UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL

CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 16 – PAS 36: IMPAIRMENT OF ASSETS EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
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A. Definition of terms is part of a restructuring or held for sale or
Impairment is a fall in the market value of an asset so the asset is idle
that its “recoverable amount” is now less than its 3) Evidence that the economic performance of
carrying amount in the statement of financial position. an asset will be worse than the expected.
The carrying amount is the amount at which an asset is For example, the undiscounted net cash
recognized in the statement of financial position after flows from the asset are significantly worse
deducting accumulated depreciation and accumulated than those budgeted.
impairment loss. This is based on “established
principle” that assets shall not be carried at above their The external and internal sources of information
recoverable amount. are not exhaustive. An entity may identify other
indications than an asset may be impaired.
B. Core principle of impairment
The basic principle underlying impairment of asset is 2) Measurement of the recoverable amount
relatively straightforward. There is an established After establishment evidence that an asset has been
principle that an assets shall not be carried at above the impaired, next is to determine its recoverable amount
recoverable amount. An entity shall write down the preparatory to the recognition of an impairment loss.
carrying amount of an asset to the recoverable amount.
If the carrying amount is higher that the recoverable Under PAS 36, the recoverable amount of an asset is,
amount the asset, is judged to have suffered an its fair value less cost to sell or value in use,
impairment loss. The asset shall therefore be reduced by whichever is higher.
the amount of the impairment loss.
a) Fair value less cost of disposal
C. Accounting for impairment Fair value is the price that would be received to
In this regard, there are 3 main accounting issues to sell an asset in an orderly transaction between
consider, namely: market participants at the measurement date.
1) Indication of possible impairment
An entity shall assess at each reporting date whether Cost of disposal is an incremental cost directly
there is any indication that an asset may be impaired. attributable to the disposal of an asset, excluding
If any such indication exists, the entity shall estimate finance cost and income tax expense.
the recoverable amount of the asset.
Examples of cost of disposal include the
However, irrespective of whether there is any following:
indication of impairment, an entity shall test an a) Legal
intangible asset not yet available for use for costs
impairment annually by comparing the carrying b) Stamp
amount with the recoverable amount. The event and duty and similar transactions taxes
changes in circumstances that lead to an impairment c) Costs of
of assets may be classified as external and internal removing the asset
sources of information. d) Direct
 External sources incremental costs to bring the asset into
1) Significant decrease or decline in the market condition for sale
value of the asset as a result of passage of
time or normal use or a new competitor In simple terms, the fair value less cost of
entering the market disposal is equal to the exit price or selling price
2) Significant change in the technological, of an asset minus cost of disposal.
market, legal or economic environment of
the business in which the asset is employed. b) Value in use
This could be as simple as a change in Value in use is measured as the present value or
customer taste. discounted value of future net cash flows
3) An increase in the interest rate or market expected to be derived from an asset.
rate of return on investment which will likely
affect the discount rate in used in calculating The cash flows are pretax cash flows and pretax
the value in use discounts rate is applied in determining the
4) The carrying amount of net assets of the present value.
entity is more than the “market
capitalization”. In other words, the carrying Calculation of value in use
amount exceeds the fair value of the net Calculating a value in use calls for estimates of
assets. The market capitalization simply future cash flows and there is the possibility that
means the fair value of the net assets of the an entity might come up with “overoptimistic”
entity. estimates of cash flows. Therefore, PAS 36
requires the following:
 Internal sources 1. Cash flow projections shall be based on
1) Evidence of obsolescence or physical reasonable and supportable assumptions
damage of an asset 2. Cash flow projections shall be based on the
2) Significant change in the manner or extent most recent budgets on financial forecasts,
in which the asset is used with an adverse usually up to a maximum period of 5 years,
effect on the entity. For example, the asset unless a longer period can be justified
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 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 16 – PAS 36: IMPAIRMENT OF ASSETS EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
3. The discount rate used in estimating future PAS 36 requires that “a cash generating unit is the
cash flows is the current pretax rate. smallest identifiable group of assets that generate
Composition of estimates of future cash flows cash inflows from continuing use that are largely
1. Estimation of future cash flows includes independent of the cash inflows from other assets or
 Projections of cash inflows group of assets”.
from the continuing use of the asset
 Projections of cash outflows Simply stated, a cash generating unit is segment of
necessarily incurred to generate the business that generate revenue and cash flows
cash inflows from the continuing use of independently. In practice, a cash generating unit
the asset maybe a department, a product line, or a segment of
 Net cash flows received or business.
paid on the disposal of the asset at the
end of its useful life in an arm’s length As a basic rule, the recoverable amount of an asset
transactions shall be determined for the asset individually.

2. Estimates of future cash flows do not However, if it is not possible to estimate the
include recoverable amount of the individual asset, an entity
 Futures cash flows relating to shall determine the recoverable amount of the cash
restructuring to which the entity is not generating unit to which the asset belongs.
yet committed
 Future cash flows that are PAS 36, paragraph 104 provides that when an
expected to arise from improving or impairment loss is recognized for a cash generating
enhancing the asset’s performance unit, this loss shall be allocated to the assets of the
 Cash inflows or outflows unit in the following order:
from financing activities  First to the goodwill, if
 Income tax receipts or any
payments  Then to all other non-
cash assets of the CGU on a prorate basis on
their carrying amount.
3) Recognition of impairment loss
A. Impairment of asset - If the recoverable amount Cash generating unit with goodwill
of an asset is less than its carrying amount, an Goodwill does not generate cash flows independently
impairment loss has incurred. The impairment from other assets or group of assets, and therefore,
loss shall be recognized immediately by reducing the recoverable amount of goodwill as an individual
the asset’s carrying amount to its recoverable asset cannot be determined.
amount. The impairment loss is recognized in
profit or loss and presented separately in the As a consequence, if there is an indication that
income statement. goodwill may be impaired, recoverable amount is
determined for the cash generating unit to which
B. Impairment of revalued asset – PAS 36 provides goodwill belongs.
that an impairment loss on revalued asset is
recognized directly against any revaluation Determination of impairment
surplus related to the asset and any excess is PAS 36, paragraph 90, provides that a cash
recognized in profit or loss (impairment loss). generating unit to which goodwill has been allocated
shall be tested for impairment at least annually by
comparing the carrying amount of the unit, including
II. Formula: the goodwill, with the recoverable amount.
 Computation of impairment loss a. If the recoverable amount of the unit exceeds
Carrying amount of asset xx the carrying amount of the units, the unit and
Less: FV less cost to sell or value in the goodwill allocated to that unit shall be
use (whichever is higher) regarded as not impaired.
FV less cost to sell xx b. If the carrying amount of the unit exceeds the
Value in use xx xx recoverable amount of the unit, the entity must
Impairment loss xx recognize as impairment loss.

 Computation of impairment loss of revalued E. Reversal of an impairment loss

asset PAS 36, paragraph 114, provides that “an impairment
Decrease in replacement cost xx loss recognized for an asset in prior years shall be
Less: Decrease in acc dep’r xx reversed if there has been a change in the estimate of
Add: Revaluation surplus, the recoverable amount”.
net of RE xx xx
Impairment loss xx In other words, if the recoverable amount of an asset
that has previously been impaired turns out to be
higher than the asset’s current carrying amount, the
D. Cash generating unit carry amount of the asset shall be increased to its
new recoverable amount.

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 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 16 – PAS 36: IMPAIRMENT OF ASSETS EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
However, PAS 36, paragraph 117, further provides
that “the increase carrying amount of an asset due to
a reversal of an impairment loss shall not exceed the
carrying amount that would have been determined,
had no impairment loss been recognized for the asset
in prior years.”

The reversal of the impairment loss shall be

recognized immediately in the income statement as
gain on reversal of impairment loss.

But PAS 36 further requires that any reversal of an

impairment loss on a revalued asset shall be (treated
as a revaluation increase, meaning,) credited to
income to the extent that it reverse a previous
revaluation decrease and any and any excess is
credited directly to revaluation surplus.

F. Reversal of impairment loss on goodwill

PAS 36, paragraph 114, explicitly provides that an
impairment loss recognized for goodwill shall not be
reversed in a subsequent period.

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