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IMPAIRMENT OF ASSETS
Objective of PAS 36
The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its
assets are carried at no more than their recoverable amount. An asset is carried at more than its
recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the
asset. If this is the case, the asset is described as impaired and the Standard requires the entity to
recognize an impairment loss. The Standard also specifies when an entity should reverse an impairment
loss and prescribes disclosures.
Definitions
An active market is a market in which all the following conditions exist:
(a) The items traded within the market are homogeneous;
(b) Willing buyers and sellers can normally be found at any time; and
(c) Prices are available to the public.
The agreement date for a business combination is the date that a substantive agreement between the
combining parties is reached and, in the case of publicly listed entities, announced to the public. In the case
of a hostile takeover, the earliest date that a substantive agreement between the combining parties is
reached is the date that a sufficient number of the acquirees owners have accepted the acquirers offer for
the acquirer to obtain control of the acquiree.
Carrying amount is the amount at which an asset is recognized after deducting any accumulated
depreciation (amortization) and accumulated impairment losses thereon.
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.
Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cashgenerating unit under review and other cash-generating units.
Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating
unit, excluding finance costs and income tax expense.
Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial
statements, less its residual value.
Depreciation (Amortization) is the systematic allocation of the depreciable amount of an asset over its
useful life.
Fair value less costs to sell is the amount obtainable from the sale of an asset or cash-generating unit in
an arms length transaction between knowledgeable, willing parties, less the costs of disposal.
An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit
exceeds its recoverable amount.
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to
sell and its value in use.
Useful life is either:
(a) The period of time over which an asset is expected to be used by the entity; or
(b) The number of production or similar units expected to be obtained from the asset by the entity.
Value in use is the present value of the future cash flows expected to be derived from an asset or cash-

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generating unit.

Identifying an Asset That May Be Impaired


At each balance sheet date, an entity shall review all assets to look for any indication that an asset may be
impaired its carrying amount may be in excess of the greater of its net selling price and its value in use. PAS
36 has a list of external and internal indicators of impairment. 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.
The recoverable amounts of the following types of intangible assets should be measured annually
whether or not there is any indication that it may be impaired. In some cases, the most recent detailed
calculation of recoverable amount made in a preceding period may be used in the impairment test for that
asset in the current period:

An intangible asset with an indefinite useful life.


An intangible asset not yet available for use.
Goodwill acquired in a business combination.

Indicators of Impairment
External sources:
Internal sources:
Market value declines
Obsolescence or physical damage
Negative changes in technology, markets, Asset is part of a restructuring or held for
economy, or laws
disposal
Increases in market interest rates
Worse economic performance than expected
Company stock price is below book value
The lists are not intended to be exhaustive. Also, must consider materiality. Further, an indication that an
asset may be impaired may indicate that the asset's useful life, depreciation method, or residual value may
need to be reviewed and adjusted.
Determining Recoverable Amount
a. If fair value less costs to sell or value in use is more than carrying amount, it is not necessary

to calculate the other amount. The asset is not impaired.


b. If fair value less costs to sell cannot be determined, then recoverable amount is value in use.
c. For assets to be disposed of, recoverable amount is fair value less costs to sell.

Fair Value Less Costs to Sell


a. If there is a binding sale agreement, use the price under that agreement less costs of disposal.
b. If there is an active market for that type of asset, use market price less costs of disposal. Market

price means current bid price if available, otherwise the price in the most recent transaction.
c. If there is no active market, use the best estimate of the asset's selling price less costs of disposal.
d. Costs of disposal are the direct added costs only (not existing costs or overhead).

Value in Use
The calculation of value in use should reflect the following elements:
a. An estimate of the future cash flows the entity expects to derive from the asset in an arm's length
b.
c.
d.
e.

transaction;
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.

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Considerations for Cash Flow Projections
a. Cash flow projections should be based on reasonable and supportable assumptions, the most
recent budgets and forecasts, and extrapolation for periods beyond budgeted projections. presumes
that budgets and forecasts should not go beyond five years; for periods after five years, extrapolate
from the earlier budgets. Management should assess the reasonableness of its assumptions by
examining the causes of differences between past cash flow projections and actual cash flows.
b. Cash flow projections should relate to the asset in its current condition future restructurings to
which the entity is not committed and expenditures to improve or enhance the asset's performance
should not be anticipated.
c. Estimates of future cash flows should not include cash inflows or outflows from financing activities,
or income tax receipts or payments.
Discount Rate
a. In measuring value in use, the discount rate used should be the pre-tax rate that reflects current
market assessments of the time value of money and the risks specific to the asset.
b. The discount rate should not reflect risks for which future cash flows have been adjusted and
should equal the rate of return that investors would require if they were to choose an investment
that would generate cash flows equivalent to those expected from the asset.
c. For impairment of an individual asset or portfolio of assets, the discount rate is the rate the
company would pay in a current market transaction to borrow money to buy that specific asset or
portfolio.
d. If a market-determined asset-specific rate is not available, a surrogate must be used that reflects
the time value of money over the asset's life as well as country risk, currency risk, price risk, and
cash flow risk. The following would normally be considered:
The enterprise's own weighted average cost of capital
The enterprise's incremental borrowing rate
Other market borrowing rates.
Recognition of an Impairment Loss
a. An impairment loss should be recognized whenever recoverable amount is below carrying amount.
b. The impairment loss is an expense in the income statement (unless it relates to a revalued
asset where the value changes are recognized directly in equity).
c. Adjust depreciation or amortization charges for future periods.
Cash-Generating Units
a. Recoverable amount should be determined for the individual asset, if possible.
b. If it is not possible to determine the recoverable amount (fair value less cost to sell and value in
use) for the individual asset, then determine recoverable amount for the asset's cash-generating
unit (CGU).
c. The CGU is the smallest identifiable group of assets:
That generates cash inflows from continuing use, and
That are largely independent of the cash inflows from other assets or groups of assets.
Impairment of Goodwill

a. Goodwill should be tested for impairment annually.


b. To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or
groups of cash-generating units, that are expected to benefit from the synergies of the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units or
groups of units. Each unit or group of units to which the goodwill is so allocated shall:
Represent the lowest level within the entity at which the goodwill is monitored for internal
management purposes; and
Not be larger than a segment based on either the entity's primary or the entitys secondary
reporting format determined in accordance with PAS 14 Segment Reporting.

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c. A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least
annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable
amount of the unit:
If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the
goodwill allocated to that unit is not impaired.
If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must
recognize an impairment loss.
d. The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of
units) in the following order:
First, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of
units); and
Then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the
basis.
e. The carrying amount of an asset should not be reduced below the highest of:
Its fair value less costs to sell (if determinable);
Its value in use (if determinable); and
Zero.
Reversal of an Impairment Loss
a. Same approach as for the identification of impaired assets: assess at each balance sheet date
whether there is an indication that an impairment loss may have decreased. If so, calculate
recoverable amount.
b. No reversal for unwinding of discount.
c. The increased carrying amount due to reversal should not be more than what the depreciated
historical cost would have been if the impairment had not been recognized.
d. Reversal of an impairment loss is recognized as income in the income statement.
e. Adjust depreciation for future periods.
f. Reversal of an impairment loss for goodwill is prohibited.
Disclosures
Disclosure by class of assets:
Disclosure by segment:
Impairment losses recognized in the income Primary segments only (usually product line or
statement
industry)
Impairment losses reversed in the income Impairment losses recognized
statement
Impairment losses reversed
Which line item(s) of the income statement
Other disclosures:
If an individual impairment loss (reversal) is material disclose:

Events and circumstances resulting in the impairment loss.


Amount of the loss.
Individual asset: nature and segment to which it relates.
Cash generating unit: description, amount of impairment loss (reversal) by class of assets and
segment.
If recoverable amount is fair value less costs to sell, disclose the basis for determining fair value.
If recoverable amount is value in use, disclose the discount rate.

If impairment losses recognized (reversed) are material in aggregate to the financial statements as a whole,
disclose:

Main classes of assets affected


Main events and circumstances

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Disclose detailed information about the estimates used to measure recoverable amounts of cash generating
units containing goodwill or intangible assets with indefinite useful lives.

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