1. Impairment of Assets: IAS 36
Wiecek and Young
IFRS Primer
Chapter 16

2. Impairment of Assets Related standards IAS 36 Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice

3. Related Standards FAS 157 Fair value measurements
FAS 144 Accounting for the impairment or disposal of long-lived assets
FAS 142 Goodwill and other intangible assets
FAS 141 Business combinations

4. Related Standards IFRS 3 Business combinations
IAS 16 Property, plant and equipment
IAS 17 Leases
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in associates
IAS 31 Interests in joint ventures
IAS 38 Intangible assets
IAS 40 Investment property

5. IAS 36 – Overview Objective and scope
Identifying an asset that might be impaired
Recognizing and measuring an impairment loss for an individual asset
Recognizing and measuring an impairment loss for cash-generating units and goodwill
Reversing an impairment loss
Disclosure

6. 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”

7. IAS 36 – Objective and Scope
IAS 36 excludes:
inventories
assets arising from construction contracts
employee benefit assets
deferred tax assets
financial assets under IAS 39
non-current assets or disposal groups held-for-sale
investment property, biological assets based on FV measurements

8. IAS 36 – Objective and Scope

9. IAS 36 – Identifying an Asset that May Be Impaired
Assets
end of each reporting period
assess for indications of impairment
if indications of impairment, test for impairment
Intangibles with indefinite lives, those not yet ready for use, and goodwill
annually
test for impairment regardless of indications of impairment

10. IAS 36 – Identifying an Asset that May Be Impaired
Indication of impairment? Consider:

11. 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, and
value in use

12. 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”

13. 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 value
Disposal costs: e.g., legal costs, transaction taxes, removal costs, costs to put in condition for sale

14. 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 disposal
Two 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.

15. IAS 36 – Identifying an Asset that May Be Impaired
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.

16. 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

17. 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 flows
Includes assets
directly involved, and
those allocated to the CGU on a reasonable basis

18. 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 combination
at lowest level in organization that manages the goodwill
not on an arbitrary basis

19. 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 remaining
base on relative value of the CGU sold to portion retained

20. IAS 36 – Recognizing and Measuring an Impairment Loss for CGUs and Goodwill
Testing CGUs for impairment
CGUs with related G/W not allocated specifically:
Test when an indication of impairment
Loss = CGU carrying amount excluding G/W - recoverable amount 
CGUs with G/W allocated to it
Test at least annually
Loss = CGU carrying amount including G/W – recoverable amount

21. 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 group
allocate remainder to assets in CGU on basis of relative carrying amounts
Loss is impairment loss for individual assets in CGU

22. IAS 36 – Reversing an Impairment Loss
No reversal of impairment loss for G/W
For other assets, reversal permitted if estimates used to determine recoverable amount have changed

23. 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 initially
unless accounted for under the revaluation model – when full reversal is permitted

24. IAS 36 – Reversing an Impairment Loss
For a CGU:
reversal is allocated to the assets of the unit, excluding G/W
on basis of relative carrying amounts
restrictions on individual assets still apply

25. IAS36 – Disclosure For each class of assets:
amount of impairment loss/loss reversals in P&L
line item where loss/reversal is reported
amount of impairment loss/loss reversals on revalued assets in OCI

26. IAS36 – Disclosure Individually material loss/reversal:
explanation of events and circumstances
nature of asset/CGU
how recoverable amount is determined
amount of loss/reversal

27. IAS36 – Disclosure For G/W and intangibles with indefinite lives:
considerably more information provided
enable users to assess reliability of impairment testing
for individually significant intangible assets/CGUs
if individually insignificant, disclose amounts

28. Current GAAP Comparisons
Pages 19 to 20 of 49 of
Pages 82 to 84 of 164 of

29. IFRS Financial Statement Disclosures
Cadbury Schweppes plc
Impairment policy note for goodwill and acquisition intangibles
Page 93 of 153
 Goodwill Note 14
Page 104 of 153

30. Looking Ahead IAS 36 Impairment two recent revisions
resulting from project on business combinations
changes to IAS 27 and IFRS 3 – released in 2008
related to impairment test for goodwill
Impairment
part of longer term convergence
no short or medium term changes likely

31. 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 Oldsford-Remoteville route, but is not familiar with IAS 36.
Instructions
Write a short memo to AA’s controller, identifying how he should proceed in determining whether the Remoteville assets are impaired.

32. 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
____ Depreciation
Tools and dies $ $ 6
Specialized equipment
General equipment
The 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.

33. End-of-Chapter Practice
16-2 Instructions
Briefly 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.

34. 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 Amount
East Division $ 75
South Division
Goodwill
FC has determined that the estimated recoverable value of the two divisions together is $215.

35. End-of-Chapter Practice
16-3 Instructions
Identify 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.

36. End-of-Chapter Practice
16-4 In this chapter, flag icons identify areas where there are GAAP differences between IFRS requirements and national standards.
Instructions
Access 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.

37. Copyright © 2010 John Wiley & Sons, Inc. All rights reserved
Copyright © 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Inc., 111 River Street, Hoboken, NJ , (201) , fax (201) , website The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.