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Impairment of assets

13 important questions on Impairment of assets

What is the purpose of the impairment test?

The purpose is to ensure that disclosed assets do not have carrying amounts in excess of their recoverable amounts. For most assets, the need for an impairment test can be assessed by analyzing sources of evidence. However, there are some assets for which an impairment test must be undertaken every year.

For which assets must be undertaken an impairment test every year?

- Intangible assets with indefinite useful lives
- Intangible assets not yet available for use
- Goodwill acquired in an business combination

Evidence for impairment can come from internal of external sources, what are external sources of information?

1. Asset's value
2. Entity's environment/market
3. Interest rates
4. Market capitalisation.

Evidence for impairment can come from internal of external sources, what are internal sources of information?

1. Obsolescence or physical damage
2. Changed use within the entity
3. Economic performance of the asset.

From the definition of recoverable amount, there are two possible amounts against which the carrying amount can be tested for impairment:

1. Fair value less costs of disposal
2. Value in Use

Examples of costs of disposal

Legal costs, stamp duty, costs of removing the asset, direct incremental costs to breng the asset into condition for sale. The costs must be directly associated with either the sale of the asset or getting the asset ready for sale.

Fair value differs from value in use because of factors that are likely to be specific to the entity:

1. Additional value derived from grouping of assets
2. Synergies between the asset being measured and other assets
3. Legal rights or legal restriction that are specific only to the current owner of the asset
4. Tax benefits or tax burdens that are specific to the current owner of the asset.

Cash Generating Unit (CGU)

A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

In allocating an impairment loss in accordance with paragraph 104, an entity shall not reduce the carrying amount of an asset below the highest of:

a) Its fair value less costs of disposal (if measurable)
b) Its value in use (if determinable)
c) Zero

How should the amount of impairment be allocated?

The amount of impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata tot the other assets of the unit (group of units)

Reversal of an impairment loss - individual asset

The carrying amount cannot be increased to an amount in excess of the CA that would have been determined when no impairment loss had been recognized.

Reversal of an impairment loss - CGU

The reversal of the impairment loss is allocated pro rata to the assets of the unit, except for goodwill, with the carrying amounts of those assets. The CA of an asset cannot be increased above the lower of its RA (if determinable) and the CA hath would have been determined had no impairment loss been recognized for the asset in previous periods.

Reversal of an impairment - goodwill

Impairment loss recognized for goodwill shall not be reversed in a later period.

The question on the page originate from the summary of the following study material:

Applying International Financial Reporting Standards | 9781119159223 | Ruth Picker

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Impairment of assets

13 important questions on Impairment of assets

What is the purpose of the impairment test?

For which assets must be undertaken an impairment test every year?

Evidence for impairment can come from internal of external sources, what are external sources of information?

Evidence for impairment can come from internal of external sources, what are internal sources of information?

From the definition of recoverable amount, there are two possible amounts against which the carrying amount can be tested for impairment:

Examples of costs of disposal

Fair value differs from value in use because of factors that are likely to be specific to the entity:

Cash Generating Unit (CGU)

In allocating an impairment loss in accordance with paragraph 104, an entity shall not reduce the carrying amount of an asset below the highest of:

How should the amount of impairment be allocated?

Reversal of an impairment loss - individual asset

Reversal of an impairment loss - CGU

Reversal of an impairment - goodwill

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