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Scope of application
All non-financial assets are within the scope of
IAS 36 unless specifically excluded [IAS36.2(R.05)].
The assets scoped out are:
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Inventories |
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Assets arising from construction contracts |
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Deferred tax assets |
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Assets arising from employee
benefits |
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Assets carried at fair
value under IAS 40 - Investment Property and
IAS 41 - Agriculture |
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Financial assets within
the scope of IAS 39 |
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Assets within the scope
of IFRS 4 |
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Assets held for sale within
the scope of IFRS 5 |
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Investments in subsidiaries, joint ventures and
associates are within the scope of IAS 36 [IAS36.4(R.05)]
.
Identifying an asset that may be impaired
An entity must determine at each reporting date
whether there is any indication that an asset is
impaired [IAS36.9(R.05)]. If an indicator of impairment
exists then the asset's recoverable amount must
be determined and compared with its carrying amount
to assess the amount of any impairment.
Indicators of impairment may arise from either
the external environment in which the entity operates
or from within the entity's own operating environment.
IAS 36.12 lists some examples of impairment indicators,
as follows:
External indicators:
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A significant
decline in the asset's market value; |
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Adverse changes in technology, the
market, the economic or legal environment; |
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Increases in market interest
rates; and |
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The carrying amount of
the entity's net assets exceeds its market capitalisation. |
Internal indicators:
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Evidence
of obsolescence; |
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Plans to discontinue use of
the asset or to dispose of it; and |
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Evidence that the asset
is performing less well than expected. |
The examples provided are not an exhaustive list
and management should consider and evaluate any
adverse change in circumstances as a potential indicator
of impairment. .
Measuring recoverable amount
Assets should be tested for impairment at as low
a level as possible, at individual asset level where
possible. However, many assets do not generate cash
inflows independently from other assets. Such assets
will usually be tested within the cash-generating unit
(CGU) to which the asset belongs [IAS36.22(R.05] . A CGU
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 [IAS36.6(R.05)]. A CGU can be a single asset.
Identification of cash generating units
The existence of independent cash flows and thus
the identity of an entity's CGUs is usually a matter
of fact rather than judgement. The independence
of cash flows may be indicated by the way management
monitors the entity's operations and by the availability
of information [IAS36.IE1(R.05)] [IAS36.69(R.05)] . Management's day to day operation of the
business may not reflect the legal structure through
which the operations are conducted.
The existence of an active market for the output
of an asset, or group of assets, is evidence that
cash flows are independent. Such an asset or group
of assets will therefore be a CGU even if the output
is consumed internally [IAS36.70(R.05] .
Examples of outputs from assets for which an active
market exists include oil, gold and electricity.
The identification of CGUs should be consistent
from period to period [IAS36.72(R.05)]. However, an asset
which was previously part of a CGU but which is
no longer utilised should be excluded from the CGU
and assessed for impairment separately .
Assets held for sale, disposal groups and discontinued operations
A plan by management to dispose of an asset or group of assets is an indicator
of impairment. This will usually be well before the held for sale criteria under IFRS 5 are met. Assets or CGUs are tested for impairment when the decision to sell is made. The
impairment test is updated immediately before classification
under IFRS 5. IFRS 5 requires an asset held for sale to
be measured at the lower of its carrying amount
and its fair value less costs to sell. The carrying
amount that will be used in this measurement will
be the adjusted carrying amount after the impairment
test has been completed
.
Indefinite lived intangible assets
An intangible asset with an indefinite useful life
is required to be tested for impairment annually
irrespective of whether there is any indication
of impairment [IAS36.10(R.05)]. It is rare for an intangible
asset to generate independent cash flows and so
these assets are usually tested for impairment within
a CGU.
Fair value less costs to sell
IAS 36R provides a hierarchy of sources for fair
value less costs to sell.
The best indicator of fair value less costs to
sell is the price in a binding arm's length sale
agreement adjusted for the costs of disposal [IAS36.25(R.05)].
If there is no binding sale agreement but the asset
is traded in an active market, the current market
price or the latest transaction price, less costs
to sell, should be used [IAS36.26(R.05)].
If there is neither a binding sale agreement nor
an active market then fair value may be estimated
as the amount that the entity could obtain from
disposal of the asset in an arm's length transaction
based on data from recent market transactions [IAS36.27(R.05)] .
Discounted cash flow techniques may be used incorporating
assumptions that market participants would use in
estimating the fair value of the asset
. These assumptions may include restructurings, future investments or divestments and the like. The expected costs of disposal should be
deducted to calculate fair value less costs to sell
[IAS36.28(R.05)]. Costs of disposal are only the direct incremental costs of the disposal [IAS36.BCZ35(R.05)].
Value in use
An asset's value in use (VIU) is the present value
of the future cash flows expected to be derived
from the use of an asset or CGU and from its disposal.
VIU is calculated by applying an appropriate pre-tax
discount rate to the asset's estimated future pre-tax
cash flows [IAS36.31(R.05)]. The value in use calculation
is not a fair value calculation or a proxy for fair
value. VIU is a prescribed form of cash flow model
set down in IAS 36 so that impairment testing is
comparable.
Value in use: estimation of future cash
flows
Cash flow projections should be based on reasonable
assumptions that represent management's best estimate
of the range of economic conditions that will exist
over the remaining useful life of the asset [IAS36.33(a)(R.05)]
. Management must assess the reasonableness
of the assumptions used as the basis for the current
cash flow projections and give greater weight to
assumptions supported by external market data. When assessing assumptions management
should reflect on the extent to which their previous
forecasts have proved reliable and the reasons for
variances [IAS36.34(R.05)].
The cash flow projections must be based on the
most recent financial budgets that have been approved
by management [IAS36.33(R.05)] . The projections, using specific assumptions,
should cover a maximum period of five years, unless
a longer period can be justified [IAS36.33(R.05)]. The
cash flows associated with assets under construction
include expenditure necessary to get the asset ready
for use [IAS36.42(R.05)].
Cash flow projections beyond five years are estimated
by extrapolating the projections for the first five
years using a steady or declining growth rate for
subsequent years, unless an increasing rate can
be justified. The growth rate should not exceed
the long-term average growth rate for the products,
industries, or countries in which the entity operates,
or for the market in which the asset is used unless a higher rate can be justified [IAS36.33(R.05)].
Cash flow projections exclude expenditure on (and
benefits of) any restructuring plan where management
has not created a constructive obligation. The projections
also exclude any future capital expenditure that
will improve or enhance the asset's performance
[IAS36.44(R.05)] [IAS36.45(R.05)]. The asset is assessed for
impairment in its current condition, not as a modified
asset that the entity might own in the future .
The cash flows include any decommissioning costs
payable at the end of the asset's life, and any
amounts receivable on disposal [IAS36.39(c)(R.05)]. The
carrying amount of the asset or CGU should also
include any liabilities established for decommissioning
at the end of the asset's useful life, where applicable
[IAS36.76(R.05)].
The cash flows should exclude any financing cash
flows and any tax cash flows [IAS36.50(R.05)] . They should also exclude any cash flows
to the lessor in respect of assets of the CGU held
under a finance lease.
Central overhead costs should be allocated on a
consistent and reasonable basis across CGUs [IAS36.41(R.05)].
Value in use: selection of discount rate
A pre-tax discount rate is used to calculate value
in use [IAS36.55(R.05)] .
The discount rate used is the rate which reflects
the specific risks of the asset or CGU . Different CGUs will often warrant different
discount rates. The discount rate should not be
adjusted for risks that have already been considered
in projecting future cash flows [IAS36.56(R.05)] .
Management might have regard to the entity's weighted
average cost of capital or its incremental borrowing
rate as a starting point when determining an appropriate discount rate
[IAS36.AppendixA.17(R.05)]. Consideration should also
be given to country risk, currency risk and cash
flow risk. Different rates should be used for different
future periods with different risks where appropriate,
[IAS36.AppendixA.21(R.05)].
Value in use: Foreign currency cash flows
The VIU of an asset which generates cash flows in
a foreign currency should be estimated in that foreign
currency and then translated to the parent entity's
functional or reporting currency using the spot
rate at the date of the valuation [IAS36.54(R.05)] . The cash flows used in the VIU calculation
should be expressed in the foreign currency and
should include inflation expectations for that territory.
The discount rate should be a rate appropriate for
the territory taking account of relevant local economic
data.
Allocation of assets to CGUs
Part of the process of impairment testing is determining
the carrying amount of CGUs for comparison with
their recoverable amounts. This requires the allocation
to CGUs of assets which do not generate independent
cash flows but which do so in a group of other assets.
The carrying amount of a CGU includes only those
assets that can be directly attributed or allocated
on a reasonable and consistent basis to it [IAS36.76(a)(R.05)].
If there is an indication that a CGU is impaired,
or that an asset which can be, and has been, directly
allocated to the CGU is impaired then the CGU is
tested for impairment. In the event of an impairment
arising, the assets within the CGU will be written
down to their recoverable amounts.
Some assets cannot be allocated to individual CGUs
on a reasonable and consistent basis; the most common
examples are goodwill and corporate assets. CGUs
may have to be grouped together until the remaining
assets can be allocated to the group of CGUs on
a reasonable and consistent basis in order to carry
out impairment testing of these assets . Any impairment loss arising at CGU level
is accounted for, and assets are written down to
their recoverable amounts, before the CGUs are grouped
for impairment testing of the remaining assets.
Goodwill
Goodwill arising in a business combination must
be tested for impairment annually [IAS36.10(b)(R.05)].
As goodwill does not generate
independent cash flows, it must be allocated to
one or more CGUs for the purposes of impairment
testing .
Goodwill is allocated from the date of acquisition
to the CGUs that are expected to benefit from the
synergies of the combination, both existing and
acquired CGUs. The group of CGUs to which goodwill
is allocated shall represent the lowest level at
which it will be monitored and managed and cannot
be larger than a segment [IAS36.80(R.05)].
Goodwill is the residual in a business combination
after all the identifiable assets and liabilities
of the acquiree have been recognised. Goodwill may
include:
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the fair value
of the acquiree's 'going concern element'; |
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| b) |
the fair value of expected synergies from
the combination; |
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| c) |
overpayments by the acquirer; |
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| d) |
errors in measuring and recognising
the fair value of either the cost of the combination
or the fair value of the net assets acquired; |
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| e) |
assets which are not capable
of recognition (e.g. skilled workforce, non-contractual
customer relationships). |
| f) |
deferred taxes |
Identification of the constituent parts of goodwill
(a required disclosure of IFRS 3) may assist in
allocating the goodwill to the CGUs or groups of
CGUs which are expected to benefit from the synergies
or to which the unrecognised assets have been deployed.
The allocated goodwill forms part of the CGU's
carrying amount. Potential impairment
of the CGU is measured by comparing its carrying
value, including any allocated goodwill, to its
recoverable amount.
Similarly, if goodwill is allocated to a group
of CGUs rather than an individual CGU the goodwill
forms part of the total carrying amount of the group
of CGUs, for impairment testing purposes.
There may be cases where the fair values of identifiable
net assets recognised in a business combination
are based on the provisional fair values available
at the time of the acquisition. The fair value of
these assets and liabilities and the resulting amount
of any goodwill should be finalised within twelve
months of the acquisition date . Goodwill, as the residual,
is not finally determined until the fair value exercise
is complete. A change to goodwill arising from the
completion of the fair value exercise is not impairment
[IFRS3.62].
Goodwill acquired in a business combination during
the period may not have been allocated to a CGU
or group of CGUs at the reporting date. The reasons
why a portion has not been allocated and the amount
of unallocated goodwill is disclosed [IAS36.133(R.05)].
Goodwill must be allocated to CGUs by the end of
the year following the year of the business combination.
Corporate assets
Corporate assets such as head office assets and
research and development facilities do not generate
cash flows independently from other assets [IAS36.100(R.05)].
Corporate assets should be allocated on a reasonable
and consistent basis to CGUs or to groups of CGUs
using a similar approach to that for allocating
goodwill [IAS36.102(R.05)].
Recognition of an impairment loss
An impairment loss should be recognised if an asset's
carrying amount is greater than its recoverable
amount. The carrying amount should be reduced to
the recoverable amount [IAS36.59-60(R.05)] . The corresponding charge is recognised in
the income statement in the same line as the depreciation/amortisation
charge for the asset or, if it is material, in a separate line [IAS1.86(R.05)].
The impairment charge is recognised against the
revaluation surplus to the extent that it reverses
a previous revaluation uplift for that asset [IAS36.60(R.05)].
The future depreciation or amortisation of the
impaired asset is adjusted to reflect the revised
carrying amount [IAS36.63(R.05)]. The asset's remaining
useful economic life should also be reviewed.
An impairment loss arising on a CGU is allocated
to the CGU's individual non-monetary assets on the
following basis [IAS36.104(R.05)]:
| a) |
first to goodwill
allocated to the CGU ; |
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| b) |
second, to the other non-monetary assets
in proportion to their carrying amounts . |
The other non-monetary assets are likely to include
property, plant and equipment and intangible assets.
The carrying amount of each asset within the CGU
is reduced to the higher of [IAS36.105(R.05)]:
| a) |
its fair value
less costs to sell (if determinable); |
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| b) |
its value in use (if determinable); and |
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zero. |
Any unallocated impairment is reallocated to the
CGU's non-monetary assets, subject to the same limits.
This could result in an iterative process, continuing
until the impairment charge is fully allocated or
until each of the CGU's non-monetary assets have
been reduced to the higher of each asset's fair
value less costs to sell, value in use and zero.
The recognition of an impairment shall not, however,
result in the recognition of a liability unless
it meets the definition of a liability under another
IFRS standard [IAS36.108(R.05)].
Reversing impairment losses
Impaired assets, other than goodwill, are assessed
in subsequent years for indications that the impairment
may have reversed. The indicators are generally
the converse of those used to identify impairment
[IAS36.111(R.05)]. A reversal is recognised when it arises
from a change in the estimates used to calculate
the recoverable amount [IAS36.114(R.05)] .
The asset's recoverable amount is recalculated,
and its carrying amount increased to the revised
recoverable amount, subject to the limits described
below.
Goodwill impairment is never reversed [IAS36.124(R.05)].
The impairment reversal is limited to the amount
that would have been recognised had the original
impairment not occurred, after allowing for depreciation
or amortisation in the intervening period [IAS36.117(R.05)].
The same principles apply to the reversal of an
impairment of a CGU. The allocation of the reversal
is made to assets, other than goodwill, on a pro-rata
basis [IAS36.122(R.05)]. When reversing impairment losses
previously applied to assets within a CGU, the carrying
amount of each asset cannot be increased above the
lower of:
| a) |
its recoverable
amount; and |
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| b) |
the carrying amount that it would have
had, had no impairment loss been recognised. |
When should impairment tests be conducted?
An impairment test should be performed at each
reporting date when there is an indication of impairment
[IAS36.9(R.05)]. The reporting dates include interim
balance sheet dates [IAS34.30(a)(R.05)].
Annual impairment testing is required for the following
assets, even if indicators of impairment are not
present:
| a) |
intangible assets
with an indefinite useful life [IAS36.10(a)(R.05)];
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| b) |
intangible assets not yet available for use
[IAS36.10(a)(R.05)]; and |
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| c) |
Goodwill acquired in a business
combination [IAS36.10(b)(R.05)]. |
Indefinite lived intangible assets; intangible
assets not yet available for use and goodwill acquired
in a business combination may be tested for impairment
at any time during an annual period provided the
test is performed at the same time every year. Different
intangible assets may be tested at different times.
These assets should be tested for impairment before
the end of the period in which they are initially
recognised [IAS36.10(R.05)].
Goodwill which was acquired in a business combination
during the current period and which has been allocated
to a CGU (or group of CGUs) is tested for impairment
(with the CGU or group of CGUs) before the end of
the year [IAS36.96(R.05)].
Disclosures
IAS 36 requires extensive disclosure of the results
of the impairment resting process. The disclosures
are designed to enable a reader of the financial
statements to understand the process and to decide
whether he would have reached the same conclusion.
Disclosure of impairment losses and reversals
The amount of impairment losses recognised and reversed
during the period is disclosed for each class of
asset [IAS36.126(R.05)]. Separate disclosure is made
of amounts recognised in income and amounts charged
directly to equity. Disclosure is made of the line
items in the income statement to which impairment
has been charged [IAS36.126(R.05)].
An entity reporting segment information also discloses
the following for each reportable segment, based
on the entity's primary reporting format [IAS36.129(R.05)]:
| a) |
the impairment
losses recognised in the income statement and
directly in equity during the period; and |
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| b) |
the reversals of impairment losses recognised
in the income statement and directly in equity
during the period. |
Additional disclosures for significant impairments
Where an impairment loss or a reversal is material
the following additional disclosures are required
[IAS36.130(R.05)]. These apply to impairments or reversals
of impairments of assets, CGUs and goodwill.
| a) |
the circumstances
giving rise to the impairment/reversal |
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| b) |
the amount of impairment loss or reversal |
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| c) |
the nature and description
of asset or CGU |
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| d) |
the primary segment to which
the asset or CGU belongs |
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| e) |
whether recoverable amount
is fair value less costs to sell or VIU, and: |
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| f) |
if fair value less costs to
sell - how it was determined |
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| g) |
if VIU - the discount rates
used in the current assessment and in the previous
one |
Disclosure of estimates used in measuring recoverable
amount
Additional disclosures are required for each CGU
or group of CGUs, where the carrying amount of allocated
goodwill or intangible assets with indefinite useful
lives is significant . These include [IAS36.134(R.05)]:
| a) |
the carrying amount
of goodwill and intangible assets with indefinite
useful lives allocated to the CGU or group of
CGUs |
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| b) |
the basis on which recoverable amount has
been determined, fair value less costs to
sell or VIU |
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| c) |
if the recoverable amount is value
is use : |
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description of each key
assumption underlying the cash flow projections,
and management's approach to determine it |
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the period over which management has
projected cash flows (when greater than five
years reasons why that longer period is justified) |
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the growth rate used to extrapolate
cash flows |
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the discount rate applied to the cash
flow projections |
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| d) |
if the recoverable amount is based
on fair value less costs to sell: methodology
used to determine it. If it is not determined
based on market prices, the following information
shall also be disclosed: |
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a description of each key assumption
used and management's approach to determining
the key assumptions |
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whether the assumptions are consistent
with past experience or external data and if
not, why not |
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| e) |
if a reasonably possible change
in a key assumption underlying fair value less
costs to sell or VIU would cause an impairment
to arise, disclosure is required of the following : |
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the amount of headroom |
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the value of the assumption |
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the amount of change in
the assumption which would result in an impairment
loss |
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