PAS 36 - Impairment of Assets Impairment Objective...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Impairment of Assets Impairment Objective Objective The objective of this Standard is to prescribe The the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognize an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures. impairment Scope Scope This standard shall be applied in accounting for the impairment of all This assets, other than: assets, a. Inventories b. Assets arising from construction contracts c. Deferred tax assets d. Assets arising from employee benefits e. Financial assets that are within the scope of IAS 39 Financial Financial Instruments: Recognition and Measurement Instruments: f. Investment property that is measured at fair value g. Biological assets related to agricultural activity that are at fair Biological value less estimated point-of-sale costs value h. Deferred acquisition costs, and intangible assets, arising from an Deferred insurer’s contractual rights under insurance contracts within the scope of IFRS 4 Insurance Contracts scope i. Non-current assets (or disposal groups) classified as held for sale Non-current in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Discontinued Definitions Definitions The following terms are used in this Standard with the meanings The specified: specified: An active market is a market in which all the following An active conditions exist: conditions a. The items traded within the market are homogeneous. b. Willing buyers and sellers can normally be found at any time. c. Prices are available to the public. The agreement date for a business combination is the date The agreement that a substantive agreement between the combining parties is reached and, in the case of publicly listed entities, announced to the public. In the case of a hostile takeover, the earliest date that a substantive agreement between the combining parties is reached is the date that a sufficient number of the acquiree’s owners have accepted the acquirer’s offer for the acquirer to obtain control of the acquiree. acquiree. Definitions… Definitions… Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon. (amortization) A cash-generating unit is the smallest identifiable group of cash-generating assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. of Corporate contribute contribute generating generating units. units. Cost of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense. assets are assets other than the goodwill that to the future cash flows of both the cashunit under review and other cash-generating Definitions… Definitions… Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value. its Depreciation (Amortization) is the systematic allocation of the depreciable amount of an asset over its useful life. the Fair value less costs to sell is the amount obtainable from Fair the sale of an asset or cash-generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. less An impairment loss is the amount by which the carrying An impairment amount of an asset or a cash-generating unit exceeds its recoverable amount. recoverable Definitions… Definitions… The recoverable amount of an asset or a cash-generating The unit is the higher of its fair value less costs to sell and its value in use. value a. Useful life is either: The period of time over which an asset is expected to be The used by the entity; or The number of production or similar units expected to be The obtained from the asset by the entity. obtained b. b. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. unit. Identifying an Asset that may be Impaired Identifying An entity shall assess at each reporting An date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. the Identifying an Asset that may be Impaired ….. ….. In assessing whether there is any indication that an asset may be In impaired, an entity shall consider, as a minimum, the following indications: indications: External sources of information a. b. c. d. During the period, an asset’s market value has declined During significantly more than would be expected as a result of the passage of time or normal use. passage Significant changes with an adverse effect on the entity have taken Significant place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated. entity Market interest rates or other market rates of return on investments Market 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. and The carrying amount of the net assets of the entity is more than its The market capitalization. Identifying an Asset that may be Impaired ….. ….. Internal sources of information e. f. g. Evidence is available of obsolescence or physical damage of an Evidence asset asset Significant changes with an adverse effect on the entity have taken Significant place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the 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. asset Evidence is available from internal reporting that indicates that the Evidence economic performance of an asset is, or will be, worse than expected. expected. Measuring Recoverable Amount Measuring It is not always necessary to determine both an asset’s fair It value less costs to sell and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it its not necessary to estimate the other amount. the It may be possible to determine fair value less costs to sell, It even if an asset is not traded in an active market. However, sometimes it will not be possible to determine fair value less costs to sell because there is no basis for making a reliable estimate of the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. In this case, the entity may use the asset’s value in use as its recoverable amount. recoverable Measuring Recoverable Amount….. Measuring If there is no reason to believe that an asset’s value in use materially exceeds its If fair value less costs to sell, the asset’s fair value less costs to sell may be used as its recoverable amount. This will often be the case for an asset that is held for disposal. This is because the value in use of an asset held for disposal will consist mainly of the net disposal proceeds, as the future cash flows from continuing use of the asset until its disposal are likely to be negligible. negligible. Recoverable amount is determined for an individual asset, unless the asset Recoverable does not generate cash inflows that are largely independent of those from other assets or group of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs, unless either: either: a. The asset’s fair value less costs to sell is higher than its carrying amount b. The asset’s value in use can be estimated to be close to its fair value less The costs to sell and fair value less costs to sell can be determined. costs In some cases, estimates, averages and computational short cuts may provide In reasonable approximations of the detailed computations illustrated in this Standard for determining fair value less costs to sell or value in use. Fair Value less Costs to Sell Fair The best evidence of an asset’s fair value less costs to sell is a price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset. that If there is no binding sale agreement but an asset traded in an active market, fair If value less costs to sell is the asset’s market price less the costs of disposal. The appropriate market price is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction may provide a basis from which to estimate fair value less costs to sell, provided that there has not been a significant change in economic circumstances between the transaction date and the date as at which the estimate is made. between If there is no binding sale agreement or active market for an asset, fair value less If costs to sell is based on the best information available to reflect the amount than an entity could obtain, at the balance sheet date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. In determining this amount, an entity considers the outcome of recent transactions for similar assets within the same industry. Fair value less costs to sell does not reflect a forced sale, unless management is compelled to sell immediately. unless Fair Value less Costs to Sell ….. Fair Cost of disposal, other than those that have been recognized as liabilities, are deducted in determining fair value less costs to sell. Examples of such costs are legal costs, stamps duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits and costs associated with reducing or reorganizing a business following the disposal of an asset are not direct incremental costs to dispose of the asset. are Sometimes, the disposal of an asset would require the buyer Sometimes, to assume a liability and only a single fair value less costs to sell is available for both the asset and the liability. to Value in Use Value The following elements shall be reflected in the calculation of an asset’s The value in use: value a. An estimate of the future cash flows the entity expects to derive An from the asset from b. Expectations about possible variations in the amount or timing of Expectations those future cash flows those c. The time value of money, represented by the current market riskfree rate of interest d. The price for bearing the uncertainty inherent in the asset e. Other factors, such as illiquidity, that market participants would Other reflect in pricing the future cash flows the entity expects to derive from the asset. from Estimating the value in use of an asset involves the following steps: a. Estimating the future cash inflows and outflows to be derived from Estimating continuing use of the asset and from its ultimate disposal continuing b. Applying the appropriate discount rate to those future cash flows. Recognizing and Measurement an Impairment Loss Impairment If, and only if, the recoverable amount of ant asset is less than its carrying If, amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss. recoverable An impairment loss shall be recognized immediately in profit or loss, unless An the asset is carried at revalued amount in accordance with another Standard. Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard. An impairment loss on a non-revalued asset is recognized in profit or loss. However, an impairment loss on a revalued asset is recognized directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed the amount in the revaluation surplus for the same asset. the When the amount estimated for an impairment loss is greater than the When carrying amount of the asset to which it relates, an entity shall recognize a liability if, and only if, that is required by another Standard. liability After the recognition of an impairment loss, the depreciation (amortization) After charge for the asset shall be adjusted in future period to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life Reversing an Impairment Loss Reversing An entity shall assess at each reporting date whether there is any An indication that an impairment loss recognized in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of the asset. the In assessing whether there is any indication that an impairment loss In recognized in prior periods for an asset other than goodwill may no longer exist or may have decreased, an entity shall consider, as a minimum, the following indications: minimum, External sources of information a. The asset’s market value has increased significantly during the The period. period. b. Significant changes with a favorable effect on the entity have taken Significant place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates of in the market to which the asset dedicated. entity c. Market interest rates or other market rates of return on investment Market have decreased during the period, and those decrease are likely to affect the discount rate used in calculating the asset’s value in use and increase the asset’s recoverable amount materially. and Reversing an Impairment Loss… Reversing Internal sources of information d. Significant changes with a favorable effect on the entity Significant have taken place during the period, or are expected to take place in the near future, in the extent to which or manner in which, the asset is used or is expected to be used. These changes include costs incurred during the period to improve or enhance the asset’s performance or restructure the operation to which the asset belongs. restructure e. Evidence is available from internal reporting that Evidence indicates that the economic performance of the asset is, or will be, better than expected. Reversing an Impairment Loss for an Individual Asset Asset The increased carrying amount of an asset other than goodwill attributable to a The reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asse6t in prior years. impairment Any increase in the carrying amount of an asset other that goodwill above the Any carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years is a revaluation. In accounting such a revaluation, an entity applies the Standard applicable to the asset. the A reversal of an impairment loss for an asset other than goodwill shall be reversal recognized immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard. Any reversal of an impairment of a revalued asset shall be treated as revaluation increase in accordance with that other Standard. accordance A reversal of an impairment loss on a revalued asset is credited directly to reversal equity under the heading revaluation surplus. However, to the extent that an impairment loss on the same revalued asset was previously recognized in profit or loss, a reversal of that impairment loss is also recognized in profit or loss. or After a reversal of an impairment loss is recognized, the depreciation charge for After the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. its Disclosure Disclosure An entity shall disclose the following for each class of assets: a. The amount of impairment losses recognized in profit or The loss during the period and the line item(s) of the income statement in which those impairment losses are included. included. b. The amount reversals of impairment losses recognized The in profit or loss during the period and the line item(s) of the income statement in which those impairment losses are reversed. are c. The amount of impairment losses on revalued assets The recognized directly in equity during the period. recognized d. The amount of reversals of impairment losses on The revalued assets recognized directly in equity during the period. period. ...
View Full Document

This note was uploaded on 11/30/2011 for the course ECON 310 taught by Professor Johnsmith during the Spring '11 term at Kentucky.

Ask a homework question - tutors are online