IAS 36 applies to all assets except: - Inventories (IAS2) - Financial assets - Deferred tax (IAS12) - Investment property at FV (IAS 40) - And so on It does apply to: - Land, building, machine (IAS 16) - Investment property carried at cost (IAS 40) - Intangible assets (IAS36) - Goodwill - Subsidiaries - Assets at revalued amounts An asset is impaired when carrying amount > recoverable amount. Carrying amount is the amount on the balance. Recoverable amount is higher of FV – cost to sell or value in use. CA-RA = impairment loss. You need to check at the end of each reporting If there are indicators of impairment. If yes impairment. Intangible assets with indefinite useful life or intangibles not yet available for use must be test for impairment annually. Goodwill acquired in business combination annually impairment test Indications of impairment - External sources o Declline in market value o Significant changes (market, technology, legal, economic) o Increase in interest rates, might affect the discount rate o Carrying amount > market capitalization - Internal resources o Obsolescence/physical damage o Significant changes (restructuring/discontinuing) o Internal reporting evidence
Recoverable amount Impairment loss different between CA and RA. Higher of assets/CGU’s: - Fair value less cost to sell and; - Value in use If any of these > CA then there is no impairment. If FV-cost to sell impossible to set use value in use. Value in use - Present value of the future cash flows expected to be derived from an asset /CGU o Future cash flows o Variations o Time value of money o Uncertainty o Other factors Basis: - FCF must be on reliable assumptions +; - Recent budgets/forecasts +; - Extrapolation - Cash inflows from continuing use - Necessary and directly attributable/ allocated cash outflows - Net cash flows from disposal - Inflation on a consistent basis What not in cash flows?: - No future restructuring if not yet committed - Improving / enhancing performance in future - Cash flows should not include financial assets like receivables or liabilities like payables - No financing activities - Income tax because discount rate is determined on a pre-tax basis Discount rate: - Pre-tax rate that reflect current market assessment of o Time value of money o Risks specific to asset - Market rate - When no market rate o Use for example WACC o Incremental borrowing rate o Other market borrowing rates
Impairment loss CA-RA recognize impairment loss in the financial statements - Cost model o Debit directly in P/L – impairment loss o Credit Asset (adjustment) - Revaluation model o Debit: OCI – revaluation surplus o Credit: asset (adjustment) - If no revaluation surplus in equity o Debit: P/L – impairment loss o Credit: Asset (adjustment) After recognition of impairment loss, you need to adjust depreciation for future periods to new CA. On a systematic basis.
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- Fall '19