Section 3240: Impairment of Long-lived Assets
International Accounting Standard 36
Impairment of Assets
1. First version of IAS 36
"Impairment of Assets" issued in June 1998
2. Revisions
Revised in March 2004
[U.S. GAAP Codification Topic]
360-10-35
[U.S. GAAP before the Codification]
SFAS 144, August 2001, Accounting for the Impairment or Disposal of Long-Lived Assets
3. Impaired
An asset is impaired,
--> if recoverable amount is smaller than carrying amount
4. Carrying amount
= cost - (1) - (2) or
= revalued amount - (1) - (2)
(1) accumulated depreciation
(2) accumulated impairment losses
5. Recoverable amount
= The higher of (1) and (2)
(1) fair value less costs to sell
(2) value in use
6. Impairment indication [IAS 36.12]
Check if there is an indication of impairment
Examples:
Significant decrease in market price of an asset
Evidence of obsolesence
7. Impairment test
If there is an indication, impairment test itself is one-step
--> Is carrying amount > recoverable amount?
8. For the following assets, IAS 36.10
Impairment test is applied annually,
--> regardless of the outcome of impairment indication
(1) goodwill
(2) intangible assets with an indefinite useful life
(3) intangible assets not yet available for use
9. Impairment Test: U.S. GAAP, ASC 360-10-35-17, 21
Indication --> recoverability test --> impairment test
Is there an indication that carrying amount may not be recoverable?
--> If yes, go to recoverability test.
Two-step approach:
(1) Recoverability test: Is carrying amount recoverable?
Is carrying amount > sum of undiscounted expected cash flows from use?
(2) Impairment test: Is an asset impaired?
Is carrying amount > fair value?
10. Goodwill Impairment Test, IAS 36.80-108
Goodwill is allocated to each Cash Generating Unit (CGU) or groups of CGUs
Impairment test for a CGU, annually or when there is an indication of impairment,
--> Is carrying amount > recoverable amount?
Impairment loss of a CGU
--> is allocated to reduce the carrying amount of goodwill, first
--> then to other assets
11. Cash Generating Unit, CGU
Smallest identifiable group of assets
--> the group generates cash inflows
--> that are largely independent of (a)
(a) cash inflows from other assets
12. Corporate Assets
Assets that contribute to both (1) and (2):
(1) future cash flows of CGU under review
(2) future cash flows of other CGUs
Goodwill is not a corporate asset
13. Goodwill Impairment Test: U.S. GAAP, ASC 350-20-35-28
Timing of goodwill impairment test:
Annually or when there is an indication of impairment
Two-step impairment test, ASC 350-20-35-4, 13
Step 1: Is carrying amount > fair value of a reporting unit?
--> If no, goodwill is considered not impaired.
--> If yes, go to step 2
Step 2: Is carrying amount > fair value of goodwill?
14. Reporting Unit, ASC 350-20-35-34
(1) an operating segment or
(2) a component of an operating segment
--> if the component satisfies (a) and (b)
(a) discrete financial information is available
(b) its operating results are regularly reviewed
Components with similar economic characteristics
--> are deemed as a single reporting unit
15. Operating Segment, ASC 280-10-50-1
--> a component of an enterprise
16. Reportable Operating Segment, ASC 280-10-50-10
--> an operating segment that meets any of the quantitative thresholds:
(1) 10% or more of combined revenue, combined assets
(2) absolute amount of profit or loss is
10% or more of the greater of (a) or (b):
(a) combined reported profit of all segments with profit
(b) combined reported loss of all segments with loss
17. Impairment loss = (1) - (2)
(1) carrying amount
(2) recoverable amount
Carrying amount is reduced to recoverable amount, IAS 36.59
18. Recognition of Impairment Loss
Impairment loss is recognised in profit or loss, except for revalued assets
19. For revalued assets, IAS 36.60
Impairment loss is treated as revaluation decrease under IAS 16
20. Revaluation surplus, IAS 16.39, 40
Increase in carrying amount after a revaluation
(1) Revaluation surplus is
--> recognised in other comprehensive income
(2) Revaluation surplus is
--> accumulated in equity under separate heading
21. If the increase is a reversal of previous decrease,
--> which was recognised in profit or loss,
--> recognise such increase in profit or loss.
22. Revaluation surplus, IAS 16.39, 40
Decrease in carrying amount after a revaluation
(1) Recognised in profit or loss
(2) If revaluation surplus has credit balance
--> reduce revaluation surplus, first
23. When the asset is derecognised,
--> revaluation surplus in equity is
--> transferred to retained earnings.
24. Reversal of Impairment Losses
For Goodwill, IAS 16.124
Impairment loss is not reversed, in subsequent periods.
For Assets other than Goodwill, IAS 16.114
Impairment loss is reversed if and only if,
--> there was a change in estimates used in (a)
(a) the estimation of recoverable amount
25. If (1) > (2) --> it is a case of revaluation, IAS 16.117
(1) Increase in carrying amount
(2) Impairment loss already recognised
26. Reversal of impairment loss is, IAS 36.119
--> recognised in profit or loss, except for revalued assets
For revalued assets,
--> reversal of impairment loss is treated as revaluation increase under IAS 16
27. Under U.S. GAAP, ASC 360-10-35-20
Reversal of previously recognised impairment loss is not allowed.
When an impairment loss is recognized,
--> new cost basis = carrying amount - impairment loss
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