IAS 36

IAS 36 Impairment of Assets

 

Overview:

IAS 36 prescribes the procedures that ensure that entity’s assets are carried at no more than their recoverable amount. If carrying amount of asset exceeds its recoverable amount, the asset is impaired and IAS 36 prescribes how to recognize an impairment loss

 

SCOPE

All assets, except: inventories, construction contracts, deferred tax assets, employee benefits, financial assets, investment property, biological assets, insurance contract assets, and assets held for sale.

 

ASSETS TO BE REVIEWED

INDIVIDUAL ASSETS

 

CASH-GENERATING UNITS (CGUs)

The smallest identifiable group of assets that generates cash flows that are independent of the cash inflows from other assets or group of assets.

IMPAIRMENT = Carrying Amount > Recoverable Amount

RECOVERABLE AMOUNT = Higher of fair value less costs to sell and value in use

Fair value less cost to sell

Amount obtainable in an arm’s length transaction less costs of disposal

Value-in-use

Represents the discounted future net pre-tax cash flows from the continuing use and ultimate disposal of the asset.

Fair value

• Binding sale agreement
• Market price in an active market.

 

Costs of disposal

Incremental costs attributable to the disposal of an asset.

Cash flows

• From continuing use and disposal
• Based on asset in its current form
• Exclude financing activities
• Pre-tax

 

Discount rate

• Pre-tax
• Risks relating to value in use are reflected either in future cash flows or in the discount rate. The assumptions are otherwise double-counted.

 

WHEN TO TEST FOR IMPAIRMENT?

When there is an indicator of impairment. Indicators are assessed at each reporting date

INTERNAL INDICATORS

 

Evidence of obsolescence or physical damage

• Discontinuance, disposal or restructuring plans
• Declining asset performance

 

EXTERNAL INDICATORS

 

Significant decline in market value

• Changes in technological, market, economic or legal environment
• Changes in interest rates
• Low market capitalisation

 

ANNUAL IMPAIRMENT TESTS

Compulsory for:

• Intangible assets with an indefinite useful life
• Intangible assets not yet available for use
• CGUs to which goodwill has been allocated.

 

WHEN TO REVERSE IMPAIRMENT?

Individual asset –recognise in profit and loss unless asset carried at revalued amount.

CGUs – allocated to assets of CGUs on a pro-rata basis.

Goodwill – Impairment of goodwill is never reversed.

 

INTERNAL INDICATORS

Changes in way asset is used or expected to be used

• Evidence from internal reporting indicates that economic performance of the asset will be better than expected

 

EXTERNAL INDICATORS

Significant increase in market value

• Changes in technological, market, economic or legal environment
• Changes in interest rates
• Market interest rates have decreased