1. Impairment of assets (LKAS 36)
Rangajewa Herath
B.Sc. Accountancy and Financial Management(Sp.)(USJ)
MBA-PIM(USJ)

2. Introduction
Entities are required to conduct impairment tests to ensure their assets are not overstated
An impairment loss results when an asset’s carrying amount (CA) is more than its recoverable amount (RA)
Recovery can be from disposal of the asset OR from future use of the asset (including is ultimate disposal)
Not all assets require this test. Notable exclusions include:
Inventories
Deferred tax assets
Assets held for resale

3. When to undertake an impairment test
For most assets it is not necessary to conduct impairment tests every year
Assets must be tested for impairment when there is an indication (or evidence) of impairment
The following assets must be tested annually for impairment:
Intangibles with indefinite useful lives
Intangibles not yet available for use
Goodwill acquired in a business combination

4. Indicators
Indicators are classified into two groups – internal and external
External sources
Decline in market value – e.g. technological advancements
Adverse changes in entity’s environment/ market – e.g. a competitor may have patented a new product, resulting in a permanent fall in market share of the entity
Increases in interest rates – affects the PV of future cash flows
Market capitalisation

5. Indicators cont...... Internal sources Obsolescence or physical damage
Change in asset use – has the asset become idle?
Economic performance of the asset – worse than expected?
Cash outflows are higher than expected – e.g. maintenance costs
Cash inflows are lower than expected

6. Impairment test for an individual asset
There are two possible amounts against which the carrying amount can be tested for impairment
Fair value less costs of disposal (FV-CD)
Value in use (VIU)
Not always necessary to measure both amounts when testing for impairment
If either one of these two amounts is higher than the carrying amount, the asset is not impaired
When FV-CD > CA there is no need to calculate the VIU of the asset

7. Impairment test for an individual asset – Fair value less costs to sell
An exit price
Measured using a relevant valuation technique
Using observable or unobservable inputs (the ‘value hierarchy’)
Costs of disposal include:
Legal fees
Stamp duty / transaction taxes
Costs of removing the asset
Direct incremental costs to bring the asset to a saleable condition

8. Impairment test for an individual asset – Value in use
“The present value of future cash flows expected to be derived from an asset or cash-generating unit”
Five elements when calculating value in use
Estimate of future cash flows
Expectations about possible variations in amount or timing of future cash flows
Time value of money
Price for bearing uncertainty inherent in asset
Other factors such as illiquidity

9. Impairment test for an individual asset – Recognition and measurement of an impairment loss for an individual asset
An impairment loss is recognised where CA > RA
Where the asset is accounted for under the cost model the impairment loss is recognised immediately in profit or loss.
Where the asset is accounted for under the revaluation model the impairment loss is treated as a revaluation decrease.
Any subsequent depreciation/amortisation is based on the new recoverable amount.

10. Illustration 1
The cost and accumulated deprecation of a plant as at was Rs. 5 million and Rs.1.5 million respectively. The fire value less cost of disposal and value in use of this plant on this date was Rs. 3.2 million and Rs.3.3 respectively.
Required:
Calculate the impairment loss
Prepare the necessary ledger accounts
Provide the extracts of the financial statements

11. Illustration 2
ABC PLC purchased a plant for Rs.8 million on and estimated a useful life of 8 years. The fire value less cost of disposal and value in use of this plant on were Rs. 4.4 million and Rs.4.5 respectively.
Required:
Calculate the impairment loss
Prepare the necessary ledger accounts
Provide the extracts of the financial statements for year 2015/16 and 2016/17.

12. Cash-generating units (CGUs) – excluding goodwill
Our focus has been on individual assets, where both the FV-CD and the VIU could be measured
FV-CD can be determined for most assets.
But many individual assets do not generate cash inflows in their own right; e.g. a machine in a factory works in conjunction with the rest of the assets in the factory
When it is not possible to determine the RA for an individual asset, the entity should
Determine the RA of the Cash Generating Unit (CGU) to which the asset belongs
The impairment test is applied to the CGU, not the individual asset
A CGU is defined as ‘…the smallest identifiable group of assets that generates cash flows that are largely independent of the cash inflows from other assets or groups of assets’

13. CGUs excluding goodwill – Identifying a CGU
Key to identification – what is the smallest group of assets?
Consider:
How does management monitor the entity’s operations?
How does management makes decisions about continuing or disposing of the entity’s assets and operations?
Is there an active market for the output of a group of assets?
If the output is used internally, can it be sold outside the entity?
CGUs must be identified consistently from period to period
LKAS 36 allows a ‘segment’ to be used as a CGU
Where the segment equates to the smallest group of assets generating independent cash flows
Segment determined in accordance with AASB 8 Operating Segments

14. CGUs excluding goodwill – Impairment losses and CGUs
An impairment loss arises when the CA of the CGU assets > RA
Determining the impairment loss
Principles for determining RA are the same for CGUs as for individual assets
Accounting for the impairment loss
The loss is allocated to each asset in the CGU on a pro-rata basis
Based on the CA of each asset / the total CA amount of the CGU assets
Losses are accounted for in the same way as for individual assets discussed earlier
The CA of an individual asset cannot be reduced below the highest of:
FV-CD (if determinable);
VIU (if determinable); or
Zero

15. Illustration 3
A Ltd has identified an impairment loss of Rs.12,000 on one of its CGUs
The CGU consists of the following assets (stated at current carrying amounts):
Buildings ,000
Equipment 300,000
Land 250,000
Fittings 150,000
The FV-CD of the building is Rs.497,000
Required:
Calculate the allocation of impairment loss against all assets in the CGU

16. Cash Generating units and goodwill
The asset goodwill can only arise in a business combination
It cannot be internally generated, revealed or amortised
It is subject to impairment testing
Goodwill is a residual balance, consisting of assets that cannot be individually identified or separately recognised
Therefore it is not possible to determine a FV-CD for goodwill, or to identify cash flows relating specifically to goodwill
When goodwill is recognised in a business combination it must be allocated to one or more CGUs (similar to corporate assets)
LKAS 36 requires that goodwill be allocated to the lowest level at which management monitors the goodwill
Goodwill can only be tested for impairment at the CGU level

17. Illustration 4
A Ltd has identified an impairment loss of $300,000 on one of its CGUs
The CGU consists of the following assets (stated at current carrying amounts):
Buildings ,000
Equipment 300,000
Land 250,000
Goodwill 150,000
Required:
Calculate the allocation of impairment loss against all assets in the CGU.

18. Reversal of an impairment loss
Recognised losses are reassessed annually
Are there indicators the previous loss does not exist or has decreased?
Indicators are the same as those used for initially recognising a loss; e.g.
Improvement in the economy or product markets
Interest rates have decreased
A review of the indicators might result in:
Changes to depreciation parameters (e.g. useful life) instead of a reversal
IF there is a change in the estimates, a reversal of impairment is possible
Ability to recognise a reversal of an impairment loss and the accounting for that reversal is dependent on whether the reversal relates to an individual asset, a CGU, or goodwill

19. Reversal of an impairment loss – Goodwill
LKAS 36
An impairment loss recognised for goodwill is not to be reversed in a later period
Like individual assets, recognised losses in relation to a CGU are reassessed annually
Are there indicators…?
If reassessed estimates indicate RA of a CGU is > CA, impairment reversals are required
Except for goodwill