Topic 6

Impairment of assets
Chapter 13

Learning objectives
1. Explain the purpose of the impairment test for
assets (p. 634)
2. Assess when to undertake an impairment test (p.
635)
3. Explain how to undertake an impairment test
for an individual asset (p. 637)
4. Identify a cash-generating unit, and account for
an impairment loss for a cash-generating unit
not including goodwill (p. 645)
5. Account for the impairment of goodwill (p. 652)
6. Account for reversals of impairment losses (p.
659)
7. Apply the disclosure requirements of AASB 136

Introduction to AASB 136

Entities are required to conduct impairment tests

to ensure their assets are not overstated
An impairment loss results when an assets
carrying amount (CA) is more than its recoverable
amount (RA)
Recovery
Recoverycan
canbe
befrom
fromdisposal
disposalof
ofthe
theasset
assetOR
ORfrom
fromfuture
future
use
useof
ofthe
theasset
asset(including
(includingisisultimate
ultimatedisposal)
disposal)

Not all assets require this test.

Notable
exclusions
The
requirements
Thespecific
specific
requirements
in
inrelation
relationto
tothese
theseassets
assets
include:
are
arecovered
coveredin
inthe
theAASBs
AASBs
that
Inventories
thatdeal
dealwith
withthese
these
balances
balances
Deferred tax assets
Assets held for resale

When to undertake an
impairment test
For most assets it is not necessary to
conduct impairment tests every year
Assets must be tested for impairment when
there is an indication (or evidence) of
impairment
The following assets must be tested
annually for impairment:
Intangibles with indefinite useful lives
Intangibles not yet available for use
Goodwill acquired in a business
combination

When to undertake an
impairment test Collecting
evidence of impairment
Indicators are listed within AASB 136 and
are classified into two groups internal and
external
These are considered the minimum indicators
management shall consider

External sources

Decline in market value e.g. technological

advancements
Adverse changes in entitys environment/ market
e.g. a competitor may have patented a new
product, resulting in a permanent fall in market
share of the entity
Increases in interest rates affects the PV of future
cash flows

When to undertake an
impairment test Collecting
evidence of impairment
Internal sources

Obsolescence or physical
damage
Change in asset use has
the asset become idle?
Economic performance of
the asset worse than
expected?

Cash outflows are higher than

expected e.g. maintenance
costs
Cash inflows are lower than
expected

Impairment test for an

individual asset

Impairment Testing Definitions

Recoverable amount 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
sale in an arms length transaction between knowledgeable
willing parties, less cost of disposal
Costs to sell incremental costs directly attributable to the
disposal, excluding costs of finance and income tax expense
Value in use the present value of the future cash flows
expected to be derived from the asset, requires an estimation
8 discount rate
of future cash flowsACW2491/Impairment
and selection ofofAssets
appropriate

Value in use
An asset is expected to generate the following
cash inflows for the next 2 years:
Year 1- $40 000
Year 2- $50 000
Assuming a discount rate of 8%, the value in use of the
asset is calculated as:
= (40,000 x (1/(1+0.08)1) + (50,000 x (1/(1+0.08)2)
=
= 80,401
ACW2491/Impairment of Assets

Impairment Test for an Individual Asset

Compare carrying amount with recoverable

amount to determine whether an impairment
loss needs to be recognised
CA > RA
need to write down the asset and record an
impairment loss

CA < RA
no entry needed (unless there is a reversal of a
previous impairment loss)
ACW2491/Impairment of Assets

10

Impairment Test for an Individual

Asset
Impairment loss is recognised immediately in
profit or loss
No need to write off accumulated depreciation or
create a separate accumulated impairment
account
Impairment loss is included in accumulated
depreciation

Once an impairment loss is recognised,

subsequent depreciation/amortisation is based on
the new recoverable amount
ACW2491/Impairment of Assets

11

Impairment test for an individual

asset Recognition and measurement
of an impairment loss for an
individual asset

Example

Machinery has a cost of $160 000, and

accumulated depreciation of $60 000. The fair
value less costs to sell is determined to be
$85 000, and the value in use is $90 000.
CA = 160,000-60,000 = 100,000
RA = higher of FV-CD and VIU = 90,000
CA > RA , impairment loss is to be
recognised
Dr Impairment Loss
10,000
Cr Acc Depn and Impairment Losses
10,000

Cash-generating units (CGUs)

excluding goodwill

Our focus has been on individual assets, where

both the FV-CD and the VIU could be measured

When it is not possible to determine the RA for an

individual asset, the entity should

FV-CD can be determined for most assets

But many individual assets do not generate cash inflows
in their own right; e.g. a machine in a factory works in
conjunction with the rest of the assets in the factory

Determine the RA of the Cash Generating Unit (CGU) to

which the asset belongs
The impairment test is applied to the CGU, not the
individual asset

A CGU is defined as the smallest identifiable

group of assets that generates cash flows that are
largely independent of the cash inflows from other
assets or groups of assets

CGUs excluding goodwill

Impairment losses and CGUs

An impairment loss arises when the CA of the CGU

assets > RA
Determining the impairment loss

Accounting for the impairment loss

Principles for determining RA are the same for CGUs as

for individual assets

The loss is allocated to each asset in the CGU on a prorata basis

Based on the CA of each asset / the total CA amount of
the CGU assets
Losses are accounted for in the same way as for
individual assets discussed earlier

The CA of an individual asset cannot be reduced

below the highest of:

FV-CD (if determinable);

VIU (if determinable); or
Zero

CGUs excluding goodwill

Example impairment losses
and CGUs

A Ltd has identified an impairment loss of $12,000

on one of its CGUs
The CGU consists of the following assets (stated at
current carrying amounts):
Buildings 500,000
Equipment 300,000
Land
250,000
Fittings
150,000
The FV-CD of the building is $497,000

Required:
Calculate the allocation of impairment loss against
all assets in theSee
CGU
p. 649 Illustrative example 13.1

CGUs excluding goodwill

Example impairment losses
and CGUs CA
Pro-rata Impairment
loss
allocated
5,000

Adjusted
CA

Buildings

500,000

50,000/1,200,0
00 x 12,000

Equipment

300,000

300,000/1,200,
000x 12,000

3,000

297,000

Land

250,000

250,000/1,200,
000x 12,000

2,500

247,500

Fittings

150,000

250,000/1,200,
000x 12,000

1,500

148,500

1,200,00
0

495,000

12,000

As the FV-CD of the building is $497,000, the

maximum impairment loss that can be allocated to
the building is limited to $3,000. The remaining
$2,000 must be allocated across the other assets in
the CGU

CGUs excluding goodwill

Example impairment losses
and CGUs
Adjusted
CA

Pro-rata
($000)

Impairme
nt loss
allocated

Buildings

Total
impairmen
t loss
allocated
3,000

Equipment
Land

297,000

297/693 x 2

857

3,857

247,500

247.5/693 x
2

714

3,214

Fittings

148,500

148.5/693 x
2

429

1,929

Impairment Losses

693,000

Acc Depre and Impairment Losses Building

12,000

2,000

12,000

3,000

Acc Depre and Impairment Losses Equipment

3,857

Acc Depre and Impairment Losses Land

3,214

Acc Depre and Impairment Losses Fittings

1,929

Cash Generating units and

goodwill

The asset goodwill can only arise in a business

combination

It cannot be internally generated, revalued or amortised

It is subject to impairment testing

Goodwill is a residual balance, consisting of assets

that cannot be individually identified or separately
recognised

Therefore it is not possible to determine a FV-CD for

goodwill, or to identify cash flows relating specifically to
goodwill
When goodwill is recognised in a business combination it
must be allocated to one or more CGUs (similar to
corporate assets)
AASB 136 requires that goodwill be allocated to the
lowest level at which management monitors the goodwill

CGUs and goodwill

Impairment testing of
goodwill

Where a CGU has goodwill allocated to it, the CGU

must be tested for impairment at least annually

Where RA > CA no impairment; goodwill remains

unadjusted

Or more frequently if there is an indication that the CGU

may be impaired

Is this a good test of impairment of goodwill?

Where CA > RA = impairment loss

When an impairment loss arises in a CGU with
goodwill the following allocation rules apply:

To reduce the carrying amount of the CGUs goodwill (to

zero if necessary)
To the other assets of the CGU on a pro rata basis (on the
same basis as discussed on slide 19)

CGUs and goodwill

Impairment testing of
goodwill Example

A Ltd has identified an impairment loss of

$300,000 on one of its CGUs
The CGU consists of the following assets (stated at
current carrying amounts):
Buildings
500,000
Equipment 300,000
Land
250,000
Goodwill 150,000

Required:
Calculate the allocation of impairment loss against
all assets in the CGU.

Impairment losses and CGUs

with goodwill: example

CA

Pro-rata

Impairment
loss
allocated

Adjusted
CA

150,000

Goodwill

150,000

Buildings

500,000

500/1,0
50 x 150

71,429

428,571

Equipment

300,000

300/1,0
50 x 150

42,857

257,143

Land

250,000

250/1,0
50 x 150

35,714

214,286

1,050,000

300,000

Reversal of an impairment
loss

Recognised losses are reassessed annually

A review of the indicators might result in:

Are there indicators the previous loss does not exist or

has decreased?
Indicators are the same as those used for initially
recognising a loss; e.g.

Improvement in the economy or product markets

Interest rates have decreased

Changes to depreciation parameters (e.g. useful life)
instead of a reversal
IF there is a change in the estimates, a reversal of
impairment is possible

Ability to recognise a reversal of an impairment

loss and the accounting for that reversal is
dependent on whether the reversal relates to an

Reversal of an impairment
loss
individual assets
Previously recognised impairment losses in

relation to individual assets are able to be

reversed (up to recoverable amount)
One limitation

The new CA cannot be higher than the CA that

would have been determined had no impairment

loss been previously recognised
I.e. for depreciable assets, the impact of
depreciation needs to be considered

The journal entry to record the reversal of the

impairment loss would be:
Dr Accum depn & impairment losses xx
Cr Income - impairment loss reversal xx

Reversal of an impairment
loss
Goodwill

AASB 136 (para. 124)

Like individual assets, recognised losses in relation

to a CGU are reassessed annually

Are there indicators?

If reassessed estimates indicate RA of a CGU is >

CA, impairment reversals are required

An impairment loss recognised for goodwill is not to be

reversed in a later period

Except for goodwill

To prevent backdoor recognition of internally

generated goodwill

Which AASB 138 does not allow

Reversal of an impairment
loss CGUs

The reversal of any impairment loss relating to a

CGU is allocated across the assets of the CGU
(excluding goodwill) on a pro-rata basis
The reversals for specific assets will be accounted
for in the same way as outlined above for
individual assets
The CA of an asset cannot be increased above the
lower of:
its RA (if determinable)
the CA that would have been determined had no
impairment loss been recognised in prior periods
Any excess from
above
situation
is allocated
Seethe
p. 661
Illustrative
example 13.4
across the remaining assets in the CGU on a prorata basis

Disclosures
Key disclosures include:

The amount of impairment losses (and reversals of

losses ) recognised in P&L during the period*
The amount of impairment losses on revalued
assets (and reversals of losses ) recognised in OCI
during the period *
**In
Inrelation
relationto
tothese,
these,the
theentity
entitymust
mustidentify
identifythe
theline
lineitem
itemin
inthe
the
Statement
Statementof
ofP&L
P&L/ /OCI
OCIin
inwhich
whichthey
theyare
areincluded
included

AASB 116 PPE requires a note that reconciles the

opening and closing balance for each class of asset
Refer to Figures 13.14 to 13.16 for examples of
disclosures

Tutorial Week 7
Chapter 13
RQ 1, 4, 5, 7, 10
PQ 13.1, 13.4, 13.9

All students are expected to have attempted all tutorial problems before attending
the tutorial. Specifically, the question(s) that has been bolded.
For further understanding, you are encouraged to attempt Demonstration Problem
1 on p. 668.