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IAS 36 Impairment of Assets

The Basic Principle

If an asset’s carrying amount in the financial statements is higher than its recoverable amount
(amount to be recovered through the asset’s sale or use), the asset is judged to have suffered an
impairment loss.

It should therefore reduce value of asset, by the amount of the impairment loss.

Scope

IAS 36 applies to impairment of all assets other than:

1. Inventories
2. Deferred tax assets
3. Employee benefit assets
4. Financial assets
5. Investment property held under the fair value model
6. Non-current assets held for sale.
7. Biological assets held at fair value less costs to sell

Content

1. Impairment Indications
2. Impairment loss measurement
3. Impairment loss recognition
4. Impairment: Cash generating units
5. Reversal of impairment
6. Disclosures
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Impairment Loss: Indications

For impairment of an asset, the following  Plans to discontinue/

are indicators restructure the operation to
which the asset belongs
External:
 Plans to dispose of an asset
1. Unexpected decreases in market before the previously
value expected date
2. Significant adverse changes have  Reassessing an asset's useful
taken place, or are about to take life as finite rather than
place, in the technological, market, indefinite
economic or legal environment
3. Increased interest rates have Note
decreased an asset’s recoverable
Annual impairment tests, irrespective of
amount
4. Entity’s net assets are measured at whether there are indications of impairment,
more than its market capitalisation. are required for:
Internal:  Intangible assets with an indefinite
1. Evidence of obsolescence or damage useful life/not yet available for use
2. Evidence that the economic  Goodwill acquired in a business
performance of an asset has been, or combination.
will be, worse than expected.
Once the asset meets the criteria to be
3. Significant changes with an adverse
classified as ‘held for sale’, it is excluded from
effect on the entity:
the scope of IAS 36 and accounted for under
 The asset becomes idle
IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.

Impairment Loss: Measurement

An impairment loss occurs if the carrying amount of an asset is greater than its recoverable
amount.

Note:

If fair value less costs to sell is higher than the carrying amount, there is no impairment and no
need to calculate value in use.

The recoverable amount is the higher of fair value less costs to sell and value in use.

 Fair value is defined in IFRS 13 (Fair Value Measurement) as the price received when
selling an asset in an orderly transaction between market participants at the
measurement date.
 Costs to sell are incremental costs directly attributable to the disposal of an asset.
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Examples: Legal costs, stamp duty and similar transaction taxes, costs of removing the
asset, and direct incremental costs to bring an asset into condition for its sale. They exclude
finance costs and income tax expense.

 Value in use is calculated by estimating future cash (inflows less outflows) from the use
of the asset and its ultimate disposal, and applying a suitable discount rate to these cash
flows.

Future cash flow projections are based on the most recent management-approved
forecasts. They should cover a maximum period of five years, unless a longer period can
be justified.
 The cash flows should include:
1. Projections of cash inflows (and cash outflows necessarily incurred to
generate the cash inflows) from continuing use of the asset.
2. Net cash flows, if any, for the disposal of the asset at the end of its useful
life.
3. Future overheads that can be directly attributed, or allocated on a
reasonable and consistent.
 The cash flows should exclude:
1. Obligations already recognised as liabilities (to avoid double counting).
2. The effects of any future restructuring to which there is no commitment
yet now.
3. From financing activities or income tax receipts and payments.
 The discount rate should be a pre-tax rate that reflects current market
assessments of:
1. The time value of money; and
2. The risks specific to the asset for which future cash flow estimates have
not been adjusted.

Impairment Loss: Recognition

Impairment loss normally charged to profit or loss.

If the asset has previously been revalued upwards, the impairment is recognised to other
comprehensive income and is debited (charged) to the revaluation reserve until the surplus
relating to that asset has been reduced to nil. The remainder of the impairment loss is
recognised in profit or loss.

The remaining carrying amount of the asset is then depreciated/amortised over its remaining
useful life.

After the impairment review

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The depreciation/amortisation is adjusted in future periods to allocate the asset’s revised

carrying amount less its residual value on a systematic basis over its remaining useful life.

Cash-Generating Units (CGU).

“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.”

Identify CGU

Examples:

1. Fleet of buses.
2. Chair of restaurants
3. Mineral extraction company having private railway system

Allocating corporate assets & goodwill to CGUs.

The CA of a CGU includes the assets that will generate the future cash inflows used in
determining the CGU’s value in use.

Two Issues:

 Corporate Assets: Assets that are used by several CGUs & do not generate their own
cash inflows, so do not themselves qualify as CGUs (e.g. a head office building or a
research centre).
 Goodwill, which does not generate cash flows independently of other assets and often
relates to a whole business.

Corporate assets and goodwill should be allocated to CGUs on a reasonable and consistent
basis. A CGU to which goodwill has been allocated must be tested for impairment annually.

Impairment loss allocation: CGU’s

If an impairment loss arises in respect of a CGU, it is allocated among the assets in the following
order:

1. Goodwill
2. Other assets in proportion to their carrying amount.

However, the carrying amount of an asset cannot be reduced below the highest of:

1. Fair value less costs to sell

2. Value in use
3. Nil.
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Impairment if reasonable allocation is impossible

If no reasonable allocation of corporate assets or goodwill is possible, then a group of cash-

generating units must be tested for impairment together in a two-stage process.

Impairment loss: Reversal (Single Asset)

The calculation of impairment losses is based on predictions of what may happen in the future.
Sometimes, actual events turn out to be better than predicted. If this happens, the recoverable
amount is re-calculated and the previous write-down is reversed.

For this reason impaired assets should be reviewed at each reporting date to see whether there
are indications that the impairment has reversed.

However, the carrying amount of an asset is not increased above the lower of:

 Its recoverable amount (if determinable); and

 Its depreciated carrying amount had no impairment loss originally been recognised.

Impairment loss: Reversal (CGU)

Goodwill once recognised, impairment losses on goodwill are not reversed.

A reversal for a CGU is allocated to the assets of the CGU, except for goodwill, pro rata with the
carrying amounts of those assets.

The reversal is recognised in profit or loss, except where reversing a loss recognised on assets
carried at revalued amounts, which are treated in accordance with the applicable IFRS. For
example, an impairment loss reversal on revalued property, plant and equipment reverses the
loss recorded in profit or loss and any remainder is credited to OCI (reinstating the revaluation
surplus).

Disclosures

Impairment loss:

 Impairment losses recognised during the period

 Impairment reversals recognised during the period.

Impairment loss reversal (If material)

 The amount of loss or reversal and the events causing it

 The recoverable amount of the asset (or cash generating unit)
 The level of fair value hierarchy (per IFRS 13) used in determining fair value less costs to
sell
 The discount rate(s) used.