Impairment of assets Highlights in IAS 36 applies to: Impairment of assets Highlights
- property, plant and equipment; Impairment of assets Highlights
- intangible assets; Impairment of assets Highlights
- goodwill; Impairment of assets Highlights
- investments in entities measured at cost; and Impairment of assets Highlights
- cash-generating units. Impairment of assets Highlights
The standard requires an entity to recognise impairment when its assets are carried at more than their recoverable amount. The standard prescribes procedures that an entity has to apply to ensure assets are carried at no more than their recoverable amount as illustrated here.
In terms of IAS 36 at the end of each reporting period, the reporting entity is required to assess whether there is an indication that an asset may be impaired. A list of external and internal indicators of impairment are described by IAS 16. If there’s an indication that the entity’s asset(s) may be impaired then the asset(s) recoverable amount must be calculated.
IAS 36 prescribes that goodwill acquired in a business combination is tested annually for impairment and recoverable amounts determined whether or not there are any internal or external indications of impairment. The same applies for intangible assets with an indefinite useful life and intangible assets not yet available for use (e.g. Software that is work in progress).
Examples of impairment indicators are as follows:
– External sources of information – Impairment of assets Highlights
- observable indicators that the assets’ value has declined significantly;
- significant changes expected in terms of technological advances, market, economic or legal environment;
- increases in market interest rates; and
- net assets of the entity are more than its market capitalisation.
– Internal sources of information – Impairment of assets Highlights
- obsolescence and physical damage;
- significant changes; expected and occurred, in the entity making assets idle assets, restructuring, discontinuing or restructuring of the operations to which an asset belongs;
- internal evidence that the performance of an asset will be worse than expected; and
- for investments in subsidiaries, joint ventures, associates; the carrying amount of the investment in the separate financial statement exceeds the consolidated financial statements of the investee.
Dividend from a subsidiary, joint venture or associate and evidence is available that:
- the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill and
- the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared.
These examples provided above are not intended to be exhaustive.
IAS 36 requires that assets be carried at no more than their recoverable amount. To meet this objective, the standard requires entities to test all assets that are within its scope for potential impairment when indicators of impairment exist or, at least, annually for goodwill and intangible assets with indefinite useful lives.
The entity assesses, at each reporting date, whether there is any indication that an asset may be impaired.
- If there is an indication that an asset may be impaired, the recoverable amount of the asset (or, if appropriate, the cash generating unit (CGU)) is determined.
- The recoverable amount of goodwill, intangible assets with an indefinite useful life and intangible assets that are not available for use on the reporting date, is required to be measured at least on an annual basis, irrespective of whether any impairment indicators exist.
- The asset or CGU is impaired if its carrying amount exceeds its recoverable amount.
- The recoverable amount is defined as the higher of the ‘fair value less costs to sell’ and the ‘value in use’.
- Any impairment loss is recognised as an expense in profit or loss for assets carried at cost. If the affected asset is a revalued asset, as permitted by IAS 16 Property, Plant and Equipment (IAS 16) and IAS 38 Intangible Assets (IAS 38), any impairment loss is recorded first against previously recognised revaluation gains in other comprehensive income in respect of that asset.
- Extensive disclosure is required for the impairment test and any impairment loss recognised.
- An impairment loss recognised in prior periods for an asset other than goodwill is required to be reversed if there has been a change in the estimates used to determine the asset’s recoverable amount.
The recoverable amount of an asset is the greater of its ‘fair value less costs to sell’ and its ‘value in use’. To measure impairment, the asset’s carrying amount is compared with its recoverable amount.
The recoverable amount is determined for individual assets. However, if an asset does not generate cash inflows that are largely independent of those from other assets, the recoverable amount is determined for the CGU to which the asset belongs. A CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Value in use
Value in use (VIU) is the present value of the future cash flows expected to be derived from an asset or a CGU. A VIU calculation includes:
- Cash flow projections:
- An estimate of the future cash flows that the entity expects to derive from the asset
- Expectations about possible variations in the amount or timing of those future cash flows
- Discount rate:
- The time value of money — that is a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset for which the future cash flow estimates have not been adjusted
- The price for bearing the uncertainty inherent in the asset which can be reflected in either the cash flow estimate or the discount rate
- Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset
See also: The IFRS Foundation