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TOPIC 7

IMPAIRMENT OF ASSETS (MFRS 136)


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CONCEPT OF IMPAIRMENT
Some

non-current assets are subjected to a sudden, dramatic drop in market value due to a substantial decline in value of the assets, economic changes, technological advancements and fluctuation in market interest rate. these factors would lead to a phenomenon which called impairments value or benefits of assets declined to the value expected to be recovered from the use of the assets.

All

The

MFRS 136 IMPAIRMENT OF ASSETS

Applicable to impairment of: Property, Plant and Equipment (MFRS 116) Intangible assets (MFRS 138) Goodwill (MFRS 3) Investment in subsidiary (MFRS 127) Investment in associate (MFRS 128) Interest in joint venture (MFRS 131)

RECOGNITION OF IMPAIRMENT
Para 59: an asset is considered as impaired when:
carrying amount > recoverable amount
Carrying amount (PPE) = cost accumulated depreciation Recoverable amount: = The higher of,

Fair value cost to sell Value in use


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RECOGNITION OF IMPAIRMENT
carrying

value should be reduced to the recoverable amount loss = carrying amount recoverable amount recoverable amount > carrying amount: an asset is not impaired
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Impairment

If

RECOGNITION OF IMPAIRMENT
Example 7.1: Cost Accumulated depreciation Carrying amount Recoverable amount Impairment loss 1,000 400

600 400 200

RECOGNITION OF IMPAIRMENT

Journal entry: Dr Impairment Loss Cr Accumulated Impairment

200
200

New carrying amount = Cost accum depreciation accum impairment


New carrying amount = 1,000 400 200 = 400 (equal to recoverable amnt)

IDENTIFY AN IMPAIRED ASSET (PARA 12)


(a)

External Sources of Information i) Assets market value has declined significantly more than would be expected as a result of the passage of time or normal use. ii) Significant changes with an adverse effect on the entity have taken 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. iii) Market interest rates or other market rates of return on investments have increased during the period. iv) The carrying amount of the net assets of the entity is more than its market capitalization.

IDENTIFY AN IMPAIRED ASSET


(b)

Internal Sources of Information i) Evidence is available of obsolescence or physical damage of an asset. ii) Significant changes with an adverse effect on the entity 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, 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. iii) Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.
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IDENTIFY AN IMPAIRED ASSET (PARA 12)


(a) (b)

(c)

(d)
(e)

(f)

Physical damage to an asset Significant decline in the market value of an asset Lower-than-expected economic performance of a segment Discontinuance or restructuring of operation Significant changes in the technological, economic or legal environment Significant change in the interest rate
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RECOVERABLE AMOUNT: FAIR VALUE LESS COST TO SELL

Best resource - price in a binding sale agreement in an arms length transaction minus cost of transaction If unavailable but the asset has active market - market price minus its selling cost. If both unavailable - refer to most recent transaction.

Cost to sell = legal cost, stamp duty, cost of removing the assets.
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RECOVERABLE AMOUNT: VALUE IN USE


Definition

= present value of the future cash flow expected to be derived from an asset. for estimate =

Bases
1.
2.

cash flow projection on reasonable and supportable assumption cash flow projection on most recent financial budget approved by management

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EXAMPLE 7.2: CALCULATION OF VALUE IN USE


Year 2009 2010 2011 Future cash flow RM 560 450 690 Present value factor at 15% discount rate 0.86957 0.75614 0.65752 Discounted future cash flow 487 340 454

2012 2013
Value in use

740 800

0.57175 0.49718

423 398
2,102
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Example Annual Report 2007 of Ekowood Bhd

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RECOGNITION & MEASUREMENT OF IMPAIRMENT LOSS


a) b)

Property, Plant and Equipment


Goodwill

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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT

The accounting treatment :


a)
b)

cost model
revaluation model

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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Cost Model Carrying amount (balance sheet) = Cost accm. Dep accm. Impairment

Journal entry:
Dr Impairment loss XXX Cr Accumulated Impairment ( to record impairment loss during the year ) XXX

Impairment loss should be recognized in income statement immediately.


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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Example 7.3:
On 1 January 2006, Vision Berhad acquired a piece of machinery at RM150,000. The machine is expected to have useful life of 5 years with no salvage value. At the end of 2007, the market value of the machine suffered a significant decline. The company estimated the recoverable amount of the asset as in the information provided below: Net selling price: RM60,000 Value in use: RM55,000

Suggested solution:
Recoverable amount = RM60,000 (the higher is net selling price) Carrying amount of machine = [RM150,000 (RM150,000/5 x 2)] = RM90,000 Impairment loss = RM30,000
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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Example (cont)

Journal entry: Dr Impairment loss 30,000 Cr Accumulated impairment 30,000

New carrying amount (end 2007) = 150,000(cost) 60,000(acc. Dep.) - 30,000(acc.impairment) = 60,000 (equal to recoverable amount) The calculation of depreciation for 2008, will be based on new carrying amount. If the expected useful life is unchanged, the depreciation charge for 2008 is RM20,000 (RM60,000/3 years).
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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Reversing an Impairment Loss (Cost Model)

If indication that led to the recognition of impairment loss is cease, the company needs to estimate the new recoverable amount based on current asset situation. Impairment loss which was recognized in the previous year may need to be reversed, or the carrying amount of the asset be increased to a new recoverable amount the increased carrying amount of an asset attributable to a reversal of an impairment loss should not be more than the carrying amount that would have been determined had no impairment loss been recognized for the asset in previous years.

the amount of write-back should be reduced by the amount20 that would have been recognized as depreciation, if the write-down had not occurred.

IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Reversing an Impairment Loss (Cost Model) (cont) Refer to example 7.3, assuming that at the end of year 2008, the company re-assesses and estimates that the recoverable amount of the machine is RM70,000. The write-back of impairment loss is calculated as follows: If no impairment loss was recognized in year 2007, the details for the machine will be: Carrying amount = RM150,000 (RM150,000/5 3) = RM60,000
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Depreciation charge per year = RM30,000 (RM150,000/5)

IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Reversing an Impairment Loss (Cost Model) (cont)

The standard requires that the increase in carrying amount should not exceed the carrying amount that would have been determined if no impairment loss had been recognized for the asset in previous years.Thus, the increment should not exceed RM60,000, or in this case, the new carrying amount after reversal is RM60,000.
The journal entry: Dr Accumulated impairment 30,000 Cr Accumulated depreciation 10,000 Write-back of impairment loss 20,000
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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Reversing an Impairment Loss (Cost Model) (cont)

The amount of write-back would be equal to the reinstatement of the RM30,000 previously written down, reduced by the amount of depreciation of RM10,000 [150,000/5 (depreciation with no impairment) RM20,000 (depreciation after impairment) ] that had not been recorded in 2008 because of the impairment.
After the reversal, the carrying amount of the machine will be RM60,000 [cost RM150,000 accumulated depreciation (30,000 3), as it would have been without the impairment recognition in 2007 and the reversal in 2008.
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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Revaluation Model

assets are carried at revalued amount less any subsequent accumulated depreciation and accumulated impairment Impairment loss is recorded as a revaluation decrease (or increase) and the journal entry:
Dr Revaluation Reserve RMXXX Cr Accumulated Impairment ( to record impairment loss during the year )

RMXXX
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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Example 7.4: Revaluation Model

A piece of land was acquired in 2006 at the cost of RM20,000. In 2007, the company revalued the asset to RM25,000 and the journal entry will be: Dr Assets RM5,000 Cr Revaluation reserve RM5,000
In 2008, the company did an impairment test and found that the recoverable amount was RM23,000. The impairment loss of RM2,000 is accounted as revaluation decrease as journalized below: Dr Revaluation reserve RM2,000 Cr Accumulated impairment RM2,000

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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Reversing an Impairment Loss (Revaluation Model)

Reversal of an impairment loss recognized previously for revalued asset should be treated as a revaluation increase If impairment has eliminated the entire revaluation capital account, and an excess loss has been reported in earnings as impairment loss, then a reversal later should be reported in earnings(provided the earlier write-down had been so reported), with any balance taken directly to revaluation reserve account.

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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Example 7.5 A piece of land was acquired by RIMA Bhd in 2006. The table below list several events related with the land.
Year Events

2006
2007 2008 2009

Acquired an asset at cost of RM20,000


Revalue the asset at RM25,000 Recoverable amount of RM18,000 Recoverable amount of RM23,000

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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


Suggested solution: Journal entry: 2007 Dr Land Cr Revaluation reserve 2008 Dr Revaluation reserve Impairment loss Cr Accumulated Impairment

5,000 5,000

5,000 2,000

7,000
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IMPAIRMENT LOSS: PROPERTY, PLANT AND EQUIPMENT


2009 Dr Accumulated Impairment 5,000 Cr Revaluation reserve Write-back of impairment loss

3,000 2,000

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IMPAIRMENT LOSS - GOODWILL

Categorized as unidentifiable intangible asset.

Arise on business combination


Calculated as difference between cost of acquisition and net fair value of identifiable net assets. Referred to residual asset that cannot be individually identified Hence, cash flow associated with the specific asset (goodwill) cannot be reliably measured and then it is not possible to determine fair value less cost to sell for goodwill

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IMPAIRMENT LOSS - GOODWILL

Impairment test for goodwill cannot be tested on its own not identifiable At acquisition date, goodwill should be allocated to each cash generating units (CGU) CGU- represent the smallest identifiable group of assets that generate cash inflows from other group of assets.

Ex: manufacturing plant, supermarket outlet.

Impairment test for goodwill should be performed annually and whenever there is indication that the unit may impaired.
Impairment loss for a CGU should be allocated to reduce the carrying amount of the assets of the units according to the following order:
i)

Reduce the carrying amount of any goodwill allocated to the CGU Reduce the carrying amount of other assets of the unit on pro-rata basis.

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ii)

IMPAIRMENT LOSS GOODWILL


Example:
In January 2008, Sejati Bhd acquired 100% interest in Bersatu Bhd for RM10 million. Bersatu Bhd operation consist of manufacturing unit and hypermarket unit. Bersatu Bhds net fair value of identifiable asset is RM8 million (RM4 million from each manufacturing unit and hypermarket unit).Goodwill is allocated 40% to manufacturing unit and 60% to hypermarket unit. At the end of 2008, the hypermarket unit of Bersatu Bhd was adversely effected by the development of new business park. The recoverable amount of the Hypermarket unit at end 2008 is RM4.1 m. The carrying amount of the unit is: Hypermarket Unit
Goodwill Net Identifiable assets Total

Cost

1.2 m

4m

5.2 m

Depreciation
Carrying amount

1.2 m

0.1 m
3.9 m

0.1 m
5.1 m

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IMPAIRMENT LOSS GOODWILL


Answer:

Impairment loss = 5.1 m 4.1 m = 1 million


Journal entry:

Dr Impairment loss Cr Goodwill ( record impairment loss)

1m
1m

Carrying amount of Goodwill = 0.2 million


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IMPAIRMENT LOSS GOODWILL


Answer (cont):

But if the recoverable amount is RM3.6 million.


Impairment loss = RM5.1 m RM3.6m = RM1.5 m (higher than goodwill RM1.2m)
1.

2.

The impairment loss first is allocated to goodwill, writing down to zero. The balance will be allocated to carrying amount of identifiable assets on pro-rata basis.

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IMPAIRMENT LOSS GOODWILL


Answer (cont..): Assuming that at end of 2008 hypermarket unit comprise of Building and equipment RM3 m (net), Inventory RM1 m and net monetary liabilities RM0.1.

The journal entry: Dr Impairment loss Cr Goodwill Dr Impairment loss Cr Accumulated depreciationBuilding and Equipment* Cr Inventory (0.3m x 0.25) 1.2 m

1.2 m
0.3 m 0.225 m 0.075 m
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( to record and allocate impairment loss on pro-rata basis ) * (0.3m x 0.75)

REVERSAL OF IMPAIRMENT LOSS GOODWILL

Prohibited under MFRS 136

Reason- any increase in the recoverable amount of goodwill is likely to be an increase in internally generated goodwill (the recognition is prohibited under MFRS 138 Intangible Assets.

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