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© 2011 IFRS Foundation 1 The IFRS for SMEs Topic 2.3 Section 13 Inventories Section 16 Investment Property Sec 17 Property, Plant & Equipment Section 18 Intangible Assets Section 27 Impairment of Assets
© 2011 IFRS Foundation 2 This PowerPoint presentation was prepared by IFRS Foundation education staff as a convenience for others. It has not been approved by the IASB. The IFRS Foundation allows individuals and organisations to use this presentation to conduct training on the IFRS for SMEs. However, if you make any changes to the PowerPoint presentation, your changes should be clearly identifiable as not part of the presentation prepared by the IFRS Foundation education staff and the copyright notice must be removed from every amended page. This presentation may be modified from time to time. The latest version may be downloaded from: The accounting requirements applicable to small and medium ‑ sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.
© 2011 IFRS Foundation 3 The IFRS for SMEs Scope of Sections 13 and 16–18
© 2011 IFRS Foundation 4 Section 13 – scope Inventories are assets: –held for sale in the ordinary course of business (finished goods); –in the process of production for such sale (work in process); or –in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials & consumables). Section 13 specifies accounting + reporting for inventories
© 2011 IFRS Foundation Section 13 – scope exclusions Section 13 applies to all inventories, except –work in progress arising under construction contracts –financial instruments –biological assets related to agricultural activity and agricultural produce at the point of harvest 5
© 2011 IFRS Foundation 6 Section 17 – definition of PP&E Property, plant and equipment (PP&E) are tangible assets: held for –use in the production or supply of goods or services, –for rental to others, or –for administrative purposes; & are expected to be used in +1 period.
© 2011 IFRS Foundation 7 Section 17 – scope Section 17 specifies accounting & reporting for: –property, plant and equipment; and –investment property whose fair value cannot be measured reliably without undue cost or effort on an ongoing basis.
© 2011 IFRS Foundation 8 Section 16 – scope Investment property is land or a building (or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both. Section 16 specifies accounting & reporting for: –investment property whose fair value can be determined reliably without undue cost or effort on an ongoing basis
© 2011 IFRS Foundation 9 Section 18 – definition intangible asset Intangible = identifiable non-monetary asset without physical substance Identifiable when: –separable, ie can be separated from the entity & sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability, or –arises from contractual or legal rights
© 2011 IFRS Foundation 10 Section 18 – scope Section 18 specifies accounting & reporting for intangible assets, excluding –goodwill –financial assets –mineral rights & mineral reserves, such as oil, natural gas and similar non ‑ regenerative resources
© 2011 IFRS Foundation Sections 13 & 16–18 – scope examples In scope of S13, S16, S17 or S18? Ex 1*: A trades in property (ie it buys property to sell it at a profit near-term) Ex 2*: B trades in transferable taxi licences Ex 3*: C produces wine from grapes harvested from its vineyards in a 3-year production cycle * see example with the same number in Module 13 of the IFRS Foundation training material 11
© 2011 IFRS Foundation Sections 13 & 16–18 –examples continued In scope of S13, S16, S17 or S18? Ex 4*: D holds lubricants that are consumed by its machine in producing goods Ex 6*: E maintains its plant using: –a bespoke long-life cleaning machine; & –a set of low-value common tools acquired from a local hardware store. * see example with the same number in Module 13 of the IFRS Foundation training material 12
© 2011 IFRS Foundation Sections 13 & 16–18 –examples continued In scope of S13, S16, S17 or S18? Ex 9*: F operate a hotel from a building it owns –it rents out hotel rooms for short-stays –guest services included in the room rate = breakfast and television –services charged for separately = other meals, room bar, gymnasium facilities & guided tours * see example 9 in Module 16 of the IFRS Foundation training material 13
© 2011 IFRS Foundation Sections 13 & 16–18 –examples continued In scope of S13, S16, S17 or S18? Ex 3*: G buys a building to earn rentals under an operating lease from its subsidiary. The sub sells its products from the building Ex 7*: H owns –a herd of cattle—breeding stock of its agricultural activities –a tractor used to transport feed to the herd * see example with the same number in Module 17 of the IFRS Foundation training material 14
© 2011 IFRS Foundation Sections 13 & 16–18 –examples continued In scope of S13, S16, S17 or S18? Ex 1: I owns digital films and audio recordings which it licenses to its customers Ex 12: In accounting for the acquisition of the net assets and operations of a competitor J recognised future economic benefits arising from assets that are not individually identified as an asset (goodwill) 15
© 2011 IFRS Foundation Examples of classification judgements –when unclear what purpose of acquiring property is (inventories, IP or PP&E?) –when property owner provide ancillary services to the occupants of a property (IP or PP&E?) –mixed use property (IP or PP&E?) –when is undue cost or effort necessary to measure the fair value of an IP on an ongoing basis (IP or PP&E?) 16
© 2011 IFRS Foundation 17 The IFRS for SMEs Section 13 Inventories and Paragraphs 27.2–27.4 (impairment of inventories)
© 2011 IFRS Foundation 18 Section 13 – measurement Inventories in the scope of Section 13 are measured at the lower of: –cost; and –estimated selling price less costs to complete and sell (SP-CTC&S).
© 2011 IFRS Foundation Section 13 – measurement exemptions Section 13 does not apply to the measurement of inventories of –producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, or –commodity brokers and dealers when measured at fair value less costs to sell through profit or loss 19
© 2011 IFRS Foundation Section 13 – measurement examples Are these inventories measured in accordance with Section 13? Ex 7*: A commodity broker-trader acquires wheat in anticipation of selling it in the short-term. The broker-trader measures such inventories at fair value less costs to sell Ex 8*: Same as Ex 7 except the broker ‑ trader measures inventories at cost * see example with the same number in Module 13 of the IFRS Foundation training material 20
© 2011 IFRS Foundation 21 Section 13 – cost Cost = costs of purchase + costs of conversion + other costs incurred in bringing the inventories to their present location and condition
© 2011 IFRS Foundation 22 Section 13 – cost of purchase Cost of purchase = purchase price + import duties + other taxes (non-refundable in nature) + other direct costs –costs of purchase is after deducting trade discounts, rebates etc –if purchase arrangement effectively contains an unstated financing element, eg a difference between the purchase price for normal credit terms and the deferred settlement amount, the difference is recognised as interest expense over the period of the financing (ie it is not added to the cost of the inventories)
© 2011 IFRS Foundation 23 Section 13 – examples cost of purchase Ex 13*: A buys a good priced at CU500 per unit from Z. Z awards A a 20% discount on orders of +100 units and 10% discount when A buys +999 units in 1 year. The discounts apply to all units acquired in a year. A buys as follows: 800 units on 1/1/20X1 and 200 units on 24/12/20X1. On 31/12/20X1, 150 units were unsold (ie inventories of A). * see example 13 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 24 Section 13 – examples cost of purchase Ex 13 continued : A measures the cost of the inventories in 20X1 at CU350,000 [ie 1,000 units × (CU500 list price less 30%(CU500) volume discount)], because all units purchased in the year get the full 30% discount. A recognises: –expense (cost of sales) of CU297,500 [ie 850 units sold × (CU500 list price less 30%(CU500) volume discount)] in profit or loss in 20X1 –asset (inventories) of CU52,500 [ie 150 units unsold × (CU500 less 30%(CU500) discount)] at 31/12/20X1.
© 2011 IFRS Foundation 25 Section 13 – examples cost of purchase Ex 17*: A buys inventory for CU2,000,000 on 2 ‑ year interest ‑ free credit. Appropriate discount rate = 10% per year. The cost of the inventory is CU1,652,893 (ie the present value of the future payment). Calculation: CU2,000,000 future payment ÷ (1.1) 2. * see example 17 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 26 Section 13 – cost of conversion Cost of conversion = direct costs + indirect costs (allocated production overheads) –allocated production overheads = fixed production overheads + variable production overheads
© 2011 IFRS Foundation 27 Section 13 – examples conversion costs Ex 18*: A makes concrete blocks in reusable moulds. Blocks dry in a drying room for 2 weeks. Dried blocks & raw mat’s stored in separate rooms. A front-end loader (man 1) adds materials to the mixing machine operated by man 2. Casual labourers remove blocks from moulds. Man 3 supervises the factory. Man 4 does admin, finance and sales. A operates from rented premises (fixed payments). * see example 18 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 28 Section 13 – examples conversion cost Ex 18 continued : Costs of conversion include –direct costs: casual labour. –production overheads: factory rent (incl. raw mat’s area & drying room but excl. finished goods room); staff cost of man 1,2 & 3; depreciation of equipment (front end loader, mixing machine and moulds).
© 2011 IFRS Foundation 29 Section 13 – allocate production overheads Allocate fixed production overheads on –normal capacity if low or normal production –actual production (units) if abnormally high production (so that inventory is not measured above cost) –note: unallocated overheads are expensed when incurred Allocate variable production overheads on actual production
© 2011 IFRS Foundation 30 Section 13 – example FP overheads Ex 20*: Fixed production (FP) overheads = CU900, ,000 units produced. Normal capacity = 250,000 units. Allocation rate: CU900,000 ÷ 250,000 units normal capacity = CU3.6 per unit produced. Allocate to inventories: CU3.6 × 200,000 units = CU720,000. Unallocated overheads of CU180,000 are expense (ie CU900,000 less CU720,000 in inventory). * see example 20 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 31 Section 13 – example FP overheads Ex 21*: Same as Ex 20 except 300,000 units produced. Normal capacity = 250,000 units. Allocation rate: CU900,000 ÷ 300,000 units actual production = CU3 per unit produced. Allocate to inventories: CU3 × 300,000 units = CU900,000 * see example 21 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 32 Section 13 – example wastage Ex 27*: Total costs of a production run = CU100,000 (including a cost of normal wastage of CU2,000). The weakening of operating controls while the owner- manager was in hospital caused the wastage of raw materials to increased to CU7,000 per production run. The abnormal wastage cost of CU5,000 (CU7,000 – CU2,000) is not included in the cost of inventory but recognised as an expense. * see example 27 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 33 Section 13 – joint and by-products Production process results in more than one product being produced simultaneously –joint product, or –main product and by-product. Allocate joint costs on a rational and consistent basis If by-product is immaterial –measure by-product at selling price less costs to complete and sell (SP-CTC&S) –deduct this amount from the cost of the main product.
© 2011 IFRS Foundation 34 Section 13 – example by-product Ex 22*: A production process costs CU100,000 (including allocated overheads). It mixes base chemicals to produce: –5,000 litres of product A (sales value = CU250,000); and –1,000 litres of by-product C (sales value = CU2,000). Cost per litre of A = CU19.60 (ie CU100,000 less CU2,000 SP of C) ÷ 5,000 litres = CU * see example 22 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 35 Section 13 – example joint product Ex 23*: Same as in Ex 22 except, instead of by ‑ product ‘C’ there is a joint product ‘B’. Total costs = CU300,000 to produce: –5,000 litres of A (sales value = CU250,000); and –4,000 litres of B (sales value = CU400,000). Allocate joint process costs on relative sales values. * see example 23 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 36 Section 13 – example joint product continued Ex 23 continued : Cost per litre of A = CU23.08 & B = CU Calculation A: CU250,000 SP of A ÷ CU650,000 combined SP of A & B × CU300,000 costs = CU115,385 cost of 5,000 litres of A. CU115,385 ÷ 5,000 litres = CU Calculation B: CU400,000 SP of B ÷ CU650,000 combined SP of A & B × CU300,000 costs = CU184,615 cost of 4,000 litres of B. CU184,615 ÷ 4,000 litres = CU46.15.
© 2011 IFRS Foundation 37 Section 13 – other costs Include other costs in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. Ex 25*: A manufactures individually packaged pens. The cost of the inventory includes the cost of manufacturing the pens and the individual packaging in which they are presented for sale. * see example 25 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation 38 Section 13 – cost formulas Specific identification of costs if –goods not ordinarily interchangeable or –segregated for specific projects Other inventories –FIFO or –weighted average (WA) Can use other ways if approximates cost –standard cost –retail method –most recent purchase price
© 2011 IFRS Foundation 39 Section 27 – impairment of inventories Assess at each reporting date whether any inventories are impaired, by –comparing the carrying amount (CA) of each item of inventory with its selling price less costs to complete and sell (SP- CTC&S) –if CA > SP-CTC&S reduce CA to SP- CTC&S –that reduction = impairment loss –impairment loss = expense in profit or loss
© 2011 IFRS Foundation 40 Section 27 – examples impairment Ex 1: At reporting date –CA (cost) of raw materials = 100 –replacement cost = 80 –est. selling price of finished good = 200 –est. costs to convert the raw material into finished good = 60 –est. costs to sell the finished good = 30 Ex 2: Same as Ex 1 except est. SP = 180
© 2011 IFRS Foundation 41 Section 27 – impairment exception Inventory is assessed for impairment item by item –only if it is impracticable to determine SP- CTC&S item-by-item may items of inventory: –relating to the same product line that have similar purposes or end uses; and –that are produced and marketed in the same geographical area –be grouped for the purpose of assessing impairment.
© 2011 IFRS Foundation 42 Section 27 – examples impairment Ex 3: A has 3 items of inventory (finished goods) that qualify for impairment testing as a group –CA (cost) = 320 –est. SP-CTC&S for the 3 items = 330 Ex 4: Same as Ex 3 except –items do not qualify for impairment testing as a group; and –est. SP-CTC&S = 110 each.
© 2011 IFRS Foundation Section 27 – reversal of impairment Reverse the impairment when: –circumstances that caused inventories to be impaired no longer exist; or –there is clear evidence of an increase in SP-CTC&S because of changed economic circumstances Amount of reversal is limited to the amount of the original impairment loss –ie CA cannot be > cost 43
© 2011 IFRS Foundation 44 Section 27 – example reverse impairment Ex 5: At 31/12/20X1 –because of a decline in economic circumstances recognised an impairment loss on an item of inventory of 30 ( ie cost = 100 & SP-CTC&S = 70) At 31/12/20X2 – because of an improvement in economic circumstance the SP-CTC&S of that item is 120
© 2011 IFRS Foundation 45 Section 13 – measurement judgements For cost, examples include –determining normal capacity –separating normal & abnormal wastage –allocating joint cost to joint products –if no market for joint products at separation –if multiple joint products and exit joint production at different stages For the impairment –estimating SP-CTC&S
© 2011 IFRS Foundation 46 Section 13 – derecognition Expense inventory when –impaired –derecognised (ie when sold) Allocate inventory to another asset –eg inventory used as a component of self- constructed PP&E.
© 2011 IFRS Foundation 47 Section 13 – disclosure Disclose –accounting policies for measuring inventories –carrying amount of inventories analysed by class –amount expensed in the period –impairment losses recognised or reversed –amount pledged as security for liabilities
© 2011 IFRS Foundation 48 The IFRS for SMEs Section 17 Property, Plant and Equipment (including investment property whose fair value cannot be measured reliably on an ongoing basis)
© 2011 IFRS Foundation 49 Section 17 – recognition Recognise the cost of an item of PP&E as an asset if: –probable future benefits inflows; and –cost can be measured reliably.
© 2011 IFRS Foundation 50 Section 17 – measurement Initial measurement of PP&E = cost –cost = purchase price + direct cost for PP&E become capable of operating as intended + initial estimate of obligation to dismantle/remove –cash price equivalent at the recognition date –if payment deferred beyond normal credit terms, cost = present value of future payments Subsequent measurement = cost less depreciation and impairment losses
© 2011 IFRS Foundation 51 Section 17 – replacing parts Parts that require replacement at regular intervals (eg roof and furnace’s lining) –add cost of replacement to the carrying amount of the item if the replacement adds benefits –if consumption pattern different, depreciate component separately over its useful life –derecognise the parts replaced. Day-to-day servicing costs = expense
© 2011 IFRS Foundation 52 Section 17 – exchange of assets Cost of PP&E acquired in exchange for a non-monetary asset = fair value unless the transaction lacks commercial substance –if fair value cannot be measured reliably, cost = carrying amount of the asset given up
© 2011 IFRS Foundation 53 Section 17 – cost Cost of PP&E comprises: –purchase price (incl. fees, duties & purchase taxes after deducting trade discounts & rebates) –costs directly attributable to bring the PP&E to location & condition necessary for it to be capable of operating as intended by management: –site prep. costs, delivery & handling, installation & assembly, & testing functions. –initial estimate of dismantling & removing costs and site restoration.
© 2011 IFRS Foundation 54 Section 17 – example cost Ex 15*: Costs before ready for use as intended: –purchase price = 600 (incl 50 refundable purch tax) –costs 120 to get equip to site and to install –in 10 yrs must restore land (PV to restore = 100) –costs 135 to modify equip to operate as intended –costs 10 to train staff to operate equip. –costs 37 for testing and final modifications 23 = operating loss after ready for use. * Adapted from example 15 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation 55 Section 17 – depreciation To allocate depreciable amount over items useful life use judgement to estimate –useful life –residual value –depreciation method (eg straight-line, diminishing balance, units of production) Re-evaluate estimates if change indicator –change is a change in accounting estimate
© 2011 IFRS Foundation 56 Section 17 – depreciation continued Depreciation begins when the PP&E is available for use –ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management Depreciation stops when the PP&E is derecognised
© 2011 IFRS Foundation 57 Section 17 – example depreciation Ex 20*: On 1/1/20X1 buy machine for CU100,000. Initial estimates & judgements: –useful life = 10 yrs & residual value = 0 –straight ‑ line depreciation is appropriate At 31/12/20X5 year ‑ end reassess: –useful life = 24 yrs (from the date of acq) and residual value = CU20,000 –straight ‑ line depreciation is appropriate * adapted from example 20 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation 58 Section 17 – derecognition Derecognise PP&E on disposal or when no further benefits are expected from its use or disposal Gain or loss = net disposal proceeds (if any) less carrying amount –show gain or loss in profit or loss (except for some sale & leasebacks) –gain is not revenue
© 2011 IFRS Foundation 59 Section 17 – example derecognition Ex 35*: On 1/11/20X5 sold building for 3,500. Carrying amount = 2,000. Selling costs = 350 commission & 10 legal fees. On 1/11/20X5 recognise gain of CU1,140 in profit or loss [calculation: 3,500 less (2, )] * see example 35 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation 60 Section 17 – disclosures Disclose for each class of PP&E –measurement bases –depreciation methods –useful lives or depreciation rates –gross carrying amount & accumulated depreciation (incl. impairment losses) at beginning & end of period –reconciliation of carrying amount at beginning & end of the reporting period showing specified items (comparatives not required)
© 2011 IFRS Foundation 61 Section 17 – other disclosures Also disclose –existence and carrying amounts of PP&E when entity has restricted title or PP&E is pledged as security for liabilities –amount of contractual commitments for the acquisition of PP&E
© 2011 IFRS Foundation 62 The IFRS for SMEs Section 18 Intangible Assets other than Goodwill
© 2011 IFRS Foundation 63 Section 18 – recognition Recognise the cost of intangible as asset if: –probable future benefits inflows, and –cost can be measured reliably –the asset does not result from expenditure incurred internally on an intangible item – cannot recognise R&D costs; internally generated brands, logos, publishing titles, customer lists; expenditure to open new facilities or launch new products; training activities; advertising; relocating or reorganising costs.
© 2011 IFRS Foundation 64 Section 18 – recognise this brand? Ex 1: A developed a brand that allows it to charge a premium for its products. A maintains & enhances its brand by sponsoring local events & advertising. Ex 2: Same as Ex 1 except A bought brand from a competitor in a separate acquisition.
© 2011 IFRS Foundation 65 Section 18 – intangibles in business com Intangible asset acquired in a bus com –is normally recognised as a separate asset –fair value can be measured reliably –however, not recognised when arises from legal/contractual rights & fair value cannot be measured reliably because the asset either: –is not separable from goodwill; or –is separable but no history or evidence of exchange transactions for similar assets, and otherwise estimating fair value would be dependent on immeasurable variables.
© 2011 IFRS Foundation 66 Section 18 – initial measurement Initial measurement of intangible = cost –if separately acquired, cost = purchase price + directly attrib. cost of preparing for intended use –if acquired in a business combination, cost = at acquisition fair value –if acquired in government grant, cost = fair value at the date the grant is received or receivable Internally generated intangibles are not recognised & therefore are not measured
© 2011 IFRS Foundation 67 Section 18 – example business com Ex 3: A buys B when B’s intangibles were: A incurred 200 to complete in-process R&D project & decides to develop the related product commercially. CAFV Customer list050 In process R&D project080 Licence to operate Brand (trademark & brand name)0300
© 2011 IFRS Foundation 68 Section 18 – judgements about cost Judgements in measuring cost include: –deferred payment—determining the discount rate –exchange transaction—estimating fair value if no active market for asset received or asset given up –acquired in a business combination— estimating fair value if no active markets & judging if fair value can be measured reliably (for recognition) –acquired by government grant— estimating fair value of if no active market
© 2011 IFRS Foundation 69 Section 18 – subsequent measurement After initial recognition measure intangibles at cost less amortisation & impairment losses Similar to PP&E but –all intangibles considered to have finite useful life –useful life not > the contractual/legal right –useful life includes renewal periods only if evidence to support likely renewal without significant cost –useful life = 10 yrs if cannot estimate reliably –residual value is 0, except in specified circumstances
© 2011 IFRS Foundation 70 Section 18 – estimating useful life Ex 4: A acquires a customer list. Expects to benefit from list for 1–3 yrs. Ex 5: B acquires a 5-yr airline route authority (ARA) that is renewable every 5 yrs at no cost –renewal is routine if specified rules & regulations are complied with –B is compliant & expects to fly the route indefinitely –an analysis of demand and cash flows supports those assumptions
© 2011 IFRS Foundation 71 Section 18 – derecognition Derecognise intangibles on disposal or when no further benefits are expected from its use or disposal Gain or loss = net disposal proceeds (if any) less carrying amount –show gain or loss in profit or loss (except for some sale & leasebacks) –gain is not revenue
© 2011 IFRS Foundation 72 Section 18 – disclosures Disclose for each class of intangible –line item in income statement (or SOCI or SOI&RE) in which amortisation is included –amortisation methods –useful lives or amortisation rates –gross carrying amount & accumulated amortisation (incl. impairment losses) at beginning & end of period –reconciliation of carrying amount at beginning & end of the reporting period showing specified items (comparatives not required)
© 2011 IFRS Foundation 73 Section 18 – other disclosures –R&D expenditure expensed in the period –existence & carrying amounts of intangible with restricted title or pledged as security for liability –amount of contractual commitments for the acquisition of intangibles –(i) description, (ii) carrying amount and (iii) remaining amortisation period of individual intangible asset that is material to the entity’s financial statements –if acquired as government grant & initially recognised at fair value―the fair value initially recognised & the carrying amount
© 2011 IFRS Foundation 74 The IFRS for SMEs Section 27 Impairment of Assets
© 2011 IFRS Foundation 75 Section 27 – scope Section 27 specifies accounting and reporting of impairment losses of all assets except: –deferred tax assets –assets arising from employee benefits –financial assets in scope of Sections 11 & 12 –assets measured at fair value
© 2011 IFRS Foundation 76 Section 27 – general principles Assets except inventories: –at reporting date assess whether there is any indication that an asset may be impaired –if any such indication exists, estimate the recoverable amount (RA) of the asset –impair if carrying amount (CA) > RA –recognise impairment loss in profit or loss Note: if impairment indicated –review the remaining useful life, the depreciation (amortisation) method or the residual value for the asset even if no impairment loss found
© 2011 IFRS Foundation 77 Section 27 – impairment testing level Impairment test at level of –individual asset (if possible) –otherwise cash-generating unit (CGU) – eg when need to calculate value in use and the individual assets do not generate cash flows by themselves A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
© 2011 IFRS Foundation 78 Section 27 – impairment indicators Consider, as a minimum: External sources of information in a period –asset’s market value declined significantly > expected –significant changes in the technological, market, economic or legal environment –market rates increased (eg effect on discount rate) –CA of the net assets > estimated fair value of the entity
© 2011 IFRS Foundation 79 C Section 27 – impairment indicators continued Internal sources of information –obsolete or physical damaged asset –significant changes in the extent or manner in which, an asset is (or is expected to be) used – eg idle assets, plans to discontinue or restructure operation, plans to dispose before expected, and reassessing the useful life of an asset as finite rather than indefinite. –internal reporting indicates that the economic performance of an asset is, or will be, worse than expected (eg operating results & cash flows)
© 2011 IFRS Foundation 80 Section 27 – recoverable amount Recoverable amount = higher of value in use (VIU) & fair value less costs to sell (FV-CTS) –if either VIU or FV-CTS > CA then no need to determine the other –if no reason to believe VIU > FV-CTS, then FV-CTS may be used as RA
© 2011 IFRS Foundation 81 Section 27 – estimating FV-CTS FV-CTS = amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal –best evidence is a price in a binding sale agreement in an arm’s length transaction or a market price in an active market –if not available, estimate using best information available considering the outcome of recent transactions for similar assets within the same industry
© 2011 IFRS Foundation 82 Section 27 – estimating VIU VIU = present value of the future net cash flows expected to be derived from an asset. Steps to calculate VIU: –estimate future cash flows (in & out) from continuing use of the asset & its ultimate disposal, and –apply appropriate discount rate to future cash flows
© 2011 IFRS Foundation 83 Section 27 – estimating VIU Reflect in calculation of VIU: –est. future cash flows (FCFs) entity expects –expectations about possible variations in the amount or timing of those FCFs –time value of money (current market risk- free rate of interest) –price for uncertainty inherent in the asset –other factors (eg illiquidity) that market participants would adjust for Avoid double-counting in FCFs & discount rate
© 2011 IFRS Foundation 84 Section 27 – est. VIU cash flows Estimates of FCFs include: –cash inflows from the continuing use –cash outflows necessary to generate cash inflows (directly attributed or allocated on reasonable & consistent basis) –net cash flows, if any, expected from disposal at end of useful life May: –use recent budgets/forecasts to est. cash flows –extrapolate beyond forecast period using steady or declining growth rate, unless another is justified
© 2011 IFRS Foundation 85 Section 27 – est. VIU cash flows continued Est. FCFs for asset in current condition Est. FCFs don’t include in/outflows from: –a future restructuring to which an entity is not yet committed, or –improving or enhancing the asset’s performance. Est. FCFs also don’t include: –cash in/outflows from financing activities, and –income tax receipts/payments.
© 2011 IFRS Foundation 86 Section 27 – est. VIU discount rate Discount rate/s is a pre-tax rate/s that reflect/s current market assessments of: –the time value of money (ie current market risk-free rate of interest); and –the risks specific to the asset for which the future cash flow estimates have not been adjusted (ie avoid double-counting).
© 2011 IFRS Foundation 87 Section 27 – cash generating unit (CGU) Allocate impairment loss: –1 st to any goodwill allocated to the CGU –2 nd to other assets pro rata on the basis CA of each asset in CGU –however, cannot reduce the CA of any asset below the highest of 0, FV-CTS & VIU (if determinable) –reallocate to other assets of CGU
© 2011 IFRS Foundation 88 Section 27 – example CGU impairment Ex 1: At 31/12/20X1 CA of a CGU’s assets = 210 (ie 150 taxis, 50 taxi licence & 10 goodwill) Impairment indicated & RA = 170. Fair value of taxis = 140. Impairment loss = 40 (ie 210 CA less 170 RA) 1 st allocate 10 loss to goodwill 2 nd allocate remaining 30 loss, ie 22.5 to taxis & 7.5 to licence (pro rata on CA) 3 rd reallocate 12.5 loss from taxis to licence
© 2011 IFRS Foundation 89 Section 27 – goodwill On acquisition date goodwill is allocated to each cash-generating unit that is expected to benefit from the synergies of the business combination CA of partly-owned CGU is notionally adjusted for the NCI’s share of goodwill before being compared with its RA
© 2011 IFRS Foundation 90 Section 27 – example goodwill Ex 2: Goodwill of CU40 on A’s acquisition of 75% of B’s shares on 1/1/20X1. To reflect synergies the group allocated the goodwill 10 to A’s CGU and 30 to B’s CGU. For impairment testing purposes only B’s goodwill is notionally grossed up to 40 (ie additional goodwill for NCI = 10).
© 2011 IFRS Foundation 91 Section 27 – goodwill continued If goodwill cannot be allocated to CGU/s on a non-arbitrary basis, then for the purposes of testing goodwill for impairment, the entity determines the recoverable amount of either: –the acquired entity in its entirety (if goodwill relates to an acquired entity that has not been integrated). –the entire group of entities, excluding any entities that have not been integrated (if the goodwill relates to an acquired entity that has been integrated).
© 2011 IFRS Foundation 92 Section 27 – reversing impairment loss General principles: –at reporting date assess whether there is any indication that impairment has reversed –if any such indication exists, estimate RA –reverse impairment in profit or loss if CA < RA, but –reversal cannot increase the CA above the CA that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior years. –goodwill impairment cannot be reversed
© 2011 IFRS Foundation 93 Section 27 – example reverse impairm’t Ex 3: Facts from Ex 1. At 31/12/20X2 CA of CGU = 120 (ie 100 taxis & 20 licence) Impairment reversal indicated & RA estimated = 150 Potential impairment reversal = 30 (ie 150 RA less 120 CA) but limited to 20 (as follows) 1 st allocate to assets pro rata on CAs, ie 5 to licence & 25 to taxis 2 nd limit amt allocated to taxis to 7 (if no impairment in 20X1, CA at 20X2 = 107)
© 2011 IFRS Foundation 94 Section 27 – example reversal continued Ex 3 continued : 3 rd reallocate 18 reversal from taxis to licence Total reversal provisionally allocated to licence = 23 (ie ) 4 th limit amt allocated to licences to 13 (if no impairment in 20X1, CA at 20X2 = 33) 5 th as there are no other assets to reallocate the unallocated 10 (ie 23 less 13) reversal to, limit the total impairment reversal to 20 (ie 7 for taxis and 13 for licence)
© 2011 IFRS Foundation 95 Section 27 – after reversal After reversing impairment loss –adjust the depreciation/amortisation charge for the asset in future periods to allocate the asset’s revised CA, less its residual value (if any), on a systematic basis over its remaining useful life.
© 2011 IFRS Foundation 96 Section 27 – impairment disclosures Disclose separately for each of―(a) inventories; (b) PP&E; (c) goodwill; (d) intangibles other than goodwill; (e) investments in associates; (f) investments in joint ventures: –amount of impairment losses recognised in profit or loss & line item(s) in the income statement (or SOCI or SOI&RE) in which included. –same for reversals of impairment losses
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