IAS 36 Impairment of Assets
Did you know that the world-wide economic crisis followed by the recession caused a sharp downfall of assets’ prices? In some countries, the prices of property fell by 30-50%!
Such a steep and fast decrease had an impact on the IFRS financial reporting, too. Companies showing assets in their accounts had to reassess their book value.
What should you do when you think the value of your assets went down? And how do you determine it?
That’s where the standard IAS 36 Impairment of Assets comes in. So let’s see what’s inside.
What is the objective of IAS 36?
The objective of IAS 36 Impairment of assets is to make sure that entity’s assets are carried at no more than their recoverable amount.
The Standard also defines when an asset is impaired, how to recognize an impairment loss, when an entity should reverse this loss and what information related to impairment should be disclosed in the financial statements.
The following scheme shows to what assets IAS 36 does and does not apply:
Basically, when you’re dealing with property, plant and equipment in line with IAS 16 or intangible assets in line with IAS 38, then you need to look to IAS 36, too.
What is an impairment of assets?
An asset is impaired when its carrying amount exceeds its recoverable amount.
Identify an asset that might be impaired
If you want to be compliant with IAS 36, you have to perform the following procedures:
- You need to assess whether there is any indication that an asset might be impaired at the end of each reporting period.
You don’t need to perform impairment testing if there’s no indication. However, you need to assess the existence of such an indication. - If you hold some intangible asset with an indefinite useful life (such as trademarks) or intangible asset not yet available for use, then you need to test these assets for impairment annually.
- If your accounting records show some goodwill acquired in a business combination, you also need to test this goodwill for impairment annually.
What are the indications of impairment?
External sources of information
- Observable indications that the asset’s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use.
- Significant changes with an adverse effect on the entity in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.
- Market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.
- The carrying amount of the net assets of the entity is higher than its market capitalization.
Internal sources of information
- Obsolescence or physical damage of an asset.
- Significant changes with an adverse effect on the entity related to the use of an asset, for example: an asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.
- Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.
Standard also outlines the indications related to subsidiaries, associates and joint ventures.
Measure recoverable amount
Recoverable amount is the higher of an asset’s (or cash-generating unit’s) fair value less costs of disposal and its value in use.
You don’t necessarily need to determine both of these amounts, because if just one of them is higher than asset’s carrying amount, then there’s no impairment.
When an individual asset does not generate cash inflows that are largely independent of those from other assets (or groups of assets), then you need to determine recoverable amount for the cash-generating unit (CGU) to which this asset belongs.
Fair value less costs of disposal
Rules and guidelines for measuring the fair value of any assets are set by the standard IFRS 13 Fair Value Measurement. This standard applies for all periods beginning on 1 January 2013 or later, so you need to make sure to take it into account.
Costs of disposal are for example legal costs, stamp duties and similar transaction taxes, costs of removing the asset and direct incremental costs to bring an asset into condition for its sale.
Value in use
Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
In order to determine value in use, you need take the following elements into account:
- An estimate of the future cash flows the entity expects to derive from the asset.
- Expectations about possible variations in the amount or timing of those future cash flows.
- The time value of money, represented by the current market risk-free rate of interest.
- The price for bearing the uncertainty inherent in the asset.
- Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.
Estimating the value in use can usually be performed in 2 following steps:
Step 1: Estimate your future cash flows
When you measure value in use, you shall always base your cash flow projections on:
- Reasonable and supportable assumptions that represent management’s best estimate of the economic conditions that will exist over the remaining useful life of the asset.
- The most recent financial budgets/forecasts but for a maximum period of 5 years.
- Extrapolation of cash flow projections for the periods beyond 5 years using a steady or declining growth rate for subsequent years.
In your cash flow estimations, you shall include:
- Projections of cash inflows from the continuing use of the asset.
- Projections of cash outflows to generate the cash inflows from continuing use of the asset and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset.
- Net cash flows to be received (or paid) for the disposal of the asset at the end of its useful life.
In your cash flow estimations, you shall NOT include:
- Cash inflows from receivables.
- Cash outflows from payables.
- Cash outflows expected to arise from future restructurings to which an entity is not yet committed.
- Cash outflows expected to arise from improving or enhancing the asset’s performance.
- Cash inflows and cash outflows from financing activities.
- Income tax receipts and payments.
Let me also warn you about the inflation. You need to be consistent in projecting your cash flows and selecting your discount rate. You can either adjust your future cash flows by the inflation and use the nominal discount rate or alternatively you can project your future cash flows in the real terms and use the real discount rate.
Step 2: Determine discount rate
After projecting your cash flows you need to determine a discount rate used to calculate the present value.
The discount rate shall be a pre-tax rate that reflects current market assessment of both the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted.
The best way to select your discount rate is to look on the market and pick a market rate of return. Here, please be careful! Market rates of return are usually quoted as POST-tax rate and you need PRE-tax rate, so you need to determine pre-tax rate from post-tax rate yourself.
Recognize and measure an impairment loss
If the asset’s recoverable amount is lower than its carrying amount, then an entity must recognize an impairment loss as a difference between these 2 amounts.
An impairment loss shall be recognized to profit or loss or as a revaluation decrease if the asset is carried at revalued amount in line with other IFRS.
Don’t forget to adjust the depreciation in the future periods in order to reflect the asset’s new carrying amount.
Cash-generating units
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
If you are not able to determine recoverable amount for an individual asset, then you might need to establish cash-generating unit to which this asset belongs.
For example, you might not be able to set the fair value less costs to sell for used 5 years-old pizza oven as the quotes might not be available. At the same time, you might not be able to calculate pizza oven’s value in use because you really cannot estimate future cash inflows from pizza oven – this pizza oven does not generate any cash inflows itself.
Therefore your need to establish cash-generating unit for this pizza oven – it would probably be the whole pizzeria.
In determining your cash-generating unit you need to be consistent from period to period to include the same asset or type of assets.
You need to be consistent in determining the carrying amount of cash-generating unit with determining recoverable amount of that unit. It means that you need to include the same assets in calculation of carrying amount and recoverable amount, too.
Goodwill
If there is a goodwill acquired in a business combination, then it must be allocated to each of the acquirer’s cash-generating units (or group of them) that are expected to benefit from the synergies of the combination.
Each unit to which the goodwill is allocated shall:
- Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and
- Not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.
Goodwill should be tested for impairment on an annual basis.
A cash-generating unit (CGU) with allocated goodwill shall be tested for impairment at least annually. In this case testing means to compare:
- The carrying amount of CGU including the goodwill, and
- The recoverable amount of that CGU.
Corporate assets
Corporate assets are assets (other than goodwill) that contribute to the future cash flows of both the CGU under review and other CGUs.
The examples of corporate assets are a headquarters’ building, EDP equipment or a research center.
When you are testing a CGU, then you should first identify all the corporate assets that relate to the CGU under review.
Then, if a portion of the carrying amount of a corporate asset can be allocated to that unit on some reasonable and consistent basis, then you shall compare the carrying amount of that unit plus allocated portion of a corporate asset with its recoverable amount.
If such an allocation is not possible, then you go so-called bottom-up direction:
- You shall test the CGU without corporate asset for impairment first and recognize any impairment loss.
- Identify the smallest group of CGUs that includes the CGU under review and to which a portion of the carrying amount of the corporate asset can be allocated on a reasonable and consistent basis.
- Compare the carrying amount of that group of CGUs including the allocated portion of a corporate asset with the recoverable amount of the group of CGUs.
- Recognize impairment loss in line with the next paragraph.
Impairment loss of cash-generating unit
If the recoverable amount of CGU is lower than its carrying amount, then an entity shall recognize the impairment loss.
The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit in the following order:
- Reduce the carrying amount of any goodwill allocated to the CGU.
- Allocate remaining impairment loss to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. These reductions are recognized as impairment losses on individual assets.
In allocating an impairment loss you must make sure that you don’t reduce the carrying amount of an asset below the highest of:
- Its fair value less cost of disposal;
- Its value in use;
- Zero.
Reversal of impairment loss
Here, you need to take the same approach as in identifying the impairment loss. You need to assess at the end of each reporting period whether there is any indication that an impairment loss recognized in prior periods for an asset (other than goodwill) may no longer exist or may have decreased.
You need to assess the same set of indications from external and internal sources than when assessing the existence of impairment, just from the other side.
You can reverse an impairment loss only when there is a change in the estimates used to determine the asset’s recoverable amount. It means that you cannot reverse an impairment loss due to passage of time or unwinding the discount.
Reversal of an impairment loss for an individual asset
You can reverse an impairment loss only when there is a change in the estimates used to determine the asset’s recoverable amount. It means that you cannot reverse an impairment loss due to passage of time or unwinding the discount.
Reversal of an impairment loss is recognized in the profit or loss unless it relates to a revalued asset. The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognized.
Also, you must not forget to adjust the depreciation for future periods to reflect revised carrying amount.
Reversal of an impairment loss for a cash-generating unit
When you reverse an impairment loss for a cash-generating unit, you need to allocate reversal to the assets of the unit (except for goodwill) pro rata with the carrying amounts of these assets.
The carrying amount of an assets shall not be increased above the lower of:
- Its recoverable amount and
- The carrying amount that would have been determined (net of amortization or depreciation) without any prior impairment loss.
Reversal of an impairment loss for goodwill
Reversal of an impairment loss for goodwill is prohibited.
Please watch the following video with the summary of IAS 36 Impairment of Assets here:
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80 Comments
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Dear Silvia,
For an impairment of a CGU we first allocate la impairment loss to Goodwill and then to the other assets on a pro-rata basis but I have 2 questions:
1. what kind of assets, current, non-current, tangible intangible? I read somewhere that current assets are considered to be stated at FV and no impairment loss is allocated to them but I did not find anywhere in the IAS 36 this mention.
2. When we calculate the proportion of the asset in the total asset, do we consider all assets in that CGU or only those assets to which we can allocate the impairment loss? Many thanks
Hi Silvia!
Thanks a lot for all your very good explanations!!!
I have a doubt regarding a leased administrative office for 10 years that is currently used for two different business areas with two different purposes; the floor is clear phisically split 50%/50% and we currently allocate expenses 50%/50%. The situation is that given a corporate decision one of the business areas will be discountinue and the other area that will remain as an ongoing business can not absorb the 50% of expenses allocations for the area that will be discontinue, and that is because 50% of the space will be empty with no use; on the otherhand, there will not by any renegociation in the contract. Shall we apply an impairment loss equivalent to the 50% of discounted cashflow lease payment for the remaining years of the contract and then reverse this loss as we register the regular accounting flow for the leasing?
Hi Silvia,
In a separate FS, where the investment is recorded as cost less impairment.
Can we have a reversal of impairment if the FV of the investment is estimated to be higher than it carrying amount?
Thanks
Hi Silvia,
I have another question regarding impairment of assets. How does the impairment loss affect the financial performance of your company?
Well, negatively, isn’t it? 🙂 This looks like a question from the school assignment, so I really do recommend doing some independent thinking 🙂
Thanks a lot for the answer and replying so quickly
Hi silvia,
Thank you for the video. I have quick question.
why can’t we use IAS 36 impairment of assets for current assets?
Would like to hear from you.
Hi Bor, thank you. IAS 36 is indeed applicable to non-current assets only, that’s by design, and the main reason for that decision was the fact that you usually carry current assets at their fair value anyway (as required by other applicable standards), and also, their operating cycle is usually less than 12 months, so IAS 36 would not make much sense here.
thank you Selvia
i still learning from your Article before i was has wait your e mail now i am looking about your article without need it in my job but just to learn in your way you still make it easy from good to better GOD PLEAS YOU
Hi Silvia,
My question is consolidation entries. Here is our scenario. Entity A owns 100% of Entity B.
The original entry was
Entity A
Dr. Investment in subs
Cr. Cash
Entity B:
Dr. Cash
Cr. Equity
During Consolidation, investment in subs and equity eliminate. Subsequently if there is an impairment in Entity B as entity B’s operation ceased, the entry in entity A would be
Dr. Impairment
Cr. Investment in subs
My question is how would those elimination look like when eliminating the equity from entity b when consolidating to entity A?
Hi Clancy, the impairment entry related to the investment in subsidiary B is done in the individual A’s financial statements and is NOT deemed as a mutual transaction to eliminate. Thus, before you consolidate these two, you need to reverse the entry in parent A’s financial statements as it would have never happened and then consolidate. After you consolidate, take a look at the impairment at the consolidated level; i.e. perform the impairment test on cash generating unit CGU (that could be the whole B) and then recognize the impairment on the consolidated level. Yes, the tricky thing is that sometimes you do 2 separate impairment tests on individual and on consolidated level. Sometimes they are very similar and require just small adjustments.
The last note – while on individual level, you book the entry decreasing the carrying amount of the investment, at consolidated level, you would treat it as CGU’s impairment and reduced the carrying amount of goodwill first; then pro-rata on all assets belonging to CGU.
Why would the impairment loss on the parent’s financials be reversed prior to consolidating?
Many thanks for the response 🙂
Just for the practical matter of consolidating if that impairment loss relates to the subsidiary in question. Sure you can do your own way, my treatment is just suggested. Remember that you are not reversing impairment loss in a way that there is none; instead you are replacing the impairment loss in the parent’s individual financial statements with the impairment loss in the consolidated financial statements – relating to the same item, but completely different accounting treatment in both sets. That’s why I personally prefer remove it from the individual statements, consolidate and then recognize the impairment loss again in consolidated statements.
Hi Silvia I hope you and family are well at this moment.
Back on the 2014/15 due to the huge Brent price fall, When I used worked to IOC there was an oil well that was not going to be feasible for exploration. At that time, the future and cheaper technology to explore the asset was in research. However, my lovely auditors showed me that a future possible technology was not enough to avoid an impairment.
I do not see this explanation on the IAS 36 now… Do we still have this limitation???
Thanks Silvia I am really admire your work!!!!!!
Hi Andre, it is true that you should not take future technologies into account when assessing the impairment. You can learn more about it in my article here. All the best! PS: And yes, auditors are lovely most of the time 🙂
Many Thanks Silvia. that is great. Cheers…..
Hi Silvia and thank you,
If I use Cost Model for Investment property, I want the fair value for disclosure and for impairment test process but I don’t wanna hire external valuation entity every year (my FS is annual) because it is costly
Can we do it internally by real estate department?
Hi Sylvia can you assist we have asset that have zero Carrying Value and would like to know how to treat them.
Secondly the are assets that were impaired as result the 2008 financial meltdown, however now they are in use. how do i treat these and can i reverse the impairment
Hi Nompilo, you can read about assets with zero carrying amount still in use here. As for reversal of impairment – yes, you can reverse that if the circumstances leading to the impairment loss no longer exist, but there are certain conditions and rules to do so.
Hi Sylvia, thanks! It is the best website for learning IAS/IFRS. Very simple and easy to understand with useful illustrations.
Thank God for you and your summaries, they are always so concise and understandable it’s actually a superpower!
Hi Silvia,
Good job!
Can an intangible asset not yet available for use be part of a CGU? I understand no, since it still does not contribute to generate cash flows, and therefore, does not generate cash flows dependent on other assets. A similar case is that of assets that are no longer in use. Therefore, intangible assets should be individually tested for impairment. what do you think?
Good day Sylvia,
kindly I want to know if you mean by the cash outflow is the product cost ( Direct material – direct labor – and manufacturing overhead ) ?? as it’s necessary for the product to generate cash in flow.
Look here on this article.
Hello Sylvia
Subsidiary is a CGU? I have a foreign subsidiary and client provided me with external valuation. I am prepating separate FS for parent and subsidiaries are valued at cost. There is a material impairment but values are in foreign currency. Shall i translate valuation with closing rate and compare with carrying value or shall i take the cost of acquisition when the subsidiary was acquired and retranslate it using closing rate and then compare. Can share some light??? Thank u
Hi there.
Sylvie, If an asset is revalued for the second time and there is a revaluation increase. The same asset was previsously revalued with a gain.
My question is should I still carry it at revalued amount at second time with an increase in OCI or I carry it at it’s carrying amount as at the date of second time revaluation.
Because under IAS 36 entities are not required to carry assets at amounts greater than their recoverable amounts. On second time the Fair value ( recoverable amount in this case is higher than carrying amount thus no impairment).
Should I carry the asset at it’s new Fair value and carry a gain to OCI or carry it at it’s carrying amount.
Thanks
Revalued amount; i.e. FV at the date of revaluation.
Hi,
We can computed impairment loss and the CGU consists of PPE and intangible assets (licenses). Can we allocate the impairment loss to the carrying amount of PPE (only network assets) and not allocating anything to intangibles?
Hi Maaz,
no. Instead, you need to test PPE for impairment separately (if possible) and recognize the impairment loss on these assets first. Only then you make the test of CGU for impairment, including PPE after individual impairment, and recognize any CGU’s impairment on pro-rata basis. S.
Hi Silvia
I have a question. Advances for inventory/PPE are impaired in line with IAS 36 or IFRS 9?
Dear Sivia,
Could you pls, further explain the values that you are showing in the example of the calculation of ‘ Value in use’, using a discount rate of 10%, how to find the rate of 0.909 for the first year and the rate of 0.826 for the second year?
Best Regards,
Nabil
OK, so the formula is 1/((1+rate) to the power of years). For year one and the rate of 10%, that would be 1/(1,1^1) = 1/1,1 = 0,909. For the year 2, it is 1/(1,1^2) = 1/(1,1*1,1) = 1/1.21 = 0,826. When you study the IFRS Kit (I think you are a member), then you will find these calculations in many examples, clearly showing you how to input the formula to excel file. I hope it helps!
Hi Silvia
I have a short question and I would really appreciate your help
We have an investment property (land & building) measured at cos and concluded that there are indications to perform impairment test.
We obtained the external valuation that shows separate values for the land & building. According to the valuation there was a decrease in Land and an increase in the building. Overall the value of the property shows an increase.
How should I treat this case? perform impairment only to the land or treat the whole property as a separate asset and not perform anything?
First you have to identify the cash generating unit.
Hi Silvia, What are the accounting entries for impairment of assets?
e.g Y1 Asset 10k, useful life 5 years, therefore Y2 Asset is 8k (10k less 2k depreciation). New Market value of the asset is 5k, i.e. impairment loss of 3k (8k book value less 5k market value). Accounting entries I think should be:
1. Record impairment loss of 3k
Dr Impairment loss (P&L) 3k
Cr Accumulated Impairment loss (BS) 3k
2. Should I post any other entry to reduce the value of asset?
New depreciation will be 1.25k (5k divide by remaining 4 years). If value of my asset remains unchanged then then with only 1.25k for depreciation, asset won’t be fully depreciated at the end of useful economic life.
I am looking this information for IFRS 16 Right of use asset but believe the accounting entries should be the same.
Thank you in advance.
Regards,
Sal
Dear Silvia,
I have an interesting case in impairment of CGU.
Based on projections as of 31-12-2017 which show huge net outflows in the first year then positive net inflows afterwards. The CGU had a carrying amount of 1M but the total cashflows expected have a negative value 0f (500K), which means the assets carrying value is impaired to Zero. Now, with the same projections, the total expected future cashflows are positive, hence, I need to emphasize that there is no change in estimates than last year as the total negative cash flow at the first year caused the impairment. Now all the future cash flows I’m expecting are positive. Does that mean I should reverse the impairment? If so, should I have not recognized impairment last year?
What caused the issue is that the value in use in 2017 was negative (500K) but I can’t recognize negative assets of course. And now after the big outflow is in the past, the future expected cash flows are all positive. So what should I do?
Hi Silvia,
Certain Asset Under Construction is already pending over 2 years because the production line related to this was not commissioned as per management decision, Can we subject this Asset Under construction to impairment ? Appreciate if you can site the IAS for this if we can subject this to impairment.
Thank you in advance.
B
Hi Silvia,
could you pls explain, do I need to consider the impairment loss on PPE when I’m depreciation. (in the end of last year I have impaired the PPE and when starting the depreciation do I need to consider the impairment?
Yes, otherwise you would “overdepreciate”.
Dear Silvia,
As a new member of this professional community I would like to say Great Thank You for this (and other) wonderful article, useful comments and questions! – And one question for CGU impairment.
According to IAS36.75 The carrying amount of a cash-generating unit shall be determined on a basis consistent with the way the recoverable amount of the cash-generating unit is determined.
So if 50% of admin building is allocated to CGU according to IAS36.102a) and the building maintenance requires some regular annual cash outflow, should the 50% of this maintenance outflow be included in CGU value in use calculation? What about 50% of buildings fair value less cost to sell, assuming there is no plans to dispose the building?
thats awesome .its very eassy to learn IFRS thanks,silvia
New to this page but have learnt a lot from your articles.
I have a query that, could the impairment be charged on an asset in Work in process state.
Means an asset which is not recognized as Plant till now because it’s installation is pending and takes a time of 4-6 months to complete. Currently it is in Work in process state now, when it will be completed there may be some difference in its purchased cost and Fair value, the difference could be charged as Impairment loss?? Please advice
Thanks
Hi Sylvia,
New to this page but have learnt a lot from your articles which are comprehensive and easy to understand.
I have a query with regards to Impairment on Investment in Subsidiary where no goodwill was taken up at date of acquisition. The subsidiary is also a private company and the market is immature meaning there is no market price if sold in the open market. Do you use the Net Assets to determine the value of the subsidiary and compare this to the investment made by Parent company for the impairment loss or gain? Please advise.
Thanks
Douna
This is awesome
Very sipsimple to understand
I am a student of MS Accounting & Finance at Riphah International University Islamabad. I have watched your videos regarding IAS and IFRS and I must say that your explaining method is simply amazing,easy to to understand. I learnt a lot from your videos.
Hi Silvia,
Land is not depreciated and infinite useful life, so could we test impairment for land under IAS 36 if any circumstances arise. Please explain calculation of impairment test separately if any there and circumstances if any
Hi Sylvia,
Great article as usual.
Just a doubt about corporate assets.
When we allocate the Carrying amount of corp assets to the CGUs, do we need to allocate the Recoverable amount of the corp asset also to the CGUs, for finding impairment loss? The corporate assets may have high selling prices in the market (Fair value less costs to sell).
Coz if we compare the combined carrying amount of CGUs and Corp assets, with only the CGU specific Recoverable amount, we would invariably look at some impairment loss!
Dear Rishabh,
when you test the corporate assets for impairment, you compare:
– the carrying amount of CGU + the allocated carrying amount of corporate assets WITH
– the recoverable amount of CGU. So no, you are not allocating the recoverable amount of a corporate asset to CGU.
BUT!!! IAS 36 also says that the “the distinctive characteristics of corporate assets are that they do not generate cash inflows independently of other assets…” and also, because of that, “the recoverable amount of an individual corporate asset cannot be determined unless management has decided to dispose of the asset” (paragraphs 100, 101).
Therefore, if you can determine the recoverable amount of a corporate asset, then you should test it for impairment separately. But likely, it will not be the case for many corporate assets. S.
Thank you.. 🙂
Dear Sylvia,
Excellent article as usual!
I have a question that requires your input. Let’s say i have an investment in a subsidiary that has been fully impaired, and was liquidated recently.
As such, the remaining available cash of $200k in the subsidiary was returned to the parent company. In view of this :
1. How do i recognise the $200k?
2. DO i need to reverse the impairment made previously on the subsidiary?
Appreciate your feedback on this matter.
Mark
Dear Mark,
once you liquidate the subsidiary, you should derecognize it from your financial statements as it does not exist anymore. You do not reverse any impairment in this case, and recognize 200K as an income in P/L. S.
Dear Sylvia
May I please ask one other question in addition to the one above. Let’s say that liquidating subsidiary A has it’s own (100%) subsidiary B where investment has been fully impaired due to certain restrictions on activity. On liquidation of subsidiary A, holding in subsidiary B should be passed onto the parent company. Would you be able to advise if the provision made on subsidiary B need to be reversed before passing it to the Parent? (and, subsequently provided for because there is no value to that investment).
Thank you in advance
Hi Sandy, well, normally, if a parent acquires an investment in a subsidiary in its separate accounts, it is recognized either at cost or by equity method or at fair value. Here, you did not provide any info about the specifics of the “passing to the parent”, but in general – if liquidating subsidiary disposes of any investment, then it derecognizes it fully and there is, in most cases, no reason to reverse any prior impairment. Parent will recognize the “new subsidiary” in its separate accounts as a new acquisition, by any of three methods I mentioned.
Hi Sylvia
Thank you for your prompt response. The investment in subsidiary is stated at cost and impaired fully. So, the Parent should also recognise the new acquisition at cost (and impair accordingly)?
Hi Sandy, it is a parent’s choice under IAS 27.
Thank you dear Sylvia.
Hello Sylvia,
I just need a clarification on the reversal of impairment for an asset that has previously been revalued – e.g. building (revaluation model under IAS 16).
If a building has been revalued and there was a revaluation surplus in the equity but then in subsequent period, the asset has been revalued downward for the amount exceed the revaluation surplus and the exceeding amount is booked in P&L.
Now if there is an upward revaluation again in one of the following periods do we book it through equity (revaluation surplus) as the standard says that the reversal goes through P&L except for revalued assets?
Or do we book it through P&L up to the depreciated amount of the historical cost as the impairment (revaluation downward)has never happened?
Hope the question is clear!:)
Thanks a lot
Eni
Hello Sylvia
Have a good day..
I have a question on Impairment testing we bought a software(has 10 yrs of useful life) last 2013, but the software will be available for use on March 2015. Is the software externally generated is subject for impairment testing annually even the useful life is finite?
The phrase below is from IAS 36, I’m just confuse because the standard is not clear whether the useful life is finite or infinite. Please I need your help. Thank you so much.
IAS 36.10 Irrespective of whether there is any indication of impairment, an entity shall also:
(a) test an intangible asset with an indefinite useful life or an intangible asset
not yet available for use for impairment annually by comparing its carrying
amount with its recoverable amount. This impairment test may be
performed at any time during an annual period, provided it is performed at
the same time every year. Different intangible assets may be tested for
impairment at different times. However, if such an intangible asset was
initially recognised during the current annual period, that intangible asset
shall be tested for impairment before the end of the current annual period.
(b) test goodwill acquired in a business combination for impairment annually
in accordance with paragraphs 80–99.
Hi Sylvia,
Please I don’t understand what you meant when you said that in calculating value in use, cashflows from financing activities shall be excluded because time value of money is considered by discounting cashflows? please can you use an example?
Hi Sylvia.
Thanks a lot!
Please, I have a question.
In calculating cash flow projections, there is need to consider variations. What are these variations?
Assuming an asset was purchase at 1/7/2007 at $1,000,000. the coy depreciation policies is to depreciate the asset @ 10% on cost. an impairment review was carried out on 1/8/2009 where the value in use was $500,000 and the fair value less ccost to sell is $480,000. what is the carrying amount as at when the impairment test was carried out, and what is the carrying amount of the asset as as 31/12/2009 which is the ccoy financial year. now my cofusion here is that considering that the impairment was not carried out at the end of the year, how much will be charge as depreciation during the year.
thanks in advance
Thank you, Silvia!
You are as usual very helpful… and full of ideas ))
I think more and more frequently that IFRS is art ))
Hi, Silvia!
I am looking for insight in relation to impairment of construction in progress. May be you will be interested in this case study. The Company has a single generating unit-oil field. It bulds new O&G assets to develope the field. While the asset is under construction it is recognised as part of CIP (construction in progress), when it is ready and commissioned it is transferred to O&G working assets. The question is whether CIP can be considered being a part of this single CGU. The second, how to treat some CIP which are decided to be abondonded. We can not transfer them to O&G since they are not available for use, at the same time keeping them in CIP for ages (since they can not be tested individually as being part of a CGU) till impairment test of the all assets shows impairment (which can be for 10-15 years, when field will start declining). Looks strange. I am in opinion that these uncompleted PPE are to be impaired individually anyway, however I am in doubt how to prove that CIP is not part of a single generating unit…
Any ideas?
Hi Olga,
1) Yes, CIP can be considered being part of a single CGU.
2) I agree with you in relation to individual impairment. The thing is that some assets within CGU can be tested individually and some of them can’t. Under IAS 36, you should identify the impairment loss on individual assets first, recognize it first, and only then test the whole CGU (new carrying amount after impairment loss on individual assets).
Hope it helps
S.
Hi Silvia,
I have a question regarding assets under construction.
I work for a Real Estate Property Developer and most of our assets are Investment Property which are under construction.
In one particular case an Office Building is under construction and is partially complete. The Office Buildings are to be leased out as offices. At the time of doing the feasibility 3 years ago the project had a negative NPV (this is first year we are adopting IFRS) but no impairment was booked. However, under current market conditions, if we re-assess the project it may or may not result in an impairment once. Can assets under construction be considered for impairment eventhough they are not yet complete and IAS 36 disallows future capex and to considred in Value in Use calculation:
IAS 36 para 33 (b) states the following: “…but shall exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset’s performance…”
and para 45 talks about the assessing for impairment of the asset under its “current condition” (in my case assets current condition is incomplete)
Is the asset even eligible for impairment testing as the asset is not complete under its “current condition”. How do I calculate Value in Use when IAS 36 disallows additional outflows expected from “enhancing asset performance” which I need to do to earn my future inflow. Or does this para not apply to assets under construction.
Thanks!
Dear Fahd,
this is an interesting question. First of all, what model do you apply for measuring your investment property? If it’s a fair value model, then IAS 36 does not apply, i.e. you do NOT perform an impairment review (IAS 36.2(f)).
If it’s a cost model, then yes, do DO perform an impairment review, but you test for the impairment ONLY when there’s an indication (asset is broken, unfavorable market conditions,…).
Now, while IAS 36 says it clearly about value in use, you can still determine the fair value of your investment property in a state as it is.
But, when you determine the fair value, you would for sure need to consider planned and strategic CAPEX, because this is NOT considered to improve or enhance the property. This is planned, stragegic CAPEX that knowledgeable, willing buyer would consider when calculating the purchase price of an investment property under construction (refer to the highest use).
Hope this helps. S.
Hi Silvia,
Thanks! That helps a lot. We are applying IAS 40 on cost model. Two more questions if you do not mind:
1. Does IAS 36 define the difference between Planned & Strategic Capex and Capex that is to be used to enhance?
2. We also have a Residential Building that we are going to test for impairment. Management has planned and committed to enhance the building by installing automatic sliding access doors, installing bike racks etc. This will only result in better user experience for the tenants. It will not result in higher rent charges, so there is no additional rental income expected from this capex expenditure. However, some of this capex was committed initially at the time at a time before building was constructed but the work was never completed when the building was handed over to tenants. And some of the additional capex item were items to make the buildings at par with competitors which were never part of the original plan. Which capex should I include and exclude?
1. No. Please note that I wrote about fair value, not value in use. And, refer to IFRS 13. The market value of any investment property is determined on the basis of the highest value considering any use that is feasible and probable (concept of the best and highest use in IFRS 13).
2. Well, again, let me stress that we talk about fair value here. Therefore, any CAPEX that would be done by the average market participant to get the property to its highest and best use should be taken into account. In other words, if it’s only YOU and not the average market participant who would do some types of CAPEX, then this type of CAPEX should not be taken into account. Now the question is – would installing doors, racks… be performed by other market participants to get the same use as without these things? I doubt it.
S.
This is wonderful. Thanks for this. Very helpful indeed.
By far the best teaching site for accounting. Simple yet comprehensive and amazingly interesting. I sticked to the video till the end and never got bored. Keep up the awesome job Sylvia. Many Thanks
Thank you, Qamar 🙂 I love similar comments, they keep me moving on! S.
Vry simple to understand.tanx u
Hello! ur email address plz
You can use our contact form to send me an e-mail 🙂 http://www.cpdbox.com/contact/
hi silia..thank yu sooo muj, ur video’s r jst awesome, m a final year Accounting student n all ur resources rily help. :p
Its Great Silvia. Your slides are easy to understand and comprehensive. A great job. Thanks again.
thank you Silvia, your videos and mails are very easy to understand and remember
Your pictures are amazing.
Great Silvia, as usual! Thanx!