1. Chapter 9
Impairment of Assets

2. Overview
If the company is not expected to recover the carrying amount of the asset, then an impairment loss exists.
All assets must be impairment tested unless their valuation is specifically addressed under another Accounting Standard.

3. Impairment Indicators
9.1
Impairment and
Impairment Indicators

4. Impairment
AASB 136 Impairment of Assets aims to ensure that assets are not carried at amounts that exceed their recoverable amount.

5. Impairment Loss
An impairment loss is the amount by which the carrying amount exceeds the recoverable amount.
An impairment loss is required to be recognised in the Income Statement.

6. The Impairment Test

7. Key Definitions
Carrying amount –the asset after deducting accumulated depreciation and impairment loss.
Recoverable amount – the higher of the fair value of the asset less costs to sell and its value in use.

8. Key Definitions
Fair value – the amount obtainable from the sale of an asset.
Value in use – is the present value of future cash flows expected f.rom an asset

9. Impairment of Assets
If impairment indicators exist the entity must estimate the recoverable amount at each reporting date
An entity must determine annually the recoverable amount of:
Intangible assets with indefinite useful lives, and
Goodwill acquired in a business combination

10. Impairment Indicators
Impairment indicators are signals that an asset’s carrying amount may exceed its recoverable amount.

11. AASB 136: Impairment Indicators
AASB 136 requires the following impairment indicators to be considered as a minimum.
They are internal or external indicators.

12. External Indicators Significant decline in market value of an asset
Significant adverse changes in the technological, market, economic or legal environment
Significant increases in interest rates or cost of capital.
Carrying amount of net assets exceeds market capitalisation

13. Evidence of physical damage to or obsolescence of the asset.
Internal Indicators
Evidence of physical damage to or obsolescence of the asset.
Significant changes have occurred, or are likely to occur, in the business that will adversely affect the use of the asset.
Evidence that the economic performance of the asset is less than expected.

14. Identify assets that may be impaired and
9.2
Identify assets that may be impaired and
assets that are excluded from impairment testing

15. Impairment Testing
AASB 136 applies in accounting for impairment of all assets.
Exceptions are given for assets which have specific standards and methods of evaluation.

16. Exclusions from Impairment Testing
Inventories.
Assets arising from construction contracts.
Deferred tax assets.
Assets arising from employee benefits.
Financial assets within the scope of AASB139
Investment property measured at fair value.
Biological assets.
Non-current assets classified as held for sale.

17. Assets within scope of AASB136
Subsidiaries, associates or joint venture interests.
Property, plant and equipment.
Goodwill.
Other Intangible assets.

18. 9.3
Recoverable Amount

19. Recoverable Amount
Recoverable amount is defined as the higher of the asset’s fair value less costs to sell, and its value in use.
If one is calculated and is higher than the carrying amount, impairment does not exist and the other does not need to be calculated.

20. Recoverable Amount
Recoverable amount is determined for an individual asset unless it does not generate cash flows independent of other assets.
In this case assets would be grouped into a single cash generating unit (CGU) for measuring the recoverable amount.

21. Calculating an Asset’s Value
9.4
Calculating an Asset’s Value

22. Fair value less cost to sell
Fair value is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable willing parties.
Costs to sell are disposal costs that are not already recognised as liabilities, such as legal fees.

23. Value in Use
Value in use is the present value of future cash flows expected to be derived from an asset or cash generating unit.
Future cash inflows and outflows to be derived from the continued use of the asset and its ultimate disposal must be estimated.
An appropriate discount rate is applied to these future cash flows.

24. Value in Use Calculation
The calculation should incorporate:
Value Use Calculation
Estimated future cash flows
Expectations about future variation in cash flows
Time value of money by applying the current risk-free market interest rate
The price for uncertainty inherent in the asset
Other relevant factors

25. Present Value Calculations
AASB136 describes two approaches to present value calculation:
Traditional approach.
Expected cash flow approach
The approaches can be chosen in terms of whether five to be used in calculation are in the cash flow or discount rate.

26. Present Value Calculations

27. Traditional Approach
Most common approach. Identifies a single set of cash flows and discounts them at a risk adjusted discount rate. Used to identify the exact timing of cash flows.

28. Expected Cash Flow Approach
Probabilities about timing and magnitude of cash flows are included in the cash flow estimates rather than the discount rate.. Primarily used where cash flow is uncertain. Uses a risk-free discount rate

29. Example of Present Value Calculations
Expected cash flow approach:
Cash flow = (4,000 x 0.25) + (10,000 x 0.80) + (20,000 x 0.10) = $11,000
Traditional approach:
Cash flow = $10,000 (the most probable outcome)

30. Recognise and Measure Impairment Loss
9.5
Recognise and Measure Impairment Loss

31. Recognise and Measure Impairment Loss
Carrying amount
Recoverable amount

32. Impairment Loss
Impairment loss is the reduction of the carrying value of an asset to the recoverable amount if the recoverable amount is less.

33. Example

34. Revaluation Decrement
Where an asset is carried at a re-valued amount under another standard, the loss is treated as a revaluation decrement.

35. Example

36. Impairment of a Depreciable Asset
If the impairment loss is in respect of a depreciable asset, future depreciation needs to be adjusted based on the carrying amount at the time of impairment less the accumulated impairment loss.

37. Reversal of Impairment Loss for Individual Assets
An entity should assess whether an impairment loss recognised in a prior period for an asset, other than goodwill, may have reversed.
If there is evidence, then the recoverable amount should be estimated.

38. Goodwill – the Exception
An impairment loss on goodwill cannot be reversed.

39. Testing Goodwill for Impairment
9.6
Testing Goodwill for Impairment

40. Testing Goodwill for Impairment
For impairment testing, goodwill acquired in a business combination must be allocated to the associated cash generating units (CGUs).

41. The group to which goodwill is allocated should:
( a ) Represent the lowest level at which goodwill is monitored for management purposes, and
( b ) Not be larger than a primary or secondary business segment defined under AASB 114 Segment Reporting. These business segments are distinguishable components of a business and may be primarily distinguishable by:
Business type, for example, product or
Geography.
The internal reporting system of a business is typically used as the basis for identifying segments.
Chapter 9

42. Timing of Impairment Testing
A CGU that has goodwill allocated to it must be tested for impairment annually AND whenever an impairment indicator exists.
Goodwill should be allocated to the group which:
Represent the lowest level at which goodwill is measured.
Not be larger than a reportable segment defined under AASB8 Operating Segments.

43. Disposal of operation within a CGU
If a CGU operation is disposed of, the amount of the goodwill associated with the operation is measured based on the how much of the CGU is retained compared to how much is sold.

44. Example of an Operation Within a CGU

45. Accounting Treatment of Impairment Loss for a Cash Generating Unit
9.7
Accounting Treatment of Impairment Loss for a Cash Generating Unit

46. Accounting Treatment
Like individual assets, an impairment loss for a CGU needs to be recognised if the recoverable amount is less than the carrying amount.
The impairment loss is allocated to reduce the carrying amount in the following order:
1. Goodwill allocated to that GCU
Other assets of the CGU on a pro rata basis

47. Reversal of an impairment loss for a CGU
In allocating a reversal, the carrying amount of an asset shall not be increased above the lower of its recoverable amount and the carrying amount that would have been determined had no impairment loss been recognised.
An impairment loss for goodwill shall not be reversed in a subsequent period.

48. Accounting Entries for Impairment of Goodwill
9.8
Accounting Entries for Impairment of Goodwill

49. Impairment Losses - Goodwill
Goodwill should be measured at cost less any accumulated impairment losses (AASB 136).
Goodwill should be assessed annually and written down is necessary in accordance with AASB 3.