topic 7 impairment of assets a122 1

7/30/2019 Topic 7 Impairment of Assets A122 1

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TOPIC 7

IMPAIRMENT OF

ASSETS (MFRS 136)

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CONCEPTOF IMPAIRMENT

Some non-current assets are subjected to asudden, dramatic drop in market value dueto a substantial decline in value of theassets, economic changes, technologicaladvancements and fluctuation in marketinterest rate.

All these factors would lead to a

phenomenon which called impairments

The value or benefits of assets declined tothe value expected to be recovered from theuse of the assets.

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MFRS 136 IMPAIRMENTOF ASSETS

Applicable to impairment of:

Property, Plant and Equipment (MFRS 116)

Intangible assets (MFRS 138)

Goodwill (MFRS 3) Investment in subsidiary (MFRS 127)

Investment in associate (MFRS 128)

Interest in joint venture (MFRS 131)

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RECOGNITIONOF IMPAIRMENT

Para 59: an asset is considered as impaired when:

Carrying amount (PPE) = cost accumulateddepreciation

Recoverable amount:

= The higher of,

carrying amount > recoverable amount

Fair value cost to sell

Value in use

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carrying value should be reduced to the

recoverable amount

Impairment loss= carrying amount recoverable amount

If recoverable amount > carrying amount: an asset is not impaired

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Example 7.1:

Cost 1,000

Accumulated depreciation 400Carrying amount 600

Recoverable amount 400

Impairment loss 200

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Journal entry:

Dr Impairment Loss 200Cr Accumulated Impairment 200

New carrying amount

= Cost accum depreciation accum impairment

New carrying amount = 1,000 400 200

= 400

(equal to recoverable amnt)7


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IDENTIFYAN IMPAIRED ASSET (PARA 12)

(a) External Sources of Information

i) Assets market value has declined significantly more than

would be expected as a result of the passage of time or

normal use.

ii) Significant changes with an adverse effect on the entity have

taken place in the near future, in the technological, market,

economic or legal environment in which the entity operates or

in the market to which an asset is dedicated.

iii) Market interest rates or other market rates of return oninvestments have increased during the period.

iv) The carrying amount of the net assets of the entity is more

than its market capitalization. 8


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IDENTIFYAN IMPAIRED ASSET

(b) Internal Sources of Information

i) Evidence is available of obsolescence or physical damageof an asset.

ii) Significant changes with an adverse effect on the entity have

taken place during the period, or are expected to take placein the near future, in the extent to which, or manner in which,an asset is used or is expected to be used. These changesinclude the asset becoming idle, plans to discontinue or

restructure the operation to which an asset belongs, plans todispose of an asset before the previously expected date,and reassessing the useful life of an asset as finite rather

than indefinite.

iii) Evidence is available from internal reporting that indicatesthat the economic performance of an asset is, or will be,worse than expected.

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IDENTIFYAN IMPAIRED ASSET (PARA 12)

(a) Physical damage to an asset

(b) Significant decline in the market value of an

asset

(c) Lower-than-expected economic performance of

a segment

(d) Discontinuance or restructuring of operation

(e) Significant changes in the technological,

economic or legal environment

(f) Significant change in the interest rate

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RECOVERABLEAMOUNT:

FAIRVALUELESSCOSTTOSELL

Best resource - price in a binding sale agreement in an

arms length transaction minus cost of transaction

If unavailable but the asset has active market - market

price minus its selling cost.

If both unavailable - refer to most recent transaction.

Cost to sell = legal cost, stamp duty, cost of removing

the assets.

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RECOVERABLE AMOUNT:

VALUE IN USE

Definition = present value of the future cash

flow expected to be derived from an asset.

Bases for estimate =1. cash flow projection on reasonable and

supportable assumption

2. cash flow projection on most recent

financial budget approved by management

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EXAMPLE 7.2:

CALCULATIONOFVALUEINUSE

YearFuture cash flow

RM

Present value

factor at 15%

discount rate

Discounted

future cash

flow

2009 560 0.86957 487

2010 450 0.75614 340

2011 690 0.65752 454

2012 740 0.57175 423

2013 800 0.49718 398

Value in

use2,102

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Example Annual Report 2007 of Ekowood Bhd

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RECOGNITION & MEASUREMENTOF

IMPAIRMENT LOSS

a) Property, Plant and Equipment

b) Goodwill

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IMPAIRMENT LOSS:

PROPERTY, PLANTAND EQUIPMENT

The accounting treatment :

a) cost model

b) revaluation model

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IMPAIRMENT LOSS:


Cost Model

Carrying amount (balance sheet)

= Cost accm. Dep accm. Impairment

Journal entry:

Impairment loss should be recognized in income

statement immediately.

Dr Impairment loss XXX

Cr Accumulated Impairment XXX

( to record impairment loss during the year )

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IMPAIRMENT LOSS:


Example 7.3:On 1 January 2006, Vision Berhad acquired a piece of machinery at

RM150,000. The machine is expected to have useful life of 5 years

with no salvage value. At the end of 2007, the market value of the

machine suffered a significant decline. The company estimated the

recoverable amount of the asset as in the information provided below:

Net selling price: RM60,000

Value in use: RM55,000

Suggested solution:

Recoverable amount = RM60,000 (the higher is net selling price)

Carrying amount of machine = [RM150,000 (RM150,000/5 x 2)]

= RM90,000

Impairment loss = RM30,000 18


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IMPAIRMENT LOSS:


Example (cont)

Journal entry:

Dr Impairment loss 30,000

Cr Accumulated impairment 30,000

New carrying amount (end 2007)

= 150,000(cost) 60,000(acc. Dep.) - 30,000(acc.impairment)

= 60,000 (equal to recoverable amount)

The calculation of depreciation for 2008, will be based on newcarrying amount. If the expected useful life is unchanged, thedepreciation charge for 2008 is RM20,000 (RM60,000/3 years).

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IMPAIRMENT LOSS:


Reversing an Impairment Loss (Cost Model)

If indication that led to the recognition of impairment loss is

cease, the company needs to estimate the new recoverable

amount based on current asset situation.

Impairment loss which was recognized in the previous yearmay need to be reversed, or the carrying amount of the asset

be increased to a new recoverable amount

the increased carrying amount of an asset attributable to a

reversal of an impairment loss should not be more than the

carrying amount that would have been determined had noimpairment loss been recognized for the asset in previous

years.

the amount of write-back should be reduced by the amount

that would have been recognized as depreciation, if the

write-down had not occurred.

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IMPAIRMENT LOSS:


Reversing an Impairment Loss (Cost Model)(cont)

Refer to example 7.3, assuming that at the end of year 2008,

the company re-assesses and estimates that the recoverable

amount of the machine is RM70,000. The write-back of

impairment loss is calculated as follows:

If no impairment loss was recognized in year 2007, the

details for the machine will be:

Carrying amount = RM150,000 (RM150,000/5 3)

= RM60,000

Depreciation charge per year = RM30,000 (RM150,000/5) 21


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IMPAIRMENT LOSS:


Reversing an Impairment Loss (Cost Model)(cont)

The standard requires that the increase in carrying amountshould not exceed the carrying amount that would have beendetermined if no impairment loss had been recognized for theasset in previous years.Thus, the increment should not

exceed RM60,000, or in this case, the new carrying amountafter reversal is RM60,000.

The journal entry:

Dr Accumulated impairment 30,000

Cr Accumulated depreciation 10,000

Write-back of impairment loss 20,00022


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IMPAIRMENT LOSS:


Reversing an Impairment Loss (Cost Model) (cont)

The amount of write-back would be equal to the re-instatement of the RM30,000 previously written down,reduced by the amount of depreciation of RM10,000

[150,000/5 (depreciation with no impairment) RM20,000(depreciation after impairment) ] that had not been recordedin 2008 because of the impairment.

After the reversal, the carrying amount of the machine will

be RM60,000 [cost RM150,000 accumulated depreciation(30,000 3), as it would have been without the impairmentrecognition in 2007 and the reversal in 2008.

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IMPAIRMENT LOSS:


Revaluation Model

assets are carried at revalued amount less any

subsequent accumulated depreciation and accumulated

impairment

Impairment loss is recorded as a revaluation decrease

(or increase) and the journal entry:

Dr Revaluation Reserve RMXXX

Cr Accumulated Impairment RMXXX

( to record impairment loss during the year )

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IMPAIRMENT LOSS:


Example 7.4: Revaluation Model

A piece of land was acquired in 2006 at the cost of RM20,000. In2007, the company revalued the asset to RM25,000 and thejournal entry will be:

Dr Assets RM5,000

Cr Revaluation reserve RM5,000

In 2008, the company did an impairment test and found that therecoverable amount was RM23,000. The impairment loss ofRM2,000 is accounted as revaluation decrease as journalized

below:

Dr Revaluation reserve RM2,000

Cr Accumulated impairment RM2,00025


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IMPAIRMENT LOSS:


Example 7.5

A piece of land was acquired by RIMA Bhd in 2006. The table

below list several events related with the land.

Year Events

2006 Acquired an asset at cost of RM20,000

2007 Revalue the asset at RM25,000

2008 Recoverable amount of RM18,000

2009 Recoverable amount of RM23,000

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IMPAIRMENT LOSS:


Suggested solution:

Journal entry:

2007

Dr Land 5,000

Cr Revaluation reserve 5,000

2008

Dr Revaluation reserve 5,000

Impairment loss 2,000Cr Accumulated Impairment 7,000

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IMPAIRMENT LOSS:


2009

Dr Accumulated Impairment 5,000

Cr Revaluation reserve 3,000

Write-back of impairment loss 2,000

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IMPAIRMENT LOSS - GOODWILL

Categorized as unidentifiable intangible asset.

Arise on business combination

Calculated as difference between cost of

acquisition and net fair value of identifiable netassets.

Referred to residual asset that cannot be

individually identified

Hence, cash flow associated with the specific

asset (goodwill) cannot be reliably measured and

then it is not possible to determine fair value less

cost to sell for goodwill30


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IMPAIRMENT LOSS - GOODWILL

Impairment test for goodwill cannot be tested on its own not

identifiable

At acquisition date, goodwill should be allocated to each cash

generating units (CGU)

CGU- represent the smallest identifiable group of assets that

generate cash inflows from other group of assets.

Ex: manufacturing plant, supermarket outlet.

Impairment test for goodwill should be performed annually and

whenever there is indication that the unit may impaired.

Impairment loss for a CGU should be allocated to reduce the

carrying amount of the assets of the units according to thefollowing order:

i) Reduce the carrying amount of any goodwill allocated to

the CGU

ii) Reduce the carrying amount of other assets of the unit on

pro-rata basis.

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IMPAIRMENT LOSS GOODWILL

Example:In January 2008, Sejati Bhd acquired 100% interest in Bersatu Bhd

for RM10 million. Bersatu Bhd operation consist of manufacturing unitand hypermarket unit. Bersatu Bhds net fair value of identifiable assetis RM8 million (RM4 million from each manufacturing unit andhypermarket unit).Goodwill is allocated 40% to manufacturing unitand 60% to hypermarket unit.

At the end of 2008, the hypermarket unit of Bersatu Bhd wasadversely effected by the development of new business park. Therecoverable amount of the Hypermarket unit at end 2008 is RM4.1 m.

The carrying amount of the unit is:

Hypermarket Unit Goodwill NetIdentifiable

assets

Total

Cost 1.2 m 4 m 5.2 m

Depreciation - 0.1 m 0.1 m

Carrying amount 1.2 m 3.9 m 5.1 m

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Answer:

Impairment loss = 5.1 m 4.1 m

= 1 million

Journal entry:

Dr Impairment loss 1 m

Cr Goodwill 1 m

( record impairment loss)

Carrying amount of Goodwill = 0.2 million

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Answer (cont):

But if the recoverable amount is RM3.6 million.

Impairment loss = RM5.1 m RM3.6m

= RM1.5 m (higher than goodwill RM1.2m)

1. The impairment loss first is allocated to goodwill, writing downto zero.

2. The balance will be allocated to carrying amount of

identifiable assets on pro-rata basis.

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Answer (cont..): Assuming that at end of 2008 hypermarket unit comprise of

Building and equipment RM3 m (net), Inventory RM1 m andnet monetary liabilities RM0.1.

The journal entry:

Dr Impairment loss 1.2 mCr Goodwill 1.2 m

Dr Impairment loss 0.3 m

Cr Accumulated depreciation-

Building and Equipment* 0.225 m

Cr Inventory (0.3m x 0.25) 0.075 m

( to record and allocate impairment loss on pro-rata basis )

* (0.3m x 0.75)35


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REVERSALOF IMPAIRMENT LOSS GOODWILL

Prohibited under MFRS 136

Reason- any increase in the recoverable amount

of goodwill is likely to be an increase in internally

generated goodwill (the recognition is prohibited

under MFRS 138 Intangible Assets.

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topic 7 impairment of assets a122 1

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