IAS 36 - Impairment of Asstes
What is Impairment, and how is it calculated?
Impairment is when the Recoverable Amount is lower than the Current Carrying Value of an asset.
Recoverable amount: the higher of Net Realisable Value (Fair Value less Cost for sale) and Value in Use.
Current Carrying Amount: cost less accumulated depreciation.
Value in Use: the present value of future cashflows that the asset is expected to generate.
Fair Value (less cost of disposal/sale): potential sales proceeds less any costs incurred in selling the asset.
There are indicators/causes of impairment, both external and internal sources.
Name 3 External sources and 4 Internal Sources.
External:
- market value declines
- negative changes in technology, markets, economy, or laws
Internal:
- obsolescence or physical damage
- asset is expected to be disposed or no longer used
- plans to discontinue operation in which asset is used
- economic performance is lower than expected
Define Cash Generating Units (CGU’s).
What do you allocate impairment loss to within a CGU:
Smallest identifiable group if assets that generates cash inflows that are largely independent of the cash flows from other assets or groups of assets.
Allocate impairment to:
Firstly, Goodwill allocated to the CGU
Secondly, Other assets on a pro-rata basis based on their carrying value (cost less accumulated depreciation).
What are the stages of testing when corporate assets or goodwill are allocated to a group of CGU’s?
- Individual CGUs are tested for impairment and reduced accordingly
- Test the group of CGUs that include the in allocated goodwill or corporate assets. Any impairment is allocated against the goodwill/corporate assets.
When can you reverse an impairment? What conditions are there when reversing an impairment?
You can reverse an impairment if the Recoverable Amount of an asset (that was previously impaired) returns above its current (post-impairment) carrying value.
Condition: you cannot revalue the asset to above the ‘Carrying Value If The Asset Was Never Impaired’, i.e. if we never imapired it, it’s CCV would be £85k and therefore it cannot be revalued above £85k.
IAS 36 - Impairment of an Asset.
What information is to be disclosed relating to this International Accounting Standard?
- For each class of assets, the amount of impairment losses recognised and the amount of any impairment losses recovered.
- For individual assets or CGUs that have suffered a significant impairment loss, details of
the nature of the asset
the amount of the loss
the events that led to recognition if the loss
whether the recoverable amount is fair value less costs of disposal or value in use
and, if the recoverable amount is value in use, the basis on which thsi value was estimated
How are research and development costs treated, in accordance with IAS 38 Intangible Assets?
Research: expense in the Statement of Comprehensive Income.
Development: costs are capitalised as an intangible asset. However, specific criteria must be met.
What is the criteria that must be met to capitalise Development costs?
STEMIC!
Sellable or usuable by the entity
Technically feasible to complete
Economic benefits are expected to flow to the entity
Measurable expenditure
Intention to complete
Completable (technical, financial & other resources are aqequate)
When can an intangible asset be recongised?
- probable that the future economic benefits attributable to the asset will flow to the entity
- measured reliably (either cost model or revaluation model
How is an intangible asset measured (cost wise)?
Cost model: carried at cost less accumulated amortisation.
Revaluation model: (for infinite useful life) carried at revalued amount, which is fair value less accumulated amortisation and any susbequent impariment losses.
What should a company disclose for Intangible Assets (IAS 38)?
- method of amortisation
- useful life of assets or amortisation rate used
- gross carrying amount, accum’ amortisation & accum’ impairment losses at beginning & end of period
- reconciliation of carrying amount at beginning and end of period
- carrying amount of each intangible asset which has indefinite useful life. & reasons why it has indefinite useful life.
What is goodwill and negative goodwill?
Goodwill: asset that represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.
Itangible asset; not amortised; tested annually for impairment; cannot be revalued upwards
Negative goodwill: an acquirer pays less for a business than the fair value of its net assets
What is an investment property (IAS 40)?
Property held by the owner to earn rentals or for capital appreciation rather than for:
- use in production or supply of goods/services or for admin
- sale in the ordinary course of business
How are investment properties measured?
Cost model: as like PPE under IAS 16. Must be depreciated over useful life.
Fair Value model: market value (cost to sell). Must not be depreciated.
