
– base on relative value of the CGU sold to portion
retained
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24. IAS 36 – Recognizing and Measuring an Impairment
Loss for CGUs and Goodwill
Testing CGUs for impairment
• CGUs with related G/W not allocated specifically:
– Test when an indication of impairment
– Loss = CGU carrying amount excluding G/W -
recoverable amount
• CGUs with G/W allocated to it
– Test at least annually
– Loss = CGU carrying amount including G/W –
recoverable amount 24

25. IAS 36 – Recognizing and Measuring an Impairment
Loss for CGUs and Goodwill
• Impairment loss for a CGU or group of CGUs:
– assign loss to carrying amount of G/W allocated to
the CGU or group
– allocate remainder to assets in CGU on basis of
relative carrying amounts
• Loss is impairment loss for individual assets in
CGU
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27. IAS 36 – Reversing an Impairment Loss
• No reversal of impairment loss for G/W
• For other assets, reversal permitted if
estimates used to determine recoverable
amount have changed
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28. IAS 36 – Reversing an Impairment Loss
• For an individual asset:
– reversal limited to an increase to what asset
would have been, net of
depreciation/amortization, if no impairment had
been recognized initially
– unless accounted for under the revaluation model
– when full reversal is permitted
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29. IAS 36 – Reversing an Impairment Loss
• For a CGU:
– reversal is allocated to the assets of the unit,
excluding G/W
– on basis of relative carrying amounts
– restrictions on individual assets still apply
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30. IAS36 – Disclosure
• For each class of assets:
– amount of impairment loss/loss reversals in P&L
– line item where loss/reversal is reported
– amount of impairment loss/loss reversals on
revalued assets in OCI
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31. IAS36 – Disclosure
• Individually material loss/reversal:
– explanation of events and circumstances
– nature of asset/CGU
– how recoverable amount is determined
– amount of loss/reversal
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32. IAS36 – Disclosure
• For G/W and intangibles with indefinite lives:
– considerably more information provided
– enable users to assess reliability of impairment
testing
– for individually significant intangible assets/CGUs
– if individually insignificant, disclose amounts
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33. Looking Ahead
• IAS 36
– two recent revisions
– resulting from project on business combinations
– changes to IAS 27 and IFRS 3 – released in 2008
– related to impairment test for goodwill
• Impairment
– part of longer term convergence
– no short or medium term changes likely
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34. End-of-Chapter Practice
• 16-1 Three years ago, Ace Airlines (AA) was granted permission to
schedule flights on the popular and profitable Newalta to Oldsford
route, provided it also serviced Remoteville which is considerably
further north than Oldsford. As a result, AA set up a facility in
Oldsford and a small office and maintenance bay in Remoteville.
Remoteville is sparsely populated and not accessible except by air.
AA’s controller now wants to review the Remoteville assets for
impairment due to the continuing losses on the Oldsford-Remoteville
route, but is not familiar with IAS 36.
• Instructions
Write a short memo to AA’s controller, identifying how he should
proceed in determining whether the Remoteville assets are impaired.
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35. End-of-Chapter Practice
16-2 Waix Ltd. (WL) is a manufacturer with a number of product lines, one of
which is the production of parts for residential telephone sets. Recently there
have been indications that the market for this product is likely to decline
significantly, and WL is assessing various assets for impairment. The following
assets are used specifically to manufacture these parts:
Cost Accumulated
____ Depreciation
Tools and dies £ 10 £ 6
Specialized equipment 50 35
General equipment 30 18
The tools and dies and specialized equipment have no resale value other than
for scrap, although the general equipment could be sold or used profitably in
one of WL’s other product lines. WL plans on continuing production of these
parts for two more years in order to fill its existing commitments. The present
value of the net cash flows from the next two years’ production of these parts is
£26 and the estimated net amount that could be recovered if these assets were
sold today is £15.
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36. End-of-Chapter Practice
16-2 Instructions
a) Briefly discuss whether these assets should be assessed for
impairment individually or as part of a cash-generating unit.
b) Assuming the assets are allocated to a CGU made up of the three
types of assets identified, determine whether an impairment loss
needs to be recognized, and if so, in what total amount.
c) Prepare the entry needed to record any impairment loss indicated,
assuming these assets are reported in separate asset classes.
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37. End-of-Chapter Practice
16-3 Firstall Corp. (FC) acquired four divisions of a competitor eight years ago in a
business combination transaction, paying £25 more than the fair value of the
identifiable assets acquired. The goodwill was determined to be 100%
attributable to the operations of the East Division and the South Division.
Although these two divisions are cash-generating units in their own right, there
was no basis on which to allocate the goodwill between them. FC has identified
the combined divisions as one CGU for assessing goodwill impairment on an
annual basis. At the end of the most recent year, the following information is
available:
Carrying Amount
East Division £ 75
South Division 125
Goodwill 25
FC has determined that the estimated recoverable value of the two divisions
together is £215.
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38. End-of-Chapter Practice
16-3 Instructions
a) Identify the asset, cash-generating unit, or
group of CGUs that FC should use to test for
impairment.
b) Is there an impairment loss at the end of the
current year? Explain how you determined
your answer.
c) If applicable, indicate how any impairment
loss should be accounted for. Be specific.
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39. End-of-Chapter Practice
16-4 In this chapter, flag icons identify areas where there are GAAP
differences between IFRS requirements and national standards.
Instructions
Access the website(s) identified on the inside back cover of this book,
and prepare a concise summary of what the differences are that are
flagged throughout the chapter material.
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