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
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
