IAS 36 Impairment

IAS 36
Impairment of Assets
SCOPE
2
DEFINITIONS OF TERMS
Impairment
 A fall in the value of an asset (recoverable amount is less than
carrying value).
Carrying amount (CA) or carrying value (CV)
 The net value of the asset (after deducting accumulated
depreciation & any impairment losses).

The Recoverable Amount
 Recoverable Amount is the higher value of:
 The asset's fair value less costs to sell (FVLCS); and
 Its value in use. (IAS 36)
3
THE THREE ACCOUNTING ISSUES
1. How is it possible to identify when an imp. loss may have

occurred?
2. How should the RA of the asset be measured?
3. How should an 'impairment loss' be reported in the
accounts?
4
Identifying a Potentially Impaired
Asset
 Assess at the end of each reporting period whether

there are any indications of impairment to any assets.
 The concept of materiality applies, & only material
impairment needs to be identified.
5
Source of Information
External Sources Of Information
 A fall in the asset's market value that is more significant than
would normally be expected.

 A significant change in the technological, market, legal or
economic environment of the business.

 An increase in market interest rates or market rates of return
on investments likely to affect the discount rate.

 The carrying amount of the entity's net assets being more
than its market capitalization.
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Source of Information…
Internal Sources Of Information

 Obsolete or physically damaged asset
 Significant changes in the extent or manner in which, an asset is
used (idle assets, plans to dispose, discontinue…

 Internal reporting indicates that the economic performance of
an asset is, or will be, worse than expected

 An intangible asset with an indefinite useful life
 Goodwill acquired in a business combination
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Measuring the Recoverable Amount of
the Asset
Recoverable Amount
 The RA should be the higher value of:
 The asset's fair value less costs to sell (FVLCS); and
 Its value in use. (IAS 36)
 (FVLCS) is the amount net of selling costs (e.g.. Legal expenses)
that could be obtained from the sale of the asset.
 If there is an active market in the asset, the net selling price
should be based on:
 the market value, or
 the price of recent transactions in similar assets.
8
Measuring the Recoverable Amount…
 If there is no active market in the assets it might be possible to
estimate a net selling price using
 best estimates of what 'knowledgeable, willing parties'
might pay in an arm's length transaction.

Value in Use (VU)
 The VU is the PV of estimated future cash flows including its
estimated net disposal value (if any) at the end of its UL.
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Impairment Test
10
Accounting Treatment of Impairment
Loss: Case
Case 1
 A corporation has a heavy duty vehicles acquired before 5
years. The corporation is carrying out an exercise to establish

whether there has been an impairment of the vehicle.
Additional Information
 Its carrying amount in the statement of financial position is
ETB3m.
 The company has received an offer of ETB2.8m for the
vehicle from another company.

 The present value of the estimated cash flows from the
vehicles' continued use is ETB3.3m.

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Loss: Case …
 Required
 What should be the value of the vehicle in the statement of
financial position, and what, if anything is the impairment
loss?
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Loss: Solution
 Fair value less costs to sell = ETB 2.8m

 Value in use = PV of cash flows from use =ETB 3.3m
 Recoverable amount = Higher of these two amounts, i.e.
ETB2.8m and ETB 3.3m=3.3m
 Carrying value =ETB3m
 There is no impairment loss because the recoverable amount
of the asset is greater than its carrying amount.
13
Case 2
 A Corporation is reviewing one of its plants for impairment. The
carrying value of its net assets is ETB20 million. Management

has produced two computations for the value-in-use of the
plant.
 The first value (ETB18 million) excludes the benefit to be
derived from a future reorganization, but the second value

(ETB22 million) includes the benefits to be derived from the
future reorganization. There is not an active market for the sale
of the plant.
Required
 Explain whether the plant is impaired.
Impairment Test: Solution
 The benefit of the future reorganization should not be taken

into account in calculating value-in-use.
 Therefore, the net assets of the plant will be impaired by ETB2
million because the value-in-use (ETB18 million) is lower than
the carrying value (ETB20 million). The value-in-use can be
used as the recoverable amount as there is no active market
for the sale of the plant.
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Impairment Test…
 The recoverable amount (RA)of an individual asset cannot be

determined if:
 its VU cannot be estimated to be close to its fair value less
costs of disposal
― E.g. when the future cash flows from continuing use of the
asset cannot be estimated to be negligible); and

 the asset does not generate cash inflows that are largely
independent of those from other assets.
 In such cases, VU and, therefore, recoverable amount, can be
determined only for the asset’s CGU.
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Cash Generating Units (CGUs)
Cash Generating Units (CGUs)

 When it is not possible to calculate the RA of a single asset, then
that of its CGU should be measured instead.

 A CGU is the smallest identifiable group of assets that
 can generate cash flows from continuing use and
 are mainly independent of the cash flows from other assets or
groups of assets.
Use of Cash-Generating Unit
 As a basic rule, the recoverable amount of an asset should be
calculated for the asset individually (item-by-item).

 when it is not possible to estimate value for an individual asset,
we use CGU 17
Thank You
18

IAS 36 Impairment

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IAS 36

depreciation & any impairment losses).

 The asset's fair value less costs to sell (FVLCS); and

 Its value in use. (IAS 36)

1. How is it possible to identify when an imp. loss may have

 Assess at the end of each reporting period whether

would normally be expected.

economic environment of the business.

on investments likely to affect the discount rate.

than its market capitalization.

Internal Sources Of Information

 Significant changes in the extent or manner in which, an asset is

used (idle assets, plans to dispose, discontinue…

an asset is, or will be, worse than expected

 Goodwill acquired in a business combination

 the price of recent transactions in similar assets.

might pay in an arm's length transaction.

years. The corporation is carrying out an exercise to establish

vehicle from another company.

vehicles' continued use is ETB3.3m.

 Fair value less costs to sell = ETB 2.8m

carrying value of its net assets is ETB20 million. Management

derived from a future reorganization, but the second value

 The benefit of the future reorganization should not be taken

 The recoverable amount (RA)of an individual asset cannot be

asset cannot be estimated to be negligible); and

Cash Generating Units (CGUs)

that of its CGU should be measured instead.

 can generate cash flows from continuing use and

 are mainly independent of the cash flows from other assets or

calculated for the asset individually (item-by-item).

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