Accounting for Impairments under FRS 102
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© ICAEW 2018
Accounting for Impairments under FRS 102
27 September 2018
Introduction
Sarah Dunn
Technical Manager
ICAEW
Peter Drummond
Advisory Accountant
HMRC
Dave Rice
Senior Manager
Deloitte
Today’s presenters
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Scope
Inventories
Overview of principles – other assets
Impairment test: when and how
Recognising an impairment loss
Reversing an impairment loss
Disclosures
Contents
Scope of FRS 102 Section 27
Construction contract assets
Deferred tax assets
Employee benefit assets
Investment property
Biological assets
Insurance contract assets
Financial assets in scope of Sections 11 or 12
In general, applies to the impairment of all assets -
but with some important exceptions:
Scope of FRS 102 Section 27
Investments in subsidiaries, associates and joint ventures:
If measured using cost
model
In scope of section
27
If measured
at fair value
N/A
If accounted for using
equity method
In scope of section
27
© ICAEW 2018
Impairment of inventories
• Assess at each reporting date:
• Carry out comparison:
• Can assess for a group of items, subject to restrictions:
Damage?
Obsolescence?
Declining selling
prices?
Carrying value
Selling price less costs to
complete and sell
Same product line Similar end use Same geographical area
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Inventories – reversal of impairment
• At each reporting date:
• Reversal required when:
• Reversal limited to amount of original impairment
• Credit is gain in profit or loss
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Make new
assessment of selling
price less costs to
complete and sell
Consider whether any previous impairment needs to be reversed
Circumstances that caused impairment no
longer exist
Clear evidence of increase in selling price less costs to complete and sell
OR
Other assets – overview of principles
• Asset or CGU impaired when
Carrying amount Recoverable amount>
Higher of
Value in use
Present value of future
cash flows expected to be
derived from asset or CGU
Fair value less
costs to sellAmount obtainable from
sale in an arm’s length
transaction between
knowledgeable, willing
parties less the costs of
disposal
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Cash-generating units
• If not possible to estimate recoverable amount for a single asset, need to
estimate recoverable amount of the CGU to which asset belongs
• The number and nature of CGUs depends on the business and how its
operations are structured
• Assets to be disposed of – assess for impairment as a single asset, not as
part of a CGU
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CGU
Smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or
groups of assets
When to perform an impairment test
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Check for indicators
• Standard includes external and internal indicators to consider as a minimum
Perform impairment
test
• Unlike inventories, only perform an impairment test if there is an indication of impairment
Review• Don’t forget to review
useful lives, depreciation method, residual values
How to perform an impairment test
• For many assets VIU likely to be higher than FV less costs to sell
• Not always necessary to determine both VIU and FV less costs to sell
• If holding for disposal, then can use FV less costs to sell
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Carrying value
Recoverable amount
Recoverable
amountHigher
of
VIU
FV less costs to sell
Costs to
sell
How to determine FV less costs to sell
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Market info
• Price in binding arm’s length sale agreement, or
• Market price in an active market
Estimate
• Based on best information available
• Consistent with 3rd party assumptions
• Take into account any restrictions
• Direct and incremental costs
• Include: legal costs, transaction taxes,
moving costs
• Exclude: reorganisation expenses,
redundancy costs
How to calculate VIU
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VIUPresent value of future cash flows expected
to be derived from asset or CGU
Cash flows
Recent budgets and forecasts are a good starting point
Based on asset or CGU’s current condition
Exclude: uncommitted future enhancements or restructurings
Include: maintenance costs
Extrapolation, assume a steady or declining growth rate
Discount rate
Should: reflect time value of money and risks specific to the
asset or CGU
Should not: double count for risks for which cash flows have
already been adjusted
WACC used as a starting point, but should be adjusted
for asset or CGU specific risks
How to calculate VIU
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VIUPresent value of future cash flows expected
to be derived from asset or CGU
Cash flows
Recent budgets and forecasts are a good starting point
Based on asset or CGU’s current condition
Exclude: uncommitted future enhancements or restructurings
Include: maintenance costs
Extrapolation, assume a steady or declining growth rate
Discount rate
Should: reflect time value of money and risks specific to the
asset or CGU
Should not: double count for risks for which cash flows have
already been adjusted
WACC used as a starting point, but should be adjusted
for asset or CGU specific risks
How to test goodwill for impairment
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Goodwill does not generate independent cash flows
Allocate goodwill to each CGU expected to
benefit
Test carrying value of CGU (including
goodwill allocation) for impairment
If allocation would be arbitrary, approach
depends on whether acquired
business is integrated
Integrated –determine
recoverable amount of group (excluding
unintegrated entities)
Not integrated –determine
recoverable amount of acquired entity
How to test goodwill for impairment
© ICAEW 2018
Entity
/CGU
A
CGU
B
CGU
C
Entity
A
GW
How to test goodwill for impairment
© ICAEW 2018
Entity
/CGU
A
CGU
B
CGU
C
Entity
A
CGU B
CGU C
CGU A
GW
How to test goodwill for impairment
© ICAEW 2018
Entity
/CGU
A
CGU
B
CGU
C
Entity
A
CGU ACGU C
CGU B
How to test goodwill for impairment
© ICAEW 2018
Entity
/CGU
A
CGU
B
CGU
C
Entity
A
GW
Integrated
How to test goodwill for impairment
© ICAEW 2018
Entity
/CGU
A
CGU
B
CGU
C
Entity
A
GW
How to test central assets for impairment
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Assets used by a number of
CGUs
Allocate to CGUs on a
reasonable and consistent basis
Relative use (ideal)
CGU carrying values, turnover, other reasonable
basis
If can’t reasonably
allocate, use ‘two-step approach’
Step 1 – Test CGU for impairment and recognise any
impairment loss
Step 2 – CV of all CGUs plus CV of
central asset, compared to combined
RA of CGUs
or
then
How to test central assets for impairment
© ICAEW 2018
Assets used by a number of
CGUs
Allocate to CGUs on a
reasonable and consistent basis
Relative use (ideal)
CGU carrying values, turnover, other reasonable
basis
If can’t reasonably
allocate, use ‘two-step approach’
Step 1 – Test CGU for impairment and recognise any
impairment loss
Step 2 – CV of all CGUs plus CV of
central asset, compared to combined
RA of CGUs
or
then
Poll question
What have you found the most challenging when applying the impairment requirements in
practice? [you can select multiple answers]
a. Identifying CGUs
b. Determining the discount rate
c. Forecasting cash flows
d. Determining fair value less costs to sell
e. Not sure – haven’t performed an impairment test yet/recently
f. None of the above
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Recognising an impairment loss – single asset
• Historical cost – profit or loss
• Revalued asset – treated as a revaluation decrease
- OCI (against cumulative revaluation gain), and thereafter
- Profit or loss
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Historical cost
Carrying value £10m
Recoverable amount
(VIU = £6m; FV = £7m)
£7m
Impairment loss
(Profit or loss)
£3m
Revalued asset
Carrying value
(Revaluation reserve £2m)
£10m
Recoverable amount
(VIU = £6m; FV = £7m)
£7m
Impairment loss
(OCI)
£2m
Impairment loss
(Profit or loss)
£1m
Recognising an impairment loss - CGU
• First to goodwill
• Then pro-rata to other assets of CGU based on CV
- BUT can’t reduce individual asset below its RA or zero
- Any excess allocated to other assets of the CGU based on CV
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Recognising an impairment loss
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CGU
£’000s
Carrying amount
pre-impairment
Individual
recoverable amounts
Goodwill 800 -
Other intangibles 300 100
Property 600 500
Plant and equipment 500 Not known
Debtors 400 400
Total CV 2,600
Recoverable amount 1,350
Total impairment loss 1,250
Goodwill (800)
Remaining impairment
loss to be allocated
(450)
Recognising an impairment loss
© ICAEW 2018
£’000s Other
intangibles
CA = 300
RA = 100
Property
CA = 600
RA = 500
Plant and
equipment
CA = 500
RA = NA
Debtors
CA = 400
RA = 400
Initial
allocation
75
[450x300/1,800]
150
[450x600/1,800]
125
[450x500/1,800]
100
[450x400/1,800]
Impairment
restricted to
200
[300-100]
100
[600-500]
500
[500-Nil]
Nil
[400-400]
Excess
impairment
Nil 50 Nil 100
Reallocation
of impairment
56
[150x300/800]
(50) 94
[150x500/800]
(100)
Final
impairment
131
[75+56]
100 219
[125+94]
Nil
Reversing an impairment loss
• Subsequent periods must consider if there has been a reversal
• Not a choice, if there has been a reversal it must be recognised
• Indicators of reversal are generally the opposite of impairment indicators
© ICAEW 2018
Recognise reversal if RA > CV
Calculate recoverable
amount
CGUSingle asset
Reversing an impairment loss – single asset
• Any reversal is limited to the carrying amount that would have been
recognised (net of depreciation) had no impairment loss been recognised
• Historical cost – profit or loss
• Revalued asset – treated as a revaluation increase
- Profit or loss (to extent reverses previous impairment in P&L), and thereafter
- OCI
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Reversing an impairment loss - CGU
• Reversal allocated to assets in the CGU pro-rata, except goodwill
• Impairment loss on goodwill is not reversed
© ICAEW 2018
Reversal for
each asset
limited to
Lower
of
Individual asset’s
recoverable
amount
Carrying amount
had no
impairment loss
been recognised
Disclosures
• Disclosures required by Section 27 separately for each class of asset:
• Consider also:
- Requirements of Section 17 PPE
- Disclosure of key sources of estimation uncertainty
© ICAEW 2018
Amount of any
impairment losses
recognised in profit or
loss in period
The line item in which the impairment or
reversal is included
Amount of any reversals of
impairment losses recognised in profit or
loss in period
Description of events and circumstances
that led to the impairment or
reversal
Ask a question
VAT Changes in 2015
Audio problems?
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quality try refreshing your page.
Ask a question
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box then click submit.
Download resources here
FRF members: icaew.com/f-
faculty :
resources
Peter Drummond
Advisory Accountant
HMRC
Dave Rice
Senior Manager
Deloitte
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