Impairment of Non-Current Assets

and Goodwill

IAS 36
IAS36 Overview

 Objective and scope

 Identifying an asset that might be impaired
 Recognizing and measuring an impairment loss
for an individual asset
 Recognizing and measuring an impairment loss
for cash-generating units and goodwill
 Reversing an impairment loss
 Disclosure
Background

General expectation that future economic benefits from

holding assets mean that these benefits are greater than or
equal to the carrying value of the asset
(see for example Inventories where they are valued at the
lower of cost or net realisable values)

Assets on a balance sheet represent unexpired costs and

there is the expectation that future income will exceed
these.
IAS 36 Objective & Scope

 IAS 36 ensures that assets are reported on the

statement of financial position at no more than the
entity can recover from their use or sale. 
 May be an impairment loss—“the amount by which

the carrying amount of an asset or a cash-generating

unit (CGU) exceeds its recoverable amount”
 CGU-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.
IAS 36 Objective & Scope
Definitions

 Impairment loss = amount by which the carrying amount of an

asset exceeds its’ recoverable amount.
 Carrying amount = amount at which asset is recognised after
deduction of depreciation (amortisation) and any other losses
 Recoverable amount = Higher of net realisable value and value
in use
 Value in use = present value of future cash flows
 Cash generating unit = smallest identifiable group of assets that
generate cash inflows independent of cash flows from other
assets or group of assets
 Corporate assets = assets other than goodwill contributing to the
future cash flows of the cash generating unit under review and
the other cash generating units
Measurement of recoverable amount

The higher of

Fair value Value in

less costs to
use
sell
Determination of recoverable amount

 Assessment required at balance sheet date whether

there is any indication that an asset may be impaired

 If there is, the recoverable amount must be estimated

 Intangible assets with indefinite useful lives must be

tested annually

 Acquired goodwill must be tested annually

Indications of asset impairment
The Review

Comparison of carrying value (CV) with recoverable

Amount (RA)

If RA greater than CV then no loss in value has occurred

If CV greater than RA then asset is overvalued and excess

is written off to the income statement
Calculation of Recoverable Amount

Net realisable value;

Selling price less direct selling costs (e.g. legal costs,
stamp duty)

Value in use:
Present value of future cash flows obtainable as a result
of the asset’s continued use. Includes amounts resulting
from its ultimate disposal (could be positive or negative)
Recognition and measurement of impairment losses

If the recoverable amount of an asset is less than its carrying value,

the asset should be reduced to its recoverable amount

The loss should be recognised immediately as an expense in the

income statement

The depreciation charge will be adjusted to reflect the lower

depreciable amount
Cash generating units (formerly Income generating units)

 Where it is not possible to estimate the recoverable

amount of an individual asset, then the entity should
estimate the recoverable amount of the cash generating
unit to which the asset belongs

 An asset’s cash generating unit is the smallest group of

assets that includes the particular asset and generates
cash flows largely independent from other assets or
groups of assets

 An active market should exist for the output of a unit,

even if partly used internally
CGU

 Problem –CGU
 Judgement-

- misclassification of assets
-errors in estimating future cash
flows/consistency(period to period)
 Lack of active market esp for assets used

internally
Examples

 A chain of restaurants

 Multi-site production of a single product

 Multi-stage production processes

 As above but with intermediate markets

 Transport networks
Goodwill and impairment losses

 Goodwill should be allocated to each of the acquirer’s

cash generating units that will benefit from the
synergies of the business combination creating that
goodwill
 Where an impairment loss is recognised, it is allocated
as follows:
1. First to the goodwill
2. Then to other assets of the units on a pro rata basis
(based on carrying value)
3. In allocating this amount, an asset should not be
reduced below its net realisable value or value in use
(if determinable)
Example

A cash generating unit has the following assets

Goodwill 100
Other Assets 500
Total 600

If the recoverable amount is 400, eliminate all goodwill and

the remaining 100 over the other assets i.e. reduce them
all by 20% (100/500)
Example 2 – Where an asset has an ascertainable NRV

Goodwill 100
Machine 200
Other assets 300
Total 600

Recoverable amount of unit is 400, but machine has a net

Realisable value of 200.

Impair goodwill by 100 and other assets by one third.

(i.e. 100/300)
Reversal of impairment losses (1)

 Impairment is normally caused by a non-standard

occurrence
 Where there is an indication that previous impairment
losses may have decreased, then impairment loss must
be reversed
 Increases in value above carrying amount for an
impaired asset due to the passage of time (rather than
increases in service potential) are ignored.
 The increase is limited to the carrying value of the asset
if it had not been impaired.
Reversal of impairment losses (2)

 If historic cost is used as a basis of valuation, the

reversal is treated as income in the income statement.
 If revaluation is used then it is treated as a revaluation
increase.
 In the case of a cash generating unit, then the carrying
amount of the assets (excluding goodwill) should be
increased pro-rata except that the carrying amount of
an asset should not be increased above the lower of:
1. The recoverable amount (if determinable)
2. The carrying amount (net of amortisation or
depreciation) had no impairment loss been recognised
in prior years.
Goodwill

 Impairment cannot be reversed on goodwill

due to the problem of distinguishing
purchased from internally generated goodwill.
Where goodwill is calculated in a subsidiary

 The gross goodwill on acquisition is calculated i.e. not

just the goodwill attributed to the parent company but
also to the minority interest.

 The impairment of the goodwill is effectively charged

against both the parent and the minority interest in
proportion to their percentages held.

 This is because it is deducted from group profit and

group assets which are then adjusted by minority
interests
parent company.