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    Lecture 5 - IAS 36 Impairment of Assets

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    Jeff Ganyo
    The document summarizes key points about IAS 36 impairment of assets. It discusses calculating the recoverable amount as the higher of net selling price or value in use, with value in use being the present value of future cash flows discounted at the rate for a similarly risky investment. It also outlines indicators of impairment, the accounting treatment for impairment losses, and provides an example of allocating an impairment loss across a cash generating unit's assets.

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    Lecture 5 - IAS 36 Impairment of Assets

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    Jeff Ganyo
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    The document summarizes key points about IAS 36 impairment of assets. It discusses calculating the recoverable amount as the higher of net selling price or value in use, with value in use being the present value of future cash flows discounted at the rate for a similarly risky investment. It also outlines indicators of impairment, the accounting treatment for impairment losses, and provides an example of allocating an impairment loss across a cash generating unit's assets.

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    The document summarizes key points about IAS 36 impairment of assets. It discusses calculating the recoverable amount as the higher of net selling price or value in use, with value in use being the present value of future cash flows discounted at the rate for a similarly risky investment. It also outlines indicators of impairment, the accounting treatment for impairment losses, and provides an example of allocating an impairment loss across a cash generating unit's assets.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    35 views19 pages

    Lecture 5 - IAS 36 Impairment of Assets

    Uploaded by

    Jeff Ganyo
    The document summarizes key points about IAS 36 impairment of assets. It discusses calculating the recoverable amount as the higher of net selling price or value in use, with value in use being the present value of future cash flows discounted at the rate for a similarly risky investment. It also outlines indicators of impairment, the accounting treatment for impairment losses, and provides an example of allocating an impairment loss across a cash generating unit's assets.

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    You are on page 1of 19

    Lecture 5

    IAS 36 impairment of assets

    LECTURER: C. AGYENIM-BOATENG (PhD, MSc, BSc, FCCA)


    IAS 36 impairment of assets

    • Report at no more than recoverable amount


    • Higher of net selling price and value in use.

    • Net selling price


    • Disposal value less direct selling costs.

    • Value in use
    • PV of future cash flows
    • Discounted at rate for equally risky investment.
    IAS 36 approach

    • Single asset or cash generating unit


    • Judgmental
    • Beware concealing poor performance by grouping

    • Carrying amount = depreciated Historical Cost or


    depreciated revalued amount

    • Impaired if carrying value > recoverable amount

    • Calculate a revised carrying amount.


    Revised carrying amount

    The
    Indications of impairment

    • External indicators
    – a fall in the market value of the asset
    – material adverse changes in regulatory environment
    – material adverse changes in markets
    – material long-term increases in market rates of return used for
    discounting.
    • Internal indicators
    – material changes in operations
    – major reorganisation
    – loss of key personnel
    – loss or net cash outflow from operating activities if this is expected to
    continue or is a continuation of a loss-making situation.
    Accounting treatment of impairment losses

    • Asset not previously revalued – income statement

    • Asset previously revalued – revaluation surplus

    • Allocation of impairment losses:


    • First, reduce any goodwill in Cash Generating
    Unit(CGU)
    • Then, CGU’s other assets on a pro rata basis
    • No asset reduced below net selling price, value in use
    or zero.
    Example of the allocation of an impairment loss

    Recoverable amount is GH¢150,000 of a cash generating unit with the following


    assets: GH¢
    Goodwill 70,000
    Intangible assets 10,000
    PPE 100,000
    Inventory 40,000
    Receivables 30,000
    250,000
    The review estimates for the example that

    • The PPE includes a property with a carrying amount of GH


    ¢60,000 and a market value of GH¢75,000.
    • The net realisable value of the inventory is
    greater than its carrying values.
    • None of the receivables are considered doubtful.
    Table to show the allocation of the impairment loss

    Pre- impairment Impairment Post-impairment


    GH¢ GH¢ GH¢

    Goodwill 70,000 (70,000) Nil

    Intangible assets 10,000 (6,000) 4,000

    PPE 100,000 (24,000) 76,000

    Inventory 40,000 Nil 40,000

    Receivables 30,000 Nil 30,000

    250,000 (100,000) 150,000


    Notes to table

    • The impairment loss is first allocated against goodwill. After this has
    been done GH¢30,000 (GH¢100,000 − GH¢70,000) remains to be
    allocated.
    • No impairment loss can be allocated to the property, inventory or
    receivables because these assets have a recoverable amount that is higher
    than their carrying value.
    • The remaining impairment loss is allocated pro- rata to the intangible
    assets (carrying amount GH¢10,000) and the plant (carrying amount GH
    ¢40,000 [GH¢100,000 − GH¢60,000]).
    Illustration: value in use calculation

    £ £ £

    (£)

    £
    Illustration – revised carrying amount

    GH¢
    Carrying amount
    as at 31 December 20X3 114,500
    Net realisable value 70,000
    Value in use 100,565

    Revised carrying amount 100,565


    Published accounts – British Sky example
    Tangible fixed assets – British Sky Broadcasting Group plc
    Published accounts – British Sky example (Continued)
    Tangible fixed assets – British Sky Broadcasting Group plc
    Discussion

    • Explain the effect of revaluation on ratios.

    • Explain three factors that could lead to revision of


    estimate of useful economic life.

    • Explain why depreciation policies may make


    intercompany comparison of ROCE and EPS
    misleading.
    Discussion (Continued)

    • What are the arguments in favour of the diminishing


    balance method?

    • Why is it thought that the annuity method is


    theoretically more attractive?

    • Explain why IAS 23 benchmark treatment is the


    preferred treatment.
    Review questions

    1. Define PPE and explain how materiality affects the concept of PPE.
    2. Define depreciation. Explain what assets need not be depreciated and
    list the main methods of calculating depreciation.
    3. What is meant by the phrases ‘useful life’ and ‘residual value’?
    4. Define ‘cost’ in connection with PPE.
    5. What effect does revaluing assets have on gearing (or leverage)?
    Review questions (Continued)

    6. How should grants received towards expenditure on PPE


    be treated?
    7. Define an investment property and explain its treatment in
    financial statements.
    8. ‘Depreciation should mean that a company has sufficient
    resources to replace assets at the end of their economic
    lives’. Discuss.
    End of lecture
    Thank you!
    Any comments/questions?
    Remember my contacts
    email: yawcab72@yahoo.co.uk
    mobile: 0266225129
    Office: G13

    LECTURER: C. AGYENIM-BOATENG (PhD, MSc, BSc, FCCA)

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