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7/30/2019 Topic 7 Impairment of Assets A122 1
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TOPIC 7
IMPAIRMENT OF
ASSETS (MFRS 136)
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CONCEPTOF IMPAIRMENT
Some non-current assets are subjected to asudden, dramatic drop in market value dueto a substantial decline in value of theassets, economic changes, technologicaladvancements and fluctuation in marketinterest rate.
All these factors would lead to a
phenomenon which called impairments
The value or benefits of assets declined tothe value expected to be recovered from theuse of the assets.
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MFRS 136 IMPAIRMENTOF ASSETS
Applicable to impairment of:
Property, Plant and Equipment (MFRS 116)
Intangible assets (MFRS 138)
Goodwill (MFRS 3) Investment in subsidiary (MFRS 127)
Investment in associate (MFRS 128)
Interest in joint venture (MFRS 131)
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RECOGNITIONOF IMPAIRMENT
Para 59: an asset is considered as impaired when:
Carrying amount (PPE) = cost accumulateddepreciation
Recoverable amount:
= The higher of,
carrying amount > recoverable amount
Fair value cost to sell
Value in use
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RECOGNITIONOF IMPAIRMENT
carrying value should be reduced to the
recoverable amount
Impairment loss= carrying amount recoverable amount
If recoverable amount > carrying amount: an asset is not impaired
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RECOGNITIONOF IMPAIRMENT
Example 7.1:
Cost 1,000
Accumulated depreciation 400Carrying amount 600
Recoverable amount 400
Impairment loss 200
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RECOGNITIONOF IMPAIRMENT
Journal entry:
Dr Impairment Loss 200Cr Accumulated Impairment 200
New carrying amount
= Cost accum depreciation accum impairment
New carrying amount = 1,000 400 200
= 400
(equal to recoverable amnt)7
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IDENTIFYAN IMPAIRED ASSET (PARA 12)
(a) External Sources of Information
i) Assets market value has declined significantly more than
would be expected as a result of the passage of time or
normal use.
ii) Significant changes with an adverse effect on the entity have
taken place in the near future, in the technological, market,
economic or legal environment in which the entity operates or
in the market to which an asset is dedicated.
iii) Market interest rates or other market rates of return oninvestments have increased during the period.
iv) The carrying amount of the net assets of the entity is more
than its market capitalization. 8
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IDENTIFYAN IMPAIRED ASSET
(b) Internal Sources of Information
i) Evidence is available of obsolescence or physical damageof an asset.
ii) Significant changes with an adverse effect on the entity have
taken place during the period, or are expected to take placein the near future, in the extent to which, or manner in which,an asset is used or is expected to be used. These changesinclude the asset becoming idle, plans to discontinue or
restructure the operation to which an asset belongs, plans todispose of an asset before the previously expected date,and reassessing the useful life of an asset as finite rather
than indefinite.
iii) Evidence is available from internal reporting that indicatesthat the economic performance of an asset is, or will be,worse than expected.
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IDENTIFYAN IMPAIRED ASSET (PARA 12)
(a) Physical damage to an asset
(b) Significant decline in the market value of an
asset
(c) Lower-than-expected economic performance of
a segment
(d) Discontinuance or restructuring of operation
(e) Significant changes in the technological,
economic or legal environment
(f) Significant change in the interest rate
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RECOVERABLEAMOUNT:
FAIRVALUELESSCOSTTOSELL
Best resource - price in a binding sale agreement in an
arms length transaction minus cost of transaction
If unavailable but the asset has active market - market
price minus its selling cost.
If both unavailable - refer to most recent transaction.
Cost to sell = legal cost, stamp duty, cost of removing
the assets.
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RECOVERABLE AMOUNT:
VALUE IN USE
Definition = present value of the future cash
flow expected to be derived from an asset.
Bases for estimate =1. cash flow projection on reasonable and
supportable assumption
2. cash flow projection on most recent
financial budget approved by management
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EXAMPLE 7.2:
CALCULATIONOFVALUEINUSE
YearFuture cash flow
RM
Present value
factor at 15%
discount rate
Discounted
future cash
flow
2009 560 0.86957 487
2010 450 0.75614 340
2011 690 0.65752 454
2012 740 0.57175 423
2013 800 0.49718 398
Value in
use2,102
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Example Annual Report 2007 of Ekowood Bhd
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RECOGNITION & MEASUREMENTOF
IMPAIRMENT LOSS
a) Property, Plant and Equipment
b) Goodwill
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
The accounting treatment :
a) cost model
b) revaluation model
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Cost Model
Carrying amount (balance sheet)
= Cost accm. Dep accm. Impairment
Journal entry:
Impairment loss should be recognized in income
statement immediately.
Dr Impairment loss XXX
Cr Accumulated Impairment XXX
( to record impairment loss during the year )
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Example 7.3:On 1 January 2006, Vision Berhad acquired a piece of machinery at
RM150,000. The machine is expected to have useful life of 5 years
with no salvage value. At the end of 2007, the market value of the
machine suffered a significant decline. The company estimated the
recoverable amount of the asset as in the information provided below:
Net selling price: RM60,000
Value in use: RM55,000
Suggested solution:
Recoverable amount = RM60,000 (the higher is net selling price)
Carrying amount of machine = [RM150,000 (RM150,000/5 x 2)]
= RM90,000
Impairment loss = RM30,000 18
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Example (cont)
Journal entry:
Dr Impairment loss 30,000
Cr Accumulated impairment 30,000
New carrying amount (end 2007)
= 150,000(cost) 60,000(acc. Dep.) - 30,000(acc.impairment)
= 60,000 (equal to recoverable amount)
The calculation of depreciation for 2008, will be based on newcarrying amount. If the expected useful life is unchanged, thedepreciation charge for 2008 is RM20,000 (RM60,000/3 years).
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Reversing an Impairment Loss (Cost Model)
If indication that led to the recognition of impairment loss is
cease, the company needs to estimate the new recoverable
amount based on current asset situation.
Impairment loss which was recognized in the previous yearmay need to be reversed, or the carrying amount of the asset
be increased to a new recoverable amount
the increased carrying amount of an asset attributable to a
reversal of an impairment loss should not be more than the
carrying amount that would have been determined had noimpairment loss been recognized for the asset in previous
years.
the amount of write-back should be reduced by the amount
that would have been recognized as depreciation, if the
write-down had not occurred.
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Reversing an Impairment Loss (Cost Model)(cont)
Refer to example 7.3, assuming that at the end of year 2008,
the company re-assesses and estimates that the recoverable
amount of the machine is RM70,000. The write-back of
impairment loss is calculated as follows:
If no impairment loss was recognized in year 2007, the
details for the machine will be:
Carrying amount = RM150,000 (RM150,000/5 3)
= RM60,000
Depreciation charge per year = RM30,000 (RM150,000/5) 21
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Reversing an Impairment Loss (Cost Model)(cont)
The standard requires that the increase in carrying amountshould not exceed the carrying amount that would have beendetermined if no impairment loss had been recognized for theasset in previous years.Thus, the increment should not
exceed RM60,000, or in this case, the new carrying amountafter reversal is RM60,000.
The journal entry:
Dr Accumulated impairment 30,000
Cr Accumulated depreciation 10,000
Write-back of impairment loss 20,00022
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Reversing an Impairment Loss (Cost Model) (cont)
The amount of write-back would be equal to the re-instatement of the RM30,000 previously written down,reduced by the amount of depreciation of RM10,000
[150,000/5 (depreciation with no impairment) RM20,000(depreciation after impairment) ] that had not been recordedin 2008 because of the impairment.
After the reversal, the carrying amount of the machine will
be RM60,000 [cost RM150,000 accumulated depreciation(30,000 3), as it would have been without the impairmentrecognition in 2007 and the reversal in 2008.
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Revaluation Model
assets are carried at revalued amount less any
subsequent accumulated depreciation and accumulated
impairment
Impairment loss is recorded as a revaluation decrease
(or increase) and the journal entry:
Dr Revaluation Reserve RMXXX
Cr Accumulated Impairment RMXXX
( to record impairment loss during the year )
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Example 7.4: Revaluation Model
A piece of land was acquired in 2006 at the cost of RM20,000. In2007, the company revalued the asset to RM25,000 and thejournal entry will be:
Dr Assets RM5,000
Cr Revaluation reserve RM5,000
In 2008, the company did an impairment test and found that therecoverable amount was RM23,000. The impairment loss ofRM2,000 is accounted as revaluation decrease as journalized
below:
Dr Revaluation reserve RM2,000
Cr Accumulated impairment RM2,00025
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Example 7.5
A piece of land was acquired by RIMA Bhd in 2006. The table
below list several events related with the land.
Year Events
2006 Acquired an asset at cost of RM20,000
2007 Revalue the asset at RM25,000
2008 Recoverable amount of RM18,000
2009 Recoverable amount of RM23,000
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
Suggested solution:
Journal entry:
2007
Dr Land 5,000
Cr Revaluation reserve 5,000
2008
Dr Revaluation reserve 5,000
Impairment loss 2,000Cr Accumulated Impairment 7,000
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IMPAIRMENT LOSS:
PROPERTY, PLANTAND EQUIPMENT
2009
Dr Accumulated Impairment 5,000
Cr Revaluation reserve 3,000
Write-back of impairment loss 2,000
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IMPAIRMENT LOSS - GOODWILL
Categorized as unidentifiable intangible asset.
Arise on business combination
Calculated as difference between cost of
acquisition and net fair value of identifiable netassets.
Referred to residual asset that cannot be
individually identified
Hence, cash flow associated with the specific
asset (goodwill) cannot be reliably measured and
then it is not possible to determine fair value less
cost to sell for goodwill30
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IMPAIRMENT LOSS - GOODWILL
Impairment test for goodwill cannot be tested on its own not
identifiable
At acquisition date, goodwill should be allocated to each cash
generating units (CGU)
CGU- represent the smallest identifiable group of assets that
generate cash inflows from other group of assets.
Ex: manufacturing plant, supermarket outlet.
Impairment test for goodwill should be performed annually and
whenever there is indication that the unit may impaired.
Impairment loss for a CGU should be allocated to reduce the
carrying amount of the assets of the units according to thefollowing order:
i) Reduce the carrying amount of any goodwill allocated to
the CGU
ii) Reduce the carrying amount of other assets of the unit on
pro-rata basis.
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IMPAIRMENT LOSS GOODWILL
Example:In January 2008, Sejati Bhd acquired 100% interest in Bersatu Bhd
for RM10 million. Bersatu Bhd operation consist of manufacturing unitand hypermarket unit. Bersatu Bhds net fair value of identifiable assetis RM8 million (RM4 million from each manufacturing unit andhypermarket unit).Goodwill is allocated 40% to manufacturing unitand 60% to hypermarket unit.
At the end of 2008, the hypermarket unit of Bersatu Bhd wasadversely effected by the development of new business park. Therecoverable amount of the Hypermarket unit at end 2008 is RM4.1 m.
The carrying amount of the unit is:
Hypermarket Unit Goodwill NetIdentifiable
assets
Total
Cost 1.2 m 4 m 5.2 m
Depreciation - 0.1 m 0.1 m
Carrying amount 1.2 m 3.9 m 5.1 m
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IMPAIRMENT LOSS GOODWILL
Answer:
Impairment loss = 5.1 m 4.1 m
= 1 million
Journal entry:
Dr Impairment loss 1 m
Cr Goodwill 1 m
( record impairment loss)
Carrying amount of Goodwill = 0.2 million
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IMPAIRMENT LOSS GOODWILL
Answer (cont):
But if the recoverable amount is RM3.6 million.
Impairment loss = RM5.1 m RM3.6m
= RM1.5 m (higher than goodwill RM1.2m)
1. The impairment loss first is allocated to goodwill, writing downto zero.
2. The balance will be allocated to carrying amount of
identifiable assets on pro-rata basis.
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IMPAIRMENT LOSS GOODWILL
Answer (cont..): Assuming that at end of 2008 hypermarket unit comprise of
Building and equipment RM3 m (net), Inventory RM1 m andnet monetary liabilities RM0.1.
The journal entry:
Dr Impairment loss 1.2 mCr Goodwill 1.2 m
Dr Impairment loss 0.3 m
Cr Accumulated depreciation-
Building and Equipment* 0.225 m
Cr Inventory (0.3m x 0.25) 0.075 m
( to record and allocate impairment loss on pro-rata basis )
* (0.3m x 0.75)35
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REVERSALOF IMPAIRMENT LOSS GOODWILL
Prohibited under MFRS 136
Reason- any increase in the recoverable amount
of goodwill is likely to be an increase in internally
generated goodwill (the recognition is prohibited
under MFRS 138 Intangible Assets.
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