Impairments (IAS 36)

YouTube video

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

1 Indicators of Impairment

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

2.1 An impairment review is required:

If there is an impairment indicator (above)
Every year if there is goodwill in the SFP
Every year if there is an intangible asset in the SFP which is not being amortised because its life is indefinite.

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.

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.

Cash generating unit (CGU)

The business should divide its assets up into individual cash generating units (CGUs). These are segments of the business that generate income independently from other segments. For example, if a tuition company offers accountancy and nursing training, then accountancy and nursing would be viewed as separate CGUs.

Once the impairment loss has been calculated the assets must be written down in the following order:

Specific assets (e.g. if physically impaired)
Goodwill
Remaining non-current assets (pro-rata)

Compare like with like. Assets outside the unit’s recoverable amount — typically current assets — are excluded from the carrying amount of the CGU and receive none of the loss; show that in the calculation, not only in the narrative. Where the scenario states an indicator exists, do not spend time listing indicators.

Reversal of impairment losses

If the circumstances that triggered an impairment loss (e.g. a global pandemic) cease to apply (e.g. on discovery of a vaccine), then the impairment loss can be reversed EXCEPT in respect of any goodwill that has been written down.

Example 1 – 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 remaining plant was worth at least its carrying value.

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.

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.

Example Answer 1 – CGU impairment

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.