impairment of assets -...

Barbara Sveva Magnanelli

Impairment of Assets

Accounting

2016/2017

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IAS 36

Impairment of Assets – IAS 36

AccountingBarbara Sveva Magnanelli

OBJECTIVE: the objective of this Standard is to prescribe theprocedures that an entity applies to ensure that its assets arecarried at no more than their recoverable amount. An asset iscarried at more than its recoverable amount if its carrying amountexceeds the amount to be recovered through use or sale of theasset. If this is the case, the asset is described as impaired and theStandard requires the entity to recognise an impairment loss.

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SCOPE



This Standard shall be applied in accounting for impairment offollowing asset:

•Goodwill (coming from acquisition);•Intangibles assets;•Non current fixed assets;•Group of assets representing “cash generating unit” (CGU).

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SCOPE



This Standard is not applied in accounting for:• Inventories (IAS 2);• Assets arising from construction contracts (IAS 11);• Deferred tax assets (IAS 12);• Asset arising from employee benefits (IAS 19);• Financial assets that are financial instruments (IFRS 9);• Investment property that is measured at fair value (IAS 40);• Biological assets related to agricultural activity (IAS 41);• Non current assets (or disposal group) classified as held for

sale in accordance with IFRS 5).

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SOME DEFINITIONS



Carrying amount is the amount at which an asset is recognisedafter deducting any accumulated depreciation (amortization) andaccumulated impairment losses. (à Net book value)

Cash generating unit is the smallest identifiable group of assetsthat generates cash inflow that are largely independent of the cashinflows from other assets or group of assets.

Cost on disposal are incremental costs directly attributable to thedisposal of an asset or cash-generating unit, excluding financecosts and income tax expense.

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SOME DEFINITIONS



Fair value is the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date.

Value in use is the present value of the future cash flow expectedto be derived from an asset or cash-generating unit.

Recoverable amount of an asset or cash-generating unit is thehigher of its fair value less costs of disposal and its value in use.

Impairment loss is the amount by which the carrying amount ofan asset or a cash-generating unit exceed its recoverable amount.

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IMPAIRMENT TEST ON A SINGLE ASSET OR ON A CASH GENERATION UNIT



The IAS 36 sets out the process for the impairment test of all theassets and it states:“An assets is impaired when its carrying amount (book value)exceeds its recoverable amount”

Carrying amount > Recoverable amount Impairment test

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Some assets are able to generate cash inflows and outflowsindividually and, then they shall be valuated individually. Someexamples are:

• Licensing trademark;• Licencing patents;• Rented land and building;• Shareholding and joint venture.

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Some other assets are not able to generate cash inflows andoutflows individually and, then they shall be valuated as a cash-generating unit. Some examples are:

• Goodwill;• Trademarks;• Production patents;• Software.

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RECOVERABLE AMOUNT



The Standard states that the impairment test shall be madethrough a comparison between carrying amount and recoverableamount. Two situations may occur:

1. Carrying amount < Recoverable amount à no impairmentlosses are recorded

2. Carrying amount > Recoverable amount à impairment lossis required

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RECOVERABLE AMOUNT



If the impairment test is required, we have to measure the RECOVERABLE AMOUNT

IAS 36 defines the recoverable amount as the higher of an asset’s or cash-generating unit’s fair value less cost on disposal

and its value in use

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RECOVERABLE AMOUNT



the higher between

Fair Value, less cost on disposal Value in use

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It is a current value, related to the market that could correspond to the price for an asset’s sale at that date

FAIR VALUE

It presumes the going concern


At the acquisition date Fair Value = Historical Cost


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o The estimate is determined with reference to a current hypotheticaltransaction between willing parties presumed to be marketplaceparticipants (unrelated buyers and sellers) that are:

• knowledgeable, having a common level of understanding aboutfactors relevant to the asset or liability and the transaction;• willing and able to transact in the same markets, having the legaland financial ability to do so.

FAIR VALUE

Accounting



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It refers, first of all, to prices available and measurable in a free and active market

FAIR VALUE

An active market is a market in which the following conditions exit:• the items traded within the market are homogeneous;• willing buyers and sellers can normally be found at any time;• prices are available to the public.

Accounting



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VALUE IN USE

Accounting

Is the present value of the future cash flows expected to be derived from an asset or cash generating unit



Value in use estimation requires these two steps:• Estimating the cash inflows and outflows to be derived from

continuing use of the asset and from its disposal;• Applying the appropriate discount rate to those future cash flows

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VALUE IN USE

Accounting

Elements to be considered in the calculation of an asset’s value in use:•an estimate of future cash flows the entity expects to derive from the asset;•expectation about possible variations in the amount or timing of those future cash flows;•the time value of money, represented by the current market risk free rate of interest (discount rate);•other factors, such as illiquidity.



NPV= CASH FLOWS / (1+i)^n

18Accounting

IAS 36 states that if, and only if, the recoverable amount of an asset is less than the carrying amount, the carrying amount of

the asset shall be reduced to its recoverable amount.That reduction is an impairment loss.

RECOGNISING AND MEASURING AN IMPAIRMENT LOSS

An impairment loss shall be recognised immediately in profit or loss



19Accounting

An entity shall assess at the end of each reporting period whetherthere is any indication that an impairment loss recognised in priorperiods for an asset other than goodwill may no longer exist ormay have decreased. If any such indication exists, the entity shallestimate the recoverable amount of that asset

REVERSING AN IMPAIRMENT LOSS



An impairment loss recognised in previous periods for an assetother than goodwill shall be reversed if, and only if, there hasbeen a change in the estimates used to determine the asset’srecoverable amount since the last impairment loss wasrecognised.

20Accounting

The increased carrying amount of an asset other than goodwillattributable to a reversal of an impairment loss shall not exceedthe carrying amount that would have been determined (net ofamortization or depreciation) if no impairment loss beenrecognized for the asset in prior years.

REVERSING AN IMPAIRMENT LOSSFOR AN INDIVIDUAL ASSET



A reversal of an impairment loss for an asset other than goodwillshall be recognised immediately in profit and loss, unless theasset is carried at revalued amount in accordance with anotherIFRS (i.e. the revaluation model in IAS 16).

21Accounting

REVERSING AN IMPAIRMENT LOSSFOR A CASH-GENERATING UNIT



A reversal of an impairment loss for a cash-generating unit shallbe allocated to the asset of the unit, except for goodwill, pro ratawith the carrying amounts of those assets.In allocating a reversal of an impairment loss for a cash-generating unit the carrying amount of an asset shall not beincreased above the lower of:1. Its recoverable amount (if determinable);2. The carrying amount that would have been determined (net

amortization and depreciation) had no impairment loss beenrecognised for the asset in prior periods.

22Accounting

REVERSING AN IMPAIRMENT LOSS FOR GOODWILL



An impairment loss recognised for goodwill shall not be reversedin a subsequent years

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