IAS 36 IMPAIRMENT OF ASSETS

It is intended to avoid the possibility that non-current assets (whether tangible or intangible) are carried
at excessive amounts in the Statement of Financial Position (SFP)

Excluded Assets
IAS 36 applies to all assets other than:
i) Inventories (IAS 2)
ii) Construction contracts (IFRS 15)
iii) Deferred Tax Assets (IAS 12)
iv) Assets arising from employee benefits (IAS 19)
v) Financial Assets included in the scope of (IAS 32)
vi) Investment Property measured at fair value (IAS 40)
vii) Non-current assets classified held for sale (IFRS 5)

Impairment
An asset is impaired if its recoverable amount is below the value currently shown in the SFP, that is the
asset’s current carrying value (NBV).

Recoverable amount is taken as the higher of

(a) Fair value less costs to sell (NRV)
(b) Value in use (VIU)

Assets should be carried at the lower of

NBV/CA Recoverable Amount

Greater of

NRV VIU

Measurement of Recoverable Amount

1. Measurement of Fair Value less cost of sale

Measure may be way of
(a) A binding sale agreement
(b) The current market price less costs of disposal (where an active market exists). Examples of costs of
disposal are

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 - Legal costs
- Stamp duty
- Removal cost related to the asset
- Direct incremental costs to bring the asset into condition for sale

2. Measurement of Value in Use

Value in use is determined by estimated future cash inflows and outflows to be derived from the use of
the asset and its ultimate disposal and applying a suitable pre-tax discount rate to these cash flows.

Question 1
a) The following information relates to three assets

A B C
C.V (Carrying Value) 100 000 150 000 120 000
N.R.V 110 000 125 000 100 000
Value in Use (V.I.U) 120 000 130 000 90 000

What is the recoverable amount of each asset? Calculate the impairment loss for each of the 3 assets;

b) Blue Ltd is a manufacturing company that owns various type of machinery. At the end of the
year, one type of machinery was damaged, but still in working order. The machine was acquired on 1
January 2018 at a cost of $450 000. Depreciation was calculated on a straight line basis over the
expected useful life of 10 years. The useful life of the machine was reviewed due to the damage, and
management estimated that the remaining useful life of the machine is now 3 years from 31 December
2020.

The fair value less costs to sell of the machine is $270 000. The value in use of the machine is $260 000.

Required:
Calculate the impairment loss to be recognised for the year ended 31 December 2020.

Question 2
S Ltd has a printing machine with a carrying amount of $5 250 000. This machine was bought 3 years ago
and its original life was 8 years. Due to technological changes in the market the machine is expected to
be used for another 3 years with net cash inflows of $2 800 000, 2 500 000 and 1 850 000 before it is
disposed of for $600 000. The current market value of the machine is $2 150 000 while disposal costs
would amount to $350 000. These costs will rise to $400 000 at the end of the 3rd year. The company’s
cost of capital is 30%.

Required
Determine the amount to be recognised in the company’s books as an impairment loss.

2 Compiled by T T Herbert (0773 038 651 / 0712 560 772)

Question 3
PDQ Limited bought a lathe machine on 1 January 2017 at a cost of $10,000,000. The machine is being
depreciated at a rate of 10% per annum on a straight line method and has no residual value. On 1
January 2020 due to some technological changes, the useful life of the machine has been reduced to 7
years. The current market value of the machine is $4,000,000. Disposal costs at current prices are
estimated at $110,000. The company’s cost of capital is 20%. The expected net cash inflows of the
remaining 4 years are estimated as follows:
Year Cash Inflow Discount Factor
2020 2,800,000 0.833
2021 2,600,000 0.694
2022 2,500,000 0.579
2023 1,800,000 0.482

Required
a) State the original useful life of the machine.
b) Calculate the amount to be recognised in the company’s books as an impairment loss as at 1 January
2020.

Question 4
Sipho Ltd is a manufacturing company and owns various items of machinery. At the end of the current
year, two items were damaged, but are still in working order. The useful lives and pattern of use of the
machines were not influenced by the damage. The carrying amounts of the two items on 31 December
2020 were as follows:
$
Machine 1 500 000
Machine 2 380 000

Machine 1 can at this stage be disposed of for $490 000, in an orderly transaction between market
participants. In order to sell the machine, it has to be serviced and tuned at a cost of
$10 000. Direct selling expenses of $5 000 would also have to be incurred. Management determined the
value in use of the machine to be $488 000 using an appropriate discount rate of 10%.

Machine 2 can at this stage be disposed of for $380 000, in an orderly transaction between market
participants. Direct selling expenses of $5 000 would also have to be incurred.
Management determined the value in use of the machine to be $390 000 using an appropriate discount
rate of 10%.

Ignore any tax implications.

Required
Prepare the note on profit before tax that will accompany the financial statements of Sipho Ltd for the
year ended 31 December 2020, so as to comply with the requirements of International Financial

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Reporting Standards (IFRS). Comparative amounts and an accounting policy note are not required.

Indicators of Impairment
IAS 36 requires that at each reporting date an entity must assess whether there are indicators of
impairment. Indicators may be derived from within the entity itself (internal sources) or the external
market (external sources).

External Sources of Information

a) The asset’s market value has declined more than expected.
b) Changes in the technological economic or legal environment have had an adverse effect on the
entity.
c) Interest rates have changed thus increasing the discount rates used in calculating the assets value in
use.

Internal Sources of Information

a) There is evidence of obsolescence or damage to the asset.
b) Changes in the way the asset is used have occurred or are imminent.
c) Evidence is available from reporting indicating that the economic performance of an asset will be
worse than expected.

Therefore, if an indicator of impairment exists, then an impairment review must be performed.

Annual Impairment Reviews

Where there is no indication of impairment then no further action need to be taken. An exception to
this rule is
i) Goodwill acquired in a business combination
ii) An intangible asset with an indefinite useful life
iii) An intangible asset not yet available for use

IAS 36 requires that annual impairment review for these assets be conducted irrespective of whether
there is an indication of any impairment.

Recognition and Measurement of Impairment

Where there is an indication of impairment, an impairment review should be carried out
a. The recoverable amount should be calculated
b. The asset should be written down to recoverable amount
c. The impairment loss should be immediately recognised in the Statement of Profit or Loss.

N.B The only exception to this is if the impairment reverses a previous gain taken to the revaluation,
in this case, the impairment will be taken to the revaluation reserve (and so disclosed as other
comprehensive income until the revaluation gain is reversed and then to the Statement of Profit or
Loss).

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Question 5
An entity owns property which was originally purchased for $300,000. The property has been revalued
to $500,000 with the revaluation of $200,000 being recognised as other comprehensive income and
recorded in the revaluation reserve. The property has a current carrying value of $460,000 but the
recoverable amount of the property has just been estimated at $280,000.
Required:
What is the cost of impairment and how should this be treated in the financial statements.

Cash Generating Units (CGUs)

When assessing the impairment of assets it will not always be possible to base the impairment review
on individual assets. The value in use calculation will be impossible on a single asset because the asset
does not generate distinguishable cash flows. In this case the impairment calculation should be based on
a cash generating unit.

A CGU is defined as the smallest identifiable group of assets which generates cash inflows independent
of others e.g. in a restaurant, the smallest group of assets might be the assets within a single restaurant,
but with a company all the assets of the company might make up a single CGU. The impairment
calculation is done by:
1) Assuming the cash generating unit is one asset
2) Comparing the carrying value of the CGU to the recoverable amount of the CGU.

Impairment of a CGU
IAS 36 requires that an impairment loss attributable to a CGU should be allocated to write down the
assets in the following order.
1) Purchased Goodwill
2) The other assets (including other intangible assets) in the CGU on a pro-rata basis based on the
carrying amount of each asset in the CGU.

N.B No individual asset should be written below its recoverable amount.

Question 6
A company has a unit that suffers a massive drop in income due to the failure of its technology on 01
January 2020. The following carrying values were recorded in the books immediately prior to the
impairment.

Goodwill 20,000
Brands 10,000
Technology 5,000
Land 50,000
Buildings 30,000
Other net assets 40,000

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- The recoverable value of the unit is estimated at $85,000. The technology is worthless following its
complete failure.
- The other net assets include inventory, receivables and payables. It is considered that the book value
of other net assets is a reasonable representation of its net realisable value (NRV).
Required
Show the impact of the impairment on 01 January 2020.

When testing a CGU for impairment, it is important to ascertain whether it has goodwill or not.
1. If the recoverable amount exceeds the carrying amount, the unit and the goodwill attached to it will
be considered as not impaired.
2. If the carrying amount exceeds the recoverable amount the entity should recognise an impairment
loss.

Question 7
P. Ltd acquired the shares in Q. Ltd on 01/01/2018 for $35,000,000. Q. Ltd comprised of 3 CGUs i.e. X, Y
and Z. The fair values of these units’ net assets were $12,500,000, $8,400,000 and $6,000,000
respectively. The following information also relates to these units.

DETAILS (31 December 2018) X Y Z TOTAL

Net carrying Amount (excluding goodwill) 16 million 6,5 million 3,8million 26,3million
Recoverable Amount ( Including effect on 18,3million 9,7 million 3,3 million 31,3million
goodwill)

Required:
Calculate the impairment losses for the CGUs (where applicable) on 31/12/2018. Assume that Goodwill
can be allocated to the units based on the fair values of their net assets.

Question 8
X. Ltd owns a specific machine with a carrying amount of $106,667 at 31/12/2014 for which there is an
active market. The machine can at this stage be disposed of to a knowledgeable willing buyer for
$107,000. This machine initially costs $200,000 and it is written off over 71/2 years on the straight line
basis. A total of 3 ½ years of the useful life of a machine has already expired as at 31/12/2014. Any
broker involved in such a transaction will charge a fee of $2,000 and the cost to dismantle and remove
the asset will be $3,000.

X. Ltd is of the opinion that this asset will generate net cash inflows of $40,000 per annum over the next
4 years and this was confirmed in the most recent Cash Flow Budget of management. The asset will be
disposed of for a net amount of $4,000 at the end of its useful life. An appropriate after tax discount
rate for this type of machine is 15.4% p.a. and the tax rate is 30%. There have been numerous reports in
the press in the last few weeks before the company’s financial year end indicating that this type of asset
is heading for major technical innovations.

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Required
Calculate the following;
a) The fair value less cost to sell of the asset
b) The value in use of the asset
c) The impairment loss that would result
d) The depreciation for the year 2014
e) The depreciation for the next year and years thereafter

Question 9
On 1 January 2020 Multiplex acquired the whole of Steamdays, a company that operates a scenic
railway along a coast of a popular tourist area. The summarised statement of financial position at fair
values of Steamdays on 1 January 2020 reflecting the terms of the acquisition was:
$
Goodwill 200 000
Operating licence 1 200 000
Property – train stations and land 300 000
Rail track and coaches 300 000
Two steam engines 1 000 000
Purchase consideration 3 000 000

The operating licence is for ten years. It was renewed on 1 January 2020 by the transport authority and
is stated at cost of its renewal. Carrying values of property, rail track and coaches are based on their
value in use. Engines are valued at their net selling prices.

On 1 February 2020 the boiler of one of the steam engines exploded completely destroying the whole
engine. Fortunately no one was injured but the engine was beyond repair. Due to its age a replacement
could not be obtained. Because of the reduced passenger capacity the estimated value in use of the
whole of the business after the accident was assessed at $2 000 000.

Passenger numbers after the accident were below expectations even after the reduction of capacity. A
market research report concluded that tourists were not using the railway because of their fear of a
similar accident occurring to the remaining engine. In the light of this the value in use of the business
was re-assessed on 31 March 2020 at $1 800 000. On this date Multiplex received an offer of $900 000
in respect of the operating licence (it is transferable). The realisable value of the other net assets has not
changed significantly.

REQUIRED
Calculate the carrying value of the assets of Steamdays (in Multiplex`s consolidated statement of
financial position) at 1 February 2020 and 31 March 2020 after recognising the impairment losses.

7 Compiled by T T Herbert (0773 038 651 / 0712 560 772)

Question 10
X Ltd acquired Y Ltd on 1 July 2016 for $50 000 000. The acquiree company has 2 independent
operations winch meet the definition of a cash generating unit. One operation is in South Africa while
the other is in D.R.C

The following information relates to the D.R.C. operation on the date of acquisition:
$
Fair value of identifiable assets 15 000 000
Goodwill 5 600 000
Total purchase price 20 600 000

Depreciation on tangible non-current assets is provided for on a straight-line basis over 6 years.
Intangible non-current assets are not amortised, but tested for impairment on an annual basis. Residual
values are not applicable.

On 30 June 2018 the D.R.C. announced significant restrictions on locally-based companies, which
impacted negatively on Y Ltd's business. The value in use of this business on that date was $9 600 000.

REQUIRED
Calculate and allocate the impairment loss for the D.R.C. operation and show how it is allocated.

Reversal of an Impairment Loss

Indicators of a reversal
- The recoverable amount of an asset shall be re-estimated if at the reporting date there is an indication
that an impairment loss recognised for that asset in previous years may no longer exist or may have
decreased.
- The entity shall consider as a minimum the following indicators of a reversal of a previous impaired
loss.

External Sources of Information

a) The asset’s market value has increased significantly during the period.
b) Significant changes with a favourable effect on the entity have taken place the period or will take
place in the near future in the technological, economic, or legal environment in which the entity
operates, or in the market to which the asset is dedicated.
c) Market interest rates or other rates of return on investments have decreased during the period
affecting the discount rate used in calculating the asset’s value in use and increasing the assets
recoverable amount.

Internal Sources of Information

a) Significant changes with a favourable effect on the entity have taken place during the period or are
expected to take place in the near future, in the extent to which or manner in which the asset is used or

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expected to be used. These changes include capital expenditure that has been incurred during the
period to improve or enhance an asset in excess of its originally assessed standard of performance.
b) Evidence is available from internal reporting that indicates that the economic performance of the
asset is or will be better than expected.

NB. An impairment loss for an asset other than Goodwill shall be reversed if there has been a change
in the estimates used to determine the assets recoverable amount since the last impairment
loss was recognised.
The carrying amount of the asset shall be increased to its recoverable amount. This increase is a
reversal of impairment loss.

Individual Asset Reversal

a) An impairment loss of previous periods for assets other than Goodwill is reversed only to the extent
that it does not increase the carrying amount of an asset above the carrying amount that would have
been determined for the asset (Net of Amortisation or Depreciation) had no impairment loss been
recognised in prior years.

b) A reversal of an impairment loss shall be recognised as income for assets carried at cost and treated
as a revaluation increase for assets carried at revalued amount.

c) After the reversal of an impairment loss, the depreciation charge for future periods shall be adjusted.

Cash Generating Unit – Reversal of an Impairment Loss

Such a reversal shall be allocated to the assets (using carrying amounts)
a) For assets other than goodwill on a pro rata basis based on the carrying amounts of assets in the unit.
b) Goodwill can never be reinstated on reversal of an impairment loss.

N.B These increases in carrying amounts shall be treated as reversals of impairment losses for
individual assets.

The carrying amount of an asset shall not be increased above the lower of
a) Its recoverable amount
b) The carrying a mount that would have been determined (Net of Amortisation or Depreciation) had
no impairment loss been recognised in prior years.

Goodwill Reversal of Impairment Loss

An impairment loss of goodwill shall not be reversed in any subsequent period.

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Question 11
On 1 January 2011 Big Picture Ltd acquired an interest in Out Here Ltd which operates in 3 different
continents. The purchase price of $20 million could be allocated as follows:

$000 $000 $000

Purchase Price Carrying Amount Goodwill
Europe 10,000 7,000 3,000
Asia 4,000 3,000 1,000
Africa 6,000 4,000 2,000
20,000 14,000 6,000

During 2014 there was a severe drought throughout Africa and the production of the Africa Cash
Generating Unit (CGU) decreased by 70%. Management determined the recoverable amount of the
Africa operations to be $1.5 million on 31 December 2014. Accumulated impairment losses in respect of
goodwill of the Africa operations amounted to $800,000 on 31/12/2013. By 2017 the region had
adequate rainfall to relieve the drought conditions and it is estimated that production would again
increase by 50%. All assets are written off over a period of 10 years on a straight line basis.

Requirement
a) Calculate the impairment loss and allocation thereof in 2014.
b) Calculate the reversal of the impairment loss in 2017 if the recoverable amount is 1.6 million
c) Calculate the reversal of the impairment loss if the recoverable amount is $1,000,000
Your solution must comply with Statement of GAAP

Disclosure requirements
The following shall be disclosed for each class of assets.
(1) Amount recognised in the income statement during the period for
(a) Impairment losses
(b) Reversals of impairment

If an impairment loss for an individual asset (including goodwill) or a CGU is recognised or reversal and is
material to the financial statements disclose the following
(i) Events and circumstances that led to the loss being recognised and reversed
(ii) Amount recognised or reversed

a) For each individual asset – nature of the asset

b) For a CGU a description of the CGU and the amount of the impairment loss recognised or reversed by
class of assets.

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Question 12
On 1 January 2012, FCI Ltd acquired a controlling stake in Panashe (PVT) Ltd, a seed maize company with
interests in sub-Saharan Africa. The purchase consideration of $100m was made up as follows:
Purchase Price Carrying Amount Goodwill
$000 $000 $000
West Africa 50,000 40,000 10,000
Southern Africa 30,000 25,000 5,000
East Africa 20,000 14,000 6,000
100,000 79,000 21,000
In January 2012, a mid-season drought started in Southern Africa which decimated agricultural
production and reduced the region’s output by 60%. On 31 December 2012 the directors of FCI Ltd
estimated the recoverable amount of the investment in this region to be $10m. Towards the end of
2013, the rainfall situation had improved sufficiently, with output increasing by 80%. FCI Ltd depreciates
all non-current assets over 5 years, using the straight line basis.
Required:
a) Calculate the impairment loss and its allocation on 31 December 2012.
b) Calculate the reversal of the impairment loss on 31 December 2013 if the recoverable amount on
that date was $17m.
c) Calculate the reversal of the impairment loss on 31 December 2013 if the recoverable amount on
that date was $8m.

Question 13
The objective of IAS 36 Impairment of assets is to prescribe the procedures that an entity applies to
ensure that its assets are not impaired.
Required:
Explain what is meant by an impairment review. Your answer should include reference to assets that
may form a cash generating unit. [4 marks]

a. Telepath acquired an item of plant at a cost of $800 000 on 1 April 2010 that is used to produce and
package pharmaceutical pills. The plant had an estimated residual value of $50 000 and an
estimated life of five years, neither of which has changed. Telepath uses straight-line depreciation.
On 31 march 2012, Telepath was informed by a major customer (who buys products produced by
the plant) that it would no longer be placing orders with Telepath. Even before this information was
known, Telepath had been having difficulty finding work for this plant. It now estimates that net
cash inflows from the plant for the next three years will be:
$000
Year ended: 31 March 2013 220
31 March 2014 180

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 31 March 2015 170

On 31 March 2015, the plant is still expected to be sold for its estimated realizable value.
Telepath has confirmed that there is no market in which to sell the plant at 31 March 2012.
Telepath’s cost of capital is 10% and the following values should be used.
$
Value of $1 at
End of year 1 0.91
End of year 2 0.83
End of year 3 0.75

Telepath owned a 100% subsidiary, Tilda, which is treated as a cash generating unit. On 31 March 2012,
there was an industrial accident (a gas explosion) that caused damage of Tilda’s plant. The assets of Tilda
immediately before the accident were:
$000
Goodwill 1 800
Patent 1 200
Factory building 4 000
Plant 3 500
Receivables and cash 1 500
12 000

As a result of the accident, the recoverable amount of Tilda is $6.7 million. The explosion destroyed (to
the point of no further use) an item of plant that had a carrying amount of $500 000. Tilda had an open
offer from a competitor of $1 million for its patent. The receivables and cash are already stated at their
fair values less costs to sell (net realizable value).
Required
Calculate the carrying amounts of the assets in (i) and (ii) above at 31 March 2012 after applying any
impairment losses. Calculations should be to the nearest $1 000. (15 marks)

12 Compiled by T T Herbert (0773 038 651 / 0712 560 772)