Chapter 11 HKAS 36 Impairment of Assets

1.
1.1 1.2 1.3 1. 1." 1.& 1.' 1.(

Objectives
State the principle of value to business related to impairment. Define the meaning of impairment, carrying amount, recoverable amount, net realizable value and value in use. Identify the events to trigger off an impairment review. !ompute the impairment loss. #$plain the allocation of goodwill for a cash%generating unit. #$plain the allocation of impairment loss for a cash%generating unit. #$plain the accounting treatments for impairment loss for a cash%generating unit and an individual asset. #$plain the disclosure re)uirements by *+,S 3&.

Scope 1 D e fi n i ti o n

Id e n ti fy Im p a ir m e n t

! a s h / e n e r a ti n g 0 n i ts

, c c o u n ti n g fo r Im p a irm e n t . o s s

S ubse)uent - e v ie w

D isc lo sure

2.

Introduction
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2.3

2.

,n enterprise3s assets are normally recorded at the value of transactions at the time when they are ac)uired. Subse)uently, the enterprise may revalue their assets as times goes by to reflect their fair value of the assets as stated in the balance sheet. 4oreover, it has long been established that if there are permanent decline in the value of assets, i.e. the assets are impaired, the asset3s carrying amount should be written down to their recoverable amount. 5he purpose of *+,S 3& is to ensure that enterprises do not carry assets at a value in e$cess of their recoverable amount ( ). ,lso, it gives some specific guidance on when and how to apply the test of impairment. 5he logical thin6ing and deduction on the concept of impairment is based on the principle of 7value to the business8 9or deprival value:. ;alue to the business is the lower of an asset3s carrying amount and its recoverable amount. DEFINITIONS 9a: 9b: Impairment ( ) is a reduction in the recoverable amount of a fi$ed asset or goodwill below its carrying amount. Carrying amount ( ) is defined in *+,S 3& as the amount at which an asset is recognized in the balance sheet after deducting any accumulated depreciation and accumulated impairment losses thereon 9 :. Recoverable amount is the higher of fair value less costs to sell 9or net selling price or net realizable value: and its value in use. Net realizable value ( ) or fair value le co t to ell is the amount at which an asset could be disposed of, less any direct selling costs 9 !"#$%&'()* +,-./0 123456:. !alue in u e ( ) is the present value of the future cash flows obtainable as a result of an asset3s continued use, including those resulting from its ultimate disposal 9789:;<4<48=>?@12A BCDE5FGE:.

2."

9c: 9d:

9e:

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! a rry in g a m o u n t

. ow er of

D e p rec ia ted c o st 9say ( <:

- e c o v e ra b le a m o u n t

h ig h e r o f

= a ir v alu e le ss c o s t t o s e ll 9say ":

; a lu e in u se 9say & <:

2.&

=rom the above flowchart, it can be 6nown that the carrying amount of the asset should be valued at &<. E"#$%&E ' 5he carrying amount, net selling price and value in use for four different 6inds of assets are shown below>
# et !arrying amount 2et selling price ;alue in use # ?<<< 1<< "< 2<< ( ?<<< 1<< 2<< "< C ?<<< 3<< 1"< 2<< D ?<<< 3<< 2<< 1"<

2.'

5he value of assets stated in the balance sheet is determined by comparing the asset3s carrying amount and its recoverable amount as follows>
# et !arrying amount -ecoverable amount 9higher of net selling price and value in use 2<< 2<< 2<< 2<< # ?<<< 1<< ( ?<<< 1<< C ?<<< 3<< D ?<<< 3<<

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;alue to be stated in balance sheet 9lower of carrying amount and recoverable amount: 1<< 1<< 2<< 2<<

5he economic decision in each case is> ,sset , @ !ontinue to use. ,sset A @ Sell. ,sset ! @ !ontinue to use. 95he carrying amount of the asset is written down to its value in use, ?2<<,<<<.: ,sset D @ Sell. 95he carrying amount if the asset is written down to its net selling price of ?2<<,<<<.:

3.
3.1

Identif in! Impairment

,n entity should carry out a revie) of it a et at eac* balance *eet +ate , to assess whether there are any indications of impairment to any assets. 5he concept of materiality applies, and only material impairment needs to be identified. If there are indications of possible impairment, the entity is re)uired to ma6e a formal estimate of the recoverable amount of the assets concerned. ,E- %OINTS 9a: E.ternal ource information @ 9i: Significant decline in the asset3s mar6et value more than would be e$pected as a result of the passage of time or normal useB 9ii: Significant changes in the technological, mar6et, economic or legal environmentsB 9iii: Increases in the mar6et interest rate or other mar6et rate of return on investments, and those increases that are li6ely to affect the discount rate used in calculating the asset3s valueB 9iv: Decline in the enterprise3s mar6et capitalization. Internal ource of information @ 9i: Specific evidence of obsolescence or of physical damage to an assetB 9ii: Significant internal changes to the organization or its operations so that the e$pected useful life or utility of the asset has seemingly been reducedB and 9iii: #vidence from internal reporting indicating that economic performance

3.2

3.3

9b:

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of the asset is, or will be, worse than e$pected. 3. It is important to stress that the above is a list of events that indicate that an impairment review may be appropriate. 5he indicators will only trigger off an impairment review if they are relevant to the measurement of the goodwill or fi$ed assets. =or e$ample, there are circumstances in which short term interest rates are increased without affecting the re)uired rate of return on long term basis. 5his may be because the mar6et e$pectations are that the increase in interest rates will be relatively short% lived. In these circumstances there is no effect on the recoverable amount of such assets and no impairment review would be re)uired. #ven if there are no indications of impairment, the following assets must al)ay be tested for impairment annually. 9i: ,n intangible asset with an in+efinite u eful lifeB 9ii: /oo+)ill ac)uired in a business combination.

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(#) .1

Computin! Impairment #oss

Ca * generating unit Chen attempting to assess the value in use of an asset, it may be difficult because the asset does not generate income or cash flows on its own but only as part of a larger unit. 5he procedure to be adopted in this case is to estimate the recoverable amount of the whole unit, and to recognize an impairment if the value of the whole unit is found to be below its carrying value. DEFINITION , ca *0generating unit 9 E 5 H I J : is a group of assets, liabilities and associated goodwill that generates income that is largely independent of the reporting entity3s other income streams. 5he assets and liabilities include those directly involved in generating the income and an appropriate portion of those used to generate more than one income stream 9 9:;<4KE5FLMNO PQR+.SQR:;<4TUVWXYZ[\]Q R:.

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.3

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E"#$%&E 1 , mining company owns a private railway that it uses to transport output from one of its mines. 5he railway now has no mar6et value other than as scrap, and it is impossible to identify any separate cash inflows with the use of the railway itself. !onse)uently, if the mining company suspects an impairment in the value of the railway, it should treat the mine as a whole as a cash generating unit, and measure the recoverable amount of the mine as a whole.

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E"#$%&E 2 , bus company has an arrangement with a town3s authorities to run a bus service on four routes in the town. Separately identifiable assets are allocated to each of the bus routes, and cash inflows and outflows can be attributed to each individual route. 5hree routes are running at a profit and one is running at a loss. 5he bus company suspects that there is an impairment of assets on the loss%ma6ing route. *owever, the company will be unable to close the loss%ma6ing route, because it is under an obligation to operate all four routes, as part of its contract with the local authority. !onse)uently, the company should treat all four routes together as a cash generating unit, and calculate the recoverable amount for the unit as a whole.

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Step for computing impairment lo 5he following steps should be applied in computing impairment loss> 9a: Identify individual asset or group of assetsB 9b: #stimate future cash inflowsB 9c: !hoose appropriate discount rate 9E^:B 9d: Determine recoverable amountB 9e: Crite down carrying amount to recoverable amount. Identify individual asset or group of assets If cash flows cannot be identified with individual asset, it becomes necessary to group the assets to perform impairment test. 5he re)uirement is that grouping of assets, i.e. a cash%generating unit, should be identified for the smallest or the lowest level groups of assets together to generate an identifiable and independent stream of cash flows. In practice, the groupings may be at departmental level, product line, output of material, labour, overhead, etc. 5o a certain e$tent, aggregation process may be necessary when the enterprise3s operation is integrated.

(a) .'

.(

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*+,S 3& re)uires cash%generating units, once have been identified, be applied consistently from period to period for the same asset or types of assets. Estimate future cash flows 5he estimates of future cash inflows should include> 9i: proEections of cash inflows from continuing use of the asset or group of assetsB 9ii: proEections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset or group of assetsB and 9iii: net cash flows, if any, to be received 9or paid: for the disposal of the asset or group of assets at the end of its useful life. Chen estimating future cash flows, past e$perience is very important for proEection. In addition, management should consider various factors such as the industry pattern, economic conditions, etc. 2on%cash costs such as depreciation, cash flow from financing activities and income ta$ receipts or payment should not be included in the estimates. Choose appropriate discount rate 5he discount rate adopted for computing the discounted present value of cash inflows should be a pre%ta$ rate that reflects current mar6et assessments of the time value of money and the ris6s specific to the asset or group of assets. ,s a starting point, *+,S 3& provides that the enterprise may ta6e into account the following rates> 9i: the enterprise3s weighted average cost of capitalB 9ii: the enterprise3s incremental borrowing rateB and 9iii: other mar6et borrowing rates. Determine recoverable amount Determine net selling price @ 5he determination of net selling price appears relatively simple. 2et selling price is the amount obtainable from the sale of an asset in an arm3s length transaction between 6nowledgeable, willing parties, less the cost of disposal. Determine value in use @ ;alue in use is the present value of estimated future cash flows e$pected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Cith the proEected cash inflows and the appropriate discount rate, value in use can be computed. Determine recoverable @ -ecoverable amount is the higher of an asset3s net selling
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(b) .1<

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(c) .12

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(d) .1

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price and its value in use. (e) .1' Write down carrying amount to recoverable amount ,n impairment loss is the amount by which the carrying amount of an assets e$ceeds its recoverable amount. 5hus, to recognize the loss, the carrying amount of individual asset or group of assets is written down to its recoverable amount. E"#$%&E 3 5he operations of ,A .td was divided into two cash%generating units, !/0I and !/0II> C/4I 5666 << 3<< "< "<< &<< C/4II 5666 1,<<< 1,1<< 1,3<< 1,2<< 1,"<<

.1(

Ca * flo) Fear 1 2 3 "

5he discount rates applied to !/0I and !/0II are 1<G and 12G respectively. 5he net selling prices of assets in !/0I and !/0II are ?2." million and ?3." million respectively. 5he carrying amounts of assets in !/0I and !/0II are ?2 million and ?" million respectively. 5he impairment loss, if any, for !/0I and !/0II is computed as follows> -ear C/4I 7 Ca * flo) ?<<< << 3<< Di count !alue in C/4II 7 Di count !alue in rate ue Ca * rate ue flo) 1<G ?<<< ?<<< 12G ?<<< <.D<D 3&3.& 1,<<< <.(D3 (D3.< <.(2& 2 '.( 1,1<< <.'D' ('&.'

1 2

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3 "

"< "<< &<<

<.'"1 <.&(3 <.&2<

33(.< 3 1." 3'2.< 1,&&2.D

1,3<< 1,2<< 1,"<<

<.'12 <.&3& <."&'

D2".& '&3.2 ("<." ,3<D 3,"<< ,3<D ",<<<

2et selling price -ecoverable amount !arrying amount

2,"<< 1,&&2.D 2,<<<

!/0I @ 5here is no impairment since the recoverable amount is higher than the carrying amount. !/0II @ Impairment loss was ?&D1,<<< 9?",<<<,<<< @ ? ,3<D,<<<:, the amount by which the carrying amount e$ceeds its recoverable amount.

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%eversa& of 'revious& %eco!nised Impairment #oss

-ecoveries of previously impaired assets re)uire recognition where there is any indication that an impairment loss recognized for an asset in prior years may no longer e$ist or may have decreased. 5he enterprise should consider, as a minimum, the following indications> 9i: #$ternal sources of information @ 9a: Signification increase in the asset3s mar6et valueB 9b: Signification changes with a favourable effect on the enterprise have ta6en place, or will ta6e place in the near future, in the technological, mar6et, economic or legal environment in which the enterprise operatesB 9c: Decrease in the mar6et interest rates or other mar6et rates of return on investmentsB 9ii: Internal sources of information @ 9a: Significant changes with a favourable effect on the enterprise, e.g. that has been incurred to improve or enhance an asset in e$cess of its originally assessed standard of performanceB and 9b: #vidence from internal reporting indicating that the economic performance of the asset is, or will be, better than e$pected. !onsistent with the treatment for recognition of impairment loss, a reversal of an impairment loss for a cash%generating unit should be allocated to increase the carrying amount of the assets of the unit in the following order>
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to assets other than goodwill on a pro%rata basis based on the carrying amount of each asset in the unitB and to goodwill allocated to the cash%generating unit, provided that the impairment loss was originally caused by a specific e$ternal event of an e$ceptional nature that is not e$pected to recur, and subse)uent e$ternal events have occurred that reverse the effect of the original event. 5hus, the reversal of goodwill may seem only to arise under very rare situation.

6.
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Accountin! for Impairment #oss ( Individua& Asset

,E- %OINT If the asset is carried at a revalued amount, the impairment loss should be recognized directly against any revaluation surplus for the asset to the e$tent that the impairment loss does not e$ceed the amount held in the revaluation surplus for that same asset, the balance will then be charged to the profit and loss account as an e$pense.

&.2

,fter the recognition of an impairment loss, the depreciation 9amortisation: charge for the asset should be adEusted in future periods to allocate the asset3s revised carrying amount, less its residual value, on a systematic basis over its remaining useful life. E"#$%&E 8 !ost of machinery purchased at 1.1.2<< Depreciation method =air value at 31.12.2<< -ecoverable amount at 31.12.2<<" ?1,<<<,<<< Straight line over 2< years ?1,2<<,<<< ?(<<,<<<

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5he Eournal entries to reflect the depreciation and changes in value of the machinery would be> Dr 9?: !r 9?: =or 2<< Depreciation 9?1,<<<,<<<H2<: "<,<<< ,ccumulation depreciation "<,<<< Aeing depreciation provided on cost Dr 9?: 2<<,<<< "<,<<< !r 9?:

31.12.2<<

4achinery ,ccumulation depreciation

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-evaluation reserve I?1,2<<,<<< @ 9?1,<<<,<<< @ ?"<,<<<: Aeing revaluation surplus on the asset recorded. Dr 9?: &3,1"(

2"<,<<<

!r 9?:

=or 2<<"

Depreciation 9?1,2<<,<<<H1D: ,ccumulation depreciation &3,1"( Aeing depreciation provided on revalued amount of the asset. Dr 9?: (&,( 2 !r 9?:

31.12.2<<"

JH. @ Impairment loss K?(<<,<<< @ I9?1,2<<,<<< @ ?&3,1"(: @ ?2"<,<<<LM -evaluation reserve 2"<,<<< ,ccumulated depreciation &3,1"( 4achinery Aeing impairment loss on the asset recognized. Dr 9?: ,

<<,<<<

!r 9?:

=or 2<<&

Depreciation 9?(<<,<<<H1(: ,ccumulated depreciation , Aeing depreciation provided based on net carrying amount of the asset after deducting impairment loss.

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Accountin! for %eversa& of Impairment #oss ( Individua& Asset

,n impairment loss recognized for an asset in prior years should be reversed if, only if, there has been a change in estimates used to determine the asset3s recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset should be increased to its recoverable amount. 5hat increase is a reversal of an impairment loss. 5he detailed accounting treatment for the reversal is described as follows> 9i: 5he increased carrying amount of an asset due to a reversal of an impairment loss should not e$ceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. ,ny

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9ii:

9iii:

9iv:

increase in the carrying amount of an asset above the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior year is a revaluation. , reversal of an impairment loss for an asset should be recognized as income immediately in the profit and loss account, unless the asset is carried at revalued amount. , reversal of an impairment loss on a revalued asset is credited directly to e)uity under the heading 7revaluation surplus8. *owever, to the e$tent that an impairment loss on the same revalued asset was previously recognized as an e$pense in the profit and loss account, a reversal of that impairment loss is recognized as income in the profit and loss account. ,fter a reversal of an impairment loss is recognized, the depreciation charge for the asset should be adEusted in future periods to allocate the asset3s revised carrying amount, less its residual value, on a systematic basis over its remaining useful life.

'.2

E"#$%&E 9 =ollowing the e$ample " in the previous section, assume that the recoverable amount of the machinery at 31 December 2<<' was ?1,1"<,<<<. In allocating a reversal of an impairment loss, *+,S 3& re)uires that the carrying amount of an asset should not be increased above the lower of its recoverable amount and the carrying amount that would have been determined 9net of amortisation or depreciation: had no impairment loss been recognized for the asset in prior years. Aefore ma6ing any adEustment for the reversal, the carrying amount of the machinery at 31 December 2<<' that would have been determined, had no impairment loss been recognized for the asset in prior years, must firstly be computed. Carrying amount of t*e mac*inery *a+ no impairment lo been recognize+ ? 1,<<<,<<< 9"<,<<<: D"<,<<< 2"<,<<< 1,2<<,<<<

!ost at 1.1.2<< Depreciation for 2<< !arrying amount at 31.12.2<< -evaluation surplus !arrying amount at 31.12.2<<

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Depreciation for 2<<" to 2<<' 9?1,2<<,<<< $ 3 years: !arrying amount at 31.12.2<<' Carrying amount of t*e mac*inery )it* impairment lo recognize+

91(D, ' : 1,<1<,"2& previou ly been

!ost at 1.1.2<< Depreciation for 2<< !arrying amount at 31.12.2<< -evaluation surplus !arrying amount at 31.12.2<< Deprecation for 2<<" 9?1,2<<,<<<H1D: !arrying amount at 31.12.2<<" Impairment 9? <<,<<< @ ?&3,1"(: !arrying amount Depreciation for 2<<& and 2<<' 9?(<<,<<<H1( $ 2 years: !arrying amount at 31.12.2<<'

? 1,<<<,<<< 9"<,<<<: D"<,<<< 2"<,<<< 1,2<<,<<< 9&3,1"(: 1,13&,( 2 933&,( 2: (<<,<<< 9((,(((: '11,112

In this case, the ma$imum amount for the reversal that can be reflected in the financial statements for 2<<3 would be limited to ?1,<1<,"2&, as it is lower that the asset3s recoverable amount of ?1,1"<,<<<. 5herefore, the reversal of impairment loss for ?2DD, 1 9?1,<1<,"2& @ ?'11,112: can be accounted for. 5he Eournal entries to record the reversal of impairment loss would be> Dr 9?: !r 9?: 31.12.2<<' 4achinery 2DD, 1 JH. @ -eversal of impairment (&,( 2 loss -evaluation reserve 9?2DD, 1 @ 212,"'2 ?(&,( 2: Aeing reversal of impairment loss on the asset recognised

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+isc&osure %e,uirement
5he disclosures re)uired by *+,S 3& are very e$tensive. 5he more important

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disclosures include the following> 9i: 5he amount of impairment losses recognized in the profit and loss account, and the line item9s: under which they are included, and its disclosure under segment reporting. 9ii: 5he amount of reversals of impairment losses recognized in the profit and loss account, and the line item9s: under which they are included, and its disclosure under segment reporting. 9iii: 5he amount of impairment losses recognized directly in e)uity. 9iv: 5he amount of reversals of impairment losses recognized directly in e)uity. 9v: 2otes giving details of the events and circumstances leading to impairment losses or reversals.

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E.amination Style :ue tion

:ue tion ' ,dvent is a publicly listed company. Details of ,dventNs non%current assets at 1 October 2<P( were>

5he following information is relevant> 9i: 5he land and building were revalued on 1 October 2<P3 with ?(< million attributable to the land and ?2<< million to the building. ,t that date the estimated remaining life of the building was 2" years. , further revaluation was not needed until 1 October 2<P( when the land and building were valued at ?(" million and ?1(< million respectively. 5he remaining estimated life of the building at this date was 2< years. 9ii: Jlant is depreciated at 2<G per annum on cost with time apportionment where appropriate. On 1 ,pril 2<PD new plant costing ? " million was ac)uired. In addition, this plant cost ?" million to install and commission. 2o plant is more than four years old. 9iii: 5he telecommunications licence was bought from the government on 1 October 2<P' and has a 1< year life. It is amortised on a straight line basis. In September 2<PD, a review of the sales of the products related to the licence showed them to be very disappointing. ,s a result of this review the estimated recoverable amount of the licence at 3< September 2<PD was estimated at only ?1<< million. 5here were no disposals of non%current assets during the year to 3< September 2<PD. Re;uire+< 9a: Jrepare e$tracts from the statement of financial position relating to ,dventNs non%current assets as at 3< September 2<PD 9including comparative figures:, together with any disclosures 9other than those of the accounting policies: under current International =inancial -eporting Standards. 9D mar6s: #$plain the usefulness of the above disclosures to the users of the financial statements.
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9 mar6s: 95otal Q 13 mar6s: 9,!!, 2." =inancial -eporting December 2<< R"9b::

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