BALIUAG UNIVERSITY

Integrated Accounting Course II

Summer 2017

MODULE 4: Impairment of Assets LVC

 RELATED STANDARDS: IAS 36 – Impairment of Assets and IFRS 13 – Fair Value Measurement

 Definition of Terms
Carrying amount – The amount at which an asset is recognized after deducting any accumulated depreciation
(amortization) and accumulated impairment losses thereon.
Cash-generating unit – 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 – 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 – Incremental costs directly attributable to the disposal of an asset or cash-generating unit,
excluding finance costs and income tax expense.
Depreciable amount – The cost of an asset, or other amount substituted for cost in the financial statements, less its
residual value.
Depreciation (Amortization) – The systematic allocation of the depreciable amount of an asset over its useful life.
Fair value – 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.
Impairment loss – The amount by which the carrying amount of an asset or a cash-generating unit exceeds its
recoverable amount.
Recoverable amount – The higher of its fair value less costs of disposal and its value in use.
Useful life – It 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 – The present value of the future cash flows expected to be derived from an asset or cash-generating
unit.

 Scope
 IAS 36 applies to all assets except:
 Inventories (IAS 2)
 Assets arising from construction contracts (IFRS 15/IAS 11)
 Deferred tax assets (IAS 12)
 Assets arising from employee benefits ( IAS 19)
 Financial assets (IFRS 9)
 Investment property carried at fair value (IAS 40)
 Agricultural assets carried at fair value (IAS 41)
 Insurance contract assets (IFRS 4)
 Non-current assets held for sale (IFRS 5)
 Therefore, IAS 36 applies to (among other assets):
 PPE
 Investment property carried at cost
 Intangible assets, including goodwill
 Investments in subsidiaries, associates, and joint ventures carried at cost
 Assets carried at revalued amounts under IAS 16 and IAS 38
 Identifying an asset that may be impaired
 At the end of each reporting period, an entity is required to assess whether there is any indication that an
asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount).
 IAS 36 has a list of external and internal indicators of impairment.
 If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calcu-
lated.
 The recoverable amounts of the following types of intangible assets are measured annually whether or
not there is any indication that it may be impaired.
 Indications of impairment
 External sources:
 Market value declines
 Negative changes in technology, markets, economy, or laws
 Increases in market interest rates
 Net assets of the company higher than market capitalization
 Internal sources:
 Obsolescence or physical damage

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 Asset is idle, part of a restructuring or held for disposal

 Worse economic performance than expected
 For investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the
carrying amount of the investee's assets, or a dividend exceeds the total comprehensive income of the
investee
 These lists are not intended to be exhaustive.
 Determining recoverable amount
 If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to
calculate the other amount. The asset is not impaired.
 If fair value less costs of disposal cannot be determined, then recoverable amount is value in use.
 For assets to be disposed of, recoverable amount is fair value less costs of disposal.
 Fair value less costs of disposal
 Fair value is determined in accordance with IFRS 13 Fair Value Measurement
 Costs of disposal are the direct added costs only (not existing costs or overhead).
 Value in use
 The calculation of value in use should reflect the following elements:
 An estimate of the future cash flows the entity expects to derive from the asset
 Expectations about possible variations in the amount or timing of those future cash flows
 The time value of money, represented by the current market risk-free rate of interest
 The price for bearing the uncertainty inherent in the asset
 Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows
the entity expects to derive from the asset
 Cash flow projections should be based on reasonable and supportable assumptions, the most recent
budgets and forecasts, and extrapolation for periods beyond budgeted projections.
 IAS 36 presumes that budgets and forecasts should not go beyond five years; for periods after five
years, extrapolate from the earlier budgets. Management should assess the reasonableness of its as-
sumptions by examining the causes of differences between past cash flow projections and actual cash
flows.
 Cash flow projections should relate to the asset in its current condition – future restructurings to
which the entity is not committed and expenditures to improve or enhance the asset's performance
should not be anticipated.
 Estimates of future cash flows should not include cash inflows or outflows from financing activities, or
income tax receipts or payments.
 Discount rate used in measuring value in use
 The discount rate used should be the pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the asset.
 The discount rate should not reflect risks for which future cash flows have been adjusted and should
equal the rate of return that investors would require if they were to choose an investment that would
generate cash flows equivalent to those expected from the asset.
 For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity
would pay in a current market transaction to borrow money to buy that specific asset or portfolio.
 If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the
time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow
risk.
 The following would normally be considered:
a. Entity's own weighted average cost of capital
b. Entity's incremental borrowing rate
c. Other market borrowing rates.
 Recognition of an impairment loss
 An impairment loss is recognized whenever recoverable amount is below carrying amount.
 The impairment loss is recognized as an expense (unless it relates to a revalued asset where the impair-
ment loss is treated as a revaluation decrease).
 Adjust depreciation for future periods.
 Cash-generating units
 Recoverable amount should be determined for the individual asset, if possible.
 If it is not possible to determine the recoverable amount (fair value less costs of disposal and value in use)
for the individual asset, then determine recoverable amount for the asset's cash-generating unit (CGU).
 The CGU is the smallest identifiable group of assets that generates cash inflows that are largely indepen-
dent of the cash inflows from other assets or groups of assets.

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 Impairment of goodwill
 Goodwill should be tested for impairment annually.
 To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or
groups of CGU, that are expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
 A CGU to which goodwill has been allocated shall be tested for impairment at least annually by comparing
the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit:
 The impairment loss for CGU is allocated to reduce the carrying amount of the assets of the unit (group of
units) in the following order:
 First, reduce the carrying amount of any goodwill allocated to the CGU
 Then, reduce the carrying amounts of the other assets of the CGU pro rata on the basis
 The carrying amount of an asset in the CGU should not be reduced below the highest of:
 its fair value less costs of disposal
 its value in use
 zero
 If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other
assets of the unit CGU.
 Reversal of an impairment loss
 Same approach as for the identification of impaired assets: assess at each balance sheet date whether
there is an indication that an impairment loss may have decreased. If so, calculate recoverable amount.
 No reversal for unwinding of discount.
 The increased carrying amount due to reversal should not be more than what the depreciated historical
cost would have been if the impairment had not been recognized.
 Reversal of an impairment loss is recognized in the profit or loss unless it relates to a revalued asset.
 Adjust depreciation for future periods.
 Reversal of an impairment loss for goodwill is prohibited.
 Disclosure
 Disclosure by class of assets:
 Impairment losses recognized in profit or loss
 Impairment losses reversed in profit or loss
 Which line item(s) of the statement of comprehensive income
 Impairment losses on revalued assets recognized in other comprehensive income
 Impairment losses on revalued assets reversed in other comprehensive income
 Disclosure by reportable segment:
 impairment losses recognized
 impairment losses reversed
 If an individual impairment loss (reversal) is material disclose:
 events and circumstances resulting in the impairment loss
 amount of the loss or reversal
 individual asset: nature and segment to which it relates
 cash generating unit: description, amount of impairment loss (reversal) by class of assets and segment
 if recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy
(from IFRS 13 Fair Value Measurement) within which the fair value measurement is categorized, the
valuation techniques used to measure fair value less costs of disposal and the key assumptions used in
the measurement of fair value measurements categorized within 'Level 2' and 'Level 3' of the fair
value hierarchy
 if recoverable amount has been determined on the basis of value in use, or on the basis of fair value less
costs of disposal using a present value technique, disclose the discount rate
 If impairment losses recognized (reversed) are material in aggregate to the financial statements as a
whole, disclose:
 main classes of assets affected
 main events and circumstances
 Disclose detailed information about the estimates used to measure recoverable amounts of cash generat-
ing units containing goodwill or intangible assets with indefinite useful lives.
 Difference between Full IFRS and IFRS for SMEs
Full IFRS IFRS for SMEs
An impairment loss must be recognized immediately in It does not permit the application of
profit or loss, unless the asset is carried at revalued revaluation models and therefore all
amount. Any impairment loss of a revalued asset must impairment losses are immediately
be treated as a revaluation decrease. recognized in profit or loss.
Illustrative Problems
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1. Defined by IAS 36 as 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.
A. Corporate assets C. Corporate cash units
B. Cash generating units D. Cash assets
2. Defined by IAS 36 the cost of an asset, or other amount substituted for cost in the financial statements,
less its residual value.
A. Value in use C. Depreciable amount
B. Carrying amount D. Recoverable amount
3. Defined by IAS 36 as the amount by which the carrying amount of an asset or a cash-generating unit
exceeds its recoverable amount.
A. Impairment loss C. Depreciation
B. Revaluation loss D. Amortization
4. Defined by IAS 36 as the present value of the future cash flows expected to be derived from an asset or
cash-generating unit.
A. Value in use C. Discounted value
B. Residual value D. Expected value
5. Impairment will most likely apply to which of the following assets?
A. Investment property at fair value C. Investment in subsidiary carried at cost
B. Financial assets D. Noncurrent assets held for sale
6. Recoverable amount is the
A. Fair valueless cost of disposal C. Lower amount between A and B
B. Value in use D. Higher amount between A and B
7. Regardless of any indication of impairment, an entity shall test for impairment goodwill, an intangible
asset with an indefinite useful life or an intangible asset not yet available for use at least
A. Every five years. C. Every three years.
B. Every three to five years. D. Annually.
8. Which statement is incorrect regarding value in use?
A. Estimates of future cash flows should not include cash inflows or outflows from financing activities, or
income tax receipts or payments.
B. Accounting standard for impairment presumes that budgets and forecasts use for cash flow
projections should not go beyond five years.
C. The discount rate used should be the rate after tax which reflects the current market assessments of
the time value of money and the risks specific of the asset.
D. If a market-determined asset-specific rate is not available, the entity’s own weighted average cost of
capital may be used.
9. Disclosure requirements of IAS 36 by class of assets include
A. Impairment losses recognized/reversed in profit or loss
B. Impairment losses on revalued assets recognized/reversed in other comprehensive income
C. Both A and B
D. Neither A nor B
10. According to IAS 36, if an individual impairment loss (reversal) is material the following shall be disclose,
except
A. Events and circumstances resulting in the impairment loss
B. Individual asset: nature and segment to which it relates
C. Amount of the loss or reversal
D. None of the foregoing
11. External sources of impairment does not include
A. Market value declines C. Increases in market interest rates
B. Obsolescence or physical damage D. None of the above
12. An asset was impaired in the current period. Prior to impairment, the asset has a corresponding
revaluation surplus. The impairment loss to be recognized shall be
A. Debited to revaluation surplus.
B. Recognized in the profit and loss in its entirety.
C. Charged first to against revaluation surplus and the remainder to expense.
D. Impairment loss shall not be recognized.
13. Reversal of impairment is
A. Not allowed for all assets. C. Allowed for all assets.
B. Not allowed for goodwill. D. Not allowed for all intangible assets.
14. On December 31, Year 1, Agnas Company has an equipment with the following cost and accumulated
depreciation:
Equipment 9,000,000
Accumulate depreciation 3,000,000

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Due to obsolescence and physical damage the equipment is found to be impaired. On December 31, Year
1, Agnas has determined the following related to the equipment:
Fair value less cost to sell 4,500,000
Value in use or discounted net cash inflows 4,000,000
What amount should be reported as impairment loss for Year 1?
A. 1,500,000 C. 500,000
B. 2,000,000 D. -0-
15. Durog-Durog Company has an equipment that was acquired on January 01, Year 1. The cost of the
equipment is P550,000 with P30,000 residual value and 5 years useful life. On January 01, Year 3, the
company decided to test the equipment for impairment. Value in use is P340,000. Fair value of the
equipment is P375,000 and disposal cost is P29,000. What amount should be reported as impairment loss
for Year 3?
A. 2,000 C. 5,000
B. 4,000 D. -0-
16. Luray-Luray Company purchased four convenience store building on January 1, Year 1 for a total of
P25,000,000. The buildings have been depreciated using the straight-line method with a 20-year useful life
and 10% residual value. On January 1, Year 7, Luray-Luray estimates that the building have a remaining
useful life of 10 years, that their residual value will be zero, that net cash inflow from the building will total
P1,5000,000 per year, and that the current fair value less cost of disposal of the building is P10,000,000.
The appropriate discount rate is 12%. The present value of an ordinary annuity of 1 at 12% for 10 periods
is 5.65.
What impairment loss should be recognized for Year 7?
A. 8,250,000 C. 7,500,000
B. 9,775,000 D. -0-
17. Refer to preceding problem. What is the depreciation of the building for Year 7?
A. 1,000,000 B. 900,000 C. 847,500 D. 762,750
18. Panis Company has determined that its electronics division is a cash generating unit. The entity calculated
the value in use of the division to be P8,000,000. The assets of the cash generating unit at carrying amount
are as follows:
Building 5,000,000
Equipment 3,000,000
Patent 2,000,000
10,000,000
Panis Company has also determined that the fair value less cost to sell of the building is P4,500,000 while
the value in use is P4,200,000. What is the impairment loss to be allocated to the equipment?
A. 1,000,000 B. 900.000 C. 600,000 D. 400,000
19. On January 1, Year 1, Tuklap Company acquired all the assets and liabilities of another entity. The acquiree
has a number of operating divisions, including one whose major industry is the manufacture of toy train.
The toy train division is regarded as a cash generating unit. In paying P20,000,000 for the net assets of the
acquiree, Tuklap calculated that it had acquired goodwill of P2,400,000. The goodwill was allocated to
each of the divisions, and the assets and liabilities acquired are measured at fair value at acquisition date.
On December 31, Year 1, the carrying amount of the assets of the toy train division were:
Building 2,000,000
Machinery 1,500,000
Trademark 1,000,000
Goodwill 500,000
There is a declining interest in toy train because of the aggressive marketing of computer-based toys.
Management of Tuklap Company measured the value in use of the toy train division on December 31, Year
1 at P3,600,000. Fair value less cost to sell of the toy division is P3,500,000.
What is the impairment loss to be allocated to the building?
A. 400,000 B. 500,000 C. 900,000 D. 300,000

- End of discussion

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