Part 2: Why impairment is needed?
Part 3: Impairment, Measuring recoverable amount
Part 4: Impairment loss – Individual assets other than goodwill, Cash generating unit (CGU)
Part 5: Impairment loss for cash-generating unit (CGU), Reversing an impairment lossRead IAS 36 Summary Online IAS 36 Test
4 Impairment loss – Individual assets other than goodwill
The carrying amount of an asset shall be reduced to its recoverable amount if and only if carrying amount exceeds recoverable amount. The amount deducted from the carrying amount is an impairment loss.
An impairment loss shall be recognized in profit or loss
If asset is revalued then impairment loss is recognized in other comprehensive income (simply, equity) i.e. impairment loss is set against revaluation surplus. If impairment loss exceeds the revaluation surplus then the excess amount shall be recognized in profit or loss.
In case impairment loss exceeds carrying amount then entity shall recognize a liability if it is required by another Standard.
If impairment is recognized:
- Depreciation (amortization) shall be adjusted to allocate revised carrying amount (less scrap value) over its remaining useful life.
- Deferred tax assets/liabilities shall be determined using asset’s revised carrying amount and tax base.
5 Cash-generating unit
5.1 Problem and solution
A basic principle is that if asset is impaired then recoverable amount is estimated for each asset individually. However, if the estimate is not possible for individual assets then recoverable amount is determined for a group of asset taken as one unit i.e. cash-generating unit.
The recoverable amount of an individual asset cannot be determined if:
- asset’s value in use cannot be estimated to be close to its fair value less costs to sell; and
- asset does not generate cash inflows that are largely independent of those from other assets.
In simple words as asset alone is not generating any cash and cash is flowed from the asset only when used together with other assets then the value in use for the asset alone will not be easily determinable.
For example, passenger railway can generate cash flows alone however, railway used for mining activities cannot generate cash flows on its own and thus value in use for the mine as a whole, to which mining railway belongs, will be determined.
5.2 Determining Cash-generating Unit
A cash-generating unit 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.
There are two things to understand in this definition:
- Identification of an asset’s cash-generating unit
- Whether cash inflows of such asset (group assets) is independent
Identification of an asset’s cash-generating unit involves judgement. If recoverable amount cannot be determined for an individual asset, an entity identifies the lowest aggregation of assets that generate largely independent cash inflows.
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)
- how management makes decisions about continuing or disposing of the entity’s assets and operations.
- Whether active market exists for the output of asset or group of assets
Once the individual asset or group of asset is identified as a cash-generating unit then management should remain consistent from period to period and changes should be made only when there is a change in the assets or type of assets making up cash generating unit.
5.3 Carrying amount and recoverable amount of CGU
To determine the recoverable amount of a CGU, same procedure is followed as applied for individual asset.
The recoverable amount of a CGU is higher of the following:
- Fair value less cost to sell of CGU
- Value in use of CGU
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.
Generally, the carrying amount of CGU:
- includes the carrying amount of only those assets that are directly attributable or can be allocated on reasonable basis as the inflows from only such assets will be used to determine CGU’s value in use
- excludes the liabilities already recognized unless CGU’s recoverable amount can only be determined by including such liabilities.
Recognized liability will form part of recoverable amount in situations like the buyer is required to assume the liability in which case the fair value less cost to sell of CGU will be:
Selling price of CGU + Liability taken up by the buyer – Disposal costs
Sometimes CGU’s recoverable amount is determined by adding the asset’s other then CGU e.g. receivables. In this case, carrying amount of CGU will be:
- Increased by the carrying amount of such assets
- Decreased b the carrying amount of such liabilities
IAS 36 permits the use of most recent detailed calculation of recoverable amount of CGU in preceding period in current period for impairment test provided:
- Composition of CGU have not changed significantly since last calculation
- Recoverable amount exceeded carrying amount substantially in the most recent calculation
- Likelihood of carrying amount exceeding recoverable amount due to changes in circumstances is remote.
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not:
- individually identified and
- separately recognised.
In simple words, here we are talking about purchased goodwill.
- does not generate cash flows independently of other assets or groups of assets,
- often contributes to the cash flows of multiple cash-generating units.
- sometimes cannot be allocated on a non-arbitrary basis to individual cash-generating units, but only to groups of cash-generating units
5.4.1 Allocating goodwill to CGU
For impairment purposes, from the acquisition date the acquired goodwill shall be allocated to each of the acquirer’s CGU(s) that is expected to benefit from the synergies of the combination irrespective of whether other assets or liabilities acquired are assigned to those CGU(s).
Each CGU(s) to which goodwill is allocated shall:
- represent lowest level at which goodwill is monitored for internal management purposes
- not be larger than an operating segment as defined under IFRS 8
If the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is affected, the acquirer:
- accounts for the combination using those provisional values; and
- recognises any adjustments to those provisional values as a result of completing the initial accounting within 12 months period after acquisition date.
If it is not possible to complete initial accounting within the specified period then this should be disclosed.
If entity disposes an operation within CGU to which goodwill has been allocated then the goodwill related to operation shall be:
- measured on the basis of the relative values of:
- the operation disposed of and
- the portion of the cash-generating unit retained
- included in the carrying amount of the operation to determine gain/loss on disposal
If entity reorganizes its reporting structure in a way that composition of CGU(s) to which goodwill is allocated changes then goodwill shall also be reallocated using relative value approach as used in disposal of an operating within CGU(s)
5.4.2 Testing CGU(s) with goodwill for impairment
Related goodwill not allocated
When goodwill relates to a cash-generating unit but has not been allocated to that unit, the unit shall be tested for impairment:
- whenever there is an indication that the unit may be impaired,
- by comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount.
However, if a CGU includes the intangible asset of the following kind then it should be impairment tested annually:
- With indefinite asset, or not yet available for use
- Which can only be tested for impairment as part of CGU
Related goodwill allocated
A cash-generating unit to which goodwill has been allocated shall be tested for impairment
- annually, and whenever there is an indication that the unit may be impaired,
- by comparing the unit’s carrying amount, including the goodwill, with its recoverable amount.
5.4.3 Timing of impairment tests
CGU(s) to which goodwill has been can be tested for impairment at any time during the year provided the tests are performed at the same time every year. Different CGU(s) may be tested at different times i.e. there is no compulsion that all of the CGU(s) should be tested at the same time.
However, the goodwill allocated was acquired in the current period then CGU shall be tested within 12 months.
If an asset within the CGU (a CGU to which goodwill is allocated) is tested for impairment at the same time the CGU is tested then asset is tested for impairment and impairment loss (if any) is recognized before CGU is tested for impairment
5.5 Corporate assets
Corporate assets include group or divisional assets such as the building of a headquarters or a division of the entity, EDP equipment or a research centre.
The structure of an entity determines whether an asset meets this Standard’s definition of corporate assets for a particular cash-generating unit.
The distinctive characteristics of corporate assets are that:
- they do not generate cash inflows independently of other assets or groups of assets and
- their carrying amount cannot be fully attributed to the cash-generating unit under review.
Because corporate assets do not generate separate cash inflows, the recoverable amount of an individual corporate asset cannot be determined unless management has decided to dispose of the asset.
As a consequence, if there is an indication that a corporate asset may be impaired then the CGU to which this asset belongs is tested for impairment
In testing a CGU for impairment, an entity shall identify all the corporate assets that relate to CGU under review.
If a portion of the carrying amount of a corporate asset:
- Can be allocated to the related CGU then it is tested for impairment including the portion of carrying amount of the corporate asset.
- Cannot be allocated to the related CGU then:
CGU is tested for impairment excluding the corporate asset.
- identify the smallest group of CGU that includes:
- The CGU under review (i.e. a CGU generating cash flows independently ); and
- CGU to which a portion of corporate asset can be allocated (i.e. a bigger CGU that encompass both corporate asset and the CGU under review e.g. entity as a whole)
- Test the group of units for impairment including the carrying amount of corporate asset allocated to that group of units.