ACBP6221 LU5
ACBP6221 LU5 IAS36 – Impairment of assets
5.1 Introduction
Assets can be damaged which decreases the benefits that a business can get through the
use or sale of the asset – “impairment”
The carrying value of assets should always reflect their current worth and not be overstated.
5.2 Objectives and Scope
5.2.1 Objectives
Objective is to ensure no asset is carried at a value greater than the asset’s recoverable
amount (amount that would be recovered through sale or use of the asset).
If the CV of asset > recoverable amount – asset is impaired
If an asset is impaired, an impairment loss must be recognised.
5.2.2. Scope
IAS16 applies to all assets other than:
- Inventories
- Contract assets and assets arising from costs to obtain or fulfil a contract that are
recognised with IFRS15
- Deferred tax assets
- Assets arising from employee benefits
- Financial assets that are within the scope of IFRS 9
- Investment property that is measured at FV
- Biological assets related to agricultural activity
- Deferred acquisition costs and intangible assets arising from an insurer’s contractual
rights under insurance contracts
- Non-current assets classified as held for sale
Applies to assets carried at revalued amounts (revaluation model of PPE and IP).
5.3 Key terms
Impairment loss = amount by which the CV of an asset exceeds its recoverable amount
Recoverable amount = higher value of an assets fair value less costs of disposal and its
value in use
Value in use = present value of the future cash flows expected to be derived from an asset
Fair value = the price that would be received to sell an asset or pair to transfer a liability in
an orderly transaction between market participants at the measurement date
Costs of disposal = incremental costs directly attributable to the disposal of an asset
excluding finance costs and income tax expense
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, ACBP6221 LU5
5.4 Identifying an impaired asset
An asset is impaired when its carrying value is greater than its recoverable amount.
End of each reporting period, an entity should determine whether as asset shows indications
of impairment
- If yes – entity should estimate the recoverable amount of the asset
- If no – no formal estimate of the recoverable amount is required
Following should be tested yearly for impairment:
- Intangible assets with indefinite useful lives and intangibles assets not yet available
for use
o Impairment test may be done at any time during the reporting year (has to be
taken at the same time each year)
o Different intangible assets may be tested for impairment at different times
o If the recognition of the IA was in the current period, it should be tested for
impairment before the end of current financial year
o Asset
Intangible assets not yet available for use, needs to be tested annually
- Goodwill acquired in a business combination
Indications an asset might be impaired, we look at external sources and internal sources of
info.
External sources of information
- Assets market value has decreased more than expected
- Changes in entity’s economic, technological, market or legal environment
- Market interest rates have increased and these interest rates impact the discount
rate used in the entity’s calculation of value in use causing a material decrease in the
asset’s recoverable amount
- Carrying amount of the net assets of the entity exceeds its market capitalisation
o Equity > (number of shares issued x trading share price)
Internal sources of information
- Available evidence of the assets obsolescence or physical damage
- Changes that impact the extent/ manner in which the asset is used
- Internal reporting evidence that shows the economic performance of the asset is or
will be worse than expected
Indicators of impairment that are derived from evidence from internal reporting include the
existence of:
- Cash spent on asset is higher than predicted
- Cash coming from asset is lower than expected
- Decline in profit flowing from asset
When there are signs of impairment, it suggests that the remaining useful life, the
depreciation method or the residual value of the asset needs to be reviewed or adjusted.
2
ACBP6221 LU5 IAS36 – Impairment of assets
5.1 Introduction
Assets can be damaged which decreases the benefits that a business can get through the
use or sale of the asset – “impairment”
The carrying value of assets should always reflect their current worth and not be overstated.
5.2 Objectives and Scope
5.2.1 Objectives
Objective is to ensure no asset is carried at a value greater than the asset’s recoverable
amount (amount that would be recovered through sale or use of the asset).
If the CV of asset > recoverable amount – asset is impaired
If an asset is impaired, an impairment loss must be recognised.
5.2.2. Scope
IAS16 applies to all assets other than:
- Inventories
- Contract assets and assets arising from costs to obtain or fulfil a contract that are
recognised with IFRS15
- Deferred tax assets
- Assets arising from employee benefits
- Financial assets that are within the scope of IFRS 9
- Investment property that is measured at FV
- Biological assets related to agricultural activity
- Deferred acquisition costs and intangible assets arising from an insurer’s contractual
rights under insurance contracts
- Non-current assets classified as held for sale
Applies to assets carried at revalued amounts (revaluation model of PPE and IP).
5.3 Key terms
Impairment loss = amount by which the CV of an asset exceeds its recoverable amount
Recoverable amount = higher value of an assets fair value less costs of disposal and its
value in use
Value in use = present value of the future cash flows expected to be derived from an asset
Fair value = the price that would be received to sell an asset or pair to transfer a liability in
an orderly transaction between market participants at the measurement date
Costs of disposal = incremental costs directly attributable to the disposal of an asset
excluding finance costs and income tax expense
1
, ACBP6221 LU5
5.4 Identifying an impaired asset
An asset is impaired when its carrying value is greater than its recoverable amount.
End of each reporting period, an entity should determine whether as asset shows indications
of impairment
- If yes – entity should estimate the recoverable amount of the asset
- If no – no formal estimate of the recoverable amount is required
Following should be tested yearly for impairment:
- Intangible assets with indefinite useful lives and intangibles assets not yet available
for use
o Impairment test may be done at any time during the reporting year (has to be
taken at the same time each year)
o Different intangible assets may be tested for impairment at different times
o If the recognition of the IA was in the current period, it should be tested for
impairment before the end of current financial year
o Asset
Intangible assets not yet available for use, needs to be tested annually
- Goodwill acquired in a business combination
Indications an asset might be impaired, we look at external sources and internal sources of
info.
External sources of information
- Assets market value has decreased more than expected
- Changes in entity’s economic, technological, market or legal environment
- Market interest rates have increased and these interest rates impact the discount
rate used in the entity’s calculation of value in use causing a material decrease in the
asset’s recoverable amount
- Carrying amount of the net assets of the entity exceeds its market capitalisation
o Equity > (number of shares issued x trading share price)
Internal sources of information
- Available evidence of the assets obsolescence or physical damage
- Changes that impact the extent/ manner in which the asset is used
- Internal reporting evidence that shows the economic performance of the asset is or
will be worse than expected
Indicators of impairment that are derived from evidence from internal reporting include the
existence of:
- Cash spent on asset is higher than predicted
- Cash coming from asset is lower than expected
- Decline in profit flowing from asset
When there are signs of impairment, it suggests that the remaining useful life, the
depreciation method or the residual value of the asset needs to be reviewed or adjusted.
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