Impairment of Assets - IAS 36 - Accounts

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Identified Intangible and Goodwill

Where intangible assets are acquired within a business combination there is no exemption from the necessity of applying IAS 12. If the intangible in question is not tax deductible on either consumption or sale, a deferred tax liability based on the value of the intangible and the prevailing tax rate will be recognised. The corresponding debit entry will increase goodwill.

In certain jurisdictions, the amortization of intangible assets is deductible for tax purposes. This generates additional benefits for the owner of the asset which impacts the fair value of the asset. This is the tax amortization benefit (TAB). On a business combination any TAB that would be available if the asset were acquired separately should be reflected in the fair value of the asset. The TAB will increase the intangible value and reduce goodwill. However, the deferred tax on the intangible asset will increase goodwill.

DTL on intangible assets in a business combination may be significant, as there may be no tax deduction for these assets. This leads to the recognition of a higher amount of goodwill. A value in use calculation, which is a pre-tax value, may lead to an impairment charge soon after an acquisition is made, due to the higher amount of goodwill that is recorded as a result of recognised a deferred tax liability.

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Minority Interest

In carrying out an impairment test of a CGU that has a minority interest, that is valued at their proportionate share of net assets, this ‘mismatch’ has to be addressed. This is done as follows :

§ First the carrying amount of the CGU is notionally adjusted to include goodwill attributable to the minority. This is done by grossing up the carrying amount of goodwill allocated to the CGU to include the goodwill attributable to the minority.

§ The notional carrying amount of the CGU is then compared with the recoverable amount of the CGU

§ If the recoverable amount is lower then the notional carrying amount an impairment loss is recognised.

§ This impairment loss will include a loss attributable to the minority’s notional share of goodwill. That element of the loss needs to be identified an excluded from the amount of the loss that is recognised. This is done in proportion to the amount of loss that is attributable to the notional goodwill as a whole.

§ The impairment loss is first applied to write down the goodwill that has been recognised, that is actually recgonised in the financial statements, not the notional goodwill that includes the minority interest. Any excess of impairment losses over the carrying amount of goodwill is then applied pro rata basis.

§

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Example :- An entity (A) acquires 60% of the ownership interest in another entity (B). The goodwill arising on acquisition was 24 minr, and the carrying value of entity B’s net assets in the consolidated financial statements is 60 minr at Dec 31, 08. The recoverable amount of the cash-generating unit B is 80 minr at Dec 31, 2008. Calculate any impairment loss arising at December 31, 08, for the CGU B.

Goodwill Net assets Total

Carrying amount 24 60 84

Unrecognized minority interest 16 – 16

Notionally adjusted carrying amount 40 60 100

Recoverable amount (80)

Impairment loss 20

This impairment loss will reduce goodwill on acquisition to 12 minr (24 – 60% of 20 million).

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Corporate Assets

Corporate assets are that they do no generate cash inflows independently of other assets or groups of assets and their carrying amount cannot be fully attributed to the CGU that is being reviewed for impairment.

A corporate assets is usually tested for impairment only if there is an indicator that its impaired ( unless it’s a global brand which must be tested annually ).

If there is an impairment indicator then the corporate asset must be tested as part of a CGU as it does not generate independent cash flows and so its standalone value in use cannot be estimated. An entity should ensure that the carrying value of all CGUs in a group should add up to the carrying value of the group’s assets in aggregate. No asset should escape the impairment review.

However, if the asset cannot be allocated on such a basis, then three processes should occur:

§An impairment test should be carried out on the CGU without the corporate asset.

§The smallest group of CGU should be identified that includes the CGU under review and to which part of the corporate assets can be reasonably allocated.

§This group of cash-generating units should then be tested for impairment.

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Example :- An entity has two cash-generating units, X and Y. There is no goodwill within the units’ carrying values. The carrying values are X 10 minr and Y 15 minr. The entity has an office building that has not been included in the above values and can be allocated to the units on the basis of their carrying values. The office building has a carrying value of 5 minr. The recoverable amounts are based on value-in-use of 9 minr for X and 19 minr for Y. Determine whether the carrying values of X and Y are impaired.

X Y Total

Carrying value 10 15 25

Office building (10:15) 2 3 5

12 18 30

Recoverable amount 9 19

Impairment loss 3 0

The impairment loss will be allocated on the basis of 2/12 against the building (0.5 minr) and 10/12 against the other assets (2.5 minr).

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Where the recoverable amount of an asset is less than its carrying amount, the carrying amount will be reduced to its recoverable amount. This reduction is the impairment loss.

For assets carried on the depreciated historical cost basis the impairment loss should be recognised in the income statement immediately. The loss is charged in arriving at profit or loss before tax.

For assets that are carried at valuation an impairment loss is treated as a revaluation decrease. The loss is first set against any revaluation surplus relating to the asset in reserves to the extent of the surplus and the balance of the loss is then treated as an expense in the income statement.

Where the amount of an impairment loss exceeds the carrying amount of the asset to which it relates an entity should write the asset down to zero. The balance of the impairment loss should be recognised as a provision only if it meets the criteria for recognition in IAS 37.

The principle in accounting for fixed assets is that asset lives and residual value should be reviewed at least annually to ensure they are realistic.

§Recognition of an Impairment loss

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Allocation of Impairment Loss

Any impairment loss calculated for a cash-generating unit should be allocated to reduce the carrying amount of the asset in this order:

§ The carrying amount of goodwill should be first reduced, then the carrying amount of other assets of the unit should be reduced on a pro rata basis determined by the relative carrying value of each asset.

§ Any reductions in the carrying amount of the individual assets should be treated as impairment losses. The carrying amount of any individual asset should not be reduced below the highest of its fair value less cost to sell, its value-in-use and zero.

If this rule is applied, the impairment loss not allocated to the individual asset will be allocated on a pro rata basis to the other assets of the group.

Example :- A cash-generating unit has these net assets: Goodwill 10 minr Property 20 minr Plant and equipment 30 minr. The recoverable amount has been determined as 45 million. Allocate the impairment loss to the net assets of the entity.

Goodwill Property Plant Total

Carrying value 10 20 30 60

Impairment loss (10) (2) (3) (15)

Carrying value after impairment - 18 27 45

§

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Reversal of an Impairment Loss

At each reporting date, an entity should determine whether an impairment loss recognized in the previous period may have decreased. This does not apply to goodwill. In determining whether an impairment loss has reversed, the entity should consider the same sources of information as for the original impairment loss.

An impairment loss may be reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss had been recognized. If this is the case, then the carrying amount of the asset shall be increased to its recoverable amount. The increase will effectively be the reversal of an impairment loss.

However, the increase in the carrying value of the asset can only be up to what the carrying amount would have been if the impairment had not occurred. Any reversal of an impairment loss is recognized immediately in the income statement unless the asset is carried at a revalued amount; in this case, the reversal will be treated as a revaluation increase. The reversal of an impairment loss may require an adjustment to the depreciation of the asset in future periods.

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Increase in value in use should not be recognised as reversals of impairment losses if they arise simply from the passage of time, resulting from the unwinding of the discount rate that was applied to arrive at the PV of expected future cash flows.

Accounting for the reversal of an impairment loss should be consistent with the treatment adopted when the impairment was recognised. Where the asset is held at historical cost, the reversal should be recognised in the current year’s income statement since the original loss would have been charged in the income statement.

For a revalued asset, the reversal of an impairment loss should be recognised in the income statement to the extent that the original impairment loss was recognised in the income statement. Any remaining balance of reversal of an impairment loss should be recognised in equity.

After a reversal of an impairment loss has been recognised the future depreciation charge for the asset should be adjusted to allocate the revised carrying amount less residual value over its remaining useful life on a systematic basis.

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Increase in value in use should not be recognised as reversals of impairment losses if they arise simply from the passage of time, resulting from the unwinding of the discount rate that was applied to arrive at the PV of expected future cash flows.

Accounting for the reversal of an impairment loss should be consistent with the treatment adopted when the impairment was recognised. Where the asset is held at historical cost, the reversal should be recognised in the current year’s income statement since the original loss would have been charged in the income statement.

For a revalued asset, the reversal of an impairment loss should be recognised in the income statement to the extent that the original impairment loss was recognised in the income statement. Any remaining balance of reversal of an impairment loss should be recognised in equity.

After a reversal of an impairment loss has been recognised the future depreciation charge for the asset should be adjusted to allocate the revised carrying amount less residual value over its remaining useful life on a systematic basis.

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Example:- At 31st Dec 01 and was purchased for 100 Minr. Its expected useful life is 20 yrs. There year later it was revalued to 136 Minr. At 31st Dec 2006, the asset was reviewed for impairment and written down to its recoverable amount of 50 minr.

Movements in the asset’s book value on a depreciated historical cost and actually recognised in the financial statement.

Depreciated historical cost Revalued Carrying amount 31st Dec 2001- Cost 100 100 Depreciation (3 yrs) (15) (15) Revaluation -- 51 31st Dec 2004 85 136 Depreciation (2 yrs) (10) (16) 31st Dec 2006 75 120 Impairment loss (25) (70) 31st Dec 2006 after impairment 50 50

The impairment loss of 70 minr will be recognised as :- 45 minr in equity and 25 minr in income statement. The standard states that the impairment loss is charged to equity to the extent of which revaluation surplus held in equity that relates to the assets.

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

At 31st Dec economic condition have improved and the asset’s recoverable amount is estimated to be 90 minr.

If no impairment loss had been recognised, the carrying value at 31st Dec 2008 would have been 104 MINR, which is greater than recoverable amount of 90 minr. Therefore, the whole of the increase in the carrying value can be treated as a reversal of the previous impairment loss. If the carrying value had been increase to more than 104 minr, the excess would be treated as revaluation, not a reversal of the impairment.

The impairment loss should be reversed, as indicated in the table

Before Impairment After Impairment Carrying Value 31st Dec 2006 75 50 50 Depreciation (2 yrs) (10) (7) (7) 31st Dec 2008 65 43 43 Reversal of Impairment loss -- 22 47 31st Dec 2008 after reversal 65 65 90

The reversal of 45 minr will be recognised as :- 25 minr in equity and 22 minr in income statement.