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IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 4
Introduction
%
Value concepts (fair value vs. recoverable amount: higher of fair value less
costs to sell and value in use)
Goodwill impairment test methodology (one-step vs. two-step approach)
Asset impairment test methodology (discounted vs. undiscounted cash
flows)
Reversals of impairment losses obligatory under IFRS (except goodwill);
under US GAAP prohibited
Additional triggering event under IFRS: increase in market interest rates
Minority interest: IFRS grossing up approach; US GAAP fair value of
controlling interests
Overview
Procedure of Impairment Test under IFRS
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l Allocated goodwill*
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Practice Issue
Determination of Carrying Amount of CGU
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Within a CGU there is a non-operating building rented to third
parties. Rental payments are not included in the CGUµs financial
projections.
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Value Concept
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IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 9
Carrying Amount and Recoverable Amount
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IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 10
Carrying Amount and Recoverable Amount
Value in Use
Value Concept
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Value in Use
Technical Issue - Pre-tax vs. Post-tax calculation
µGrossing-up¶ or omitting tax-shield of debt sometimes applied
by valuation practitioners
However, pre-tax cost of equity can not be derived from capital
market data (e.g. CAPM)
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should lead to the same result as discounting pre-tax cash
flows with pre-tax discount rate (IAS 36.BCZ85)
For disclosure purposes: A two-step iterative calculation
process can be used to convert the post-tax discount rate into
an implicit pre-tax rate
Value in Use
Selected Technical Issues
Deferred taxes
Area is still evolving ± treatment might be inconsistent in
practice
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Food for thought:
- Deferred are not subject to IAS 36 test
- DTA related to pre-existing NOLs could be easily excluded
from carrying amount
- Ignoring all deferred taxes, especially DTL subsequent to
purchase accounting for non-taxable stock deal might
inappropriately trigger impairment
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 14
Timing
Overview
³Frequency´ of Impairment Testing
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Overview
Impairment Indicators (³Triggering Events´)
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IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 16
Cash Generating Units
Overview
Asset and Goodwill Impairment Test
#! #!
Corporate Assets
(IAS 36.102 (b)) Hierarchy
Levels for
Cash-generating Unit (CGU) Cash-generating Unit (CGU)
Impairment
Testing
Individual Asset
³If it is not possible to estimate the
³If there is any indication that an asset recoverable amount of the individual
may be impaired, recoverable amount asset, [«] determine the recoverable
shall be estimated for the individual amount of the cash-generating unit to
asset.´ which an asset belongs.´
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 17
Cash Generating Units
Overview
CGU Structure
Goodwill ³... the lowest level within the entity at which goodwill is monitored
Top-down for internal management purposes ...´
and not be larger than an IFRS 8 operating segment (IAS 36.81)
approach
Entity
Segment 2 Segment 3
Segment Segment
1 Division 1 Region 2 4
Division 2 Division 3 Region 1
Country 1 Country 2
BU BU BU
1 2 3
Region Region
1 2
« « « «
Entity¶s asset base
Bottom-up
³A cash-generating unit is the smallest identifiable group of assets
approach that generates cash inflows that are largely independent of the
Assets cash inflows from other assets or groups of assets.´ (IAS 36.6)
Overview
Determination Goodwill CGU Structure ± Example
Retailer Metro Group
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4,
Top-down Goodwill
approach Impairment Test
on the Level of Germany Austria ... Poland
Group of CGUs
Asset
Impairment Store Store Store
Test on CGU 1 2 3
Bottom-up
Level
approach
Corporate Assets
Practice Issue
Determination of Carrying Amount of CGU
?
Certain corporate assets have been appropriately allocated to a
CGU. In the financial projections of the CGU, corporate charges
have been reflected. They relate to payments to the ultimate
parent company, being the legal owner of the corporate assets.
In performing the impairment test, all corporate charges have
been excluded to determine VIU and FVLCS.
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Valuation Issues
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Carrying amount of goodwill needs to be grossed up to a
100% basis, to include the goodwill attributable to the minority
interest. (IAS 36.92)
Any impairment loss is proportionally allocated between
parent company and minorities with the portion attributable to
parent being recognised as goodwill impairment loss
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Typically not applied in EU for IFRS purposes, since prices on
active markets are of higher priority to other estimates, control
premium might be difficult to defend
IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 22
Tier 1 ± Individual Asset Tier 3 ± Goodwill CGU
Trigger
No !
Level 1 Yes
Impairment @:
No
Test No
Intangible
Definite useful life?
Yes
Ready for use?
No !?
FVLCTS > Yes No
Yes Carrying Amount Impairment Yes Yes
FVLCTS Yes
determinable? No
No VIU >
Carrying Amount
Yes No 3@&! :3 ±
VIU Impairment
determinable? &±+,A
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Trigger
Consider in Carrying Amount
Level 2 ?
No
Corporate Asset
Practice Issue
Corporate Trade Name
?
A corporate trade name accounted for according to IFRS 3/IAS
38 with indefinite life has been considered a corporate asset.
The trade name has been allocated to 10 individual CGUs.
Due to the indefinite life the trade name is to be tested for
impairment on an annual basis.
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Overview
Goodwill Allocation - Acquisition
Goodwill shall be allocated to each CGU / group of CGUs that are expected to benefit
from the synergies (external synergies and going concern element) of the
combination! (IAS 36.80)
CGU 1 EBIT/EBITDA?
Expected
synergies Net Revenue?
CGU 2
Net Income?
CGU 3
... Going-concern Assets in CGU?
CGU n
element «?
Overview
Goodwill Allocation ± First Time Adopters
First time adopters electing not to apply IFRS 3 retrospectively have to allocate US
GAAP goodwill to CGU and test goodwill for impairment as of the date of transition
(IFRS 1 B2 (iii))
CGU 1 EBIT/EBITDA?
Expected
synergies Net Revenue?
CGU 2
Net Income?
CGU 3
... Going-concern Assets in CGU?
CGU n
element «?
Overview
Treatment of Impairment Losses
Overview
Treatment of Impairment Losses
Scope of IAS 36
Inventories (IAS 2)
Property, plant and equipment Assets arising from construction contracts
(IAS 11)
Assets arising from employee benefits
Intangible assets, including (IAS 19)
goodwill Deferred tax assets (IAS 12)
Financial assets within the scope of IAS 39
Investment property measured at fair value
(IAS 40)
Biological assets (IAS 41)
Financial assets classified as
Insurance contracts (IFRS 4)
Subsidiaries Non-current assets classified as held for
Associates sale (IFRS 5)
Joint ventures
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IFRS ± Impairment Tests under IAS 36 May 7, 2009
PricewaterhouseCoopers Slide 29
Appendix
Presenter
Picture +1 646 471 4858
g.gollnow@us.pwc.com