DEFINITIONS NOT SAME IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004 and for all other assets prospectively from the beginning of the first annual period beginning on ID: 437025
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Slide1
IMPAIRMENT OF ASSETSSlide2
DEFINITIONSSlide3
NOT SAMESlide4Slide5
IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004, and for all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004.Slide6
IAS 36 Impairment of Assets (the standard) sets out the
requirements to account for and report impairment of most non-financial assets.
IAS 36 specifies when an entity needs to perform an impairment test, how to perform it, the recognition of any impairment losses and the related disclosures. Having said that, the application of IAS 36 is wide and its requirements may be open to interpretation. The recent economic uncertainty has thrown a spotlight on impairment. As such, many entities have decided to reassess their impairment testing processes, models and assumptions.Slide7
IAS 36
Impairment of Assets
seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely independent of those from other assets.Slide8
IAS 36 deals with impairment testing for all tangible and
intangible assets, except for assets that are covered by other IFRS. IAS 36 requires that assets be carried at no more than their recoverable amount. To meet this objective, the standard requires entities to test all assets that are within its scope
forpotential
impairment when indicators of impairment exist or, at least, annually for goodwill and intangible assets with indefinite useful lives.
Impairment principle and key
requirementsSlide9
Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount
.
Carrying amount:
the amount at which an asset is
recognised
in the balance sheet after deducting accumulated depreciation and accumulated impairment losses
Key
DefinitionsSlide10
Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use
.
Fair value:
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Value in use:
the present value of the future cash flows expected to be derived from an asset or cash-generating unitSlide11Slide12Slide13Slide14
If we should not determine the recovarable amaount, then
we
determine the recoverable amount for the cash-generating unit (CGU) to which that asset belongs
.
The CGU is the smallest identifiable group of assets
:
* that generates cash inflows from continuing use, and
* that are largely independent of the cash inflows from other assets or groups of assets.
Cash Generating UnitSlide15Slide16
If you are not able to determine recoverable amount for an individual asset, then you might need to establish cash-generating unit to which this asset belongs.
For example, you might not be able to set the fair value less costs to sell for used 5 years-old pizza oven as the quotes might not be available. At the same time, you might not be able to calculate pizza oven’s value in use because you really cannot estimate future cash inflows from pizza oven – this pizza oven does not generate any cash inflows itself.
Therefore your need to establish cash-generating unit for this pizza oven – it would probably be the whole pizzeria.Slide17
The standard requires an entity to assess, at each reporting date,
whether there are any indicators that assets may be impaired.
An entity is required to consider information from both external
sources (such as market interest rates, significant adverse changes
in the technological, market, economic or legal environment in
which the entity operates, market
capitalisation
being lower than
net assets) and internal sources (such as internal restructurings,
evidence of obsolescence or physical damage to the asset).
Notwithstanding whether indicators exist, recoverability of
goodwill and intangible assets with indefinite useful lives or
those not yet in use are required to be tested at least annually.
Indicators
of
ImpairmentSlide18
External sources:
market value declines
negative changes in technology, markets, economy, or laws
increases in market interest rates
net assets of the company higher than market
capitalisation
Internal
sources:
obsolescence
or physical damage
asset is idle, part of a restructuring or held for disposal
worse economic performance than expected
for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee's assets, or a dividend exceeds the total comprehensive income of the investeeSlide19
Value in use (VIU) is the present value of the
future cash flows expected to be derived from an asset or a CGU
.
Value
in
UseSlide20
A VIU
calculation
includes
:Slide21Slide22Slide23
Fair value less costs to sell (FVLCS) is the amount obtainable from the sale of the asset in an arm’s length transaction between
k
nowledgeable
and willing parties, less the costs of disposal.
Fair
V
alue
L
ess
C
osts
to
S
ell (FVLCS)Slide24
Both FVLCS and VIU should reflect risk and uncertainty to the
extent that these would be reflected in the price of an arm’s length
transaction. Risk may be reflected by adjusting either the cash
flows or the discount rate, but not both.
Determining an appropriate discount rate that reflects current
market assessments and the appropriate risks (the risks not
already reflected in the cash flows) will often be difficult and will
require consideration and input from financial management, line
management and, perhaps, valuation professionals.
Input from these parties will also be required to formulate
assumptions regarding growth rates used to project cash flows
until the end of the asset’s useful life, which will also require
significant judgment to formulate.
Risk
and
UncertaintySlide25
An impairment loss is recognised
whenever recoverable amount is below carrying amount.
The impairment loss is
recognised
as an expense (unless it relates to a revalued asset where the impairment loss is treated as a revaluation decrease).
Adjust depreciation for future periods.
Recognition of an
I
mpairment
L
ossSlide26
IAS 36 requires extensive disclosures in respect of the impairment tests performed and impairments
recognised
. The disclosures are even more extensive for goodwill than for the impairment of other assets.
DisclosuresSlide27
• The amounts of impairments
recognised
and reversed and the
events and circumstances that were the cause thereof
• The amount of goodwill per CGU or group of CGUs
• The valuation method applied: FVLCS or VIU and its approach in
determining the appropriate assumptions
• The key assumptions applied in the valuation, including the
growth and discount rate used
• A sensitivity analysis, when a reasonably possible change in a
key assumption would result in an impairment, including the
‘headroom’ in the impairment calculation and the amount by
which the assumption would need to change to result in an
impairment.
The key disclosure requirements are the following:Slide28
inventories
assets arising from construction contracts
deferred tax assets
assets arising from employee benefits
financial assets
investment property carried at fair value
agricultural assets carried at fair value
insurance contract assets
non-current assets held for sale
IAS 36 applies to all assets except
;Slide29Slide30
QUESTIONS ?