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Chapter 14

Impairment and disposal of


assets

International Financial Reporting and Analysis, 5th edition


David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Contents

Impairment of assets
Non-current assets held for sale
Discontinued operations

International Financial Reporting and Analysis, 5th edition


David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment of assets:
IAS 36

Scope and coverage


Definitions
Identifying an asset that may be impaired
Measurement of recoverable amount
Fair value less cost to sell
Value in use
Recognition and measurement of impairment
losses
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Principle of the
standard
First, the carrying amount of an asset is
determined in accordance with accounting principles
and other relevant International Standards
Second, the recoverable amount of the asset is
determined as of that date, being the higher of fair
value less costs to sell and the assets value in use
(to the existing enterprise)
If the recoverable amount is lower than the carrying
value as recorded, then an impairment loss must be
recognized immediately, that is, the carrying value is
lowered to the recoverable amount. Otherwise, no
impairment loss is required
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Principle of the
standard (contd)
It is important to emphasize that
recoverable amount is a very different concept from
fair value and, for non-current assets, will often be
significantly higher than fair value. IAS 36 does not
require assets within its scope to be recorded at the
lower of cost and market or fair value
The essential objective of IAS 36 is to ensure that
assets are not carried at a figure greater than their
recoverable amount. The Standard itself says nothing
about possible or normal methods of arriving at
carrying value. The Standard applies whatever the
underlying basis of valuation of the asset is
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

IAS 36: impairment of


assets definitions
This standard contains a lot of details and introduces
a set of new definitions
An impairment loss is the amount by which the
carrying amount of an asset or a cash-generating unit
exceeds its recoverable amount
Carrying amount is the amount at which an asset is
recognized after deducting any accumulated
depreciation (amortization) and accumulated
impairment losses thereon
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

IAS 36: impairment of assets


definitions (contd)
The recoverable amount of an asset or a
cash-generating unit is the higher of its fair
value less costs to sell, and its value in use
Fair value less costs to sell is the amount
obtainable from the sale of an asset or cashgenerating unit in an arms length transaction
between knowledgeable, willing parties, less
the costs of disposal
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Identifying an asset that


may be impaired
Step one:

assess, at each balance sheet date,


whether there is any indication that an
asset may be impaired
Step two:

if any such indication exists, the enterprise


should estimate the recoverable amount of
the asset
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Measurement of
recoverable amount
First, the standard deals with the measurement of an
impairment for individual assets
Second, the standard concentrates on the
measurement of an impairment for cash generating
units
Subsequently attention is paid to corporate assets

International Financial Reporting and Analysis, 5th edition


David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Recognition and
measurement of impairment
losses
Recognition and measurement

individual assets
cash generating units
goodwill
Reversal of impairment loss

individual assets
cash generating units
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Cash generating units

An assets cash-generating unit is the smallest group


of assets that includes the asset and that generates
cash inflows from continuing use that are largely
independent of the cash inflows from other assets or
groups of assets
If an active market exists for the output produced by
an asset or a group of assets, this asset or group of
assets should be identified as a cash-generating unit,
even if some or all of the output is used internally
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Cash generating units (contd)

If this is the case, managements best estimate of future market


prices for the output should be used (para. 70):
in determining the value in use of this cash-generating unit,
when estimating the future cash inflows that relate to the
internal use of the output
in determining the value in use of other cash-generating
units of the reporting entity, when estimating the future cash
outflows that relate to the internal use of the output

International Financial Reporting and Analysis, 5th edition


David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Steps to take
Step one:
Define the cash generating unit

Step two:
Determine and compare the recoverable amount
and carrying amount of that unit

The carrying amount of a cash-generating


unit should be determined consistently with
the way the recoverable amount of the cashgenerating unit is determined
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Recognition and
measurement of impairment
losses goodwill
Goodwill, by definition, does not generate cash flows
independently from other assets or groups of assets
and, therefore, the recoverable amount of goodwill as
an individual asset cannot be determined. As a
consequence, if there is an indication that goodwill
may be impaired, the recoverable amount is
determined for the cash-generating unit to which the
goodwill belongs. This amount is then compared to
the carrying amount of this cash-generating unit and
any impairment loss is recognized, attributed first to
the goodwill as discussed later
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment and goodwill


1. The goodwill should, from the acquisition
date, be allocated to each of the acquirers
cash-generating units, or groups of cashgenerating units, that are expected to
benefit from the synergies of the business
combination, irrespective of whether other
assets or liabilities of the acquiree are
assigned to those units or groups of units
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment and goodwill


(contd)
2.

Each unit or group of units to which the


goodwill is allocated should:
i.

represent the lowest level within the entity at


which the goodwill is monitored for internal
management purposes
ii. not be larger than a segment based on either
the entitys primary or the entitys secondary
reporting format determined in accordance
with IAS 14, Segment Reporting
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment and goodwill


(contd)
3. If the initial allocation of goodwill acquired in
a business combination cannot be
completed before the end of the annual
period in which the business combination
occurs, that initial allocation should be
completed before the end of the annual
period beginning after the acquisition date
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment and goodwill


(contd)
4.

When an entity disposes of an operation


within a cash-generating unit (group of units) to
which goodwill has been allocated, the goodwill
associated with that operation should be:
i. included in the carrying amount of the operation
when determining the gain or loss on disposal
ii. measured on the basis of the relative values of
the operation disposed of and the portion of the
cash-generating unit (group of units) retained,
unless the entity can demonstrate that some
other method better reflects the goodwill
associated with the operation disposed of
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment and goodwill


(contd)
5. When an entity reorganizes its reporting structure in
a manner that changes the composition of cashgenerating units (groups of units) to which goodwill
has been allocated, the goodwill should be
reallocated to the units (groups of units) affected.
This reallocation should be performed using a
relative value approach similar to that used when an
entity disposes of an operation within a cashgenerating unit (group of units), unless the entity
can demonstrate that some other method better
reflects the goodwill associated with the reorganized
units (groups of units)
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment and goodwill


(contd)
6. The Standard permits (not requires)
the annual impairment test for a cash-generating unit
(group of units) to which the goodwill has been
allocated to be performed at any time during an annual
reporting period, provided that the test is performed at
the same time every year and different cash-generating
units (groups of units) to be tested for impairment at
different times. However, if some of the goodwill
allocated to a cash-generating unit (group of units) was
acquired in a business combination during the current
annual period, the Standard requires that unit (group of
units) be tested for impairment before the end of the
current period
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment and goodwill


(contd)
7. The Standard also permits the most recent detailed
calculation made in a preceding period of the
recoverable amount of a cash-generating unit
(group of units) to which goodwill has been
allocated to be used in the impairment test for that
unit (group of units) in the current period, provided
specified criteria are met, as follows:
the assets and liabilities making up the unit have
not changed significantly since the most recent
recoverable amount calculation
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Impairment and goodwill


(contd)
the most recent recoverable amount calculation
resulted in an amount that exceeded the carrying
amount of the unit by a substantial margin
based on an analysis of events that have occurred
and circumstances that have changed since the
most recent recoverable amount calculation, the
likelihood that a current recoverable amount
determination would be less than the current
carrying amount of the unit is remote.
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Recognition of impairment
losses cash-generating unit

An impairment loss should be recognized for a


cash-generating unit if, and only if, its recoverable
amount is less than its carrying amount. The
impairment loss should be allocated to reduce the
carrying amount of the assets of the unit in the
following order:
first, to goodwill allocated to the cash-

generating unit (if any)


then, to the other assets of the unit on a
pro rata basis based on the carrying amount
of each asset in the unit.
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Recognition of impairment
losses cash-generating unit
(contd)
In allocating an impairment loss the carrying amount
of an asset should not be reduced below the highest
of:
its fair value less costs to sell (if determinable)
its value in use (if determinable)
zero
A liability should be recognized for any remaining
amount of an impairment loss for a cash-generating
unit, if, and only if, that is required by other
International Accounting Standards
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Reversal of an impairment loss


Step one:

Is there an indication that an impairment


loss recognized in earlier years may have
decreased significantly?
Series of indicators:
External sources of information
Internal sources of information

International Financial Reporting and Analysis, 5th edition


David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Reversal of an impairment loss


cash generating units (contd)
In allocating a reversal of an impairment loss for a
cash-generating unit, the carrying amount of an asset
should not be increased above the lower of:

the recoverable amount (if determinable)


the carrying amount that would have been
determined (net of amortization or
depreciation) had no impairment loss been
recognized for the asset in prior years
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Reversal of an impairment loss


cash generating units (contd)
The amount of the reversal of the impairment loss
that would otherwise have been allocated to the
asset should be allocated to the other assets of the
unit, except for goodwill, on a pro rata basis
The Standard now completely prohibits the
recognition of reversals of impairment losses for
goodwill

International Financial Reporting and Analysis, 5th edition


David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Disclosure Impairment
An entity shall disclose the following for each class of
assets:
the amount of impairment losses recognized in profit
or loss during the period
the amount of reversals of impairment losses
recognized in profit or loss during the period
the amount of impairment losses on revalued assets
recognized directly in equity
the amount of reversals of impairment losses on
revalued assets recognized directly in equity
many more disclosures
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA