IAS 36 | Impairment of Assets

1

Objective

The objective is to prescribe procedures to ensure assets are carried at no more than their recoverable amount. An asset is impaired if its carrying amount exceeds the amount to be recovered through use or sale. The standard requires recognising impairment losses and specifies when to reverse them and what to disclose.

2

Scope

This Standard applies to accounting for the impairment of all assets, other than: (a) inventories (IAS 2); (b) contract assets (IFRS 15); (c) deferred tax assets (IAS 12); (d) employee benefit assets (IAS 19); (e) financial assets (IFRS 9); (f) investment property at fair value (IAS 40); (g) biological assets at fair value less costs to sell (IAS 41); (h) insurance contracts (IFRS 17); and (i) non-current assets held for sale (IFRS 5).

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Subsidiaries/Associates

The standard applies to financial assets classified as subsidiaries, associates, and joint ventures.

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Revalued Assets

The standard applies to assets carried at revalued amounts (e.g., under IAS 16 or IAS 38). Whether the recoverable amount needs to be estimated depends on whether disposal costs are negligible. If disposal costs are not negligible, a revalued asset may be impaired even if its fair value equals its carrying amount.

6

Definitions

The following terms are used in this Standard with the meanings specified:

• Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.
• 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.
• Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units.
• 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.
• Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.
• Depreciation (Amortisation) is the systematic allocation of the depreciable amount of an asset over its useful life.
• 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.
• An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
• The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use.
• Useful life is either: (a) the period of time over which an asset is expected to be used by the entity; or (b) the number of production or similar units expected to be obtained from the asset by the entity.
• Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

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Impairment Concept

An asset is impaired when its carrying amount exceeds its recoverable amount. If indications of impairment exist, the entity must estimate the recoverable amount.

9

Assessment Frequency

An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired.

10

Mandatory Testing

Irrespective of indications, an entity shall annually test for impairment: (a) intangible assets with an indefinite useful life or not yet available for use; and (b) goodwill acquired in a business combination.

11

Intangible Uncertainty

The ability of an intangible asset not yet available for use to generate sufficient future economic benefits is usually subject to greater uncertainty, necessitating annual testing.

12

External Indicators

External sources of information include: significant decline in asset value; significant adverse changes in technological, market, economic, or legal environments; increases in market interest rates affecting the discount rate; and carrying amount of net assets exceeding market capitalisation.

12(h)

Investment Indicators

For investments in subsidiaries/associates/joint ventures, indicators include dividend recognition where the carrying amount of the investment exceeds the carrying amount of the investee's net assets, or the dividend exceeds the investee's total comprehensive income.

14

Internal Indicators

Internal sources include: obsolescence or physical damage; significant adverse changes in the use of the asset (e.g., idleness, restructuring, disposal plans); and internal reporting indicating economic performance is worse than expected.

15

Materiality

The concept of materiality applies. If previous calculations showed a substantial margin of recoverable amount over carrying amount, re-estimation may not be needed unless events eliminated that margin.

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Recoverable Amount Definition

Recoverable amount is the higher of an asset's or CGU's fair value less costs of disposal and its value in use.

19

Determining Amount

It is not always necessary to determine both values. If either exceeds the carrying amount, the asset is not impaired.

20

Fair Value Measurement

Fair value less costs of disposal can often be measured even without a quoted price in an active market. If no reliable estimate is possible, the entity may use value in use as the recoverable amount.

21

Assets Held for Disposal

For assets held for disposal, value in use (future cash flows from use) is likely negligible, so fair value less costs of disposal is used as the recoverable amount.

22

Individual vs CGU

Recoverable amount is determined for an individual asset unless it does not generate independent cash inflows. In that case, it is determined for the CGU to which the asset belongs.

24

Intangible Asset Testing

The most recent detailed calculation of recoverable amount for an intangible asset with an indefinite useful life may be used in the current period if specific criteria (no significant change in assets/liabilities, substantial margin previously, remote likelihood of impairment) are met.

28

Disposal Costs

Costs of disposal (e.g., legal costs, stamp duty, removal costs) are deducted in measuring fair value less costs of disposal. Termination benefits and reorganisation costs are excluded.

30

Value in Use Elements

Calculation reflects: (a) estimated future cash flows; (b) expectations about possible variations in amount/timing; (c) time value of money (risk-free rate); (d) price for bearing uncertainty; and (e) other factors like illiquidity.

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Value in Use Steps

Involves estimating future cash inflows/outflows from continuing use and ultimate disposal, and applying the appropriate discount rate.

33

Cash Flow Basis

Projections shall be based on reasonable and supportable assumptions representing management's best estimate of economic conditions. They shall be based on the most recent financial budgets/forecasts (max 5 years usually) and exclude future restructurings or enhancements not yet committed to.

34

Reasonableness Check

Management assesses assumptions by examining causes of differences between past projections and actuals.

39

Composition of Estimates

Estimates include: cash inflows from continuing use; necessary cash outflows to generate inflows (including for day-to-day servicing); and net cash flows from disposal at the end of useful life.

40

Inflation

Assumptions about inflation in cash flows and discount rates must be consistent (both nominal or both real).

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Double-Counting

Estimates exclude cash inflows from assets generating independent inflows (e.g., receivables) and outflows for obligations recognised as liabilities (e.g., payables).

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Current Condition

Future cash flows are estimated for the asset in its current condition. Estimates exclude inflows/outflows from future restructurings not yet committed to or improvements/enhancements.

50

Exclusions

Estimates exclude cash flows from financing activities and income tax receipts/payments.

53A

Fair Value vs Value in Use

Fair value reflects market participants' assumptions. Value in use reflects entity-specific factors (e.g., synergies, specific legal rights) not available to market participants.

54

Foreign Currency

Future cash flows are estimated in the currency generated and discounted using a rate appropriate for that currency. The present value is then translated using the spot rate.

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Discount Rate

The rate shall be a pre-tax rate reflecting current market assessments of the time value of money and risks specific to the asset (if not adjusted in cash flows).

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Impairment Recognition

If recoverable amount is less than carrying amount, the carrying amount is reduced to the recoverable amount. This reduction is an impairment loss.

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P&L vs OCI

Impairment loss is recognised immediately in profit or loss, unless the asset is carried at revalued amount (IAS 16/38). An impairment loss on a revalued asset is treated as a revaluation decrease (recognised in OCI to the extent of any revaluation surplus).

63

Depreciation Adjustment

After impairment, the depreciation charge is adjusted to allocate the revised carrying amount (less residual value) over the remaining useful life.

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CGU Identification

If recoverable amount cannot be estimated for an individual asset, it is determined for the CGU to which the asset belongs.

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CGU Definition

A CGU is the smallest group of assets generating cash inflows largely independent of other assets. Identification involves judgement.

72

CGU Consistency

CGUs are identified consistently from period to period unless a change is justified.

80

Goodwill Allocation

Goodwill acquired in a business combination is allocated from the acquisition date to each of the acquirer's CGUs (or groups of CGUs) expected to benefit from the synergies. Each unit/group must represent the lowest level at which goodwill is monitored and not be larger than an operating segment.

90

Goodwill Testing

A CGU to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication of impairment, by comparing the carrying amount (including goodwill) with the recoverable amount.

96

Timing of Tests

Annual tests can be performed at any time provided it is the same time every year. Different CGUs can be tested at different times.

104

Allocation of Loss

Impairment loss for a CGU is allocated to reduce the carrying amount of assets in the unit: first, to reduce goodwill allocated to the unit; then, to other assets pro rata based on carrying amount.

105

Limitation on Allocation

The carrying amount of an asset is not reduced below the highest of: its fair value less costs of disposal (if measurable); its value in use (if determinable); and zero.

110

Reversal Indicators

An entity assesses at each reporting date if there is indication that a prior impairment loss (other than goodwill) may no longer exist or may have decreased.

114

Reversal Requirement

An impairment loss is reversed if, and only if, there has been a change in the estimates used to determine the recoverable amount since the last loss was recognised. The carrying amount is increased to the recoverable amount.

117

Reversal Limit

The increased carrying amount cannot exceed the carrying amount that would have been determined (net of amortisation) had no impairment loss been recognised in prior years.

119

Reversal Recognition

Reversal of an impairment loss is recognised immediately in profit or loss, unless the asset is carried at revalued amount (where it is treated as a revaluation increase).

124

Goodwill Reversal

An impairment loss recognised for goodwill shall not be reversed in a subsequent period.

126

Disclosure

Entities must disclose amounts of impairment losses and reversals recognised in profit or loss and OCI for each class of assets.

130

Specific Disclosures

For individual assets or CGUs with material impairment losses/reversals, disclose: events leading to recognition; amount; nature of asset/CGU description; whether recoverable amount is fair value less costs of disposal or value in use; and details of the measurement basis (e.g., discount rates, key assumptions).

134

Estimates Disclosure

For CGUs containing significant goodwill or indefinite-life intangibles, disclose: carrying amount of goodwill/intangibles; basis for recoverable amount; key assumptions (growth rates, discount rates); and sensitivity analysis if a reasonably possible change would cause impairment.

139

Effective Date

The Standard applies prospectively for annual periods beginning on or after 31 March 2004.