European Union Accounting Rule 18: Impairment of Assets PDF

EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN UNION ACCOUNTING RULE 18 Impairment of Assets  EUROPEAN COMMISSION Budget Budget execution Account...

EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN UNION ACCOUNTING RULE 18 Impairment of Assets  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 2 of 26 INDEX 1. Objective.......................................................................................................................................3 2. Scope.............................................................................................................................................3 3. Definitions.....................................................................................................................................3 4. Impairment of non-cash generating assets....................................................................................4 4.1 Identification of impairment.................................................................................................4 4.2 Measuring impairment..........................................................................................................6 4.3 Recognition and reversal of an impairment loss..................................................................8 5. Impairment of cash generating assets..........................................................................................11 5.1 Identification of impairment...............................................................................................11 5.2 Measuring impairment........................................................................................................12 5.3 Recognition and reversal of an impairment loss................................................................16 5.3.1 Individual asset...........................................................................................................16 5.3.2 Cash generating units.................................................................................................16 5.3.3 Reversing....................................................................................................................19 6. Disclosure....................................................................................................................................21 7. Effective date...............................................................................................................................25 8. Reference to other rules...............................................................................................................25  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 3 of 26 1. Objective The objective of this EU accounting rule is to prescribe the accounting treatment for impairment of both cash generating and non-cash generating assets. 2. Scope This EU accounting rule applies to accounting for impairment of assets in the financial statements of the European Union and its consolidated entities, except:  Inventories;  Construction contracts;  Financial instruments;  Where another specific EU accounting rule contains requirements for impairment. 3. Definitions The following terms are used in this rule with the meanings specified: 1) An impairment is a loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset's future economic benefits or service potential through depreciation (amortisation). 2) An active market is a market in which the following conditions exist: o The items traded within the market are homogeneous; o Willing buyers and sellers can normally be found at any time; and o Prices are available to the public. 3) Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation and accumulated impairment losses. 4) Cash generating assets are assets held to generate a commercial return. 5) Non-cash generating assets are assets other than cash-generating assets. 6) Costs of disposal are incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense (if applicable). 7) Depreciation (amortisation) is the systematic allocation of the depreciable amount of an asset over its useful life.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 4 of 26 8) Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value. 9) Fair Value less costs to sell is the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties, less costs of disposal. 10) An impairment loss of a cash-generating asset is the amount by which the carrying amount of an asset exceeds its recoverable amount. 11) An impairment loss of a non-cash generating asset is the amount by which the carrying amount of an asset exceeds its recoverable service amount. 12) Recoverable amount is the higher of a cash-generating asset's fair value less costs to sell and its value in use. 13) Recoverable service amount is the higher of a non-cash-generating asset's fair value less costs to sell and its value in use. 14) The Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. 15) Useful life is the period over which an asset is expected to be available for use by an entity. 16) Value in use of a cash generating asset is the present value of estimated future cash flows expected to be derived from the continuing use of an asset and from a disposal at the end of its useful life. 17) Value in use of a non-cash generating asset is the present value of the asset's remaining service potential. 18) A cash-generating unit is the smallest identifiable group of assets held with the primary objective of generating a commercial return that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets. 4. Impairment of non-cash generating assets 4.1 Identification of impairment 1) An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable service amount of the asset. 2) In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications: External sources of information  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 5 of 26 (a) Cessation, or near cessation, of the demand or need for services provided by the asset. (b) Significant long-term changes with an adverse effect on the entity have taken place during the period or will take place in the near future, in the technological, legal or government policy environment in which the entity operates. Internal sources of information (c) Evidence is available of physical damage of an asset. (d) Significant long-term 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, or plans to dispose of an asset before the previously expected date. (e) A decision to halt the construction of the asset before it is complete or in a usable condition. (f) Evidence is available from internal reporting that indicates that the service performance of an asset is, or will be, significantly worse than expected. 3) The list in paragraph 2 above is not exhaustive. There may be other indications that an asset may be impaired. The existence of other indications may result in the entity estimating the asset’s recoverable service amount. For example, any of the following may be an indication of impairment: (a) During the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use; or (b) A significant long-term decline (but not necessarily cessation or near cessation) in the demand for or need for services provided by the asset. 4) Evidence from internal reporting that indicates that an asset may be impaired relates to the ability of the asset to provide goods or services rather than to a decline in the demand for the goods or services provided by the asset. This includes the existence of: (a) Significantly higher costs of operating or maintaining the asset, compared with those originally budgeted; and (b) Significantly lower service or output levels provided by the asset compared with those originally expected due to poor operating performance. 5) The concept of materiality applies in identifying whether the recoverable service amount of an asset needs to be estimated. For example, if previous assessments show that an asset’s recoverable service amount is significantly greater than its carrying amount, the entity need not re-estimate the asset’s recoverable service amount if no events have occurred that would eliminate that difference. Similarly, previous analysis may show that an asset’s recoverable service amount is not sensitive to one (or more) of the indications listed in paragraph 2.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 6 of 26 6) If there is an indication that an asset may be impaired, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value for the asset need to be reviewed and adjusted in accordance with the accounting rule applicable to the asset, even if no impairment loss is recognised for the asset. 4.2 Measuring impairment Recoverable service amount: 1) Recoverable service amount is the higher of a non-cash-generating asset's fair value less costs to sell and its value in use. 2) It is not always necessary to determine both an asset’s fair 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 is not necessary to estimate the other amount. 3) It may be possible to determine fair value less costs to sell, even if an asset is not traded in an active market. Paragraph 7 and 8 below sets out possible alternative bases for estimating fair value less costs to sell when an active market for the asset does not exist. 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 service amount. 4) If there is no reason to believe that an asset’s value in use materially exceeds its fair value less costs to sell, the asset’s fair value less costs to sell may be used as its recoverable service 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. However, for many public sector non-cash-generating assets which are held on an ongoing basis to provide specialised services or public goods to the community, the value in use of the asset is likely to be greater than its fair value less costs to sell. 5) In some cases, estimates, averages and computational short cuts may provides reasonable approximations for determining fair value less costs to sell or value in use. Fair Value less Costs to Sell: 6) 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. 7) If there is no binding sale agreement but an asset is traded in an active market, fair 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,  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 7 of 26 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. 8) If there is no binding sale agreement or active market for an asset, fair value less costs to sell is based on the best information available to reflect the amount that an entity could obtain, at reporting 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 could consider the outcome of recent transactions for similar assets within the same business environment. Fair value less costs to sell does not reflect a forced sale, unless management or the governing body is compelled to sell immediately. 9) Costs of disposal, other than those that have been recognised as liabilities, are deducted in determining fair value less costs to sell. Examples of such costs are legal costs, stamp 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 reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset. Value in Use: 10) This rule defines the value in use of a non-cash-generating asset as the present value of the asset’s remaining service potential. The present value of the remaining service potential of the asset is determined using any one of the approaches identified in paragraphs 11 to 15, as appropriate. Depreciated Replacement Cost Approach: 11) Under this approach, the present value of the remaining service potential of an asset is determined as the depreciated replacement cost of the asset. The replacement cost of an asset is the cost to replace the asset’s gross service potential. This cost is depreciated to reflect the asset in its used condition. An asset may be replaced either through reproduction (replication) of the existing asset or through replacement of its gross service potential. The depreciated replacement cost is measured as the reproduction or replacement cost of the asset, whichever is lower, less accumulated depreciation calculated on the basis of such cost, to reflect the already consumed or expired service potential of the asset. 12) The replacement cost and reproduction cost of an asset are determined on an “optimised” basis. The rationale is that the entity would not replace or reproduce the asset with a like asset if the asset to be replaced or reproduced is an overdesigned or overcapacity asset. Overdesigned assets contain features which are unnecessary for the goods or services the asset provides. Overcapacity assets are assets that have a greater capacity than is necessary to meet the demand for goods or services the asset provides. The determination of the replacement cost or  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 8 of 26 reproduction cost of an asset on an optimised basis thus reflects the service potential required of the asset. 13) In certain cases, standby or surplus capacity is held for safety or other reasons. This arises from the need to ensure that adequate service capacity is available in the particular circumstances of the entity. For example, the fire department needs to have fire engines on standby to deliver services in emergencies. Such surplus or standby capacity is part of the required service potential of the asset. Restoration Cost Approach: 14) Restoration cost is the cost of restoring the service potential of an asset to its pre-impaired level. Under this approach, the present value of the remaining service potential of the asset is determined by subtracting the estimated restoration cost of the asset from the current cost of replacing the remaining service potential of the asset before impairment. The latter cost is usually determined as the depreciated reproduction or replacement cost of the asset whichever is lower. Service Units Approach: 15) Under this approach, the present value of the remaining service potential of the asset is determined by reducing the current cost of the remaining service potential of the asset before impairment to conform with the reduced number of service units expected from the asset in its impaired state. As in the restoration cost approach, the current cost of replacing the remaining service potential of the asset before impairment is usually determined as the depreciated reproduction or replacement cost of the asset before impairment, whichever is lower. Application of Approaches: 16) The choice of the most appropriate approach to measuring value in use depends on the availability of data and the nature of the impairment: (a) Impairments identified from significant long-term changes in the technological, legal or government policy environment are generally measurable using a depreciated replacement cost approach or a service units approach, when appropriate; (b) Impairments identified from a significant long-term change in the extent or manner of use, including that identified from the cessation or near cessation of demand, are generally measurable using a depreciated replacement cost or a service units approach when appropriate; and (c) Impairments identified from physical damage are generally measurable using a restoration cost approach or a depreciated replacement cost approach when appropriate.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 9 of 26 4.3 Recognition and reversal of an impairment loss 1) If, and only if, the recoverable service amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable service amount. That reduction is an impairment loss. 2) As noted in point 4.1 paragraph 1, this rule requires an entity to make a formal estimate of recoverable service amount only if an indication of a potential impairment loss is present. 3) An impairment loss shall be recognised immediately in the statement of financial performance. 4) When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another accounting rule. 5) Where the estimated impairment loss is greater than the carrying amount of the asset, the carrying amount of the asset is reduced to zero with a corresponding amount recognised in net assets. A liability would be recognised only if another accounting rules so requires. The entity may need to make a provision for dismantling costs if required by accounting rule 10. 6) After the recognition of an impairment loss, the depreciation (amortisation) charge for 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. Reversing an Impairment Loss: 7) An entity shall assess at each reporting date whether there is any indication that an impairment loss recognised in prior periods for an asset may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable service amount of that asset. 8) In assessing whether there is any indication that an impairment loss recognised in prior periods for an asset may no longer exist or may have decreased, an entity shall consider, as a minimum, the following indications: External sources of information (a) Resurgence of the demand or need for services provided by the asset. (b) Significant long-term changes with a favorable effect on the entity have taken place during the period, or will take place in the near future, in the technological, legal or government policy environment in which the entity operates. Internal sources of information (c) Significant long-term changes with a favorable 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, the asset is used or is expected to be used. These changes include costs incurred during the period to improve or enhance an asset’s performance or restructure the operation to which the asset belongs.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 10 of 26 (d) A decision to resume construction of the asset that was previously halted before it was completed or in a usable condition. (e) Evidence is available from internal reporting that indicates that the service performance of the asset is, or will be, significantly better than expected. 9) The list in paragraph 8 is not exhaustive. An entity may identify other indications of a reversal of an impairment loss that would also require the entity to re-estimate the asset’s recoverable service amount. For example, any of the following may be an indication that the impairment loss may have reversed: (a) A significant rise in an asset’s market value; or (b) A significant long-term increase in the demand or need for the services provided by the asset. 10) If there is an indication that an impairment loss recognised for an asset may no longer exist or may have decreased, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value may need to be reviewed and adjusted in accordance with the accounting rule applicable to the asset, even if no impairment loss is reversed for the asset. 11) An impairment loss recognised in prior periods for an asset shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable service amount since the last impairment loss was recognised. If this is the case, the carrying amount of the asset shall, except as described in paragraph 13 below, be increased to its recoverable service amount. That increase is a reversal of an impairment loss. PUBLIC SECTOR 12) A reversal of an impairment loss reflects an increase in the estimated recoverable service amount of an asset, either from use or from sale, since the date when an entity last recognised an impairment loss for that asset. Examples of changes in estimates that causes the increase in recoverable service amount include: (a) A change in the basis for recoverable service amount (i.e. whether recoverable service amount is based on fair value less costs to sell or value in use); (b) If recoverable service amount was based on value in use, a change in estimate of the components of value in use; or (c) If recoverable service amount was based on fair value less costs to sell, a change in estimate of the components of fair value less costs to sell. 13) The increased carrying amount of an asset attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognised for the asset in prior periods. 14) A reversal of an impairment loss for an asset shall be recognised immediately in the statement of financial performance.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 11 of 26 15) After a reversal of an impairment loss is recognised, the depreciation (amortisation) charge for 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. Re-designation of Assets: 16) The re-designation of assets from cash generating assets to non-cash generating assets or from non-cash generating assets to cash generating assets shall only occur when there is clear evidence that such a re-designation is appropriate. A re-designation, by itself, does not necessarily trigger an impairment test or a reversal of an impairment loss. Instead, the indication for an impairment test or a reversal of an impairment loss arises from, as a minimum, the listed indications applicable to the asset after re-designation. 5. Impairment of cash generating assets 5.1 Identification of impairment 1) An asset is impaired when its carrying amount exceeds its recoverable amount. An entity shall assess at each reporting 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. 2) Irrespective of whether there is any indication of impairment, an entity shall also test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test may be performed at any time during the reporting period, provided it is performed at the same time every year. Different intangible assets may be tested for impairment at different times. However, if such an intangible asset was initially recognised during the current reporting period, that intangible asset shall be tested for impairment before the end of the current reporting period. 3) In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications: External sources of information (a) During the period, an asset's market value has declined significantly more than would be expected as a result of the passage of time or normal use; (b) Significant changes with an adverse effect on the entity have taken 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;  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 12 of 26 (c) Market interest rates or other market rates of return on investments 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; Internal sources of information (d) Evidence is available of obsolescence or physical damage of an asset; (e) 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; and (f) Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected. 4) Evidence from internal reporting that indicates that an asset may be impaired includes the existence of: (a) Cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are significantly higher than those originally budgeted; (b) Actual net cash flows or net surplus or deficit flowing from the asset that are significantly worse than those budgeted; (c) A significant decline in budgeted net cash flows or surplus or a significant increase in budgeted loss, flowing from the asset; or (d) Deficits or net cash outflows for the asset, when current period amounts are aggregated with budgeted amounts for the future. 5) The concept of materiality applies in identifying whether the recoverable amount of an asset needs to be estimated. For example, if previous calculations show that an asset's recoverable amount is significantly greater than its carrying amount, the entity need not re-estimate the asset's recoverable amount if no events have occurred that would eliminate that difference. Similarly, previous analysis may show that an asset's recoverable amount is not sensitive to one (or more) of the indications listed in paragraph 3. 6) If there is an indication that an asset may be impaired, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value for the asset needs to be reviewed and adjusted in accordance with the accounting rule applicable to the asset, even if no impairment loss is recognised for the asset. 5.2 Measuring impairment Recoverable amount:  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 13 of 26 1) This accounting rule defines recoverable amount as the higher of an asset's fair value less costs to sell and its value in use. See also the general provisions in point 4.2 on the recoverable amount which are in essence also applicable for cash generating assets. 2) Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash generating unit to which the asset belongs (see point 5.3.2), unless either: (a) The asset's fair value less costs to sell is higher than its carrying amount; or (b) The asset is a part of a cash-generating unit but is capable of generating cash flows individually, the asset's value in use can be estimated to be close to its fair value less costs to sell and the asset’s fair value less costs to sell can be determined. 3) Point 5.1 Paragraph 2 requires an intangible asset with an indefinite useful life to be tested for impairment annually by comparing its carrying amount with its recoverable amount, irrespective of whether there is any indication that it may be impaired. However, the most recent detailed calculation of such an asset's recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period, provided all of the following criteria are met: (a) If the intangible asset does not generate cash inflows from continuing use that are largely independent of those from other assets or groups of assets and is therefore tested for impairment as part of the cash-generating unit to which it belongs, the assets and liabilities making up that unit have not changed significantly since the most recent recoverable amount calculation; (b) The most recent recoverable amount calculation resulted in an amount that exceeded the asset's carrying amount by a substantial margin; and (c) Based on an analysis of events that have occurred and circumstances that have changed since the most recent recoverable amount calculation, the likelihood that a current recoverable amount determination would be less than the asset's carrying amount is remote. Fair Value less Costs to Sell: 4) Paragraphs 6 – 9 of point 4.2 above are also applicable for cash generating assets. 5) Sometimes, the disposal of an asset would require the buyer to assume a liability and only a single fair value less costs to sell is available for both the asset and the liability. Point 5.3.2, Paragraph 13 explains how to deal with such cases. Value in Use: 6) Value in use of a cash generating asset is the present value of estimated future cash flows expected to be derived from the continuing use of an asset and from a disposal at the end of its useful life.The following elements shall be reflected in the calculation of an asset's value in use:  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 14 of 26 (a) An estimate of the future cash flows the entity expects to derive from the asset; (b) Expectations about possible variations in the amount or timing of those future cash flows; (c) The time value of money, represented by the current market risk-free rate of interest; (d) The price for bearing the uncertainty inherent in the asset; and (e) Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. 7) Estimating the value in use of an asset involves the following steps: (a) Estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and (b) Applying the appropriate discount rate to those future cash flows. 8) The elements identified in paragraph 9 (b), (d) and (e) can be reflected either as adjustments to the future cash flows or as adjustments to the discount rate. Whichever approach an entity adopts to reflect expectations about possible variations in the amount or timing of future cash flows, the result shall be to reflect the expected present value of the future cash flows, i.e., the weighted average of all possible outcomes. Basis for Estimates of Future Cash Flows: 9) In measuring value in use an entity shall: (a) Base cash flow projections on reasonable and supportable assumptions that represent management's best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Greater weight shall be given to external evidence; (b) Base cash flow projections on the most recent financial budgets/forecasts approved by management, but shall exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset's performance. Projections based on these budgets/forecasts shall cover a maximum period of five years, unless a longer period can be justified; and (c) Estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified. Management may use cash flow projections based on financial budgets/forecasts over a period longer than five years if it is confident that these projections are reliable and it can demonstrate its ability, based on past experience, to forecast cash flows accurately over that longer period. 10) Estimates of future cash flows shall include: (a) Projections of cash inflows from the continuing use of the asset;  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 15 of 26 (b) Projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and (c) Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life. 11) Estimates of future cash flows and the discount rate reflect consistent assumptions about price increases attributable to general inflation. Therefore, if the discount rate includes the effect of price increases attributable to general inflation, future cash flows are estimated in nominal terms. If the discount rate excludes the effect of price increases attributable to general inflation, future cash flows are estimated in real terms (but include future specific price increases or decreases). 12) Projections of cash outflows include those for the day-to-day servicing of the asset as well as future overheads that can be attributed directly, or allocated on a reasonable and consistent basis, to the use of the asset. 13) When the carrying amount of an asset does not yet include all the cash outflows to be incurred before it is ready for use or sale, the estimate of future cash outflows includes an estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale. For example, this is the case for a building under construction or for a development project that is not yet completed. 14) To avoid double-counting, estimates of future cash flows do not include: (a) Cash inflows from assets that generate cash inflows that are largely independent of the cash inflows from the asset under review (for example, financial assets such as receivables); and (b) Cash outflows that relate to obligations that have been recognized as liabilities (for example, payables, pensions or provisions). 15) Future cash flows shall be estimated for the asset in its current condition. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from: (a) A future restructuring to which an entity is not yet committed; or (b) Improving or enhancing the asset's performance. 16) Because future cash flows are estimated for the asset in its current condition, value in use does not reflect: (a) Future cash outflows or related cost savings (for example, reductions in staff costs) or benefits that are expected to arise from a future restructuring to which an entity is not yet committed; or (b) Future cash outflows that will improve or enhance the asset's performance or the related cash inflows that are expected to arise from such outflows.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 16 of 26 17) Until an entity incurs cash outflows that improve or enhance the asset's performance, estimates of future cash flows do not include the estimated future cash inflows that are expected to arise from the increase in economic benefits or service potential associated with the expected cash outflow. 18) Estimates of future cash flows include future cash outflows necessary to maintain the level of economic benefits or service potential expected to arise from the asset in its current condition. When a unit consists of assets with different estimated useful lives, all of which are essential to the ongoing operation of the unit, the replacement of assets with shorter lives is considered to be part of the day-to-day servicing of the unit when estimating the future cash flows associated with the unit. Similarly, when a single asset consists of components with different estimated useful lives, the replacement of components with shorter lives is considered to be part of the day-to-day servicing of the asset when estimating the future cash flows generated by the asset. 19) Estimates of future cash flows shall not include: (a) Cash inflows or outflows from financing activities; or (b) Income tax receipts or payments (if applicable). 20) Estimated future cash flows reflect assumptions that are consistent with the way the discount rate is determined. Otherwise, the effect of some assumptions will be counted twice or ignored. Because the time value of money is considered by discounting the estimated future cash flows, these cash flows exclude cash inflows or outflows from financing activities. Similarly, since the discount rate is determined on a pre-tax basis, future cash flows are also determined on a pre- tax basis. 21) The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life shall be the amount that an entity expects to obtain from the disposal of the asset in an arm's length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal. 22) The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life is determined in a similar way to an asset's fair value less costs to sell, except that, in estimating those net cash flows: (a) An entity uses prices prevailing at the date of the estimate for similar assets that have reached the end of their useful life and have operated under conditions similar to those in which the asset will be used; and (b) The entity adjusts those prices for the effect of both future price increases due to general inflation and specific future price increases or decreases. However, if estimates of future cash flows from the asset's continuing use and the discount rate exclude the effect of general inflation, the entity also excludes this effect from the estimate of net cash flows on disposal.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 17 of 26 23) Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for that currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation. Discount Rate: 24) The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market assessments of: (a) The time value of money, represented by the current risk-free rate of interest; and (b) The risks specific to the asset for which the future cash flow estimates have not been adjusted. 5.3 Recognition and reversal of an impairment loss 5.3.1 Individual asset 1) Paragraphs 1 – 6 of point 4.3 above are also applicable for cash generating assets. 2) When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another accounting rule. 5.3.2 Cash generating units 1) If there is any indication that an asset may be impaired, the recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs (the asset's cash-generating unit). 2) The recoverable amount of an individual asset cannot be determined if: (a) The asset's value in use cannot be estimated to be close to its fair value less costs to sell (for example, when the future cash flows from continuing use of the asset cannot be estimated to be negligible); and (b) The asset does not generate cash inflows that are largely independent of those from other assets and is not capable of generating cash flows individually. In such cases, value in use and, therefore, recoverable amount, can be determined only for the asset's cash-generating unit. 3) An asset's cash-generating unit is the smallest group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Identification of an asset's cash-generating unit involves judgment. If recoverable amount cannot be determined for an individual asset, an entity identifies the lowest aggregation of assets that generate largely independent cash inflows.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 18 of 26 4) Cash inflows are inflows of cash and cash equivalents received from parties external to the entity. In identifying whether cash inflows from an asset (or group of assets) are largely independent of the cash inflows from other assets (or groups of assets), an entity considers various factors including how management monitors the entity's operations (such as by product lines, businesses, individual locations, districts or regional areas) or how management makes decisions about continuing or disposing of the entity's assets and operations. 5) If an active market exists for the output produced by an asset or group of assets, that asset or group of assets shall be identified as a cash-generating unit, even if some or all of the output is used internally. If the cash inflows generated by any asset or cash-generating unit are affected by internal transfer pricing, an entity shall use management's best estimate of future price(s) that could be achieved in arm's length transactions in estimating: (a) The future cash inflows used to determine the asset's or cash generating unit's value in use; and (b) The future cash outflows used to determine the value in use of any other assets or cash- generating units that are affected by the internal transfer pricing. 6) Cash-generating units shall be identified consistently from period to period for the same asset or types of assets, unless a change is justified. 7) If an entity determines that an asset belongs to a cash-generating unit different from that in previous periods, or that the types of assets aggregated for the asset's cash-generating unit have changed, point 6 paragraph 6 requires disclosures about the cash generating unit, if an impairment loss is recognised or reversed for the cash generating unit. Recoverable Amount and Carrying Amount of a Cash-Generating Unit: 8) The recoverable amount of a cash-generating unit is the higher of the cash generating unit's fair value less costs to sell and its value in use. For the purpose of determining the recoverable amount of a cash-generating unit, any reference in the paragraphs above to 'an asset' is read as a reference to “a cash-generating unit”. 9) The carrying amount of a cash-generating unit shall be determined on a basis consistent with the way the recoverable amount of the cash-generating unit is determined. 10) The carrying amount of a cash-generating unit: (a) Includes the carrying amount of only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, to the cash generating unit and will generate the future cash inflows used in determining the cash-generating unit's value in use; and (b) Does not include the carrying amount of any recognised liability, unless the recoverable amount of the cash-generating unit cannot be determined without consideration of this liability.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 19 of 26 11) When assets are grouped for recoverability assessments, it is important to include in the cash- generating unit all assets that generate or are used to generate the relevant stream of cash inflows. Otherwise, the cash-generating unit may appear to be fully recoverable when in fact an impairment loss has occurred. 12) For practical reasons, the recoverable amount of a cash-generating unit is sometimes determined after consideration of assets that are not part of the cash generating unit (for example, receivables or other financial assets) or liabilities that have been recognised (for example, payables, pensions and other provisions). In such cases, the carrying amount of the cash-generating unit is increased by the carrying amount of those assets and decreased by the carrying amount of those liabilities. Impairment Loss for a Cash-Generating Unit: 13) An impairment loss shall be recognised for a cash-generating unit if, and only if, the recoverable amount of the unit is less than the carrying amount of the unit. The impairment loss shall be allocated to reduce the carrying amount of the cash-generating assets of the unit on a pro rata basis, based on the carrying amount of each asset in the unit. These reductions in carrying amounts shall be treated as impairment losses on individual assets and recognised in accordance with point 5.3.1. 14) In allocating an impairment loss in accordance with paragraph 13, an entity shall not reduce the carrying amount of an asset below the highest of: (a) Its fair value less costs to sell (if determinable); (b) Its value in use (if determinable); and (c) Zero. The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other cash-generating assets of the unit. 15) Where a non-cash-generating asset contributes to a cash-generating unit, a proportion of the carrying amount of that non-cash-generating asset shall be allocated to the carrying amount of the cash-generating unit prior to estimation of the recoverable amount of the cash-generating unit. The carrying amount of the non-cash-generating asset shall reflect any impairment losses at the reporting date which have been determined under the requirements of point 4 of this rule. 16) If the recoverable amount of an individual asset cannot be determined: (a) An impairment loss is recognised for the asset if its carrying amount is greater than the higher of its fair value less costs to sell and the results of the allocation procedures described in paragraphs 13 – 15; and (b) No impairment loss is recognised for the asset if the related cash-generating unit is not impaired. This applies even if the asset’s fair value less costs to sell is less than its carrying amount.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 20 of 26 17) In some cases, non-cash generating assets contribute to cash generating units. This rule requires that, where a cash-generating unit subject to an impairment test contains a non-cash-generating asset, that non-cash generating asset is tested for impairment in accordance with the requirements of point 4 of this rule. A proportion of the carrying amount of that non-cash generating asset, following that impairment test, is included in the carrying amount of the cash- generating unit. The proportion reflects the extent to which the service potential of the non- cash-generating asset contributes to the cash-generating unit. The allocation of any impairment loss for the cash-generating unit is then made on a pro rata basis to all cash generating assets in the cash-generating unit, subject to the limits in paragraph 14. The non-cash generating asset is not subject to a further impairment loss beyond that which has been determined in accordance with point 4 of this rule. 18) After the requirements in paragraphs 13 – 15 have been applied, a liability shall be recognised for any remaining amount of an impairment loss for a cash-generating unit if, and only if, that is required by another accounting rule. 5.3.3 Reversing 1) An entity shall assess at each reporting date whether there is any indication that an impairment loss recognised in prior periods for an asset may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset. 2) In assessing whether there is any indication that an impairment loss recognized in prior periods for an asset may no longer exist or may have decreased, an entity shall consider, as a minimum, the following indications: External sources of information (a) The asset's market value has increased significantly during the period; (b) Significant changes with a favorable effect on the entity have taken 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 the asset is dedicated; (c) Market interest rates or other market rates of return on investments have decreased during the period, and those decreases are likely to affect the discount rate used in calculating the asset's value in use and increase the asset's recoverable amount materially; Internal sources of information (d) Significant changes with a favorable 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, 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; and  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 21 of 26 (e) Evidence is available from internal reporting that indicates that the economic performance of the asset is, or will be, better than expected. 3) If there is an indication that an impairment loss recognised for an asset may no longer exist or may have decreased, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value may need to be reviewed and adjusted in accordance with the accounting rule applicable to the asset, even if no impairment loss is reversed for the asset. 4) An impairment loss recognised in prior periods for an asset shall be reversed if, and only if, there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If this is the case, the carrying amount of the asset shall be increased to its recoverable amount. That increase is a reversal of an impairment loss. 5) A reversal of an impairment loss reflects an increase in the estimated service potential of an asset, either from use or from sale, since the date when an entity last recognised an impairment loss for that asset. An entity is required to identify the change in estimates that causes the increase in estimated service potential. Examples of changes in estimates include: (a) A change in the basis for recoverable amount (i.e., whether recoverable amount is based on fair value less costs to sell or value in use); (b) If recoverable amount was based on value in use, a change in the amount or timing of estimated future cash flows or in the discount rate; or (c) If recoverable amount was based on fair value less costs to sell, a change in estimate of the components of fair value less costs to sell. 6) An asset's value in use may become greater than the asset's carrying amount simply because the present value of future cash inflows increases as they become closer. However, the service potential of the asset has not increased. Therefore, an impairment loss is not reversed just because of the passage of time, even if the recoverable amount of the asset becomes higher than its carrying amount. Reversing an Impairment Loss for an Individual Asset: 7) Paragraphs 13 – 15 of point 4.3 above are also applicable for cash generating assets Reversing an Impairment Loss for a Cash-Generating Unit: 8) A reversal of an impairment loss for a cash-generating unit shall be allocated to the cash- generating assets of the unit pro rata with the carrying amounts of those assets. These increases in carrying amounts shall be treated as reversals of impairment losses for individual assets and recognised in accordance with paragraph 15 of point 4.3. No part of the amount of such a reversal shall be allocated to a non-cash-generating asset contributing service potential to a cash generating unit.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 22 of 26 9) In allocating a reversal of an impairment loss for a cash-generating unit in accordance with paragraph 8, the carrying amount of an asset shall not be increased above the lower of: (a) Its recoverable amount (if determinable); and (b) The carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior periods. The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit. Re-designation of Assets: 10) Paragraph 16 of point 4.3 is also applicable for cash generating assets. 6. Disclosure 1) An entity shall disclose the following for each class of assets: (a) The amount of impairment losses recognised in surplus or deficit during the period and the line item(s) of the statement of financial performance in which those impairment losses are included. (b) The amount of reversals of impairment losses recognised in surplus or deficit during the period and the line item(s) of the statement of financial performance in which those impairment losses are reversed. 2) A class of assets is a grouping of assets of similar nature and use in an entity’s operations that is shown as a single item for the purpose of disclosure in the financial statements. 3) The information required in paragraph 1 above may be presented with other information disclosed for the class of assets. For example, this information may be included in a reconciliation of the carrying amount of property, plant and equipment, at the beginning and end of the period, as required by EU accounting rule 7: Property, plant and equipment. 4) An entity shall disclose the following for each material impairment loss recognised or reversed during the period: (a) The events and circumstances that led to the recognition or reversal of the impairment loss. (b) The amount of the impairment loss recognised or reversed. (c) The nature of the asset. (d) Whether the recoverable (service) amount of the asset is its fair value less costs to sell or its value in use. (e) If the recoverable service amount is fair value less costs to sell, the basis used to determine fair value less costs to sell (such as whether fair value was determined by reference to an active market).  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 23 of 26 (f) If the recoverable service amount is value in use, the approach used to determine value in use. (g) For a cash generating unit: (i) a description of the cash generating unit; (ii) the amount of the impairment loss recognised or reversed by class of assets; and (iii) if the aggregation of assets for identifying the cash generating unit has changed since the previous estimate of the cash generating units recoverable amount, a description of the current and former way of aggregating assets and the reasons for changing the way the cash generating unit is identified. SECTOR 5) An entity shall disclose the following information for the aggregate of impairment losses and aggregate reversals of impairment losses recognised during the period for which no information is disclosed in accordance with paragraph 1: (a) The main classes of assets affected by impairment losses and the main classes of assets affected by reversals of impairment losses. (b) The main events and circumstances that led to the recognition of these impairment losses and reversals of impairment losses. 6) An entity shall disclose the information required by (a) – (e) below for each cash generating unit for which the carrying amount of intangible assets with indefinite useful lives allocated to that unit is significant in comparison with the entity’s total carrying amount of intangible assets with indefinite useful lives: (a) The carrying amount of intangible assets with indefinite useful lives allocated to the unit; (b) The basis on which the unit’s recoverable amount has been determined (i.e., value in use or fair value less costs to sell); (c) If the unit’s recoverable amount is based on value in use: (i) a description of each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets/forecasts. Key assumptions are those to which the unit’s recoverable amount is most sensitive; (ii) a description of management’s approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information; (iii) the period over which management has projected cash flows based on financial budgets/forecasts approved by management and, when a period greater than five years is used for a cash-generating unit, an explanation of why that longer period is justified; (iv) the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts, and the justification for using any growth rate that exceeds  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 24 of 26 the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit is dedicated; and (v) the discount rate(s) applied to the cash flow projections. (d) If the unit’s recoverable amount is based on fair value less costs to sell, the methodology used to determine fair value less costs to sell. If fair value less costs to sell is not determined using an observable market price for the unit, the following information shall also be disclosed: (i) a description of each key assumption on which management has based its determination of fair value less costs to sell. Key assumptions are those to which the unit’s recoverable amount is most sensitive; and (ii) a description of management’s approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information. (e) If a reasonably possible change in a key assumption on which management has based its determination of the unit’s recoverable amount would cause the unit’s carrying amount to exceed its recoverable amount: (i) the amount by which the unit’s recoverable amount would exceed its carrying amount; (ii) the value assigned to the key assumption; and (iii) the amount by which the value assigned to the key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the unit’s recoverable amount to be equal to its carrying amount. 7) If some or all of the carrying amount of intangible assets with indefinite useful lives is allocated across multiple cash-generating units, and the amount so allocated to each unit is not significant in comparison with the entity’s total carrying amount of intangible assets with indefinite useful lives, that fact shall be disclosed, together with the aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units. In addition, if the recoverable amounts of any of those units are based on the same key assumption(s) and the aggregate carrying amount of intangible assets with indefinite useful lives allocated to them is significant in comparison with the entity’s total carrying amount of intangible assets with indefinite useful lives, an entity shall disclose that fact, together with: (a) The aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units; (b) A description of the key assumption(s); (c) A description of management’s approach to determining the value(s) assigned to the key assumption(s), whether those value(s) reflect past experience or, if appropriate, are  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 25 of 26 consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information; (d) If a reasonably possible change in the key assumption(s) would cause the aggregate of the units’ carrying amounts to exceed the aggregate of their recoverable amounts: (i) the amount by which the aggregate of the units’ recoverable amounts would exceed the aggregate of their carrying amounts; (ii) the value(s) assigned to the key assumption(s); and (iii) the amount by which the value(s) assigned to the key assumption(s) must change, after incorporating any consequential effects of the change on the other variables used to measure recoverable amount, in order for the aggregate of the units’ recoverable amounts to be equal to the aggregate of their carrying amounts.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 1 EU ACCOUNTING RULE 18: IMPAIRMENT OF ASSETS Date: December 2011 Page 26 of 26 7. Effective date This rule shall be effective for annual financial statements covering periods beginning on or after 1 January 2012. 8. Reference to other rules This accounting rule is based on the following IPSAS standards: IPSAS 21 "Impairment of non-cash generating assets"; and IPSAS 26 "Impairment of cash generating assets".