IAS 36

Impairment of Assets
KPMG International Financial Reporting Group

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 1

Agenda
Background and scope
Cash-generating units and goodwill allocation
Indications of impairment and frequency of testing
Recoverable amount
Fair value less costs to sell
Value in use
Accounting aspects
Disclosure

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 2

Background
Objective
Assets should be carried at no more than their
recoverable amount, i.e. the amount expected to be
recovered through use of the asset, or its fair value
less cost to sell.
Purpose
Specify procedures to be followed to ensure that
assets are not carried at more than recoverable
amount
Specify when an impairment loss should be reversed
Specify required disclosures
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,
and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Scope
Applies to all assets except
Inventories
Assets arising from construction contracts
Deferred tax assets
Financial assets
Assets arising from employee benefits
Investment property measured at fair value
Biological assets measured at fair value less estimated
point-of-sale costs
Assets arising from insurance contracts
Non-current assets classified as held for sale
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,
and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Agenda
Background and scope
Cash-generating units and goodwill allocation
Indications of impairment and frequency of testing
Recoverable amount
Fair value less costs to sell
Value in use
Accounting aspects
Disclosure

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 5

CGU Definition
Cash-generating unit (CGU) is smallest identifiable
group of assets that generates cash inflows that
are largely independent from other (groups of)
assets.

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

CGU Factors to be considered

Key factor: ability to generate independent cash
inflows
If an active market exists for the output of an asset
group, then it is a CGU even if the output is only
sold to another division with the entity
The focus is on cash inflows, not net cash flows

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Case study 1 CGU

XYZ Group
Do you agree with management? At what level should
XYZ identify CGUs for impairment testing purposes?
Group wide (one CGU)
Business Groups (seven CGUs)
Business Units (multiple CGUS)

What impact do the referred sales have?

What further information would you require from XYZ
to determine how to identify the CGUs?

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 8

Agenda
Background and scope
Cash-generating units and goodwill allocation
Indications of impairment and frequency of testing
Recoverable amount
Fair value less costs to sell
Value in use
Accounting aspects
Disclosure

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 9

Indications of impairment
External sources
Significant decline in market value
Technological, market, economic, legal environment
Increases in interest rates or rates of return
Internal sources
Evidence of obsolescence or physical damage
Discontinuance, disposal, restructuring plans
Asset performance declining or expected to decline

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Frequency and timing of testing (1)

CGU to which goodwill has been allocated
Intangible assets with an indefinite useful life
Intangible assets not yet available for use

Impairment test
Annually,
and

Any time within an annual

reporting period
needs to be consistent
(same time every year)

At each reporting date, if there is an impairment

indicator;

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Frequency and timing of testing (2)

Recent calculation can be used if the following
criteria are met:
CGU did not change substantially
Most recent recoverable amount was significantly
greater than carrying amount
Analysis of events and circumstances no elimination
of the difference

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Frequency - summary
yes

Asset / CGU
other than below

Indication?
no

CGU with GW,

intangible assets
with indef. lives
or not avail.
for use

impairment
test

yes

Indication?

no

impairment
test
impairment
test
impairment
test at least
annually

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

recent calculation
can be used if
criteria are met
- any time within

an annual
reporting period
- consistency
- initial recognition

Agenda

Background and scope

Cash-generating units and goodwill allocation
Indications of impairment and frequency of testing
Recoverable amount
Fair value less costs to sell
Value in use
Accounting aspects
Disclosure

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 14

Recoverable amount
Recoverable amount is the greater of:
Value in use (VIU): present value of estimated future
cash flows to be derived from an asset/CGU (continuing
use and ultimate disposal)
Fair value less costs to sell (FVLCS): amount
obtainable from the sale of asset/CGU in an arms length
transaction less costs of disposal
If FVLCS is determinable, then not required to measure
VIU or test at CGU level when:
an assets FVLCS is higher than the carrying amount; or
an assets FVLCS can be estimated to be close to VIU
(e.g. asset held for disposal)
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,
and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 15

Agenda

Background and scope

Cash-generating units and goodwill allocation
Indications of impairment and frequency of testing
Recoverable amount
Fair value less costs to sell
Value in use
Accounting aspects
Disclosure

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 16

Fair value less costs to sell

Fair value is based on best available evidence, which
is (from most reliable to least):
Binding sale agreement, or
Active market (current bid price), or
Best information available
Less costs of disposal, excluding
Finance costs and income tax expense
Costs already recognised as liabilities

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 17

Fair value less costs to sell best

information available
Observable market: not required to determine
FVLCS (other valuation techniques may be used in its
absence)
Valuation techniques: any reasonable and reliable
method can be used to estimate FVLCS
Newly acquired unit
Arms length price paid to acquire the unit: best evidence
of fair value
Needs to be adjusted: disposal costs and any changes in
economic circumstances

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 18

Agenda

Background and scope

Cash-generating units and goodwill allocation
Indications of impairment and frequency of testing
Recoverable amount
Fair value less costs to sell
Value in use
Accounting aspects
Disclosure

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 19

Value in use
Elements to be considered:
Cash inflows and outflows specific to the asset/CGU
Time value of money (market risk-free rate)
Uncertainty inherent to the asset
Expectations about possible variations in the amount
or timing of those future cash flows
Other factors (e.g. illiquidity)

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 20

Value in use measurement

Reasonable and supportable assumptions that reflect
managements best estimate
Most recent financial budgets/forecasts approved by
management (excluding future restructurings and capital
expenditure to enhance performance)
Short term projections: 5 years (unless a longer period can be
justified)
Projection beyond the period covered by the most recent
financial budgets/forecasts approved by management
Extrapolation based on steady or declining growth rate
Growth rates shall not exceed long term average rates for the
product/industry/country
Projection period based on the asset essential to CGU with the
longest useful life; replacement of assets with shorter lives
reflected in projected servicing costs
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,
and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 21

Value in use composition

Cash inflows from the continuing use of the asset,
including disposal
From the asset in its current condition: ignore cost
savings relating to uncommitted expenditure (future
restructuring) or future capital expenditure
Ignore financing and tax cash flows
Avoid double counting costs already recognised as
liabilities

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 22

Pre-tax vs Post-tax discount rate (1)

Pre-tax rate
In theory, post-tax cash flows at post tax discount
rate = pre-tax cash flows at pre tax discount rate
Post-tax discount rate may be used if cash flows are
on post-tax basis

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Pre-tax vs Post-tax discount rate (2)

If post-tax rate is used, it is essential to properly
adjust effects of future tax cash flows:
Timing differences of tax cash flows
Deferred taxes
Basis for calculation of income tax liability: CGU vs
tax entity
Gross up post-tax rate to pre-tax rate: incorrect

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Value in use consistency

Cash flows (CF)

Discount rate (DR)

CF should not include inflows and out

flows from financing activities

Financing is accounted for by discounting

If CF are adjusted for certain risks

DR should not reflect these risks

CF estimated in currency in which CF

will be generated

DR appropriate for that currency

If pre-tax CF is used

Pre-tax DR is applied

If post-tax CF is used

Post-tax DR is applied

If nominal CF is used ( i.e. including

expected inflation)

Nominal DR is applied

If real CF is used (i.e. excluding

inflation expectations)

Real DR is applied

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Agenda

Background and scope

Cash-generating units and goodwill allocation
Indications of impairment and frequency of testing
Recoverable amount
Fair value less costs to sell
Value in use
Accounting aspects
Disclosure

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 26

Allocating impairment loss step by step

Are there:
impairment indicators
for assets/
CGUs
intangible assets with
indefinite useful lives
intangible assets not
available for use?
YES

NO

Test assets / CGUs for

impairment

Recognise impairment
loss on assets / CGUs
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,
and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Test for impairment

larger CGU
containing goodwill

Book impairment loss

First allocate to GW

Other assets in CGU

on pro-rata basis

IAS 36 - 27

Reversal of impairment loss

Assess if impairment loss may no longer exist
Individual
asset

Cash generating unit

Without GW

Reverse to the extent of

increase in RA and not > CA in
the absence of impairment loss
Charge to P&L or
Reserve
Adjust future
depreciation
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,
and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

With GW
No loss reversal on
GW

Allocate pro-rata with the

CA of other assets

Case study 3 Impairment calculation

(general review)
Creature Comfort
Should an impairment test be done?
Calculate impairment loss based on a pre-tax rate.
Calculate impairment loss based on a post-tax rate.
Journal entries?

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 29

Case study 4 Impairment calculation

Do you agree with
The managements decision to not recognise an impairment loss
at the B/S date?
The managements interpretation regarding indicators of
impairment?
The managements assessment that all radio stations should be
considered as single CGU?
The rationale applied in the estimates of future cash flows to be
generated by the CGU?
The rationale applied in the discount rate measurement?
The calculations of VIU?
The measurement of impairment loss?
The managements position re classification and disclosure?
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,
and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 30

Agenda

Background and scope

Cash-generating units and goodwill allocation
Indications of impairment and frequency of testing
Recoverable amount
Fair value less costs to sell
Value in use
Accounting aspects
Disclosure

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 31

Key disclosures
By category of asset
Amount of impairment losses recognised / reversed during the
period in
Income statement and
Directly to equity
If recognised in income statement disclosure of where items are
included
Disclosures when impairment losses are material for an individual
asset
Information on basis used for determining recoverable amount
Discount rate used

2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 32

Central points
IAS 36 covers impairment of PPE, goodwill,
intangible assets and investments in subsidiaries,
joint ventures and associates
Detailed impairment testing generally is required only
when there is an indication of impairment
Annual impairment testing:
Intangible assets not yet available for use
Intangible assets with indefinite useful life
Goodwill
Recognise impairment loss if
Asset (CGU) carrying amount > FVLCS or Value in
use
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee,
and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 36 - 33

Contact details
KPMG IFRG Limited
+44 (0)20 7694 8871
www.kpmgifrg.com

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that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough
examination of the particular situation.
2007 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative.
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