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Summary Impairment of assets Ias36

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This document includes all the important summary with regards to Impairments which is Ias36 in the international financial reporting standards. The document includes all of the following; - calculating the recoverable amount - when to test for impairment - impairments on cash generating unit ...

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  • December 19, 2022
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  • 2021/2022
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Study unit 5 Chapter 11

Impairment
5.1. IAS 36
 Impairment loss: CA – recoverable amount = impairment loss (if positive answer); CA > Recoverable amount

RECOVERABLE AMOUNT = HIGHEST OF VALUE IN USE OR (FV – SELLING COST)
Fair value (FV) Price that would be received to sell asset in transaction to market on the measurement date
Additional costs that are directly attributable [legal costs, transfer costs, costs of removal, transaction
Selling costs taxes e.g. VAT] to the sale of an asset or cash-generating unit, excluding financing costs and income
tax expense
PV of future cash flows that are expected to be derived from an asset or cash-generating unit
NPV: 0 → ENT → year 1 → ENT → year 2 → ENT → year 3 → ENT → year 4 OR (year 3 x growth rate) +
Value in use
income when disposed – cost incurred when selling → ENT → before-tax discount rate → I/Y → 2ndF
CFi PV comp

INCLUDE: cost saving/other benefits due to restructuring ONLY if entity is committed to restructuring;
cashflows due to asset’s performance included ONLY if: improvement costs were actually incurred
OR improvement costs form part of restructuring and entity is committed to the restructuring
Cashflows used in value in use
EXCLUDE: depreciation; future finance charges, tax and capital expenditure incurred to improve
asset’s performance if not yet incurred; cost of future restructuring (retrenchment packages)
irrespective of whether entity is committed to restructuring or not

 Scope: All assets except: inventory, construction contracts, deferred tax assets, employee benefits, financial assets,
investment property (held against VAT), biological assets, assets for insurance contracts and assets held for sale
 Assets that should be tested for impairment every year (irrespective of indicator being present or not): Intangible asset with
infinite useful life; Asset not ready for use; Goodwill obtained in business combination

IMPORTANT TO REMEMBER:
 Depreciation of asset starts when it is available for use, and not just after it is actually put into use
 Residual value = current price of asset at same age as when we want to sell – current price of sales costs


When to test for impairment?


Mandatory for:
If there is an indicator of ▪ Intangible assets with an
impairment. indefinite useful life
Annual rating tests ▪ Assets not yet ready for
Indicators are reviewed on use
each reporting date. ▪ Goodwill obtained in
business combiantion

▪ Evidence of aging or physical
damage
▪ Unfavourable changes in extent
When? Internal indicators
to which asset used
▪ Econimical performance of asset
is worse than expected


▪ Sharp decrease in market value
▪ Unfavourable changes in technological,
market, economic or legal environment
External indicators ▪ Sharp changes in interest rates that ould
increase discount rate
▪ CA of net assets is higher than market
capitalization


Cash generating unit (CGU)

 CGU = smallest group of assets that independently generate cash flows, e.g. lecturing hall at a university
 When individual asset CAN’T generate cash flows on its own (e.g. projector in the lecture hall), we do not know what its
value in use is; therefore we rather calculate value in use for CGU as a whole


ACCC 371 @ NWU 2021 Ruané la Grange © 083 292 2662 1

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