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FR - Accounting For Transactions in Financial Statements: Impairment of Assets - IAS36 - Part 4

The document discusses impairment testing of assets according to IAS 36. It provides an example of a cash generating unit (CGU) that is tested for impairment. The CGU's recoverable amount, which is the higher of fair value less costs of sale and value in use, is estimated to be $120 million. Since this is lower than the CGU's carrying amount of $150 million, an impairment loss of $30 million must be recognized. The loss is allocated first to goodwill ($25 million) and then proportionately to other assets, with the intangible license being written down by $5 million. No asset can be reduced below its recoverable amount.

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31 views

FR - Accounting For Transactions in Financial Statements: Impairment of Assets - IAS36 - Part 4

The document discusses impairment testing of assets according to IAS 36. It provides an example of a cash generating unit (CGU) that is tested for impairment. The CGU's recoverable amount, which is the higher of fair value less costs of sale and value in use, is estimated to be $120 million. Since this is lower than the CGU's carrying amount of $150 million, an impairment loss of $30 million must be recognized. The loss is allocated first to goodwill ($25 million) and then proportionately to other assets, with the intangible license being written down by $5 million. No asset can be reduced below its recoverable amount.

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FR - Accounting for transactions in financial

statements
Impairment of Assets – IAS36 – Part 4

The impairment test involves estimating the asset’s recoverable amount. The recoverable amount is the higher
of ‘fair value less cost to sell’ and ‘value in use’.

For the purposes of conducting impairment reviews, a company divides its assets into cash generating units
(CGUs). The assets belonging to one such CGU, including goodwill which has been allocated to it, are listed
below:

Carrying amount Fair value less costs of disposal


Goodwill 25 -
Property, plant and equipment 68 72
Intangible assets (operating license) 37 23
Trade receivables 16 16
Cash 4 4
Total 150 115

Additional information:

1) Goodwill. This asset is not subject to any systematic amortisation, and must therefore be tested for
impairment annually. It does not have any market value, because there is an assumption that we cannot
transfer or sell goodwill to any third party;
2) The fair value of the company’s intangible assets has recently been revised downwards due to the
appearance of competitors, all of whom have been awarded operating licences;
3) The CGU’s fair value less costs of disposal and value-in-use have been estimated at 118 million and 120
million respectively.

Remember, that reviewing assets for impairment is a two-step process:


Note: Goodwill must be tested for impairment irrespective of whether impairment indications actually exist.

When performing the impairment review, we are comparing the carrying amount of the CGU with its recoverable
amount:

From the information we have it can be seen that the estimated value-in-use is higher than the fair value less
costs of disposal (120 > 118), and it goes to the top and becomes our estimate of the recoverable amount.
Therefore:

Carrying amount 150 million Recoverable amount 120 million

Impairment write-down = 30 million

In the case of impairment identified at the CGU level, the write-down must be allocated and spread out among
the various assets that belong to it. IAS 36 provides the order in which impairment losses recognised in respect
of the CGU should be allocated to its constituent assets:

- First, to reduce the carrying amount of any goodwill;


- Second, but only if the goodwill has been fully written off, to the other assets of the CGU, pro-rata, meaning
proportionately, to their carrying values.

Note: No single asset should be written down below its recoverable amount.

Remember: If a subsequent review finds that the recoverable amount of a cash generating unit has gone up,
the entity may increase the value of its assets as reported in the statement of financial position and recognise a
corresponding credit within P&L. However, IAS 36 does not allow reversals of impairment losses on
goodwill.

So, let’s apply all discussed above to the components of the CGU which we have been analysing:

Carrying Fair value less Impairment New carrying


amount costs of disposal loss allocation amount
Goodwill 25 - (25) -
Property, plant and equipment 68 72 - 68
Intangible assets (license) 37 23 (5) 32
Trade receivables 16 16 - 16
Cash 4 4 - 4
Total 150 115 (30) 120

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