Presentation on theme: "JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM."— Presentation transcript:
1 Impairment of Assets: IAS 36 COACHING CLASSES FOR PROFESSIONAL STUDENTS
2 JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.CONTACT:R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN
3 Impairment of Assets Related standards IAS 36 Current GAAP comparisons IFRS financial statement disclosuresLooking aheadEnd-of-chapter practice
4 Related Standards HB 1581 Business combinations HB 3025 Impaired loans HB 3051 InvestmentsHB 3061 Property, plant and equipmentHB 3063 Impairment of long-lived assetsHB 3064 Goodwill and intangible assetsHB 4211 Life insurance enterprises—specific items
5 Related Standards FAS 157 Fair value measurements FAS 144 Accounting for the impairment or disposal of long-lived assetsFAS 142 Goodwill and other intangible assetsFAS 141 Business combinations
6 Related Standards IFRS 3 Business combinations IAS 16 Property, plant and equipmentIAS 17 LeasesIAS 27 Consolidated and separate financial statementsIAS 28 Investments in associatesIAS 31 Interests in joint venturesIAS 38 Intangible assetsIAS 40 Investment property
7 IAS 36 – Overview Objective and scope Identifying an asset that might be impairedRecognizing and measuring an impairment loss for an individual assetRecognizing and measuring an impairment loss for cash-generating units and goodwillReversing an impairment lossDisclosure
8 IAS 36 – Objective and Scope IAS 36 ensures that assets are reported on the statement of financial position at no more than the entity can recover from their use or sale. May be an impairment loss—“the amount by which the carrying amount of an asset or a cash-generating unit (CGU) exceeds its recoverable amount”
9 IAS 36 – Objective and Scope IAS 36 excludes:inventoriesassets arising from construction contractsemployee benefit assetsdeferred tax assetsfinancial assets under IAS 39non-current assets or disposal groups held-for-saleinvestment property, biological assets based on FV measurements
11 IAS 36 – Identifying an Asset that May Be Impaired Assetsend of each reporting periodassess for indications of impairmentif indications of impairment, test for impairmentIntangibles with indefinite lives, those not yet ready for use, and goodwillannuallytest for impairment regardless of indications of impairment
12 IAS 36 – Identifying an Asset that May Be Impaired Indication of impairment? Consider:
13 IAS 36 – Identifying an Asset that May Be Impaired Testing for impairment:Estimate asset/CGU’s recoverable amount. If recoverable amount is greater than the carrying amount – no impairment.Recoverable amount - higher of:fair value less costs to sell, andvalue in use
14 IAS 36 – Identifying an Asset that May Be Impaired For assets that do not generate independent cash flows on their own – group into cash-generating units (CGUs)CGU – “the smallest identifiable group of assets that generates cash flows that are largely independent of the cash flows from other assets or groups of assets”
15 IAS 36 – Identifying an Asset that May Be Impaired Fair value less costs to sell = proceeds from arm’s-length sale of an asset/CGU between knowledgeable willing parties less incremental direct costs of its disposal Best measure: arm’s-length bargained price in a binding sales agreement in an active market.Hierarchy of appropriate methods to establish fair valueDisposal costs: e.g., legal costs, transaction taxes, removal costs, costs to put in condition for sale
16 IAS 36 – Identifying an Asset that May Be Impaired Value in use = present value of the future cash flows expected from asset/CGU’s use and ultimate disposalTwo approaches:Most likely cash flows from use and disposal discounted using risk-adjusted discount rate.Probability-weighted cash flows from use and disposal discounted using remaining risk-adjusted discount rate.
17 IAS 36 – Identifying an Asset that May Be Impaired E.g., estimated cash flows with a 40% probability they will be $120 and a 60% probability they will be $80. Value in use?Method 1: Most likely cash flows = $80. This amount is discounted using a rate that takes into account all risks including the uncertainty of the cash flow amounts.Method 2: Expected value of cash flows = (120 × 40%) + (80 × 60%) = $96. This amount is discounted using a rate that includes remaining risks.
18 IAS 36 – Recognizing and Measuring an Impairment Loss for an Individual Asset If recoverable amount < carrying amount:Dr. Impairment loss $Cr. Accumulated impairment losses $Recalculate depreciation rate.If recoverable amount > carrying amount: no impairment
19 IAS 36 – Recognizing and Measuring an Impairment Loss for CGUs and Goodwill CGU’s carrying amount= carrying amount of all assets used to generate the relevant stream of cash flowsIncludes assetsdirectly involved, andthose allocated to the CGU on a reasonable basis
20 IAS 36 – Recognizing and Measuring an Impairment Loss for CGUs and Goodwill Goodwill allocated to a CGU or group of CGUs not larger than an “operating segment” that is:expected to benefit from synergies of a combinationat lowest level in organization that manages the goodwillnot on an arbitrary basis
21 IAS 36 – Recognizing and Measuring an Impairment Loss for CGUs and Goodwill If part of CGU with allocated goodwill is sold:allocate goodwill between portion sold and portion remainingbase on relative value of the CGU sold to portion retained
22 IAS 36 – Recognizing and Measuring an Impairment Loss for CGUs and Goodwill Testing CGUs for impairmentCGUs with related G/W not allocated specifically:Test when an indication of impairmentLoss = CGU carrying amount excluding G/W - recoverable amount CGUs with G/W allocated to itTest at least annuallyLoss = CGU carrying amount including G/W – recoverable amount
23 IAS 36 – Recognizing and Measuring an Impairment Loss for CGUs and Goodwill Impairment loss for a CGU or group of CGUs:assign loss to carrying amount of G/W allocated to the CGU or groupallocate remainder to assets in CGU on basis of relative carrying amountsLoss is impairment loss for individual assets in CGU
24 IAS 36 – Reversing an Impairment Loss No reversal of impairment loss for G/WFor other assets, reversal permitted if estimates used to determine recoverable amount have changed
25 IAS 36 – Reversing an Impairment Loss For an individual asset:reversal limited to an increase to what asset would have been, net of depreciation/amortization, if no impairment had been recognized initiallyunless accounted for under the revaluation model – when full reversal is permitted
26 IAS 36 – Reversing an Impairment Loss For a CGU:reversal is allocated to the assets of the unit, excluding G/Won basis of relative carrying amountsrestrictions on individual assets still apply
27 IAS36 – Disclosure For each class of assets: amount of impairment loss/loss reversals in P&Lline item where loss/reversal is reportedamount of impairment loss/loss reversals on revalued assets in OCI
28 IAS36 – Disclosure Individually material loss/reversal: explanation of events and circumstancesnature of asset/CGUhow recoverable amount is determinedamount of loss/reversal
29 IAS36 – Disclosure For G/W and intangibles with indefinite lives: considerably more information providedenable users to assess reliability of impairment testingfor individually significant intangible assets/CGUsif individually insignificant, disclose amounts
30 Current GAAP Comparisons To Canadian GAAPPages 40 to 42 of 91 ofPages 72 to 75 of 118 of
31 Current GAAP Comparisons To US GAAPPages 19 to 20 of 49 ofPages 82 to 84 of 164 of
32 IFRS Financial Statement Disclosures Cadbury Schweppes plcImpairment policy note for goodwill and acquisition intangiblesPage 93 of 153 Goodwill Note 14Page 104 of 153
33 Looking Ahead IAS 36 Impairment two recent revisions resulting from project on business combinationschanges to IAS 27 and IFRS 3 – released in 2008related to impairment test for goodwillImpairmentpart of longer term convergenceno short or medium term changes likely
34 End-of-Chapter Practice 16-1 Three years ago, Ace Airlines (AA) was granted permission to schedule flights on the popular and profitable Newalta to Oldsford route, provided it also serviced Remoteville which is considerably further north than Oldsford. As a result, AA set up a facility in Oldsford and a small office and maintenance bay in Remoteville. Remoteville is sparsely populated and not accessible except by air. AA’s controller now wants to review the Remoteville assets for impairment due to the continuing losses on the Oldford-Remoteville route, but is not familiar with IAS 36.InstructionsWrite a short memo to AA’s controller, identifying how he should proceed in determining whether the Remoteville assets are impaired.
35 End-of-Chapter Practice 16-2 Waix Ltd. (WL) is a manufacturer with a number of product lines, one of which is the production of parts for residential telephone sets. Recently there have been indications that the market for this product is likely to decline significantly, and WL is assessing various assets for impairment. The following assets are used specifically to manufacture these parts:Cost Accumulated____ DepreciationTools and dies $ $ 6Specialized equipmentGeneral equipmentThe tools and dies and specialized equipment have no resale value other than for scrap, although the general equipment could be sold or used profitably in one of WL’s other product lines. WL plans on continuing production of these parts for two more years in order to fill its existing commitments. The present value of the net cash flows from the next two years’ production of these parts is $26 and the estimated net amount that could be recovered if these assets were sold today is $15.
36 End-of-Chapter Practice InstructionsBriefly discuss whether these assets should be assessed for impairment individually or as part of a cash-generating unit.Assuming the assets are allocated to a CGU made up of the three types of assets identified, determine whether an impairment loss needs to be recognized, and if so, in what total amount.Prepare the entry needed to record any impairment loss indicated, assuming these assets are reported in separate asset classes.
37 End-of-Chapter Practice 16-3 Firstall Corp. (FC) acquired four divisions of a competitor eight years ago in a business combination transaction, paying $25 more than the fair value of the identifiable assets acquired. The goodwill was determined to be 100% attributable to the operations of the East Division and the South Division. Although these two divisions are cash-generating units in their own right, there was no basis on which to allocate the goodwill between them. FC has identified the combined divisions as one CGU for assessing goodwill impairment on an annual basis. At the end of the most recent year, the following information is available:Carrying AmountEast Division $ 75South DivisionGoodwillFC has determined that the estimated recoverable value of the two divisions together is $215.
38 End-of-Chapter Practice 16-3 InstructionsIdentify the asset, cash-generating unit, or group of CGUs that FC should use to test for impairment.Is there an impairment loss at the end of the current year? Explain how you determined your answer.If applicable, indicate how any impairment loss should be accounted for. Be specific.
39 End-of-Chapter Practice 16-4 In this chapter, flag icons identify areas where there are GAAP differences between IFRS requirements and national standards.InstructionsAccess the website(s) identified on the inside back cover of this book, and prepare a concise summary of what the differences are that are flagged throughout the chapter material.