1. IPSAS 21-26 IMPAIRMENT Mourad KHENISSI Senior inspector Internal Auditor / Deconcentrated Audit Unit Ministry of Budget, Public Account and Civil Service

2. IMPAIRMENT OF CASH GENERATING AND NON- GENERATING ASSETS

3. INTRODUCTION

4. The objective of financial statement : fair value of net worth The implementation of IPSAS in french government accounting Article 27 of the Constitutional bylaw : Reference to the provisions applying to business The notion of asset used in business accounting, does not adequately account for the central government’s circumstances. Production of services expected from the use of the government main asset

5. Objective OF IPSAS 21 and 26 The IPSAS 26 is mainly based on IAS 36, “Impairment of Assets ” applicable to the business company. The IPSAS 21 is more specific to the governement accounting and applicable only to non generating assets

6. Objective OF IPSAS 21 and 26 To ensure that the assets of an entity are carried at no more than their recoverable amount The standard specifies: How to detect and recognise an impairment loss When and how an entity should reverse an impairment loss

7. SCOPE A wide rang of assets, some specific Assets with a Determinable Useful Life :depreciation shall be recognised Assets with No Determinable Useful Life :The annual measurement of use of the service potential is recognised as an expense Some generate cash flow and other only services airport facilities, waterways, canals, lakes, road, hospital

8. SCOPE All assets other than: Inventories (IPSAS 12, "Inventories"); (IAS 2) Assets arising from construction contracts (IPSAS 11, IAS 11) Deferred tax assets (IAS 12) Assets arising from employee benefits (IPSAS 25, “Employee Benefits”IAS 19) Some financial assets (described in IPSAS 15, IAS 39) Investment properties measured at fair value (IPSAS 16, IAS 40) Some biological assets (see IAS 41) Non-cash-generating property, plant and equipment that is measured at revalued amounts (see IPSAS 17, "Property, Plant and Equipment");

9. SCOPE To all public sector entities other than : Government Business Enterprises (GBEs) financial assets in Controlled entities, Associates, Joint ventures

10. DEFINITION Carrying amount Cash-generating assets Non-cash-generating assets the application of the standard 26 or 21 depends of the importance of commercial activity Example a public hospital An impairment loss : decline in the utility of an asset to the entity that controls it The recoverable amount Recoverable service amount Value in use of a cash-generating asset Value in use of a non-cash-generating asset

11. DEFINITION Fair value less costs to sell Depreciation (Amortization)

12. IDENTIFYING AN ASSET THAT MAY BE IMPAIRED At each balance sheet date, all assets of the entity have to be reviewed, to look for any indication that an asset may be impaired If it is the case, assets will be tested for impairment The following assets are always tested: intangible asset with an indefinite useful life intangible asset not yet available for use goodwill acquired in a business combination

13. IDENTIFYING AN ASSET THAT MAY BE IMPAIRED INDICATION THAT AN ASSET MAY BE IMPAIRED Internal sources of informations : Changes in the extent to which, or manner in which, an asset is used Evidence of obsolescence physical damage of an asset A decision to halt the construction Service performance of an asset is, or will be, significantly worse than expected. Plans to discontinue or restructure the operation to which an asset belongs These indications are not exhaustive

14. MEASURING RECOVERABLE AMOUNT AND RECOVERABLE SERVICE AMOUNT The Standards defines recoverable service amount and Recoverable Amount as the higher of an asset’s fair value less costs to sell and its value in use. It is not always necessary to determine both fair value less costs to sell and its value in use. The standars gives indications to determine fair value less costs to sell, even if an asset is not traded in an active market. In some cases it will not be possible to determine fair value.

15. MEASURING RECOVERABLE AMOUNT AND RECOVERABLE SERVICE AMOUNT FAIR VALUE LESS COSTS TO SELL Internal sources of informations : Is a price in a binding sale agreement The asset’s market price Based on the best information available COSTS OF DISPOSAL

16. MEASURING RECOVERABLE AMOUNT AND RECOVERABLE SERVICE AMOUNT VALUE IN USE Differs as the asset generates or not cash : the structure will expect from the use an economic benefit or a service The value in use of a non-cash-generating asset as the present value of the asset’s remaining service potential.

17. MEASURING RECOVERABLE AMOUNT AND RECOVERABLE SERVICE AMOUNT VALUE IN USE NON GENERATING ASSETS : DEPRECIATED REPLACEMENT COST APPROACH These assets shall be valued at their depreciated replacement cost, which means a valuation based on an estimate of the cost of replacing them with a similar asset offering the same service potential. The replacement cost of an asset is the cost to replace the asset’s gross service potential. This cost is depreciated to reflect the asset in its used condition.

18. MEASURING RECOVERABLE AMOUNT AND RECOVERABLE SERVICE AMOUNT VALUE IN USE NON GENERATING ASSETS : DEPRECIATED REPLACEMENT COST APPROACH Example :Significant Long-term Change with Adverse Effect on the Entity in the Technological Environment : Underutilized mainframe computer. In 2001, the French treasury purchased a new mainframe computer at a cost of 10 000. The entity estimated that the useful life of the computer would be five years and that on average 80 percent of central processing unit (CPU) capacity would be used by the various departments. The mainframe usage declined to 20 percent in 2003 because many applications of the departments were converted to run on desktop computers or servers. A computer is available on the market at a price of 1 000 that can provide the remaining service potential of the mainframe computer using the remaining applications.

19. MEASURING RECOVERABLE AMOUNT AND RECOVERABLE SERVICE AMOUNT VALUE IN USE NON GENERATING ASSETS : DEPRECIATED REPLACEMENT COST APPROACH Example : Evaluation of Impairment The indication of impairment is the significant long-term change in the technological environment resulting in conversion of applications from the mainframe to other platforms and therefore decreased usage of the mainframe computer.

20. MEASURING RECOVERABLE AMOUNT AND RECOVERABLE SERVICE AMOUNT VALUE IN USE NON GENERATING ASSETS : DEPRECIATED REPLACEMENT COST APPROACH Example : Evaluation of Impairment Acquisition cost, 2001 10 000 Accumulated depreciation, 2003 (a × 3 ÷ 5 ) 6 000 b) Carrying amount, 2003 4 000 c) Replacement cost 1 000 Accumulated depreciation(c × 3 ÷ 5) 600 d) Recoverable Service Amount 400 Impairment loss (b – d) 3600