1. F7:Financial Reporting (FR)
周冬华

2. Topic list 2

3. Study guide 3

4. Framework 4

5. Fast forward
Impairment is determined by comparing the carrying amount of the asset with its recoverable amount.
This is the higher of its fair value less costs to sell and its value in use. 5

6. Scope
Key terms
Impairment: a fall in the value of an asset, so that its 'recoverable amount' is now less than its carrying value in the balance sheet.
Carrying amount: is the net value at which the asset is included in the balance sheet (ie after deducting accumulated depreciation and any impairment losses). 6

7. Impairment of individual assets
An asset is impaired if its recoverable amount is below the value currently shown on the statement of financial position – the asset’s current carrying value (CV).
Recoverable amount is taken as the higher of:
fair value less costs to sell (net selling price), and
value in use. 7

8. An impairment exists if:8

9. The recoverable amount
The recoverable amount of an asset should be measured as the higher value of:
(a) the asset's fair value less costs to sell;
(b) its value in use. 9

10. Measurement of recoverable amount
Measurement of fair value less costs to sell
Measurement may be by way of:
a binding sale agreement
the current market price less costs of disposal (where an active market exists).
In the absence of either of these indicators, the best information available must be relied upon.
Measurement of value in use
Value in use is determined by estimating future cash inflows and outflows to be derived from the use of the asset and its ultimate disposal, and applying a suitable discount rate to these cash flows.
Cash flows relating to financing activities or income taxes should not be included. 10

11. Example：Recoverable amount
A company owns a car that was involved in an accident at the year end. It is barely useable, so the value in use is estimated at $1,000. However, the car is a classic and there is a demand for the parts. This results in a net realisable value of $3,000. The opening carrying value was $8,000 and the car was estimated to have a life of eight years from the start of the year.
Identify the recoverable amount and the impairment of the car. 11

12. Solution Recoverable amount is higher of:
fair value less costs to sell = $3,000
value in use $1,000
Therefore $3,000.
This indicates an impairment as follows: 12

13. Test your understanding 1
The following information relates to three assets:
What is the recoverable amount of each asset?
Calculate the impairment loss for each of the three assets. 13

14. The recoverable amounts for each asset are as follows: A: $120,000
Solution
The recoverable amounts for each asset are as follows:
A: $120,000
B: $130,000
C: $100,000
The impairment loss for each asset is as follows:
A:  Nil
B: $20,000
C: $20,000 14

15. Indications of impairment
IAS 36 requires that at each reporting date, an entity must assess whether there are indications of impairment.
Indications may be derived from within the entity itself (internal sources) or the external market (external sources).
External sources of information
The asset’s market value has declined more than expected.
Changes in the technological, market, economic or legal environment have had an adverse effect on the entity.
Interest rates have changed, thus increasing the discount rate used in calculating the asset’s value in use. 15

16. Indications of impairment
Internal sources of information
There is evidence of obsolescence of or damage to the asset.
Changes in the way the asset is used have occurred or are imminent.
Evidence is available from internal reporting indicating that the economic performance of an asset is, or will be, worse than expected. 16

17. Recognition and measurement of an impairment
Where there is an indication of impairment, an impairment review should be carried out:
the recoverable amount should be calculated
the asset should be written down to recoverable amount
the impairment loss should be immediately recognised in the income statement.
The only exception to this is if the impairment reverses a previous gain taken to the revaluation reserve.
In this case, the impairment will be taken first to the revaluation surplus (and so disclosed as other comprehensive income) until the revaluation gain is reversed and then to the income statement. 17

18. Test your understanding 2
An entity owns a property which was originally purchased for $300,000. The property has been revalued to $500,000 with the revaluation of $200,000 being recognised as other comprehensive income and recorded in the revaluation reserve. The property has a current carrying value of $460,000 but the recoverable amount of the property has just been estimated at only $200,000.
What is the amount of impairment and how should this be treated in the financial statements? 18

19. Solution Impairment = $460,000 – 200,000 = $260,000
Of this $200,000 is debited to the revaluation reserve to reverse the previous upwards revaluation (and recorded as other comprehensive income) and the remaining $60,000 is charged to the income statement. 19

20. Cash generating units (CGUs)
What is a CGU?
When assessing the impairment of assets it will not always be possible to base the impairment review on individual assets.
The value in use calculation will be impossible on a single asset because the asset does not generate distinguishable cash flows.
In this case, the impairment calculation should be based on a CGU.
Definition of a CGU
A CGU is defined as the smallest identifiable group of assets which generates cash inflows independent of those of other assets. 20

21. The impairment calculation
The impairment calculation is done by:
assuming the cash generating unit is one asset
comparing the carrying value of the CGU to the recoverable amount of the CGU.
As previously, an impairment exists where the carrying value exceeds the recoverable amount. 21

22. (1)any obviously impaired asset
Impairment of a CGU
If a CGU is impaired the assets must be written down in a strict order:
(1)any obviously impaired asset
(2)goodwill allocated to the CGU (both recognised goodwill and , where the proportion of net assets method is used to value the NCI, notional goodwill attributed to the NCI)
(3)other assets (pro rata according to carrying value).
Note: No individual asset should be written down below recoverable amount. P107 22

23. Test your understanding 3
A company runs a unit that suffers a massive drop in income due to the failure of its technology on 1 January 20X8. The following carrying values were recorded in the books immediately prior to the impairment:
The recoverable value of the unit is estimated at $85 million. The technology is worthless, following its complete failure. The other net assets include inventory, receivables and payables. It is considered that the book value of other net assets is a reasonable representation of its net realisable value.
Show the impact of the impairment on 1 January. 23

24. Solution Carrying value is $155 million.
Recoverable value is $85 million.
Therefore an impairment of $70 million is required. 24

25. Corporate assets
Text book : P106 25

26. Reversal of an impairment loss
The reversal of the impairment loss should be recognized immediately as income in profit or loss
The carrying amount of the asset should be increased to its new recoverable amount
An exception to this rule is for goodwill. An impairment loss for goodwill should not be reversed in a subsequent period. 26

27. NOW try the questions below from the exam bank on page 374.
Exam focus point
An exam question may ask you to calculate and allocate an impairment loss. Make sure you know the order in which to allocate the loss.
NOW try the questions below from the exam bank on page 374. 27

28. Chapter summary 28