considered when performing impairment assessments. 4.1.2 above looks into this question.
13.3 Lease payments during the lease term
Under IAS 17, operating lease payments were reflected as cash outflows in determining
VIU. Under IFRS 16, these lease payments, to the extent that they are reflected in the
recognised lease liability, are financing cash flows in nature and are therefore excluded
in determining VIU.
Impairment of fixed assets and goodwill 1537
It is important to note that, while under IFRS 16 many payments in connection with
lease arrangements are reflected in the lease liability, not all lease payments are
reflected in the recognised lease liability. Variable lease payments that do not depend
on an index or a rate and are not in-substance fixed, such as those based on performance
or usage of the underlying asset, are not reflected in the recognised lease liability. These
contractual payments therefore would still need to be reflected in the cash flow forecast
used for the VIU calculation.
In addition, IFRS 16 has certain exemptions for low-value assets and short-term leases.
If a lessee elects to use these exemptions and therefore not to record a right-of-use asset
on the balance sheet, then the cash flows in relation to those leases would still need to
be included in the VIU cash flow forecast.
13.4 Lease payments beyond the current lease term
When testing (groups) of CGUs it will frequently occur that cash flow forecasts in a
VIU model are longer than the lease term of right-of-use assets included in the
carrying amount.
An assumption of new capital investments is in practice intrinsic to the VIU test. What
has to be assessed are the future cash flows of the CGU. The cash flows, out into the
future, will include sales of products or services, cost of sales or services and all other
cash flows necessary to generate independent cash inflows. They must necessarily
include capital expenditure as well, at least to the extent required to keep the CGU
functioning as forecasted.
In cases where the cash flows of the CGU are dependent on the right-of-use
underlying assets, but the lease term will end during the cash flow forecast period,
replacement of the underlying right-of-use asset will have to be assumed. This can
be done either by assuming a new lease will be entered into and therefore
considering lease payments for this replacement lease in the cash flow forecast or
terminal value or by assuming a replacement asset will be bought. This will depend
on the entity’s planned course of action. It would be inappropriate not to reflect
such replacement needs in the CGU’s cash flows if the CGU’s future cash inflows
depends thereon.
Special attention is required when a terminal value calculation is used, where the
terminal value is calculated before the end of the lease term. For example the terminal
value may be based on the extrapolation of the cash flow expected for year 5, while the
lease term ends at the end of year 8. This means that the cash flow at the end of year 5
does not yet represent a sustainable cash flow going forward. This may be addressed by
including replacement leases/capital expenditures in the terminal year, and separately
calculating an adjustment to reflect that some of these expenditures will only start after
year 8 (if material).
1538 Chapter 20
13.5 Leased corporate assets
Companies frequently enter into lease arrangements on a corporate level, such as
a leased corporate headquarters or leased IT equipment. Under IFRS 16 these
lease arrangements will result in right-of-use assets. Similar to other corporate
assets, the right-of-use assets carrying values have to be tested for impairment
along with the CGUs they serve. An entity frequently will need to allocate the
carrying amount of corporate right-of-use assets to (groups of) CGUs when
performing the impairment test.
13.6 Transition
methods
IFRS 16 has two approaches to transition from IAS 17 to IFRS 16. IFRS 16 can be adopted
using the full retrospective method; this method assumes IFRS 16 had always been
applied and therefore comparatives are adjusted. Alternatively, IFRS 16 can be adopted
using the modified retrospective approach, with the cumulative effect of application
recognised on the date of initial application and applying a variety of practical
expedients. The selected transition method will have a direct impact on the size of the
right-of-use asset to be recorded and therefore on the impairment assessment (see
Chapter 24 at 10).
14
DISCLOSURES REQUIRED BY IAS 36
14.1 Introduction
This section sets out the principal disclosures for impairment required in financial
statements as set out in IAS 36. Any disclosures required relating to impairment by other
standards are dealt with in the chapter concerned. Disclosures that may be required by
other authorities such as national statutes or listing authorities are not included.
14.2 IAS 36 disclosures
The disclosures required fall into two broad categories:
(i) disclosures concerning any actual impairment losses or reversals made in the
period, that are obviously only required if such a loss or reversal has occurred,
regardless of the type of asset involved; and
(ii) yearly disclosures concerning the annual impairment tests required for goodwill
and intangible assets with an indefinite useful life, that are required regardless of
whether an impairment adjustment to these types of assets has occurred or not.
14.2.1
Disclosures required for impairment losses or reversals
For each class of assets the entity must disclose:
‘(a) the amount of impairment losses recognised in profit or loss during the period and
the line item(s) of the statement of comprehensive income in which those
impairment losses are included.
(b) the amount of reversals of impairment losses recognised in profit or loss during the
period and the line item(s) of the statement of comprehensive income in which
those impairment losses are reversed.
Impairment of fixed assets and goodwill 1539
(c) the amount of impairment losses on revalued assets recognised directly in other
comprehensive income during the period.
(d) the amount of reversals of impairment losses on revalued assets recognised directly
in other comprehensive income during the period.’ [IAS 36.126].
A class of assets is a grouping of assets of similar nature and use in an entity’s operations.
[IAS 36.127].
These disclosures can be made as an integral part of the other disclosures, for example
the property, plant and equipment note reconciling the opening and closing values (as
set out in Chapter 18 at 8) may contain the required information. [IAS 36.128].
Additionally, IAS 36 links disclosure of impairments with segment disclosures. Thus, if
an entity reports segment information in accordance with IFRS 8 then any impairments
or reversals must be disclosed by reportable segment as follows:
(a) the amount of impairment losses recognised in profit or loss and directly in other
comprehensive income during the period; and
(b)
the amount of reversals of impairment losses recognised in profit or loss and
directly in other comprehensive income during the period. [IAS 36.129].
14.2.2 Material
impairments
If an impairment loss for an individual asset or a cash-generating unit is recognised or
reversed during the period and is material to the financial statements of the reporting
entity as a whole, the following disclosures are required:
(a) the events and circumstances that led to the recognition or reversal of the
impairment loss;
(b) the amount of the impairment loss recognised or reversed;
(c) for an individual asset:
(i) the nature of the asset; and
(ii) if the entity reports segmental information in accordance with IFRS 8, the
reportable segment to which the asset belongs.
(d) for a cash-generating unit:
(i) a description of the cash-generating unit (such as whether it is a product line,
a plant, a business operation, a geographical area, or a reportable segment as
defined in IFRS 8);
(ii) the amount of the impairment loss recognised or reversed by class of assets
and if the entity reports segment information in accordance with IFRS 8, by
reportable segment; and
(iii) if the aggregation of assets for identifying the cash-generating unit has
changed since the previous estimate of the cash-generating unit’s recoverable
amount (if any), a description of the current and former way of aggregating
assets and the reasons for changing the way the cash-generating unit is
identified.
1540 Chapter 20
(e) the recoverable amount of the asset or CGU and whether the recoverable amount
of the asset or cash-generating unit is its fair value less costs of disposal (FVLCD)
or its value in use (VIU);
(f) if the recoverable amount is FVLCD:
(i) the level of the fair value hierarchy (as defined by IFRS 13, see 6.1 above)
within which the fair value measurement of the asset or CGU is classified,
without taking into account whether the costs of disposal are observable;
(ii) if the fair value measurement is classified as Level 2 or Level 3 of the fair value
hierarchy, a description of the valuation technique(s) used to measure
FVLCD. The entity must disclose any change in valuation technique and the
reason(s) for making it; and
(iii) if the fair value measurement is classified as Level 2 or Level 3 of the fair value
hierarchy, each key assumption on which management has based its
determination of fair value less costs of disposal. Key assumptions are those
to which the asset’s or CGU’s recoverable amount is most sensitive.
The entity must also disclose the discount rate(s) used in the current
measurement and previous measurement if FVLCD is measured using a
present value technique; and
(g) if the recoverable amount is VIU, the discount rate used in the current estimate
and previous estimate (if any) of VIU. [IAS 36.130].
It is logically possible for impairment adjustments in aggregate to be material, yet no
single one material in itself, in which case the previous requirement that relates to
individual assets or CGUs could theoretically be circumvented. Therefore the following
‘catch all’ requirement is added:
‘An entity shall disclose the following information for the aggregate impairment
losses and the aggregate reversals of impairment losses recognised during the
period for which no information is disclosed in accordance with paragraph 130:
(a) the main classes of assets affected by impairment losses and the main classes
of assets affected by reversals of impairment losses.
(b) the main events and circumstances that led to the recognition of these
impairment losses and reversals of impairment losses.’ [IAS 36.131].
In addition, in these circumstances, if there are any cases of impairment adjustments
where intangible assets with indefinite useful life and goodwill are not involved, IAS 36
encourages the disclosure of key assumptions made in the recoverable amount
calculations used to determine any impairments recognised in the period. [IAS 36.132].
However, as set out below, an entity is required to give this type of disclosure when
goodwill or intangible assets with an indefinite useful life are tested for impairment.
14.3 Annual impairment disclosures required for goodwill and
intangible assets with an indefinite useful life
Paragraph 84 of IAS 36 accepts that following a business combination it may not have
been possible to allocate all the goodwill to individual CGUs or groups of CGUs by the
end of the period in which the acquisition has been made (see 8.1.5 above). In these
Impairment of fixed assets and goodwill 1541
circumstances the standard requires that the amount of any such unallocated goodwill
be disclosed, together with the reasons why it has not been allocated. [IAS 36.133].
The annual disclosures are intended to provide the user with information about the
types of estimates that have been used in arriving at the recoverable amounts of
goodwill and intangible assets with an indefinite useful life, that are included in the
assets of the entity at the period end. They are divided into two broad categories:
(i)
those concerning individual CGUs or group of CGUs in which the carrying amount
of goodwill or of intangible assets with an indefinite useful life is ‘significant’ in
comparison with the entity’s total carrying amount of these items. In this category
disclosures are to be made separately for each significant CGU or group of CGUs;
and
(ii) those concerning CGUs or groups of CGUs in which the carrying amount of
goodwill or of intangible assets with an indefinite useful life is not ‘significant’
individually in comparison with the entity’s total carrying amount of these items.
In this case the disclosures can be made in aggregate.
For each cash-generating unit or group of units for which the carrying amount of
goodwill or intangible assets with indefinite useful lives allocated to that unit or group
of units is significant, the following disclosures are required every year:
(a) the carrying amount of goodwill allocated to the CGU (group of CGUs);
(b) the carrying amount of intangible assets with indefinite useful lives allocated to the
CGU (group of CGUs);
(c) the basis on which the CGU’s or group of CGUs’ recoverable amount has been
determined (i.e. VIU or FVLCD):
(d) if the CGU’s or group of CGUs’ recoverable amount is based on VIU:
(i) a description of each key assumption on which management has based its
cash flow projections for the period covered by the most recent
budgets/forecasts. Key assumptions are those to which the unit’s (group of
units’) recoverable amount is most sensitive;
(ii) a description of management’s approach to determining the value(s) assigned
to each key assumption, whether those value(s) reflect past experience or, if
appropriate, are consistent with external sources of information, and, if not,
how and why they differ from past experience or external sources of
information;
(iii) the period over which management has projected cash flows based on
<
br /> financial budgets/forecasts approved by management and, when a period
greater than five years is used for a cash-generating unit (group of units), an
explanation of why that longer period is justified;
(iv) the growth rate used to extrapolate cash flow projections beyond the period
covered by the most recent budgets/forecasts, and the justification for using
any growth rate that exceeds the long-term average growth rate for the
products, industries, or country or countries in which the entity operates, or
for the market to which the unit (group of units) is dedicated;
(v) the discount rate(s) applied to the cash flow projections.
1542 Chapter 20
(e) if the CGU’s or group of CGUs’ recoverable amount is based on FVLCD, the
valuation technique(s) used to measure FVLCD. An entity is not required to
provide the disclosures required by IFRS 13. If fair value less costs of disposal is
not measured using a quoted price for an identical CGU or CGU group, an entity
must disclose the following information:
(i) a description of each key assumption on which management has based its
determination of FVLCD. Key assumptions are those to which the unit’s
(group of units’) recoverable amount is most sensitive;
(ii) a description of management’s approach to determining the value(s) assigned to
each key assumption, whether those value(s) reflect past experience or, if
appropriate, are consistent with external sources of information, and, if not, how
and why they differ from past experience or external sources of information;
(iiA) the level of the fair value hierarchy (see IFRS 13) within which the fair value
measurement is categorised in its entirety (without giving regard to the
observability of ‘costs of disposal’);
(iiB) if there has been a change in valuation technique, the change and the reason(s)
for making it;
If FVLCD is determined using discounted cash flow projections, the following
information shall also be disclosed:
(iii) the period over which management has projected cash flows;
(iv) the growth rate used to extrapolate cash flow projections;
(v) the discount rate(s) applied to the cash flow projections.
(f)
if a reasonably possible change in a key assumption on which management has based
its determination of the CGU’s or group of CGUs’ recoverable amount would cause
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 304
