MFRS 136: IMPAIRMENT

OF ASSETS
 Introduction
Def: the diminution in value of an asset.
FRS 136 applies to:
i) All tangible assets
ii) Intangible assets - goodwill
iii) Financial assets - inv. in subsidiaries, joint
ventures and associates
 FRS 136 provides guidance on:

a) Identifying an impairment loss,

b) Measuring its RC amount of the asset,
c) Recognising or reversing any resulting
impairment loss,
d) Disclosing information on impairment
losses or reversals of impairment losses.
 Identifying an asset that may be
impaired
Indication of Estimate the Test for
impairment RC impairment

For intangible assets:

- indefinite useful life test for impairment
- not yet available for use annually
 Technology,
Market markets, laws
value & economy

External
Sources

Market Enterprises
interest rates. market
capitalisation
is < the CV
of net assets
 Economic
performance
is worse

Physical damage
Obsolescence Internal
Sources

Part of restructuring
 Determining Recoverable Amount
The recoverable amount can be measured as the HIGHER of:

NET SELLING PRICE VALUE IN USE

~The assets fair value less ~Present value of estimated
cost to sell
~It means amount of sale
deducting legal costs,
stamp duty, cost
removing the asset, taxes
and direct incremental
costs.
cash flows expected from
continuing use the asset
and from its disposal at
the end of useful life.
~cash flow from recent
financial budgets or
forecast by mgt. It should
be in net cash flow either
inflow or outflow.
 Recoverable amount

If net selling price cant be

determined, then recoverable
amount is the value in use.
if disposal assets, the
recoverable amount is net
selling price.
 Example:
New Moon Berhad rents out cars to
tourists in an island. The cars were bought
3 years ago at cost RM150,000 and were
depreciated over a period of 5 years. The
recent tsunami hit the island badly and the
demand of rental of cars dropped. Hence,
the company can only generate RM25,000
cash per annum in 20x5 and 20x6.
alternatively the company can sell the cars
at a net selling price of RM40,000.
 REQUIRED:
Calculate the impairment loss and prepare the balance sheet extracts at 31
December 2004. Assuming pre-tax cost of capital to be 10%.

Carrying amount RM60,000 Balance Sheet extracts on

[150-(3x 150/5)] 31December 20x4
Recoverable amount: Cost of car RM150,000
(THE HIGHER) accum depr(31/12/04)
Net selling price:RM40,000 RM90,000
VS Impairment loss RM16,625
Value in Use: (106,625)
[25,000 x 1/(1.1)] = 22,725 Net Book Value RM43,375
[25,000 x 1/(1.1)^2]= 20,650
43,375
Recoverable amount RM43,375
Impairment loss RM16,625
 Recognition and measurement of an
impairment loss
recognized immediately if (recoverable<carrying)
carrying amount should be reduced to recoverable amount
the impairment loss should be charged as an expense in
the IS.
Assets held at revalued amount: impairment loss is treat as
revaluation decrease
if impairment loss>carrying= liability should be recognized
Depreciation charge for the asset should be adjusted in
future periods to allocate the assets revised carrying
amount, less its residual value, if any, on a systematic
basis over it remaining useful life.
 CASH GENERATING UNIT
Definition
The smallest identifiable group of assets that:
1. Generates cash inflows from continuing use, and
2. Are largely independent of the cash inflows from other
assets or groups of assets.

The recoverable amount of a cash-generating unit is the

higher of the cash-generating units selling price (fair value
less costs to sell) and its value in use.
 Allocating Goodwill to
Cash Generating Units
1. Goodwill - not an identifiable asset
- cannot be tested for impairment on its own

2. FRS 136: Requires that, for purpose of impairment

testing, goodwill acquired in a business combination
should be allocated to each of the acquirers CGU that
are expected to benefit from the combination.
 Cont..
3. Allocation of goodwill:
Each cash generating unit to which goodwill is
allocated should:

(a) Represent the lowest level within the entity at which

the goodwill is monitored for internal management
purposes

(b) Not be larger than a segment (business or

geographical segment) determined in accordance with
FRS 114 Segment Reporting.
 Cont
4. When there is disposal of CGU which goodwill has
been allocated, the goodwill allocated should be
included in the carrying amount of the CGU to
determine the gain or loss.

5. The goodwill is measured based on relative values of

the disposed CGU.

6. This is similar for a company that reorganizes its

reporting structure in a manner that changes the
composition of CGU, a relative value approach should
be used for the reallocation of goodwill to the units or
group of units affected
 Cont

7. Goodwill that has been allocated to the respective

CGU should be tested for impairment annually.

8. Different CGU are to be tested for impairment at

different times.

9. The current years impairment test of CGU can be

determined using recent calculation of recoverable
amount made in previous period, with conditions:
 No significant change in assets and liabilities making up
the unit since the calculation of recoverable amount.

The most recent recoverable amount calculation resulted

in an amount that exceeded the carrying amount by a
substantial margin.

It is less likely that the current recoverable amount

determination would be less than the current carrying
amount of the CGU.
 Impairment loss for
Cash Generating Unit
The impairment loss is allocated between the assets in
the cash generating unit in the following steps:

Steps 1: To the goodwill allocated to the cash generating

unit.

Steps 2: To all other assets in the cash generating unit on a

pro rata basis.
 Cont
o The carrying amount of an asset should not be
reduced below the highest of:

a) Its net selling price (if determinable)

b) Its value in use (if determinable) and
c) Zero

Example: Bimbi Berhad

Below is the carrying value of one of the Bimbi Berhad's CGU:

RM

Goodwill 25,000

Property (market value) 41,000

Machinery 98,000

Motor Vehicles 70,000

Patents 28,000

Receivables 20,000

Cash 18,000

300,000

The recoverable amount of the CGU is RM218,000

Impairment loss: RM300,000 - RM218,000 = RM82,000

Step 1: Allocate the impairment loss first to goodwill of RM25,000

Step 2: The remaining balance of impairment loss of RM57,000

(RM82,000 - RM25,000) are allocated on other asset on pro rate basis

RM RM RM

Machinery 98,000 (98/196)x57 (28,500) 69,500

Motor Vehicles 70,000 (70/196)x57 (20,357) 49,643

Patents 28,000 (28/196)x57 (8,143) 19,857

196,000 (57,000) 139,000

 RM RM RM

Goodwill 25,000 (25,000) -

Property (market value) 41,000 41,000

Machinery 98,000 (28,500) 69,500

Motor Vehicles 70,000 (20,357) 49,643

Patents 28,000 (8,143) 19,857

Receivables 20,000 - 20,000

Cash 18,000 - 18,000

300,000 (82,000) 218,000

 REVERSAL OF IMPAIRMENT
Any impairment loss recognised previously on the assets
should be assessed to see whether;
- x longer exist or
- has decreased

Signals:
- increase in assets market value
- in technological, market, economic or
legal environment

If such indications exist, new recoverable amount should be

estimated

- See whether RA > CA or RA < CA

when RA > CA shows the increase in amount
reversal in impairment loss
 REVERSAL OF IMPAIRMENT LOSS FOR
AN INDIVIDUAL ASSETS
The carrying amount of the assets should be increased to its new
recoverable amount.

But, that new RA cannot > the original amount or depreciated CV

had the impairment not taken place.

Treatment of the reversal of impairment loss either;

i) recognise as an income in I/S for the assets
carried at cost or,
ii) treat it as revaluation increase for assets carried at revalued
amount

The depreciation or amortisation charge for the asset should be

adjusted in future periods based on the revised amount.

Illustration
Obi Berhad rents out boats to customers at Lake Wonderful. These
boats were bought on 1.1.20x3 at RM1,500,000 and were depreciated
at 20% p.a. on cost. An accident took place in 20x4 and the business
were badly affected. On 31 December 20x4, the net selling price of
these boats was RM750,000 and the value in use was RM680,000.

You are required to:

(i) draft the balance sheet extracts at 31.12.20x4; and

(ii) draft the balance sheet extracts at 31.12.20x5 if the demand for
boats picked up and the boats now have a recoverable amount of:

(a) RM650,000; and

(b) RM550,000.
Answer

(i) On 31.12.20x4
Net carrying amt.: RM1,500,000 - (20% x 1.5m x 2 years) = RM900,000

RC is the higher between net selling price of VIU = RM750,000

Impairment loss = RM900,000 - RM750,000 = RM150,000

Balance sheet extracts on 31.12.20x4

RM RM

Cost 1,500,000

Acc. Depr. On 31.12.20x4 (600,000)

Impairment loss (150,000) (750,000)

NBV 750,000
(ii) (a) At 31.12.20x5

RM RM

Cost 1,500,000

Acc. Depr. And Impairment loss

(750,000 + [750,000/3]) (1,000,000)

NBV 500,000
- RC amt is RM650,000, which is greater that the NBV.

- Therefore, there is a reversal of impairment

- Asset restated back to RM600,000, as it can't exceed the
carrying amt of the asset had the impairment not taken place
Balance sheet extracts on 31.12.20x5

RM RM

Cost 1,500,000

Acc. Depr.

Balance b/f 750,000

Charge of 20x5 250,000

Reversal of impairment (100,000) (900,000)

NBV 600,000
(b) - RC is RM550,000, which is greater than RM500,000
- Reversal of impairment = RM50,000 (RM550,000 - RM500,000)

Balance sheet extracts on 31.12.20x5

RM RM

Cost 1,500,000

Acc. Depr.

Balance b/f 750,000

Charge of 20x5 250,000

Reversal of impairment (50,000) (950,000)

NBV 550,000
 REVERSAL OF AN IMPAIRMENT LOSS
FOR A CGU
For CGU, the reversal impairment should be allocated to the assets
of the unit, except for goodwill, pro rata is used.

These increases in carrying amounts should be treated for individual

assets.

The CA of an asset should not be increased above the lower of;

(a) its recoverable amount (if determinable)
(b) the CA that would have been determined
( net of amortisation or depreciation) had no
impairment loss been recognised for the asset in
in prior periods.

FRS 136 prohibits the recognition of reversals of impairment losses

for goodwill.
 Disclosure
a) By class of assets:
i. Impairment losses recognised in IS
ii. Reversals of impairment losses
b) By reportable segments (if applies FRS 114):
i. Impairment losses recognised in IS
ii. Reversals of impairment losses
c) For each individual asset or cash-generating unit that has
suffered impairment loss:
i. The events and circumstances resulting in the impairment loss
ii. The amount of impairment loss recognised or reversed
iii. The nature of and segment to which the individual asset
relates
iv. The description, amount of impairment loss and reversal if any
of CGU by class of assets and segment
v. Whether the recoverable amount is its FV less costs to sell or
its value in use
vi. The basis for determining fair value if recoverable amount is at
net selling price
vii. The discount rate if recoverable amount is value in use
d) If impairment losses recognised or reversed are
material in aggregate to the financial statements as
whole:
i. Main classes of assets affected
ii. Main events and circumstances
e) Disclose information about the estimates used to
measure recoverable amounts of CGU containing GW
or intangible assets with indefinite useful lives
f) Disclose the amount of unallocated GW together with
the reasons for not allocating it
g) Disclose specific information if some or all of the
carrying amount of GW or intangible assets with
indefinite lives is allocated across multiple cash-
generating units of groups of units and the amount
allocated is not significant in comparison to the total
carrying amount of goodwill or intangible assets with
indefinite lives
 SUMMARY
FRS 136 applies to limited no. of assets

1) Identifying an asset that may be impaired

2) Internal and external sources of impairment
indicators
3) Determining the recoverable amount
4) Recognition of impairment loss
5) Cash generating units
6) Reversal of impairment loss