PAS 36 IMPAIRMENT of ASSETs pdf version.pdf

PAS 36 IMPAIRMENT of ASSETs SCOPE  The standard shall be applied in accounting for the impairment of all assets, other than;  - inventories  - contract assets and related items  - deferred tax assets  - assets arising from employee benefits  - financial assets  - investment property measu...

PAS 36 IMPAIRMENT of ASSETs SCOPE  The standard shall be applied in accounting for the impairment of all assets, other than;  - inventories  - contract assets and related items  - deferred tax assets  - assets arising from employee benefits  - financial assets  - investment property measured in fair value  - biological assets at fair value  - insurance contracts  Non current assets classified as held for sale IMPAIRMENT LOSS, RECOVERABLE AMOUNT and VALUE IN USE  impairment loss is the amount by which the carrying amount of an asset or a cash generating unit exceeds its recoverable amount  Recoverable amount of an asset or a cash generating unit is the higher between fair value less costs of disposal and its value in use  Value in use is the present value of the future cash flows expected to be derived from an asset or cash generating unit.  IDENTIFYING an ASSET for IMPAIRMENT  The entity shall assess every end of each reporting period whether there is any indication of impairment of asset. If there is an indication of impairment, the entity shall estimate the recoverable amount of an asset. EXTERNAL SOURCES of INFORMATION that may INDICATE that an ASSET is IMPAIRED  - there are observable indications that the assets value has declined during the period significantly more than would be expected as a result of passage of time or normal use.  - 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 the asset is dedicated.  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.  The carrying amount of the net assets of the entity is more than its market capitalization INTERNAL SOURCES of INFORMATION that may INDICATE that an ASSET is IMPAIRED  - evidence is available of obsolescence or physical damage of an asset  - significant changes with an adverse effect on the entity have taken place during the period, or will take place in the 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. INTERNAL SOURCES, cont……  Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected  -For an investment in a subsidiary, joint venture or associate, the investor recognizes dividend and evidence is available that;  - the carrying amount of the investment in the separate financial statement exceeds the carrying amount of the consolidated financial statement of the investee’s net assets, including associated goodwill  - the dividends exceeds the total comprehensive income of the subsidiary , joint venture or associate in the period the dividend is declared  INTERNAL SOURCES, cont……  Other internal evidences;  - cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it , are significantly higher than those originally budgeted  - actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those budgeted  - a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing from the asset, or  - operating losses or net cash outflows for the asset, when current periods amounts are aggregated with budgeted amounts for the future  The external and internal indicators above are not exclusive; other indications that an asset maybe impaired resulting to estimate the recoverable amount  IMPAIRMENT LOSS  Impairment loss = carrying amount – recoverable amount; this is on the premises that the recoverable amount is lower than the carrying amount thus the need to adjust the carrying amount and recognize an impairment loss  Recoverable amount is defined as the comparison between fair value of the asset less costs of disposal, or present value of net cash flow or what we call value in use, whichever is higher. Recoverable amount shall be determined individually, however if not possible, then the assets can be group together into smaller aggregation to determine its recoverable amount and such aggregation is called cash generating unit. RECOVERABLE AMOUNT  Instances when the individual recoverable amounts cannot be determined and utilize the cgu;  - the asset’s value in use cannot be estimated to be close to its fair value less costs if disposed  - the asset does not generate cash inflow that are largely independent of those from other assets  The recoverable amount of either as an individual asset or via cgu can be calculated by comparing the fair value of the individual asset or cgu less disposal cost , vs. value in use of the individual asset or cgu , whichever is higher CARRYING AMOUNT of a CGU  The carrying amount of a CGU  - includes the carrying amount of those assets that can be attributed directly or allocated on a reasonable and consistent basis, to the CGU and will generate the future cash inflows used in determining the CGU’s value in use , and  - it does not include any recognized liability, unless the recoverable amount of the CGU cannot be determined without consideration of their liability  Read corporate asset question number 23 IMPAIRMENT LOSS of CGU  If an impairment loss shall be recognized for a CGU, such loss shall be allocated to reduce the carrying amount of the assets of the unit in the following order;  - first, to the goodwill, if any  - then, to the other assets of the unit on a pro rata basis using the carrying amount of each asset in the unit  Also allocating the impairment loss to the individual assets should not in any case will the carrying amount of the individual assets be reduced below the highest of;  - fair value less cost of disposal  - its value in use  - zero REVERSAL OF IMPAIRMENT LOSS ALLOWED for CGU  The reversal of impairment loss for a CGU is allowed which will be allocated to the assets of the unit, except goodwill, applied pro rata with the carrying amount of those assets. In allocating a reversal , the carrying amount of the asset shall not increase above the lower of ;  - its recoverable amount ( if determinable ) and  - the carrying amount that would have been determined ( net of amortization or depreciation ) had no impairment loss has been recognized for the asset in prior periods FAIR VALUE at DISPOSAL of the ASSET  Examples of cost of disposal which is deducted with the fair value of the asset;  - legal costs  - stamp duty and similar transaction taxes  - cost of removing the asset  - direct incremental costs to bring an asset into condition for its sales  - termination benefits  - we note that costs associated with reducing or reorganizing a business following the disposal of an asset are not direct incremental costs VALUE in USE  Elements needed to be reflected in the calculation of an asset’s value in use;  - an estimate of the future cash flows the entity expects to derive from the asset  - expectations about possible variations in the amount or timing of those future cash flows  - the time value of money, represented by the current market risk free rate of interest  - the price for bearing the uncertainty inherent in the asset and  - other factors such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset VALUE in USE  Steps involved in estimating the value in use;  - estimate the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal  - applying appropriate discount rate to those future cash flows BASES in ESTIMATING the FUTURE CASH FLOWs in VALUE in USE  - Base the cash flow projections on reasonable and supportable assumptions that represents management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset.  Base the cash flow projections on the most recent financial budgets/forecasts approved by management excluding estimates on cash flows expected to arise from improving or enhancing the asset’s performance. Projections should cover a maximum of five years period, unless justifiable for longer period.  Estimate the projections beyond the period of most recent budgets by extrapolating the projections using a steady or declining growth rate for subsequent years, unless increasing rate is justifiable. The growth rate shall not exceed the long term average growth rate for the product/industry/country in which the entity operates unless justifiable FUTURE CASH FLOWs INCLUDED in ESTIMATION  - cash inflow projections from the continuing use of the asset  - cash outflow projections necessarily incurred to generate the cash inflows from the continuing use of the asset  - net cash flows received on the disposal of the asset at the end of the useful life in arm’s length transaction  Arm’s length transaction means transactions in which two or more unrelated and unaffiliated parties agree to do business acting independently and in their self interest CASH FLOWs not INCLUDED  - future restructuring to which an entity is not yet committed  - future costs of improving or enhancing the asset’s performance  - cash inflows or outflows from financing activities  - income tax FAIR VALUE vs VALUE in USE  Fair value is not the same with value in use, fair value reflects the assumption of market participants would use when pricing the asset however value in use reflects the effects of factors that is entity specific and not applicable to entities in general while value in use of an asset is the present value of the future cash flows expected to be derived from an asset or cash generating unit  A cash generating unit is the smallest identifiable group of assets to which independent cash flows can be identified and measured, ADDITIONAL NOTEs  If the future cash flows is in foreign currency, the entity translates the present value using the spot exchange rate at the date of the value in use calculation  The appropriate discount rate to be used in estimating the value in use shall be a pre tax rate that reflects current market assessment of;  - time value in money  - risks specific to the asset for which the future cash flows estimates have not been adjusted  If the asset specific rate is not available, an entity uses surrogates to estimate the discount rate using the following;  - the entity’s weighted average cost of capital using techniques like CAPM  - the entity’s incremental borrowing rate  - other market borrowing rates RECOGNIZING IMPAIRMENT LOSS  An impairment loss shall be recognized in profit or loss, unless the asset is carried at revalued amount in accordance with another standard. As such, any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with other standard.  A prior period impairment loss maybe reversed if such is the case, however, the entity shall assess first the external and internal sources of information to ascertain that such impairment loss in prior periods do no longer exist or have decreased. EXTERNAL and INTERNAL SOURCEs of INFORMATION  External sources;  - there are observable indications that the asset’s value has increased significantly during the period  - significant changes with a favorable effect have taken place during the period, or will take effect in the near future  - market interest rates or other market rates of return on investments have decreased which will likely affect the discount rate used in calculating the value in use  Internal sources;  - significant changes that effects internally which include costs incurred during the period to improve or enhance the asset’s performance or restructure the operation  - evidence is available from internal reporting that indicates the economic performance of an asset is or will be better than expected REVERSAL of IMPAIRMENT LOSS  Adjusting the impairment loss will result in the estimate of the carrying amount of the asset to increase to its recoverable amount.  However, such increase in the carrying amount , other than goodwill, shall not exceed the carrying amount that would have been determined ( net of depreciation or amortization ) had no impairment loss has been recognized for the asset in prior years.  This will be reflected in the profit or loss of the entity unless the asset is being carried at its revalued amount. If such is the case this will be treated as a revaluation increase in accordance with IFRS DISCLOSUREs  General disclosures;  - impairment losses recognized and the line items of the statement of comprehensive income in which those impairment losses are included  - reversals  - impairment losses on revalued assets DISCLOSUREs  Additional ;  - events and circumstances that led reversal of impairment  - amount of impairment loss recognized or reversed  - individual assets:  - nature of the asset  - segment information  - cgu ;  - description  - recognition or reversal of impairment loss  - if aggregation, and there are changes  - cgu recoverable amount  - if the recoverable amount is the FV less cost of disposal, the entity shall disclose the level of the FV hierarchy within which the FV measurement of the asset EXAMPLE allocation of Impairment Loss  A cgu comprises the following;  In millions  Building P 30  Plant and equipment 6  Goodwill 10  Current assets 20  -------  Total P66  ====  Following a recession, an impairment review has estimated the recoverable amount of the cgu to be P50M.  How do we allocate the impairment loss? An example  carrying amount impairment loss adjusted carrying amount  Bldg P30 (5) P25  Plant & equip 6 (1) 5  Goodwill 10 (10) -0-  Current assets 20 - 20  ------ ------ --------  P66 P16 P50  ===== ==== ==== calculations  Impairment loss = P66 – P50 = P16M  Exhaust first all the balance of goodwill = P16 – P10 = P6  The remaining balance will be apportioned with the long term assets;  Building = 30/(30+6) x 6 = 5  Plant and equipment = 6/36 x 6 = 1  All the best kidos