International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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rata. However, if an intangible asset is part of a CGU that is impaired, there is no
requirement to write down the intangible before the other assets in the CGU, rather
all assets are written down pro-rata. For the pro-rata allocation it is important to
keep in mind that the carrying amount of an asset should not be reduced below the
highest of its fair value less costs of disposal, value in use or zero. If the preceding
rule is applied, further allocation of the impairment loss is made pro rata to the other
assets of the unit (group of units).
11
RECOGNISING AND REVERSING IMPAIRMENT LOSSES
If the carrying value of an individual asset or of a CGU is equal to or less than its
calculated VIU, there is no impairment. On the other hand, if the carrying value of
the CGU is greater than its recoverable amount, an impairment write-down should
be recognised.
There are three scenarios: an impairment loss on an individual asset, an impairment loss
on an individual CGU and an impairment loss on a group of CGUs. The last of these may
occur where there are corporate assets (see 4.2 above) or goodwill (see 11.2 below) that
have been allocated to a group of CGUs rather than to individual ones.
1518 Chapter 20
11.1 Impairment losses on individual assets
For individual assets IAS 36 states:
‘If, and only if, the recoverable amount of an asset is less than its carrying amount,
the carrying amount of the asset shall be reduced to its recoverable amount. That
reduction is an impairment loss. [IAS 36.59].
‘An impairment loss shall be recognised immediately in profit or loss, unless the
asset is carried at revalued amount in accordance with another Standard (for
example, in accordance with the revaluation model in IAS 16). Any impairment loss
of a revalued asset shall be treated as a revaluation decrease in accordance with
that other Standard’. [IAS 36.60].
If there is an impairment loss on an asset that has not been revalued, it is recognised in
profit or loss. An impairment loss on a revalued asset is first used to reduce the
revaluation surplus in other comprehensive income for that asset. Only when the
impairment loss exceeds the amount in the revaluation surplus for that same asset is any
further impairment loss recognised in profit or loss.
IAS 36 does not require impairment losses to be shown in any particular position in the
income statement, although the requirements of IAS 1 – Presentation of Financial
Statements – should always be considered. It may be necessary to add an appropriate
line item in profit or loss if it is relevant for an understanding of the entity’s financial
performance. [IAS 1.85].
Any amounts written off a fixed asset should be shown as part of the accumulated
depreciation when an entity discloses the gross carrying amount and the accumulated
depreciation at the beginning and the end of the period. [IAS 16.73(d)]. In the reconciliation
required by IAS 16.73(e) any impairment recognised or reversed through profit and loss
should be shown in a separate line item. If the asset is held at revalued amount then any
impairment losses recognised or reversed should be shown in the reconciliation in one
line item together with the revaluations. [IAS 16.73(e)(iv)].
An impairment loss greater than the carrying value of the asset does not give rise to
a liability unless another standard requires it, presumably as this would be equivalent
to providing for future losses. [IAS 36.62]. An impairment loss will reduce the
depreciable amount of an asset and the revised amount will be depreciated or
amortised prospectively over the remaining life. [IAS 36.63]. However, an entity ought
also to review the useful life and residual value of its impaired asset, as both of these
may need to be revised. The circumstances that give rise to impairments frequently
affect these as well.
Finally, an impairment loss will have implications for any deferred tax calculation
involving the asset. The standard makes clear that if an impairment loss is recognised
then any related deferred tax assets or liabilities are determined in accordance with
IAS 12, by comparing the revised carrying amount of the asset with its tax base. [IAS 36.64].
Example 3 in the standard’s accompanying section of illustrative examples, on which
the following is based, illustrates the possible effects.
Impairment of fixed assets and goodwill 1519
Example 20.32: Recognition of an impairment loss creates a deferred tax asset
An entity has an asset with a carrying amount of €2,000 whose recoverable amount is €1,300. The tax rate is
30% and the tax base of the asset is €1,500. Impairment losses are not deductible for tax purposes. The effect
of the impairment loss is as follows:
Before
Effect of
After
impairment
impairment
impairment
€
€
€
Carrying amount
2,000
(700)
1,300
Tax base
1,500
–
1,500
Taxable (deductible) temporary difference
500
(700)
(200)
Deferred tax liability (asset) at 30%
150
(210)
(60)
The entity will recognise the deferred tax asset to the extent that the respective recognition criteria of IAS 12
are met.
11.2 Impairment losses and CGUs
Impairment losses in a CGU can occur in two ways:
(i) an impairment loss is incurred in a CGU on its own, and that CGU may or may not
have corporate assets or goodwill included in its carrying value; and
(ii) an impairment loss is identified that must be allocated across a group of CGUs
because a corporate asset or goodwill is involved whose carrying value could only
be allocated to a group of CGUs as a whole, rather than to individual CGUs (the
allocation of corporate assets to CGUs is discussed at 4.2 above, and goodwill is
discussed at 8 above). Note that if there are indicators of impairment in connection
with a CGU with which goodwill is associated, i.e. the CGU is part of a CGU group
to which the goodwill is allocated, this CGU should be tested and any necessary
impairment loss taken, before goodwill is tested for impairment (see 8.2.2 above).
[IAS 36.88].
The relevant paragraphs from the standard deal with both instances but are readily
understandable only if the above distinction is appreciated. The standard lays down that
impairment losses in CGUs should be recognised to reduce the carrying amount of the
assets of the unit (group of units) in the following order:
(a) first, to reduce the carrying amount of any goodwill allocated to the CGU or group
of units; and
(b) second, if the goodwill has been written off, to reduce the other assets of the CGU
(or group of CGUs) pro rata to their carrying amount, subject to the limitation that
the carrying amount of an asset should not be reduced to the highest of fair value
less costs of disposal, value in use or zero. [IAS 36.104, 105].
The important point is to be clear about the order set out above. Goodwill must b
e
written down first, and if an impairment loss remains, the other assets in the CGU or
group of CGUs are written down pro-rata to their carrying values subject to the
limitation stated at (b) above.
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This pro-rating is in two stages if a group of CGUs is involved:
(i) the loss reduces goodwill (which by definition in this instance is unallocated to
individual CGUs in the group); and
(ii) any remaining loss is pro-rated between the carrying values of the individual CGUs
in the group and within each individual CGU the loss is again pro-rated between
the individual assets’ carrying values.
Unless it is possible to estimate the recoverable amount of each individual asset within a
CGU, it is necessary to allocate impairment losses to individual assets in such a way that the
revised carrying amounts of these assets correspond with the requirements of the standard.
Therefore, the entity does not reduce the carrying amount of an individual asset below the
highest of its FVLCD or VIU (if these can be established), or zero. The amount of the
impairment loss that would otherwise have been allocated to the asset is then allocated pro-
rata to the other assets of the CGU or CGU group. [IAS 36.105]. The standard argues that this
arbitrary allocation to individual assets when their recoverable amount cannot be
individually assessed is appropriate because all assets of a CGU ‘work together’. [IAS 36.106].
If corporate assets are allocated to a CGU or group of CGUs, then any remaining loss at
(ii) above (i.e. after allocation to goodwill) is pro-rated against the allocated share of the
corporate asset and the other assets in the CGU.
This process, then, writes down the carrying value attributed or allocated to a CGU until the
carrying value of the net assets is equal to the computed recoverable amount. Due to the
restriction of not reducing the carrying amount of an asset below its FVLCD or VIU, it is
logically possible, after all assets and goodwill are either written off or down to their FVLCD
or VIU, for the carrying value of the CGU to be higher than the computed recoverable
amount. There is no suggestion that the net assets should be reduced any further because at
this point the FVLCD would be the relevant impairment figure. The remaining amount will
only be recognised as a liability if that is a requirement of another standard. [IAS 36.108].
IAS 36 includes in the standard’s accompanying section of illustrative examples
Example 2 which illustrates the calculation, recognition and allocation of an impairment
loss across CGUs.
However, the standard stresses that no impairment loss should be reflected against an
individual asset if the CGU to which it belongs has not been impaired, even if its carrying
value exceeds its FVLCD. This is expanded in the following example, based on that in
paragraph 107 of the standard:
Example 20.33: Individually impaired assets within CGUs
A machine has suffered physical damage but is still working, although not as well as before it was damaged. The
machine’s FVLCD is less than its carrying amount. The machine does not generate independent cash inflows.
The smallest identifiable group of assets that includes the machine and generates cash inflows that are largely
independent of the cash inflows from other assets is the production line to which the machine belongs. The
recoverable amount of the production line shows that the production line taken as a whole is not impaired.
Assumption 1: budgets/forecasts approved by management reflect no commitment of management to replace
the machine.
The recoverable amount of the machine alone cannot be estimated because its VIU may be different from its
FVLCD (because the entity is going to continue to use it) and can be determined only for the CGU to which
it belongs (the production line).
Impairment of fixed assets and goodwill 1521
As the production line is not impaired, no impairment loss is recognised for the machine. Nevertheless, the
entity may need to reassess the depreciation period or the depreciation method for the machine. Perhaps a
shorter depreciation period or a faster depreciation method is required to reflect the expected remaining useful
life of the machine or the pattern in which economic benefits are expected to be consumed by the entity.
Assumption 2: budgets/forecasts approved by management reflect a commitment of management to replace
the machine and sell it in the near future.
Cash flows from continuing use of the machine until its disposal are estimated to be negligible. The machine’s
VIU can be estimated to be close to its FVLCD. Therefore, the recoverable amount of the machine can be
determined and no consideration is given to the CGU (the production line) to which it belongs. As the
machine’s carrying amount exceeds its FVLCD, an impairment loss is recognised to write it down to FVLCD.
[IAS 36.107].
Note that it is assumed that the asset is still useable (otherwise it would not be
contributing to the cash flows of the CGU and would have to be written off) and that it
is not held for sale as defined by IFRS 5. If the asset is no longer part of the CGU, it will
have to be tested for impairment on a stand-alone basis. For IFRS 5’s requirements
when an asset is held for sale, see 5.1 above.
11.3 Reversal of impairment loss relating to goodwill prohibited
As mentioned at 8.2.4, IAS 36 does not permit an impairment loss on goodwill to be
reversed under any circumstances. [IAS 36.124]. The standard justifies this on the grounds
that such a reversal would probably be an increase in internally generated goodwill,
rather than a reversal of the impairment loss recognised for the acquired goodwill, and
that recognition of internally generated goodwill is prohibited by IAS 38. [IAS 36.125].
Example 20.34: Impairment of goodwill
Company A has a CGU that has a carrying value of $2,000,000 at 31 December 20X0. This carrying value
comprises $500,000 relating to goodwill and $1,500,000 relating to net tangible assets.
In 20X1, as a result of losses, net tangible assets have decreased to $1,400,000 reducing the total carrying
value of the unit to $1,900,000. Changes in the regulatory framework surrounding its business mean that the
cash-generating unit has a recoverable amount of $1,600,000 and has thus suffered an impairment loss of
$300,000. This is charged to profit or loss. The carrying value of goodwill is reduced to $200,000.
In 20X2 the company develops a new product with the result that the recoverable amount of the cash-
generating unit rises to $1,700,000. Net tangible assets have remained at $1,400,000. Despite the recoverable
amount of the business unit now being $1,700,000 compared to its carrying value of $1,600,000, it is not
possible to reverse $100,000 of the prior year’s impairment loss of $300,000.
11.4 Reversal of impairment losses relating to assets other than
goodwill
For all other assets, including intangible assets with an indefinite life, IAS 36 requires
entities to assess at each reporting date whether there is any indication that an
impairment loss may no longer exist or may have decreased. If there is any such
indication, the entity has to recalculate the recoverable amount of the asset. [IAS 36.110].
Therefore if there are indications that a prev
iously recognised impairment loss has
disappeared or reduced, it is necessary to determine again the recoverable amount (i.e.
the higher of FVLCD or VIU) so that the reversal can be quantified. The standard sets
out examples of what it notes are in effect ‘reverse indications’ of impairment. [IAS 36.111].
These are the reverse of those set out in paragraph 12 of the standard as indications of
1522 Chapter 20
impairment (see 2.1 above). [IAS 36.112]. They are arranged, as in paragraph 12, into two
categories: [IAS 36.111]
External sources of information:
(a) A significant increase in the asset’s value.
(b) Significant changes during the period or expected in the near future in the entity’s
technological, market, economic or legal environment that will have a favourable effect.
(c) Decreases in market interest rates or other market rates of return on investments
and those decreases are likely to affect the discount rate used in calculating the
asset’s value in use and increase the asset’s recoverable amount materially.
Internal sources of information:
(d) Significant changes during the period or expected in the near future that will affect
the extent to which, or manner in which, the asset is used. These changes include
costs incurred during the period to improve or enhance the asset’s performance or
restructure the operation to which the asset belongs.
(e) Evidence from internal reporting that the economic performance of the asset is, or
will be, better than expected.
Compared with paragraph 12, there are two notable omissions from this list of ‘reverse
indicators’, one external and one internal.
The external indicator not included is the mirror of the impairment indicator ‘the
carrying amount of the net assets of the reporting entity is more than its market
capitalisation’. No explanation is provided as to why, if a market capitalisation below
shareholders’ funds is an indication of impairment, its reversal should not automatically
be an indication of a reversal. However, the most likely reason is that all of the facts and
circumstances need to be considered before assuming that an impairment has reversed.