BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

CHAPTER 1
IAS 36 Impairment of assets

1.0 Definitions

Impairment is a fall in the value of an asset, so that its recoverable amount is now
less than its carrying value (amount) in the statement of financial position.
CA>RA = Impairment loss
Carrying amount is the net value at which the asset is included in the statement of
financial position (ie after deducting any accumulated depreciation and any
accumulated impairment losses).

e.g.
CA of PPE
= Cost/revalued amount – Acc. Dep – Acc. Impairment loss

2.0 Objectives of IAS 36

(a) Identifying an impairment loss

(b) Measuring its recoverable amount of the asset
(c) Recognising or reversing any resulting impairment loss
(d) Disclosing information on impairment losses or reversals in the statement of
financial position.

3.0 Identifying a potentially impaired asset

An entity should consider external and internal sources of information to assess

whether there is any indication that an asset may be impaired. IAS 36 suggests the
following:-

(a) External sources of information

(i) A fall in the asset’s market value that is more significant than expected.
e.g. during global financial crisis.
(ii) A significant change in the technological, market, legal or economic
environment of the business in which the assets are employed.
(iii) An increase in market interest rates or market rates of return on
investments likely to affect the discount rate used in calculating value
in use. i.e. market interest rates increase, VIU will decrease
(iv) The carrying amount of the entity’s net assets being more than its
market capitalisation. i.e. NA > MC
NA = A - L
MC = No. of shares outstanding x share price
(b) Internal sources of information.
(i) Evidence of obsolescence or physical damage of the asset.
e.g. damaged by fire/flood
(ii) Adverse changes in the way an asset is used.
e.g. asset becoming idle (not being used)
(iii) Evidence from internal reporting that indicates the economic
performance of an asset is worse than expected.
e.g. actual capacity lower than expected capacity

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

Why and when an impairment review should be carried out

Why
An impairment review is required to ensure that assets are carried in the SOFP at no
more than their recoverable amount.

When
An entity shall assess at the end of each reporting period whether there is any
indication that an asset may be impaired. If any such indication exists, the entity
shall estimate the recoverable amount of the asset.

Even if there are no indications of impairment, the following assets must always be
tested for impairment annually.

(a) An intangible asset with an indefinite useful life

(b) Goodwill acquired in a business combination

4.0 Measuring the recoverable amount of the asset

IAS 36 requires recoverable amount to be measured at the higher of

(i) the asset’s fair value less costs of disposal (net selling price) and
(ii) its value in use (VIU).

Fair value less costs of disposal

Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (See IFRS 13 Fair Value Measurement.)

Costs of disposal (costs to sell/Selling costs)

Costs of disposal are incremental costs directly attributable to the disposal of an
asset or cash-generating unit, excluding finance costs and income tax expense.

Costs of disposal include sales transaction costs such as

(i) legal expenses
(ii) stamp duty and similar transaction taxes
(iii) costs of removing the asset and direct incremental costs to bring an asset into
condition for its sale.

Value in use
The value in use is measured as the present value of estimated future cash flows
(inflows less outflows) generated by the asset, including its estimated net disposal
value (if any) at the end of its expected useful life.

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

5.0 Recognition and measurement of an impairment loss of an individual

asset
If the recoverable amount of an individual asset is below its carrying amount, the
carrying amount is reduced to the recoverable amount. The reduction is
impairment loss.

For assets held at historical cost

The impairment loss should be recognised as an expense in profit or loss.

For assets held at revalued amount

The impairment loss is to be treated as a revaluation decrease. This means:

(i) an impairment loss on a revalued asset is recognised in other comprehensive

income (charged to revaluation surplus) to the extent that the impairment
loss does not exceed the amount in the revaluation surplus for that same
asset; and
(ii) any excess is then charged to profit or loss.

Illustration 1
New Moon Berhad rents out cars to tourists visiting an island. The cars were bought
there three years ago at a total cost of RM150,000 and were written off over a period
of five years. The recent tsunami hit the island badly and the demand for car-hire
dropped tremendously. Hence, New Moon Berhad can only generate RM25,000 cash
per annum in 20x5 and 20x6. Alternatively, New Moon Berhad can sell the cars at a
net selling price of RM40,000.

Required:
Calculate the impairment loss and prepare the statement of financial position extracts
at 31 December 20x4, assuming that New Moon Berhad’s cost of capital to be 10%.

(Note: Discount rates: Year 1 (20x5) : 0.909, Year 2 (20x6) :0.826)

Solution:
RM RM
Carrying amount

Recoverable amount:
The higher of:
Costs of disposal
(Net selling price)

Value in use

Recoverable amount
Impairment loss
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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

Since the asset is held at cost, the impairment loss of _________is treated as an
expense in profit or loss.

New Moon Berhad

SOFP (extract) as at 31 December 20x4

RM
NCA
PPE
Cost
Accumulated depreciation
Accumulated impairment loss

Illustration 2
AB acquired a plant on 1.1.x3 for RM400,000 and expected to use it for 10 years. On
31.12.x4, the fair value of the plant was RM440,000 and the remaining life was eight
years. AB uses the revaluation model to measure the value of non-current assets.

On 31.12x6, there were indications that the asset could be impaired. The value in use
was calculated to be RM300,000 and fair value less costs of disposal was RM280,000.

Annual transfers (excess depreciation) were made from the revaluation surplus to
retained earnings.
Required:
(a) Calculate the carrying amount as at 31.12.x7.
(b) Calculate the revaluation surplus as at 31.12.x5 and 31.12.x6. (before
impairment loss)

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

Solution:
(a) RM
Cost as at 1.1.x3
Depreciation (1.1.x3-31.12.x4)

CA at 31.12.x4
Revaluation increase
FV at 31.12.x4
Depreciation (1.1.x5-31.12.x6)

CA at 31.12.x6
Impairment loss
RA at 31.12.x6
Depreciation (1.1.x7-31.12.x7)

CA at 31.12.x7
(b) 20x5 20x6
Revaluation surplus (reserve) RM RM
Balance as at 1.1
Realisation of revaluation surplus*
Balance as at 31.12

*Excess depreciation =

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

6.0 Cash-generating unit (CGU)

As a basic rule, the recoverable amount of an asset should be calculated for the asset
individually. However, it is not always easy to determine the value in use of an
individual asset. If this is the case, the recoverable amount of the asset’s cash-
generating unit should be measured instead.

Definition
A cash-generating unit 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.

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

Accounting treatment for impairment loss for Cash-generating Units

An impairment loss should be recognised for a cash-generating unit if (and only if)
the recoverable amount for the cash-generating unit is less than the carrying
amount in the statement of financial position for all the assets in the unit. When an
impairment loss is recognised for a cash-generating unit, the loss should be allocated
between the assets in the unit in the following order:

(a) First, to any assets that are obviously damaged, destroyed or have a fall in
the value.
(b) Next, to the goodwill allocated to the cash generating unit
(c) Then to all other assets* in the cash-generating unit on a pro rata basis.
(Note: if the fair value of a particular asset is provided and below its carrying
amount, that asset is to be written down before the remaining impairment loss
is allocated pro rata to other assets)

* Other assets exclude:

(i) an asset which has a higher fair value less costs of disposal or value in use
than its carrying amount.
(ii) the assets which are already stated at their fair values less costs of disposal
(net realisable value) e.g. receivables, cash and bank and fixed deposits.
(iii) An inventory which is valued at a lower of cost and net realisable value.

In allocating an impairment loss, the carrying amount of an asset should not be

reduced below the highest of:

(a) Its fair value less costs of disposal

(b) Its value in use (if determinable)
(c) Zero

Illustration 3

Below are the carrying values of ABC Bhd’s’s CGU:

RM
Goodwill 25,000
Property 41,000
Machinery 98,000
MV 70,000
Patents 28,000
Receivables (monetary asset) 20,000
Cash (monetary asset) 18,000
300,000

The recoverable amount of the unit was RM218,000. The property has a market value
of RM50,000 (assuming costs of disposal = nil).

Required:
Determine the amount of impairment loss and allocate the loss between the assets in
the unit in accordance with IAS 36.

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

Solution:
RM
Carrying amount
Recoverable amount
Impairment loss

Working: Allocation of IL
(a) Assets that are damaged or destroyed
(b) Goodwill =
(c) Other assets (except property as its market value is higher than its carrying
value and monetary assets i.e. receivables and cash) on pro rata =
Other assets
Carrying Impairment
value loss

RM RM
Machinery
MV
Patents

Carrying amounts (CA) before and after impairment (I)

CA Allocation Revised CA
before I of IL

RM RM RM
GW
Property
Machinery
MV
Patents
Receivables
Cash

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

8.0 Reversal of an impairment loss

In some cases, the recoverable amount of an asset that has previously been impaired
might turn out to be higher than the asset’s current carrying value. In other words,
there might have been a reversal of some of the previous impairment loss.

Accounting treatment for reversal of an impairment loss:

(a) For assets held at cost, the reversal of the impairment loss should be
recognised immediately as income in profit or loss (any reversal of an
impairment loss of a revalued asset shall be treated as a revaluation increase).
(b) The carrying amount of the asset should be increased to its new recoverable
amount.*

*The reversal of an impairment loss is recognised to the extent that it increases the
carrying amount of the asset to what it would have been determined (net of
depreciation) had no impairment loss been recognised for the asset in prior years.

An exception to this rule is for goodwill. An impairment loss for goodwill should
not be reversed in a subsequent period.

Illustration 4

Obi Berhad rents out boats to customers at Lake Wonderful. These boats were bought
on 1.1.x3 for RM1,500,000 and were depreciated over its useful life of 5 years. An
accident took place and the business was badly hit. On 31 December x4, the fair value
less cost to sell of these boats was RM750,000 and value in use was RM680,000.

Required:

(a) Calculate impairment loss and prepare the extract of statement of profit or loss
for the year ended 31 December 20x4 and SOFP as at that date.
(b) Calculate reversal of impairment loss and prepare the extract of statement of
profit or loss for the year ended 31 December 20x5 if the recoverable amount
as at 31 December 20x5 is RM650,000.

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

(a)
RM RM
Cost as at 1.1.x3
Depreciation (1.1.x3-31.12.x4)

CA at 31.12.x4
Recoverable amount:
Fair value less costs of disposal
Value in use
Recoverable amount
Impairment loss

Statement of profit or loss (extract) for the year ended 31.12.20x4

RM
Expenses
Depreciation
Impairment loss

SOFP (extract) as at 31.12.20x4

RM
NCA
PPE
Cost
Accumulated depreciation
Accumulated impairment loss

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BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets

(b)
RM
Cost as at 1.1.x3
Depreciation (1.1.x3-31.12.x4)

CA at 31.12.x4
Impairment loss
Recoverable amount as at 31.12.x4
Depreciation (1.1.x5-31.12.x5)

CA at 31.12.x5
Reversal of impairment loss
CA at 31.12.x5

Had no impairment loss recognised

Cost as at 1.1.x3
Depreciation (1.1.x3-31.12.x5)

CA (had no impairment) at 31.12.x5

Statement of profit or loss (extract) for the year ended 31.12.20x5

RM
Other Income
Reversal of impairment loss

Expenses
Depreciation

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