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Title
IAS 36 Impairment of assets, including goodwill
Coverage
This video will cover the basics of the impairment
process, including issues relating to revalued assets,
reversal of impairment losses; the identification of CGUs
and impairment reviews on goodwill.
Exam context
It is a standard that has its roots in FR but there are
additional technical areas in SBR. Its application
requires judgment. Understanding and then being able
to explain the impairment process and it apply is key.

Tom Clendon
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IAS 36 Impairment of assets

The standard ensures that assets are carried at no more
than their recoverable amount.
The standard applies to
• PPE
• Intangible assets including goodwill
• investments in subsidiaries, associates, and joint
ventures carried at cost
Identifying an asset that may be impaired
Certain assets are subject to an annual impairment
review.
• an intangible asset with an indefinite useful life
• an intangible asset not yet available for use
• goodwill acquired in a business combination
Other assets will be subject to an impairment review if
there is an indication of an impairment loss.

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Indications of impairment
External sources:
• market value declines
• negative changes in technology, markets, economy,
or laws
• increases in market interest rates
• net assets of the company higher than market
capitalisation
Internal sources:
• obsolescence or physical damage
• asset is idle, part of a restructuring or held for
disposal
• worse economic performance than expected
• for investments in subsidiaries, joint ventures or
associates, the carrying amount is higher than the
carrying amount of the investee's assets, or a
dividend exceeds the total comprehensive income
of the investee

Tom Clendon
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Impairment loss
An asset is impaired when the carrying amount of an
asset exceeds its recoverable amount.

Tom Clendon
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Recoverable amount
The recoverable amount is the higher of an asset's fair
value less costs of disposal (sometimes called net
selling price) and its value in use.
Value in use
The value in use is the present value of the future cash
flows expected to be derived from an asset.

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Q Mr 5%

An asset has a carrying value of $500,000 and is subject

to an impairment review. The asset could be sold for
$350,000 subject to an agent's commission of 5%. If the
asset was retained then it is budgeted that the current
future cash flows of $200,000 per annum would grow by
a compound 10% for the next two years and then cease.
The relevant discount rate is 8%.

Required
Determine the outcome of the impairment review

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A Mr 5%

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Determining the value in use (PV of FCF)

Cash flows
Cash flow projections should be based on reasonable
and supportable assumptions, the most recent budgets
and forecasts, and extrapolation for periods beyond
budgeted projections.
The standard presumes that budgets and forecasts
should not go beyond five years; for periods after five
years, extrapolate from the earlier budgets.
Management should assess the reasonableness of its
assumptions by examining the causes of differences
between past cash flow projections and actual cash
flows.
Cash flow projections should relate to the asset in its
current condition – future restructurings to which the
entity is not committed and expenditures to improve or
enhance the asset's performance should not be
anticipated.
Estimates of future cash flows should not include cash
inflows or outflows from financing activities, or income
tax receipts or payments.

Tom Clendon
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Determining the value in use (PV of FCF)

Discount rate (present value)
In measuring value in use, the discount rate used should
be the pre-tax rate that reflects current market
assessments of the time value of money and the risks
specific to the asset.
The discount rate should not reflect risks for which future
cash flows have been adjusted and should equal the
rate of return that investors would require if they were to
choose an investment that would generate cash flows
equivalent to those expected from the asset.
For impairment of an individual asset or portfolio of
assets, the discount rate is the rate the entity would pay
in a current market transaction to borrow money to buy
that specific asset or portfolio.
If a market-determined asset-specific rate is not
available, a surrogate must be used that reflects the
time value of money over the asset's life as well as
country risk, currency risk, price risk, and cash flow risk.
The following would normally be considered:
• the entity's own weighted average cost of capital
• the entity's incremental borrowing rate
• other market borrowing rates.

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Comment
There is a lot of judgment in the impairment review
process!

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Recognition of an impairment loss

The impairment loss is recognised as an expense in
profit or loss, unless it relates to a revalued asset.
Where the asset has been revalued then the impairment
loss is recognised in OCI / revaluation reserve, but only
to the extent of the balance of the revaluation reserve
relating to that asset. When the revaluation reserve is
exhausted then the balance of the impairment loss is
charged as an expense to the profit or loss.

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Q Balbeer
Balbeer owns some land that is accounted for as
property plant and equipment and as a matter of
accounting policy has been revalued. The historical cost
of the land is $10 million, and its carrying value is $12
million. The gain of $2 million has previously been
reported in the statement of other comprehensive
income and has resulted in a current balance in equity,
in other components of equity (OCE) of $2 million at the
reporting date. Property values have recently fallen and
it is now estimated that the fair value of the land less
costs to sell is only $8 million, which the value in use
has been estimated at $9 million.
Required
Explain the consequences of the outcome of the
impairment review

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A Balbeer

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Reversal of an impairment loss

A reversal of an impairment loss can occur if the
conditions that caused the original impairment have
improved.

When recognising a reversal of a previously recognised

impairment loss the increased carrying amount of the
asset should not be more than what the depreciated
historical cost would have been if the impairment had
not been recognised.
The reversal of an impairment loss is recognised in the
profit or loss unless it relates to a revalued asset.
The reversal of an impairment loss for goodwill is
prohibited.

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Q Wilson
Five years ago Wilson acquired an asset at a cost of
$30,000. The asset had an estimated useful life of ten
years and was depreciated straight line basis on the
assumption that there will be no residual value. After two
years owning the asset there was new competition on
the market and as a result the value in use fell and the
asset was subject to an impairment review. At that time
the recoverable amount was assessed at $16,000 and
an impairment loss recognised.
The competitor has now withdrawn from the market and
as result the prospect of future profitability and cash
flows from the use of the asset has risen with the
potential that the impairment loss has been reversed.
The recoverable amount has now been estimated at
$24,000. At no time has there been a change to the
overall estimated useful life of the asset
Required
Show the accounting for the impairment loss and its
reversal.

Tom Clendon
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A Wilson

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Cash Generating Units (CGU)

It is not usually possible to identify cash flows relating to
particular assets. For example, goodwill does not by
itself generate any cash and cannot be sold.

This means that value in use is often calculated (and the

impairment review performed) for groups of assets,
rather than individual assets.

These groups of assets are called cash generating units

(CGUs).

CGUs are segments of the business whose income

streams are largely independent of each other.

CGUs are likely to mirror the strategic business units

used for monitoring the performance of the business e.g.
be a subsidiary or associate within a group structure.

However it can be necessary to identify the CGUs.

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Q Alphabet – part one

Alphabet is a company that has purchased a subsidiary

that has a vertically integrated process. The subsidiary
has three business operations which may or may not be
cash generating units.

The subsidiary has a forest (business A) but also

operates a saw mill (business B) and retails wooden
furniture to the general public (business C). The three
stages of production are all on separate sites, managed
by different mangers and operate as three separate
profit centres. The output of A is timber that is partly
transferred to B and partly sold in an external market. If
A did not exist, B could buy its timber from the market.
The output of B has no external market and is
transferred to C at an internal transfer price. C sells the
finished product direct to the public and the sales
revenue achieved by C is not affected by the fact that
the three stages of production are all performed by the
entity.

Requirement
Identify the CGU’s of the newly purchased
subsidiary.

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A Alphabet – part one

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Allocating assets to CGU

The net assets of the business (including goodwill, but

excluding tax balances and interest bearing debt) are
allocated to CGU. There is a potential issue where
certain assets are shared across more than one CGU
e.g. goodwill or a head office building.

Whilst it may be possible to allocate such assets on a

reasonable basis (e.g. head office training centre on the
basis of number of employees) in other circumstances it
may be deemed impossible to allocate these over other
CGUs on a reasonable basis.

If no reasonable allocation of corporate assets or

goodwill is possible, then a group of CGUs must be
tested for impairment together in a two stage process.

First it is necessary to consider whether each CGU is

itself impaired by comparing its carrying value with its
own recoverable amount. Any impairment loss is then
recognised.

Secondly the revised carrying value of the business as a

whole (all the CGUs plus the unallocated asset) can
then be compared with the recoverable amount to
identify any remaining impairment loss which is then
allocated to the goodwill.

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Q Alphabet – part 2

Alphabet is a company that has purchased a subsidiary

that has a vertically integrated process. The subsidiary
has three business operations and two CGUs. Business
A is a CGU and Business B and C together form a
second CGU.

The carrying amount and the recoverable amount of the

net assets of each business and the overall purchased
goodwill of the subsidiary are as follows:

A B C Goodwill Total
$000 $000 $000 $000 $000
Carrying amount 420 360 240 150 1,170
Recoverable 360 420 300 1.080
amount

Required
Explain and illustrate how the impairment review is
calculated.

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A. Alphabet – part 2

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Allocating the impairment loss to assets within the

CGU
The impairment loss is allocated to reduce the carrying
amount of the assets of the unit (group of units) in the
following order:
• any asset that is specifically impaired
• goodwill
• the other assets on a pro rata on the basis
But the carrying amount of any asset should not be
reduced below the highest of: its fair value less costs of
disposal (if measurable), its value in use (if measurable).

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Annual impairment review of goodwill

By conducting an annual impairment review of goodwill
it ensures that it is not overstated i.e. not carried at more
than its recoverable amount.

Because goodwill does not generate cash inflows that

are independent of those from other assets the
impairment test is conducted for goodwill on a CGU i.e.
the subsidiary. The carrying value becomes the net
assets at the reporting date plus the goodwill.

NCI at FV = goodwill in full = split the impairment loss

When NCI at acquisition is measured at fair value then

the goodwill arising is in full and the impairment loss on
goodwill is apportioned between the parent and the NCI
in the proportions that they share profits and losses.

NCI pp of NA = goodwill attributable parent = loss to RE

When NCI at acquisition is measured as a proportion of

net assets then the goodwill arising is attributable to the
parent only and the impairment loss on goodwill is
wholly charged against group retained earnings.

Because goodwill is attributable to the parent only it is

necessary to notionally gross up goodwill in the
impairment review process and then to only account for
the impairment that relates to the actual goodwill.

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Q de Royale part one

Impairment of goodwill – NCI at FV

The de Royale group has a number of subsidiaries with

goodwill arising on consolidation. Each subsidiary has
been assessed as a cash generating unit. The following
information has been provided to enable the impairment
review of goodwill to be performed.

The de Royale group own 90% of subsidiary one which

has net assets at the reporting date of $100m and a
recoverable amount of $140m. The goodwill arising on
acquisition is $180m. NCI has been measured at fair
value.

Required
Calculate the impairment loss arising on the
impairment review of the cash generating unit and
show its accounting treatment.

Tom Clendon
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A de Royale part one

Tom Clendon
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Q de Royale part two

Impairment of goodwill – NCI at FV

The de Royale group own 60% of subsidiary two which

has net assets at the reporting date of $110m and a
recoverable amount of $140m. The goodwill arising on
acquisition is $120m. NCI has been measured at fair
value.

Required
Calculate the impairment loss arising on the
impairment review of the cash generating unit and
show its accounting treatment.

Tom Clendon
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A de Royale part two

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Q de Royale part three– impairment of goodwill

NCI as a proportion of net asset

The de Royale group own 90% of subsidiary three which

has net assets at the reporting date of $100m and a
recoverable amount of $140m. The goodwill arising on
acquisition is $180m. NCI has been measured as a
proportion of net assets.

Required
Calculate the impairment loss arising on the
impairment review of the cash generating unit and
show its accounting treatment.

Tom Clendon
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A de Royale part three

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Q de Royale part four - impairment of goodwill

NCI as a proportion of net asset

The de Royale group own 60% of subsidiary four which

has net assets at the reporting date of $110m and a
recoverable amount of $140m. The goodwill arising on
acquisition is $120m. NCI has been measured as a
proportion of net assets.

Required
Calculate the impairment loss arising on the
impairment review of the cash generating unit and
show its accounting treatment.

Tom Clendon
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A de Royale part four

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Key Takeaways

An asset (or CGU) is impaired when the CV exceeds the

recoverable amount.

Impairment losses must be recognised and the assets

written down. It is a non-cash expense.

Look out for clues that an impairment review is

necessary (indicators).

CGUs are segments of the business (normally a sub)

whose income streams are largely independent of each
other.

Goodwill is subject to an annual impairment review as

part of a CGU (sub’s net assets plus goodwill = CV)

When NCI is at FV then goodwill is in full, so the

impairment loss is split.

When NCI is a pp of NA then goodwill is proportional,

goodwill needs notionally grossing up in the impairment
review process, so the loss is all charged to group RE.

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The impairment process is subjective.

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A. Mr 5%

An asset is impaired when its carrying value exceeds the recoverable amount, where
the recoverable is the higher of the fair value less costs to disposal and the value in
use, where the value in use is the present value of the future cash flow.

$
Carrying value 500,000
Recoverable amount (higher) 411,180
Impairment loss 88,820

Fair value 350,000

less costs to disposal (5%) (17,500)
332,500

Value in use
200,000 x 110% x 0.9259 203,704
220,000 x 110% x 0.8573 207,476
411,180 higher !

A Balbeer

An impairment review is required as there is an indicator of impairment as property

values have fallen.

The asset must be written down to its recoverable amount. The recoverable amount
is the higher fair value in use of $9 million.

The carrying value of the asset is $12 million and this exceeds the recoverable
amount of $9 million and so the impairment loss is $3m.

As the asset has previously been impaired so the loss is first recognised in equity –
to other comprehensive income – until the balance on reserves is exhausted.

This means that $2 million of the loss is taken to equity (other components of equity)
and reported in other comprehensive income, while the excess loss of $1 million is
recognised as a PL expense.

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A. Wilson

Year 2 $
First impairment review
Carrying value (30 x 8/10) 24,000
Recoverable amount 16,000
Impairment loss 8,000

Dr Expense / profit 8,000

Cr Assets 8,000

Year 5
Subsequent impairment review
Carrying value (16 x 5/8) 10,000
Recoverable amount 24,000
Impairment loss Nil

Depreciated historical cost (30 15,000 The CV if there had been no impairment
x 5/10) loss.
Carrying value 10,000 The CV now following the impairment
loss.
Reversal of impairment loss 5,000 The amount of the reversal of the
impairment loss

Dr Assets 5,000
Cr Expense / profit 5,000

The second impairment review does not reveal a further impairment loss. It therefore
maybe that there is a reversal of the first impairment loss. The reversal cannot result
in the asset having a higher carrying value after the reversal of the impairment loss
than it would have had if the first impairment loss had never been recorded.

Accordingly we need to ascertain the depreciated historical cost of the asset at the
date of the reversal. Please note that the $14,000 is not the double entry – only the
$5,000 is recorded.

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A. Alphabet – part one

It appears that there has been an impairment loss overall of $90,000 as the overall
carrying value exceeds the recoverable amount but there are several issues to
address before deciding how the overall impairment loss is allocated because the
subsidiary is not the cash generating unit (CGU).

First as the subsidiary is not the cash generating unit it is necessary to first identify
how many of the businesses actually generate an independent cash flow i.e. how
many CGU’s there are.

The forest (business A) forms its own cash generating unit (CGU) as it can sell direct
to the market. Its value in use / cash inflows should be based on the market price for
its output.

The saw mill (business B) does not generate any independent cash flows as all of its
outputs are internal to the retail outlets (business C). Accordingly business B and C
together form one CGU unit because there is no market available for the output of
the saw mill. In calculating the value in use / cash outflows of the CGU of B + C, the
timber received from the forest should be priced by reference to the market and not
any internal transfer price.

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A. Alphabet – part two

Having identified that there are two CGUs we can aggregate B and C.

CGU A CGU B + C Goodwill Total

$000 $000 $000 $000
Carrying amount 420 600 150 1,170
Recoverable amount 360 720 1.080

As the goodwill cannot be allocated between the CGUs it is necessary to do an

impairment test on each CGU first ignoring the goodwill.

Impairment review CGU A CGU B + C

$000 $000
Carrying Value 420 600
Recoverable amount 360 720
Impairment loss 60 Nil

CGU A is impaired whilst CGU B +C is not. An impairment loss of $60,000 has to be

recognised in respect of CGU A and its carrying amount is reduced to $360,000. In
turn this reduces the carrying value of the whole subsidiary to $1,110,000.

Now we can do a further impairment review and allocate the whole loss arising to the
goodwill.

Impairment review of the subsidiary $000

Carrying Value (1,170 – 60) 1,110
Recoverable amount 1,080
Impairment loss (on goodwill) 30

So to recap the impairment loss is $90,000 which is charged to profit and allocated
$60,000 to CGU A and $30,000 to goodwill.

$000 $000
Dr Impairment loss / profits 90
Cr Assets in CGU A 60
Cr Goodwill 30

Tom Clendon
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A. De Royale – impairment review goodwill

NCI at fair value means goodwill in full and impairment loss on goodwill is split with
the NCI

Impairment review – sub one

Carrying value
Net assets at year-end 100
Goodwill 180
Carrying value 280
Recoverable amount 140
Impairment loss on goodwill 140 (90% = 126 RE W5) (10% =14 NCI w4)

Impairment review – sub two

Carrying value
Net assets at year-end 110
Goodwill 120
Carrying value 230
Recoverable amount 140
Impairment loss on goodwill 90 (60% = 54 RE W5) (40% 36 = NC1 W4)

NCI as a proportion of net assets means goodwill is proportional / attributable to

the parent only so the impairment loss on goodwill is not allocated to the NCI, all is
the responsibility of the parent. In the impairment review the goodwill attributable to
the parent has to be grossed up to include notional goodwill so the impairment loss
resulting has be stripped of that notional element.

Impairment review – sub three

Carrying value
Net assets at year-end 100
Goodwill (grossed up 180 x 100/90) 200
Carrying value 300
Recoverable amount 140
Impairment loss on goodwill (including the notional NCI) 160

Actual impairment loss (all to RE W5 160 x 90%) 144

Impairment review – sub four

Carrying value
Net assets at year-end 110
Goodwill (grossed up 120 x 100/60) 200
Carrying value 310
Recoverable amount 140
Impairment loss on goodwill (including the notional NCI) 170

Actual impairment loss (all to RE W5 170 x 60%) 102

Tom Clendon