a mine in a country in which there is a legal obligation to restore the site by replacing
the overburden. The restoration provision, which is the present value of the
restoration costs, has been provided for and deducted from the carrying value of the
assets of the CGU. It will be taken into account in the estimation of FVLCD but must
also be deducted in arriving at VIU so that both methods of estimating recoverable
amount are calculated on a comparable basis that aligns with the carrying amount of
the CGU.
There are other provisions for liabilities that would be taken over by the purchaser of a
CGU, e.g. property dilapidations or similar contractual restoration provisions. The
provision will be accrued as the ‘damage’ is incurred and hence expensed over time
rather than capitalised. If the provision is deducted from the assets of the CGU then it
must also be deducted in arriving at VIU and it has to be taken into account in the
estimation of FVLCD.
Indeed, many provisions made in accordance with IAS 37 – Provisions, Contingent
Liabilities and Contingent Assets – may be reflected in the CGU’s carrying amount as long
as they will be treated appropriately in arriving at the recoverable amount of the CGU.
Including the cash outflows that will be paid to settle the contractual obligation in the
VIU discounted cash flow calculation bears the danger of distortion as the cash flows
for impairment purposes will be discounted using a different rate to the rate used to
calculate the provision itself. The carrying amount of this class of liability will reflect a
discount rate suitable for provisions, based on the time value of money and the risks
relating to the provisions. This is likely to be considerably lower than a suitable discount
rate for an asset and the distortion caused by this would have to be considered and
adjusted if the effect is significant. A simple illustration is that the present value of a cash
outflow of €100 in 10 years’ time is €39 discounted at 10% but €68 if a discount rate of
4% is used. Deducting the respective cash flows discounted at the asset discount rate
could result in an overstatement of the CGU’s recoverable amount.
1446 Chapter 20
Therefore, to avoid the danger of distortion and to allow for a meaningful comparison
between the carrying amount of the CGU and the recoverable amount, IAS 36 requires
the carrying amount of the provision to be deducted in determining both the CGU’s
carrying amount and its VIU. [IAS 36.78].
In 2015 the Interpretations Committee received a request to clarify the application of
paragraph 78 of IAS 36. The submitter observed that the approach of deducting the
liability from both the VIU and the CGU’s carrying amount would produce a null result
and therefore asked whether this was really the intention or whether an alternative
approach was required.
In its November 2015 meeting the Interpretations Committee observed that when the
CGU’s fair value less costs of disposal (FVLCD) considers a recognised liability then
IAS 36.78 requires both the CGU’s carrying amount and its VIU to be adjusted by the
carrying amount of the liability. In the Interpretations Committee’s view this approach
provides a straightforward and cost-effective method to perform a meaningful
comparison of the recoverable amount and the carrying amount of the CGU. Moreover,
it observed that this approach is consistent with the requirement in IAS 36 to reflect the
risks specific to the asset in the present value measurement of the assets in the CGU and
the requirements in IAS 37 to reflect the risk specific to the liability in the present value
calculation of the liability.
The Interpretations Committee therefore decided that neither an interpretation nor an
amendment to a Standard was necessary and did not add this issue to its agenda.
As mentioned at 4.1 above from a practical point of view an entity could calculate the
VIU of a CGU without deducting the liability cash outflow and compare that to the CGU
excluding the liability. As long as the calculated VIU is above the CGU’s carrying amount
no impairment would be required and the lack of comparability to the FVLCD would
not cause an issue.
4.1.2
Lease liabilities under IFRS 16
A CGU may include a right-of-use asset recorded under IFRS 16. Right-of-use assets are
assessed for impairment by applying IAS 36.
When it comes to lease arrangements, in most cases a CGU would be disposed of
together with the associated lease arrangements. FVLCD for the CGU would consider
the associated lease arrangements and therefore the need to make the contractual lease
payments. This would require deducting the carrying amount of the lease liabilities
when determining the carrying amount of the CGU.
It is important to note that lease payments reflected in the lease liability recorded in the
statement of financial position will have to be excluded from the VIU calculation. If the
carrying amount of the lease liabilities is deducted to arrive at the carrying amount of
the CGU, the same carrying amount of the lease liabilities would need to be deducted
from the VIU. IAS 36 does not allow the calculation of the VIU on a net basis directly,
through reducing the future cash flows by the lease payments as this bears the risk of
distortion that will arise due to the difference in the discount rate used for the VIU
calculation and the discount rate used to calculate the carrying amount of the lease
liability. [IAS 36.78].
Impairment of fixed assets and goodwill 1447
4.1.3
Trade debtors and creditors
Whether an entity includes or excludes trade debtors and creditors in the assets of the
CGU, it must avoid double counting the cash flows that will repay the receivable or pay
those liabilities. This may be tricky because cash flows do not normally distinguish
between cash flows that relate to working capital items and others. A practical solution
often applied is to include working capital items in the carrying amount of the CGU and
include the effect of changes in the working capital balances in the cash flow forecast.
The following simplified example illustrates the effects of including and excluding initial
working capital items.
Example 20.7: The effects of working capital on impairment tests
At the end of the year, Entity A’s net assets comprise:
€
Carrying value of assets in CGU
100,000
Working capital: net liability
(800)
Its budgeted cash flows before interest and tax for the following five years, including and excluding changes
in working capital, and their net present value using a 10% discount rate are as follows:
Year
1 2 3 4 5 6
€ € € € € €
Pre-tax cash flow (1)
10,000
20,000 30,000 40,000 50,000
Opening
working
capital
(800) (1,500) (3,000) (4,500) (6,000) (7,500)
Closing
working
capital
(1,500) (3,000) (4,500) (6,000) (7,500)
Change in working capital
700
1,500
1,500
&nbs
p; 1,500
1,500
(7,500)
Notes
(1) cash flow before interest,
excluding working capital
changes
Year 5’s closing working capital is treated as a cash outflow in year 6.
Cash flow including opening
working
capital
10,700 21,500 31,500 41,500 51,500 (7,500)
NPV at 10% discount rate
107,251
Cash flow excluding
opening working capital
11,500
21,500
31,500
41,500
51,500
(7,500)
NPV at 10% discount rate
107,979
Including opening working capital:
€
Carrying value of CGU net of working capital
99,200
NPV of cash flow including opening working capital
107,251
Headroom 8,051
Excluding working capital:
€
Carrying value of CGU
100,000
NPV of cash flow excluding opening changes in working
capital 107,979
Headroom 7,979
1448 Chapter 20
Note that the headroom is not exactly the same in both cases, due to the discounting effect of differences in
the periods in which cash flows are incurred. Typically, the distortion caused by discounting will not be
significant in relation to short term working capital items. However, in our view, if significant, such distortion
should be adjusted.
Any other combination will not treat assets and cash flows consistently and will either overstate or understate
headroom, e.g. it would be incorrect to compare the carrying value of the CGU net of the working capital
(99,200) and the cash flows excluding the opening changes in working capital (107,979).
4.1.4 Pensions
As mentioned at 4 above, recognised liabilities are in general not included in arriving at
the recoverable amount or carrying amount of a CGU.
IAS 36.79 mentions pension obligations as items that might for practical reasons be
included in calculating the recoverable amount of a CGU. In such a case, the carrying
amount of the CGU is decreased by the carrying amount of those liabilities.
In practice, including cash flows for a pension obligation in the recoverable amount
could be fraught with difficulty, especially if it is a defined benefit scheme, as there can
be so many differences between the measurement basis of the pension liability and the
cash flows that relate to pensions. Deducting the carrying amount of the pension
obligation from both the value in use and the carrying amount of the CGU avoids this
issue. If the pension liability is excluded from the carrying amount of the CGU, then any
cash flows in relation to it should not be considered in the value in use calculation and
the pension liability should not be deducted from the VIU.
Cash flows in relation to future services on the other hand, whether for defined
contribution or defined benefit arrangements, should always be included in calculating
the recoverable amount as these are part of the CGU’s ongoing employee costs. In
practice, it can be difficult to distinguish between cash flows reflecting repayment of the
pension liability and cash flows that are future employee costs of the CGU.
4.1.5
Cash flow hedges
In the case of a cash flow hedge in relation to highly probable forecasted transactions,
it often makes no significant difference for short term hedging arrangements if the
hedging asset or liability and the hedging cash flows are included in the calculation of
recoverable amount. The result is to gross up or net down the assets of the CGU and the
relevant cash flows by an equivalent amount, after taking account of the distorting
effects of differing discount rates. However, some entities argue that they ought to be
able to take into account cash flows from instruments hedging their sales or purchases
that are designated as cash flow hedges under IFRS 9 because not to do so misrepresents
their economic position. In order to do this, they may wish to include the cash flows
and either exclude the derivative asset or liability from the CGU or, alternatively,
include the derivative asset or liability and reflect the related cash flow hedge reserve
in the CGU as well (this latter treatment would not be a perfect offset to the extent of
ineffectiveness). They argue that the cash flow hedges protect the fair value of assets
through their effect on price risk. They also note that not taking cash flows from
instruments hedging their sales or purchases introduces a profit or loss mismatch by
comparison with instruments that meet the ‘normal purchase/normal sale’ exemption
under which the derivative remains off balance sheet until exercised.
Impairment of fixed assets and goodwill 1449
Although logical from an income perspective, IAS 36 does not support these arguments.
The derivative asset or liability can only be included in the CGU as a practical
expediency and the hedge reserve is neither an asset nor liability to be reflected in the
CGU. As the carrying amount of the hedge instrument is a net present value, any
impairment loss might be similar to that calculated by excluding the derivative financial
instrument and its cash flows. However, there may be a difference between the two due
to different discount rates being applied in the determination of the derivative’s fair
value and the determination of the VIU. IFRS 9 would not permit an entity to mitigate
the effects of impairment by recycling the appropriate amount from the hedging
reserve. Finally, entities must be aware that cash flow hedges may have negative values
as well as positive ones.
Example 20.8: Cash flow hedges and testing for impairment
Entity A, which only has one CGU, enters into derivative contracts to hedge its commodity sales. These
derivatives are accounted for as cash flow hedges and there is no ineffectiveness.
The entity is required to perform an impairment test.
Entity A’s statement of financial position as at the impairment testing date is as follows:
€
Asset/CGU 3,000
Derivatives fair value
1,125
Equity – other reserves
(3,000)
Equity – cash flow hedge reserve
(1,125)
As at the impairment testing date, the entity’s cash flow forecasts are as follows:
Year 20X0
20X1
20X2 20X3
Forecast sales cash inflows
750
750
750
Forecast hedge cash inflows
450
450
450
Total cash inflows
1,200
1,200
1,200
NPV sales cash inflows
1,875
1,307
684
0
NPV total cash inflows
3,000
2,091
1,094
0
Fair value of hedge
1,125
784
410
0
IAS 36 requires the entity to exclude the cash flows from hedge transactions when calculating VIU. The
carrying amount of the derivative is therefore excluded fro
m the carrying amount of the cash-generating unit.
The entity recognises an impairment loss of €1,125 as follows:
€
Asset carrying amount
3,000
Recoverable amount (VIU)
1,875
Impairment loss
(1,125)
The entity is not prohibited from including within the VIU calculation the cash flows from a hedge instrument,
provided the instrument’s carrying amount is included within the carrying amount of the cash-generating unit
and the effects of discounting are taken into account, thereby ensuring that the cash flows and carrying amount
are consistently discounted. This approach would result in the same impairment of €1,125.
4.2 Corporate
assets
An entity may have assets that are inherently incapable of generating cash inflows
independently, such as headquarters buildings or central IT facilities that contribute to
1450 Chapter 20
more than one CGU. IAS 36 calls such assets corporate assets. Corporate assets are
defined as ‘...assets other than goodwill that contribute to the future cash flows of both
the cash-generating unit under review and other cash-generating units’.
The characteristics that distinguish corporate assets are that they do not generate cash
inflows independently of other assets or groups of assets and their carrying amount cannot
be fully attributed to the CGU under review. [IAS 36.100]. Nevertheless, in order to test
properly for impairment, the corporate asset’s carrying value has to be tested for impairment
along with the CGUs. Corporate assets therefore have to be allocated to the CGUs to which
they belong and then tested for impairment along with those CGUs. [IAS 36.101].
This presents a problem in the event of those assets themselves showing indications of
impairment. It also raises a question of what those indications might actually be, in the
absence of cash inflows directly relating to this type of asset. Some, but not all, of these
assets may have relatively easily determinable fair values but while this is usually true of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 285
