Hien, Nguyen Thi Thu (PhD.

,) 2016

IAS 36- Impairment

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 Example
• Your machine has a carrying value of
$100.000 in your books. It has become
obsolete in the market, and you will cease
use of this machine.
• Having no further use for the machine
within the firm, you attempt to resell the
machine. Your adviser tells you that the
resale value would be only $25.000.
• Your machine is overvalued in the books
of account, as the $100.000 will not be
recovered from either use, nor by resale.
• The asset is impaired.

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 Objective

Ensure that assets are carried

no more than their recoverable

IAS 36- Impairment amount

of assets
Define how the recoverable
amount is determined

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 IAS 36 applies to: IAS 36 does not apply to:

 Inventories (IAS 2)
construction contracts (IAS
 PPE (IAS 16) 11)
 investment property at  employee benefit (IAS 19)
cost (IAS 40)  deferred tax assets (IAS 12)
 intangible assets (IAS 38)  financial assets (IFRS 9)
 goodwill  non-current assets held-for-
 subsidiaries, associates, sale (IFRS 5)
and joint ventures at cost  agricultural assets at FV
 Assets at revalued (IAS 41)
amounts Investment property at FV
(IAS 40)

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 Related Standards

• IFRS 3 Business combinations

• IAS 16 Property, plant and equipment
• IAS 17 Leases
• IFRS 10 Consolidated Financial Statements
• IAS 27 Equity method in separate financial statements
• IAS 28 Investments in associates
• IAS 31 Interests in joint ventures
• IAS 38 Intangible assets
• IAS 40 Investment property

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 Contents

1 Definitions

2 Identification of impairment asset/CGU

3 Recoverable amount

4 Measuring & recognizing impairment loss

5 Reversing an impairment loss

6 Disclosure

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1. Definitions
•An impairment loss is the amount by which the carrying amount of
an asset or a cash-generating unit exceeds its recoverable amount.
•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.
•Value in use is the present value of the future cash flows expected
to be derived from an asset or a cash-generating unit.
•Fair value less costs to sell is the amount obtainable from the sale
of an asset or a cash-generating unit in an arm’s-length transaction
between knowledgeable, willing parties less the costs of disposal.
•A cash-generating unit is the smallest identifiable group of assets
for which independent cash flows can be identified and measured.

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1. Definitions

Cash generating unit (CGU)

= Smallest identifiable group of assets that generates cash

inflows largely independent from other assets

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 Example

• A mining company owns a private railway that

it uses to transport output from one of its
mines. The railway now has no market value
other than as scrap, and it is impossible to
identify any separate cash inflows with the use
of the railway itself. Consequently, if the
mining company suspects an impairment in the
value of the railway, it should treat the mine as
a whole as a cash generating unit, and measure
the recoverable amount of the mine as a whole.

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 Example

A bus company has an arrangement with a

town's authorities to run a bus service on four
routes in the town. Separately identifiable
assets are allocated to each of the bus routes,
and cash inflows and outflows can be
attributed to each individual route. Three
routes are running at a profit and one is
running at a loss. The bus company suspects
that there is an impairment of assets on the
loss making route. However, the company will
be unable to close the loss-making route,
because it is under an obligation to operate all
four routes, as part of its contract with the
local authority.

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2. Identification

Assets is impaired when

Carrying amount
> Recoverable amount

(Fair value- cost to sell/

(Accounting records) value in use)

CA – RA = Impairment loss
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2. Identification

Impairment: what to do?

At the end of each reporting period Indication

of impairment

Intangibles with indefinite useful life Annual test for

Intangibles not yet available for use Impairment

Annual test for

Goodwill acquired in combination Impairment

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2. Identification

Indication of impairment

External sources Internal sources

 Decline in market value  Obsolescence / physical

Significant changes damage
(Market, technology, legal, Significant changes
economic) (restructuring, discontinuing)
Increase in interest rates Internal reporting evidence
CA> market capitalization

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 Accounting for impairment
• Impairment of an asset should be identified and accounted for as
follows:
1. At the end of each reporting period, the entity should assess whether
there are any indications that an asset may be impaired.
2. If there are such indications, the entity should estimate the asset’s
recoverable amount.
3. When the recoverable amount is less than the carrying value of the
asset, the entity should reduce the asset’s carrying value to its
recoverable amount. The amount by which the value of the asset is
written down is an impairment loss.
4. This impairment loss is recognised as loss for the period

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 Accounting for impairment

5. However, if the impairment loss relates to an asset that has

previously been re-valued upwards, it is first offset against any
remaining revaluation surplus for that asset. When this happens it
is reported as other comprehensive income for the period ( a
negative value) and not charged against profit.
6. Depreciation charges for the impaired asset in future periods
should be adjusted to allocate the asset’s revised carrying
amount, minus any residual value, over its remaining useful life
(revised necessary)

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3. Determining recoverable amount.

Higher of asset’s / CUG’s

Value in
Fair value less cost to sell use

If FV less cost to sell

impossible to set
RA= Value in use

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3. Determining Recoverable Amount

• If fair value less costs to sell or value in use is more

than carrying amount, it is not necessary to calculate
the other amount. The asset is not impaired. [IAS
36.19]
• If fair value less costs to sell cannot be determined,
then recoverable amount is value in use. [IAS 36.20]
• For assets to be disposed of, recoverable amount is
fair value less costs to sell. [IAS 36.21]

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3. Determining Recoverable Amount

• Fair value less costs to sell = proceeds from

arm’s-length sale of an asset/CGU between
knowledgeable willing parties less incremental
direct costs of its disposal
•  Best measure: arm’s-length bargained price in a
binding sales agreement in an active market.
• Hierarchy of appropriate methods to establish
fair value
• Disposal costs: e.g., legal costs, transaction taxes,
removal costs, costs to put in condition for sale

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 Value in use

= Present value of the future cash flows expected

to be derived from an asset/CGU

Future cash flows Variation

Time value of money uncertainty

Other factors
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Value in use 1. Future cash flows

Basis:
Recent budgets/ Extrapolation
Assumptions forecasts

• Cash inflows from continuing use • Futurerestructuring if not

• Necessary and directly attributable/ yet committed
Allocated cash outflows •Improving/ enhancing
•Net cash flows from disposal performance
•Receivables/ Payables
•Financial activities
•Income tax
Inflation On consistent basis
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 Determining cash flows

• Two approaches:
1. Most likely cash flows from use and
disposal discounted using risk-adjusted
discount rate.
2. Probability-weighted cash flows from
use and disposal discounted using
remaining risk-adjusted discount rate.

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 Determining cash flows

• Estimated cash flows with a 40% probability they

will be $120 and a 60% probability they will be $80.
Value in use?
• Method 1: Most likely cash flows = $80. This
amount is discounted using a rate that takes into
account all risks including the uncertainty of the
cash flow amounts. 
• Method 2: Expected value of cash flows = (120 ×
40%) + (80 × 60%) = $96. This amount is
discounted using a rate that includes remaining risks.

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Value in use 2. Discount rate

= pre- tax rate that reflects current market assessment of

Time value of money Risk specific to asset

-Weighted average cost of

1. Market rate capital
2. When no market rate - Incremental borrowing
rate
-Other market borrowing
Market rates for equity are usually stated
post-tax rate
Pre-tx rate = Post-tax rate /(1- tax rate)

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 Value in use

1. Future cash flows 2. Discounting

Year Future cash flows Discount factor at 10% Present value

1 3.000 0,909 2.727
2 2.800 0,826 2.314
3 2.500 0,751 1.878
4 2.000 0,683 1.366
5 1.200 0,621 745
Total 11.500 9.031
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4. Measuring & recognizing impairment loss

Impairment loss

Recoverable amount
Carrying amount

Cost model Revaluation model

Debit: P/L – Credit: Asset Debit: OCI Credit: Asset

Impairment loss (adjustment) Revaluation surplus (adjustment)

Debit: P/L – Impairment

loss

Adjust depreciation for future periods to new carrying amount

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 Testing of CGU with goodwill

Testing annually or whenever

there is an indication of
impairment

Goodwill
Allocation to CGUs
CA of CGU +
goodwill > RA of CGU

Impairment loss

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4. Measuring & recognizing impairment loss

CGU with goodwill: impairment loss

1. Reduce CA of any goodwill allocated to CGU

2. Reduce CA of other assets of CGU pro rata

Do not reduce CA of an asset below the highest of (i) Its FV

– cost to sell, (ii) Its value in use & (iii) Zero

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5. Reversing an impairment loss

External sources Internal sources

Significant changes
Increase in market value
Significant changes (restructuring,
(Market, technology, legal, enhancement)
Internal reporting
economic)
Decrease in interest rates evidence

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 5. Reversing an impairment loss

Only when change in estimates to determine RA

Individual asset CGU Goodwill

- Increased CA <= original CA - Allocation to assets pro rata

(No goodwill)
No
-P/L, or revaluation increase reversal
- CA of asset – Not increase
-Adjust depreciation
RA Original CA

Lower of
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5. Reversing an impairment loss
• No reversal of impairment loss for G/W
• For other assets, reversal permitted if estimates used to
determine recoverable amount have changed
• For an individual asset:
– reversal limited to an increase to what asset would have
been, net of depreciation/amortization, if no impairment
had been recognized initially
– unless accounted for under the revaluation model – when
full reversal is permitted
• For a CGU:
– reversal is allocated to the assets of the unit, excluding G/W
– on basis of relative carrying amounts
– restrictions on individual assets still apply
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6. Disclosure
• For each class of assets:
– amount of impairment loss/loss reversals in P&L
– line item where loss/reversal is reported
– amount of impairment loss/loss reversals on revalued
assets in OCI
• Individually material loss/reversal:
– explanation of events and circumstances
– nature of asset/CGU
– how recoverable amount is determined
– amount of loss/reversal

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6. Disclosure
• For G/W and intangibles with indefinite lives:
– considerably more information provided
– enable users to assess reliability of impairment testing
– for individually significant intangible assets/CGUs
– if individually insignificant, disclose amounts

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 IAS 36

• Indications of impairment of assets

• Measuring recoverable amount, as net selling
price or value in use
• Measuring value in use
• Cash generating units
• Accounting treatment of an impairment loss, for
individual assets and cash generating units
• Reversal of an impairment loss

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