Lecture 7. IAS 36 Impairment of Assets

IAS 36: Impairment of Assets
Introduction: The principle of IAS 36;

Assets should be carried at no more than their recoverable amounts.
Recoverable amount is the amount that an entity could recover
through use or sale of an asset. If an asset’s recoverable amount is less
than its carrying value, then the asset is impaired and IAS 36 requires
that this impairment loss be recognized in the financial statements.
The standard (IAS 36) details the procedures that an entity should
follow to ensure this principle is applied. The standard also specifies
when an impairment loss should be reversed and prescribes disclosures
related to impairment.
Scope of the standard (IAS
36)
IAS 36, Impairment applies to all tangible, intangible and financial

assets except inventories (IAS 2), assets arising from construction
assets (IAS 11), deferred tax assets (IAS 12), assets arising from
employee benefits (IAS 19) and financial assets within the scope of
IFRS 9 (IAS 39).
This is because those IAS’s already have rules for recognising and
measuring impairment. Note also that IAS 36 does not apply to non-
current assets held for sale which is covered by IFRS 5.
How to determine impairment
Measuring the recoverable amount of an
asset
A key financial reporting issue is how to calculate an asset’s

recoverable amount and it should be noted that such a calculation
involves a judgmental process within a framework carried out by
management within the organisation.
Measuring the recoverable amount of an asset

Where there are indications of impairment an entity should assess
the recoverable amount of the asset, or group of assets (CGU).
Example 1; impairment of Individual
assets
X Ltd has a single manufacturing plant which has a carrying amount of £900,000. A new
government has passed legislation which significantly restricts exports of the product produced
by the plant. As a consequence, and for the foreseeable future, X Ltd’s production will be cut by
40%. Cash flow forecasts have been prepared, derived from the most recent budgets/forecasts
for the next five years approved by management.
Year 1 2 3 4 5
£000 £000 £000 £000 £000
Future cash flows 280 253 188 125 280

(including disposal
proceeds)
Additional information
If the plant is sold now it would realize £660,000, net of selling costs. X
Ltd estimates the pre-tax discount rate specific to the plant to be 15%,
excluding the effects of general inflation.
RTD
Calculate the recoverable amount of the plant and any impairment loss.
Solution
The fair value less costs to sell of the plant is below its carrying value. Therefore
there is indication that the plant may be impaired. Once we determine this, it is
now necessary to estimate the value in use in order to determine whether
impairment has occurred and to quantify the impairment loss.
The process involves discounting the future cash flows to Net Present values.
Discounted cash flow
Formulae
Solution
Year Future Cash Flows Discount Factor (15%) Net Present Value
$000 CFy1 divided by 1+r)^n
$000 $000
1 280 (1.15^-1) = 0.86957 243
2 253 0.75614 191
3 188 0.65752 124
4 125 0.57175 71
5 280 0.49718 139
Total (V.I.U) 768
Recoverable amount (higher of value in use and fair value less costs to sell) of
which F.V less costs to sale from question = 660
Therefore Impairment = CA- Recoverable amount = 900-768 = 132

Recognizing an impairment loss and
subsequent accounting – assets other than
goodwill
Application of IAS36- Impairment, requires us to write down the
carrying amount of an asset to its recoverable amount.
The appropriate recognition of the corresponding debit entry will
depend on whether the asset is carried at a revalued amount in
accordance with provisions of another IFRS (eg, under the
revaluation model in IAS 16 P,P&E) or at historical cost.
Recognizing impairment loss on
non-revalued assets. Illustration
1
An item of PP&E which is carried at depreciated historical cost has a
carrying amount of £10m. Due to the adverse changes in the market
for the goods that this plant produces, the Plant was assessed and
found to have been impaired. Its recoverable amount was calculated
to be £7m.
The factory would therefore be written down to £7m with the full
impairment loss of £3m being recognized in profit or loss; Thus:
Dr Impairment loss expense - P&L $3m
Cr Plant (impairment loss) - SoFP $3m
Recognizing an impairment loss
on revalued assets. Illustration 2
Another factory which is subject to a policy of revaluation has a
carrying amount of £10m. Its depreciated historical cost is £8m. An
amount of £2m has accumulated in revaluation surplus a/c in respect
of the factory. The factory becomes impaired due to an adverse
change in the market for goods that it produces. The recoverable
amount was calculated at £7m.
RTD
Accounting treatment, for Illustration 2
The factory would therefore be written down to £7m. The first £2m of
the impairment loss – which reduces the amount accumulated in
equity under the heading of revaluation surplus in respect of the asset
– is recognized in other comprehensive income. The remaining £1m
impairment loss is then recognized in profit or loss.
Dr Other Comp Income (decrease in revaluation surplus) $2m

Dr P$L (Impairment loss – Expense a/c) $1m
Cr SoFP – Factory a/c $3m
Underlying principle
The principle of IAS 36 is that assets should be carried in the SoFP at no more
than their recoverable amount. IAS 36 requires an assessment at each reporting
date of whether there is any indication that an asset within its scope may be
impaired. With the exception of goodwill and certain intangible assets, it is only
when there is an indication of impairment that the entity is required to estimate
the asset’s recoverable amount.
However
Goodwill, intangible assets with an indefinite useful life and intangible assets
which are not yet available for use must be tested annually for impairment
regardless of whether there is any indication of impairment.
Indicators of impairment:
The following indicators should be
considered.
External sources Internal sources
Significant decline in the market value of the asset Evidence of obsolescence or physical damage
i.e more than expected from passage of time or
normal use, e.g, due to increased competition.
Significant changes in the technological, market Significant changes which have an adverse
legal or economic environment in which the effect on the entity:
business operates.  The asset becomes idle / obsolete
 Plans to discontinue/restructure operations
An increase in market interest rates of return on  Plans to dispose of asset earlier than planned
investment likely to affect the discount rate used  Reassessing an asset’s useful life as finite rather
in the calculation of value in use. than indefinite.
The carrying amount of the entity’s net assets Internal evidence that asset performance
being more than its market capitalization. is or will be less favorable than expected
Cash Generating Units
An asset’s CGU is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets. An asset or group of
assets must be identified as a cash-generating unit where an active
market exists for the output produced by that asset or group of
assets, even if some or all of the output is used internally.
CGUs must be identified consistently from one period to the next for
the same asset or types of assets, unless a change is justified.
Example: Allocating impairment loss to CGU
An entity carries out an impairment assessment for a CGU with a total carrying value of
£2,600,000 and estimates that its total recoverable amount is £1,350,000. The total impairment
loss is therefore £1,250,000 ie (2600-1350 = 1250)
Allocate the impairment if information on the individual assets were as follows:
Hint, how to approach the
problem
Allocation of £1,250,000 impairment: i) first to goodwill: £800,000
ii)pro rata allocation of remaining impairment [£1,250,000 less
£800,000 = £450,000] to other assets (carrying value before
impairment £1,800,000), restricted to ensure that assets are not
written down below the highest of fair value less costs to sell and
value in use or nil:
Solution
Carrying Amount Impairment Restrictions (Where New C. A (After
before Impairment $ Allocation$ applicable)$ Impairment) $
Good will 800 (800) 800 -
Other Intangibles 300 300/800* 350 = 200 169

192 (131)
Property 600 600/1400* 450 = 100 500

192 (100)
Plant and Equipment 500 500/800* 350 = 500 281

(219)
()
Debtors 400 N/A N/A 400
Total 2600 1250 N/A 1350

Points to note
1. Impairment losses on non-revalued assets are recognized in profit
or loss.
2. Impairment losses on revalued assets are recognized as follows:
a) First, in other comprehensive income against any revaluation
surplus to the extent that it relates to the asset which is
impaired, and then
b) The remainder in profit or loss
Self paced Question 1; CGU
An entity carries out an impairment assessment for a CGU with a total carrying value of
$7,600,000 and estimates that its total recoverable amount is $4,350,000. The total impairment
loss is therefore $3,250,000 ie (7600-4350 = 3250)
Allocate the impairment if information on the individual assets were as follows:
Carrying Amount before Impairment $ (000)
Good will 2800
Other Intangibles 800
Property 600
Plant and Equipment 900
Cash and Bank balance 500
Debtors 2000
Total 7600
Self paced Question 2; CGU:
Allocation of Impairment to
CGU
Tenjiwe holdings owned 100% of the shares of Tilda (ltd). Tilda (ltd) is treated as a cash
generating unit. On 31 March 2018, there was an industrial accident that involved a gas
explosion that caused damage to some of Tilda’s assets. The assets of Tilda (ltd)
immediately before the accident were as follows:
($000)
Goodwill 18 000
Patent 12 000
Factory Building 40 000
Plant 35 000
Receivables and cash 15 000
Self paced Question 2; CGU:
Allocation of Impairment to
CGU, cont…
After the accident, the recoverable amount of Tilda (ltd) was found to be $67
million. The gas explosion destroyed an item of Plant that had a carrying amount
of $5million to the point of no further use. The receivables and cash were
already stated at their fair values less costs to sell (Net realisable values). Tilda
got an open offer from a competitor of $10 million for its Patent.
Required
Calculate the Carrying amounts of the assets at 31 March 2018 after applying
any impairment losses in line with IAS 36, Impairment losses. (10)

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IAS 36: Impairment of Assets

Introduction: The principle of IAS 36;

IAS 36, Impairment applies to all tangible, intangible and financial

A key financial reporting issue is how to calculate an asset’s

Measuring the recoverable amount of an asset

£000 £000 £000 £000 £000

Future cash flows 280 253 188 125 280

Therefore Impairment = CA- Recoverable amount = 900-768 = 132

Dr Other Comp Income (decrease in revaluation surplus) $2m

Good will 800 (800) 800 -

Other Intangibles 300 300/800* 350 = 200 169

Property 600 600/1400* 450 = 100 500

Plant and Equipment 500 500/800* 350 = 500 281

Total 2600 1250 N/A 1350

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