Impairments (IAS 36)

Identify possible impairment indicators (external vs. internal)
Perform impairment review (if identified possible impairments)
Record the impairment

1 Indicators of Impairment

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External sources

A significant decline in the asset’s market value more than expected by normal use or passage of time
A significant adverse change in the technological, economic or legal environment

Internal sources

Obsolescence or physical damage
Significant changes, in the period or expected, in the way the asset is being used e.g. asset becoming idle, plans for early disposal or discontinuing/ restructuring the operation where the asset is used
Evidence that asset’s economic performance will be worse than expected
Operating losses or net cash outflows for the asset
Loss of key employee

2 Impairment review

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If the carrying value of the asset is greater than its recoverable amount, it is impaired and should be written down to its recoverable amount.

Recoverable amount - the greater of fair value less cost to sell and value in use.
Fair value less costs to sell - the amount receivable from the sale of the asset less the costs of disposal.
Value in use - the present value of the future cash flows from the asset.

Impairment

A machine was acquired on 1 January 20X5 at a cost of $50,000 and has a useful economic life of ten years.

At 31 December 20X9 an impairment review was performed. The fair value of the machine is $26,000 and the selling costs are $2,000.

The expected future cash flows are $5,000 per annum for the next five years. The current cost of capital is 10%. An annuity factor for this rate over this period is 3.791

Prepare extract from the financial statement for the year-ended 31 December 20X9.

SFP (extract)		SPLOCI(extract)
	$		$
Non-current assets
PPE (W)	24,000	Depreciation (W)	5,000

		Impairment (W)	1,000

Workings

Carrying value @ 31 December 20X9	=	$50,000	−	($5,000 x 5 years)
	=	$25,000

Fair value less costs to sell

($26,000 - $2,000)

$24,000

Value in use	=	$5,000	x	3,791
	=	$18,995

Recoverable amount (higher)	=	$24,000

Impairment	=	$25,000	−	$24,000
	=	$1,000

3 Record the impairment

Individual asset

The reduction in carrying value is taken through profit or loss unless related to a revalued asset, in which case it is taken to any revaluation surplus first.

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Individual asset impairment

A building was bought on 1 January 20X1 at a cost of $1,000,000 and has a useful life of 20 years.

The company uses the revaluation model for its land and buildings, and on the 31 December 20X5 the fair value of the building was $1,125,000. The company opts to transfer any excess depreciation on the revalued amount to retained earnings.

On the 31 December 20X7 a fall in the market value of property led to an impairment review on the building, which revealed the value of the building to be $600,000.

Explain how the impairment of the building should be dealt with in the financial statements for the year ended 31 December 20X7.

The carrying value of $975,000 at 31 December 20X7 is impaired by $375,000 and $600,000 is recorded in the statement of financial position.

Of the $375,000 impairment, $325,000 is charged against the revaluation surplus as the asset was previously revalued, and the remaining $50,000 is charged through profit or loss.

	*Historic cost* $	*Revaluation model* $	*Revaluation surplus* $
Cost (1.1.X1)	1,000,000
Acc. Depn =1,000,000/20 years x 5 years (X1 to X5)	(250,000)
CV (31.12.X5)	750,000	1,125,000	375,000
Acc. Depn	(100,000)	(150,000)	(50,000)
CV (31.12.X7)	650,000	975,000	325,000
	(50,000)	(375,000)	(325,000)
CV (31.12.X7)		600,000	Nil

Cash generating unit (CGU)

The impairment loss is allocated as follows:

Specific assets
Goodwill
Remaining assets (pro-rata)

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CGU impairment

Peter owned 100% of the equity share capital of Sharon, a wholly-owned subsidiary.
The assets at the reporting date of Sharon were as follows:

	$’000
Goodwill	2,400
Buildings	6,000
Plant and equipment	5,200
Other intangibles	2,000
Receivables and cash	1,400
	17,000

On the reporting date a fire within one of Sharon’s buildings led to an impairment review being carried out.

The recoverable amount of the business was determined to be $9.8 million. The fire destroyed some plant and equipment with a carrying value of $1.2 million and there was no option but to scrap it.

The other intangibles consist of a licence to operate Sharon’s plant and equipment. Following the scrapping of some of the plant and equipment a competitor offered to purchase the patent for $1.5 million.

The receivable and cash are both stated at their realisable value and do not require impairment.

Show how the impairment loss in Sharon is allocated amongst the assets.

The plant and equipment is reduced in value to $4 million ($5.2 million - $1.2 million) as it has been specifically impaired following the destruction by fire of some of the equipment.

The goodwill is then fully impaired and written down to a nil carrying value.

The patent it reduced in value to $1.5 million

The remaining impairment is then $3.1 million ($17 million - $9.8 million (recoverable amount of CGU) - $1.2 million (plant & equipment) - $2.4 million (goodwill) - $0.5 million (patent)), which is spread pro-rate over the remaining assets. As the receivables and cash are held at their realisable values they will not be impaired and so the remaining impairment is fully allocated to the buildings.

Note: Within a group of companies where there are several subsidiaries, the individual CGUs (subsidiaries) are tested for impairment first, before the overall value of the business is tested.

Exam preparation question – Non-current assets

Extracts from the trial balance of Shea Co at 31 December 20X8 are as follows:

	$000	$000
Retained earnings as at 31 December 20X7 (draft)		7,350
Office building at cost	25,000
Factories at cost	50,000
Office building accumulated depreciation 1 January 20X8		7,500
Factories accumulated depreciation 1 January 20X8		15,400
Suspense account		2,500

Shea Co acquired an office building for $25m on 1 January 20X2 with an estimated useful life of 20 years. On 1 July 20X8, the building was deemed impaired as its value in use was estimated to be $14m. At that date, the estimated useful life was revised to 10 years.

Shea Co sold one of its twenty factories on 1 January 20X8 for $2.5m. The factory had originally cost $4m and accumulated depreciation $2m. The proceeds were credited to the suspense account.

No depreciation has yet been charged on any non-current assets for the year ended 31 December 20X8. Depreciation is charged on a pro-rata basis and the factories are depreciated at 10% per annum using the reducing balance method.

Ignore any deferred tax consequences.

Required
Prepare extracts from the statement of financial position as at 31 December 20X8.
Prepare a schedule of adjustment that must be made to Shea’s draft retained earnings as a result of any adjustments related to the non-current assets.

Exam preparation solution – Non-current assets

(a) Statement of financial position as at 31 December 20X8

	$’000
Non-current assets
Property, plant and equipment 13,300 + 29,340 (W)	42,640

Equity
Retained earnings (b)	390

(b) Adjustments to retained earnings

	$’000
Draft retained earnings	7,350
Profit on disposal (=$2,500,000 – ($4,000,000 - $2,000,000))	500
Depreciation – factories	(3,260)
Depreciation – office building	(625)
Impairment	(2,875)
Depreciation – office building	(700)
	390

Workings

Office building

	$’000
Cost	25,000
Accumulated depreciation	(7,500)
Depreciation 25,000/20 x 6/12	(625)
Carrying value	16,875
Impairment	(2,875)
Value in use/fair value	14,000
Depreciation (14,000/10 x 6/12)	(700)
Carrying value	13,300

Factories

	$’000
Cost	50,000
Accumulated depreciation at 1 January 20X8	(15,400)
Disposal	(2,000)
Carrying value at 1 January 20X8	32,600
Depreciation (32,600 x 10%)	(3,260)
Carrying value at 31 December 20X8	29,340

Answer the questions one at a time. Your progress is saved so you can leave and come back.

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