International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Chapter 14
Impairment and disposal of
assets
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Contents
• Impairment of assets
• Non-current assets held for sale
• Discontinued operations
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment of assets:
IAS 36
• Scope and coverage
• Definitions
• Identifying an asset that may be impaired
• Measurement of recoverable amount
• Fair value less cost to sell
• Value in use
• Recognition and measurement of impairment
losses
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Principle of the
standard
• First, the carrying amount of an asset is determined in accordance with accounting principles and other relevant International Standards
• Second, the ‘recoverable amount’ of the asset is determined as of that date, being the higher of fair value less costs to sell and the asset’s value in use (to the existing enterprise)
• If the recoverable amount is lower than the carrying value as recorded, then an impairment loss must be recognized immediately, that is, the carrying value is lowered to the recoverable amount. Otherwise, no impairment loss is required
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Principle of the
standard (cont’d)
• It is important to emphasize that recoverable amount is a very different concept from fair value and, for non-current assets, will often be significantly higher than fair value. IAS 36 does not require assets within its scope to be recorded at the lower of cost and market or fair value
• The essential objective of IAS 36 is to ensure that assets are not carried at a figure greater than their recoverable amount. The Standard itself says nothing about possible or normal methods of arriving at carrying value. The Standard applies whatever the underlying basis of valuation of the asset is
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
IAS 36: impairment of
assets – definitions
• This standard contains a lot of details and introduces
a set of new definitions
• An impairment loss is the amount by which the
carrying amount of an asset or a cash-generating unit
exceeds its recoverable amount
• Carrying amount is the amount at which an asset is
recognized after deducting any accumulated
depreciation (amortization) and accumulated
impairment losses thereon
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
IAS 36: impairment of assets
– definitions (cont’d)
• The recoverable amount of an asset or a
cash-generating unit 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 the sale of an asset or cash-
generating unit in an arm’s length transaction
between knowledgeable, willing parties, less
the costs of disposal
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Identifying an asset that
may be impaired
• Step one:
– assess, at each balance sheet date,
whether there is any indication that an
asset may be impaired
• Step two:
– if any such indication exists, the enterprise
should estimate the recoverable amount of
the asset
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Measurement of
recoverable amount
• First, the standard deals with the measurement of an impairment for individual assets
• Second, the standard concentrates on the measurement of an impairment for cash generating units
• Subsequently attention is paid to corporate assets
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Recognition and
measurement of impairment
losses • Recognition and measurement
– individual assets
– cash generating units
– goodwill
• Reversal of impairment loss
– individual assets
– cash generating units
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Cash generating units
• An asset’s cash-generating unit is the smallest group of assets that includes the asset and that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets
• If an active market exists for the output produced by an asset or a group of assets, this asset or group of assets should be identified as a cash-generating unit, even if some or all of the output is used internally
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Cash generating units (cont’d)
• If this is the case, management’s best estimate of future market
prices for the output should be used (para. 70):
– in determining the value in use of this cash-generating unit,
when estimating the future cash inflows that relate to the
internal use of the output
– in determining the value in use of other cash-generating
units of the reporting entity, when estimating the future cash
outflows that relate to the internal use of the output
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Steps to take
• Step one:
– Define the cash generating unit
• Step two:
– Determine and compare the recoverable amount
and carrying amount of that unit
• The carrying amount of a cash-generating
unit should be determined consistently with
the way the recoverable amount of the cash-
generating unit is determined
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Recognition and
measurement of impairment
losses – goodwill
• Goodwill, by definition, does not generate cash flows independently from other assets or groups of assets and, therefore, the recoverable amount of goodwill as an individual asset cannot be determined. As a consequence, if there is an indication that goodwill may be impaired, the recoverable amount is determined for the cash-generating unit to which the goodwill belongs. This amount is then compared to the carrying amount of this cash-generating unit and any impairment loss is recognized, attributed first to the goodwill as discussed later
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment and goodwill
1. The goodwill should, from the acquisition
date, be allocated to each of the acquirer’s
cash-generating units, or groups of cash-
generating units, that are expected to
benefit from the synergies of the business
combination, irrespective of whether other
assets or liabilities of the acquiree are
assigned to those units or groups of units
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment and goodwill
(cont’d)
2. Each unit or group of units to which the
goodwill is allocated should:
i. represent the lowest level within the entity at
which the goodwill is monitored for internal
management purposes
ii. not be larger than a segment based on either
the entity’s primary or the entity’s secondary
reporting format determined in accordance
with IAS 14, Segment Reporting
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment and goodwill
(cont’d)
3. If the initial allocation of goodwill acquired in
a business combination cannot be
completed before the end of the annual
period in which the business combination
occurs, that initial allocation should be
completed before the end of the annual
period beginning after the acquisition date
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment and goodwill
(cont’d)
4. When an entity disposes of an operation within a cash-generating unit (group of units) to which goodwill has been allocated, the goodwill associated with that operation should be:
i. included in the carrying amount of the operation when determining the gain or loss on disposal
ii. measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit (group of units) retained, unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment and goodwill
(cont’d)
5. When an entity reorganizes its reporting structure in a manner that changes the composition of cash-generating units (groups of units) to which goodwill has been allocated, the goodwill should be reallocated to the units (groups of units) affected. This reallocation should be performed using a relative value approach similar to that used when an entity disposes of an operation within a cash-generating unit (group of units), unless the entity can demonstrate that some other method better reflects the goodwill associated with the reorganized units (groups of units)
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment and goodwill
(cont’d)
6. The Standard permits (not requires) the annual impairment test for a cash-generating unit (group of units) to which the goodwill has been allocated to be performed at any time during an annual reporting period, provided that the test is performed at the same time every year and different cash-generating units (groups of units) to be tested for impairment at different times. However, if some of the goodwill allocated to a cash-generating unit (group of units) was acquired in a business combination during the current annual period, the Standard requires that unit (group of units) be tested for impairment before the end of the current period
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment and goodwill
(cont’d)
7. The Standard also permits the most recent detailed calculation made in a preceding period of the recoverable amount of a cash-generating unit (group of units) to which goodwill has been allocated to be used in the impairment test for that unit (group of units) in the current period, provided specified criteria are met, as follows:
– the assets and liabilities making up the unit have not changed significantly since the most recent recoverable amount calculation
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Impairment and goodwill
(cont’d)
– the most recent recoverable amount calculation
resulted in an amount that exceeded the carrying
amount of the unit by a substantial margin
– based on an analysis of events that have occurred
and circumstances that have changed since the
most recent recoverable amount calculation, the
likelihood that a current recoverable amount
determination would be less than the current
carrying amount of the unit is remote.
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Recognition of impairment
losses –cash-generating unit
• An impairment loss should be recognized for a cash-generating unit if, and only if, its recoverable amount is less than its carrying amount. The impairment loss should be allocated to reduce the carrying amount of the assets of the unit in the following order:
– first, to goodwill allocated to the cash-generating unit (if any)
– then, to the other assets of the unit on a pro rata basis based on the carrying amount of each asset in the unit.
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Recognition of impairment
losses – cash-generating unit
(cont’d)
• In allocating an impairment loss the carrying amount of an asset should not be reduced below the highest of:
– its fair value less costs to sell (if determinable)
– its value in use (if determinable)
– zero
• A liability should be recognized for any remaining amount of an impairment loss for a cash-generating unit, if, and only if, that is required by other International Accounting Standards
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Reversal of an impairment loss
• Step one:
– Is there an indication that an impairment
loss recognized in earlier years may have
decreased significantly?
– Series of indicators:
• External sources of information
• Internal sources of information
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Reversal of an impairment loss
– cash generating units (cont’d)
• In allocating a reversal of an impairment loss for a cash-generating unit, the carrying amount of an asset should not be increased above the lower of:
– the recoverable amount (if determinable)
– the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Reversal of an impairment loss
– cash generating units (cont’d)
• The amount of the reversal of the impairment loss
that would otherwise have been allocated to the
asset should be allocated to the other assets of the
unit, except for goodwill, on a pro rata basis
• The Standard now completely prohibits the
recognition of reversals of impairment losses for
goodwill
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Disclosure – Impairment
• An entity shall disclose the following for each class of assets:
– the amount of impairment losses recognized in profit or loss during the period
– the amount of reversals of impairment losses recognized in profit or loss during the period
– the amount of impairment losses on revalued assets recognized directly in equity
– the amount of reversals of impairment losses on revalued assets recognized directly in equity
– many more disclosures
