IMPAIRMENT OF ASSETS

DEFINITIONS

NOT SAME

IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004, and for all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004.

IAS 36 Impairment of Assets (the standard) sets out the requirements to account for and report impairment of most non-financial assets. IAS 36 specifies when an entity needs to perform an impairment test, how to perform it, the recognition of any impairment losses and the related disclosures. Having said that, the application of IAS 36 is wide and its requirements may be open to interpretation. The recent economic uncertainty has thrown a spotlight on impairment. As such, many entities have decided to reassess their impairment testing processes, models and assumptions.

IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely independent of those from other assets.

IAS 36 deals with impairment testing for all tangible and intangible assets, except for assets that are covered by other IFRS. IAS 36 requires that assets be carried at no more than their recoverable amount. To meet this objective, the standard requires entities to test all assets that are within its scope forpotential impairment when indicators of impairment exist or, at least, annually for goodwill and intangible assets with indefinite useful lives. Impairment principle and key requirements

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses Key Definitions

Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use. 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 Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit

If we should not determine the recovarable amaount, then we determine the recoverable amount for the cash-generating unit (CGU) to which that asset belongs. The CGU is the smallest identifiable group of assets: * that generates cash inflows from continuing use, and * that are largely independent of the cash inflows from other assets or groups of assets. Cash Generating Unit

 If you are not able to determine recoverable amount for an individual asset, then you might need to establish cash- generating unit to which this asset belongs.  For example, you might not be able to set the fair value less costs to sell for used 5 years-old pizza oven as the quotes might not be available. At the same time, you might not be able to calculate pizza oven’s value in use because you really cannot estimate future cash inflows from pizza oven – this pizza oven does not generate any cash inflows itself.  Therefore your need to establish cash-generating unit for this pizza oven – it would probably be the whole pizzeria.

The standard requires an entity to assess, at each reporting date, whether there are any indicators that assets may be impaired. An entity is required to consider information from both external sources (such as market interest rates, significant adverse changes in the technological, market, economic or legal environment in which the entity operates, market capitalisation being lower than net assets) and internal sources (such as internal restructurings, evidence of obsolescence or physical damage to the asset). Notwithstanding whether indicators exist, recoverability of goodwill and intangible assets with indefinite useful lives or those not yet in use are required to be tested at least annually. Indicators 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 capitalisation Internal sources:obsolescence or physical damage 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

Value in use (VIU) is the present value of the future cash flows expected to be derived from an asset or a CGU. Value in Use

A VIU calculation includes:

Fair value less costs to sell (FVLCS) is the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties, less the costs of disposal. Fair Value Less Costs to Sell (FVLCS)

Both FVLCS and VIU should reflect risk and uncertainty to the extent that these would be reflected in the price of an arm’s length transaction. Risk may be reflected by adjusting either the cash flows or the discount rate, but not both. Determining an appropriate discount rate that reflects current market assessments and the appropriate risks (the risks not already reflected in the cash flows) will often be difficult and will require consideration and input from financial management, line management and, perhaps, valuation professionals. Input from these parties will also be required to formulate assumptions regarding growth rates used to project cash flows until the end of the asset’s useful life, which will also require significant judgment to formulate. Risk and Uncertainty

 An impairment loss is recognised whenever recoverable amount is below carrying amount.  The impairment loss is recognised as an expense (unless it relates to a revalued asset where the impairment loss is treated as a revaluation decrease).  Adjust depreciation for future periods. Recognition of an Impairment Loss

IAS 36 requires extensive disclosures in respect of the impairment tests performed and impairments recognised. The disclosures are even more extensive for goodwill than for the impairment of other assets. Disclosures

The amounts of impairments recognised and reversed and the events and circumstances that were the cause thereof The amount of goodwill per CGU or group of CGUs The valuation method applied: FVLCS or VIU and its approach in determining the appropriate assumptions The key assumptions applied in the valuation, including the growth and discount rate used A sensitivity analysis, when a reasonably possible change in a key assumption would result in an impairment, including the ‘headroom’ in the impairment calculation and the amount by which the assumption would need to change to result in an impairment. The key disclosure requirements are the following:

 inventories  assets arising from construction contracts  deferred tax assets  assets arising from employee benefits  financial assets  investment property carried at fair value  agricultural assets carried at fair value  insurance contract assets  non-current assets held for sale IAS 36 applies to all assets except;

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