Chapter 28

Chapter 28Impairment of assetIs a fall in market value of an assetIts recoverable amount is now less than its carrying amount in the statement of financial positionImpairmentExternal SourcesInternal SourcesFactors that would indicate the Impairment of assetSignificant decrease of decline in the market value of the assetSignificant change in the technological, market, legal, or economic environment of the business in which the asset is employedIncrease in the interest rate or market rate of return on investmentExternal SourcesEvidence of obsolescenceSignificant change in the manner or extent in which the asset is used with an adverse effect on the entity.Evidence that the economic performance will be worse than expected.Internal SourcesFair value less cost to sell or Value in use, whichever is higherRecoverable AmountAmount obtainable from the sale of an asset in an arms length transaction between knowledgeable, willing parties, less cost of disposal.Net selling price

Fair value less cost to sellIf there is a binding sale agreement, fair value less cost to sell is the sales priceIf there is no binding sale agreement but the asset is traded in an active market, fair value less cost to sell is equal to market value less cost of disposal.If there is no binding sale agreement and the asset is not traded in an active market, fair value less cost to sell is equal to the best estimate of knowledgeable and willing parties in an arms length transactions.Rules to be observed in determining the fair value less cost to sellAre incremental cost directly attributable to the sale of an asset or cash generating unit.

Cost to SellLegal cost Stamp duty and similar transaction taxesCost of removing the asset Direct incremental costs to bring the asset into condition for saleExamples of Cost to sell Finance cost Income tax expenseExcluded in Cost to SellIs where all of the following conditions exist:Items traded within the market are homogeneousWilling buyers and sellers can normally be found at any timePrices are available to the publicActive MarketIs measured as the present value of estimated future net cash flows expected to be derived from an asset.

Value in UseCash flow projections shall be based on reasonable and supportable assumptions.Cash flow projections shall be based on the most recent budgets on financial forecast, usually up to a maximum of 5 years, unless a longer period can be justified.Cash flow projections beyond 5-year period shall be estimated by extrapolating the 5-year projections using a steady or declining rate each subsequent year, unless an increasing rate can be justified.Determining Value in UseProjections of cash inflows from the continuing use of the asset.Projections of cash outflows necessarily incurred to generate the cash inflows from the continuing use of the asset.Net cash flows received of paid on the disposal of the asset at the end of its useful life in an arms length transactions.Components of Estimated future cash flowsFuture cash flows relating to restructuring to which the entity is not yet committed.Future costs of improving or enhancing the assets performance.Cash inflows or outflows from financing activities.Income tax receipts or payments Excluded in Estimates of future cash flowsIf an assets recoverable amount is lower than its carrying amount, the asset is judged to have suffered an impairment loss.Impairment loss shall be recorded immediately by reducing the assets carrying amount to its recoverable amountImpairment loss is recognized on profit or loss and presented in the income statement.Recognition of Impairment LossIs the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets.

As a basic rule, the recoverable amount of an asset shall be determined for the asset individually.

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 which the asset belongs.

Cash generating UnitCash generating unit must be the smallest aggregation of the assets for which cash flows can be identified .

An aggregation that is too high is prohibited.

If aggregation is done at the entity level, there would be no impairment to be recognized.

If the impairment testing is done at the department or product line level, then some loss-producing assets would be written down to recoverable amount, and the cash generating assets would continue to be accounted for at carrying amount.ContinuationWhen an impairment loss is recognized for a cash generating unit, such loss shall be allocated to the assets of the unit in the following order:

First, to the goodwill allocated to the cash generating unit.Then, to all other non-cash assets of the cash generating unit prorata based on carrying amount.

The carrying amount of the asset shall not be reduced below the highest of the fair value less cost to sell, value in use, and zero. Recognition of impairment loss of a cash generating unit If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit shall be regarded as not impaired.

If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognized an impairment loss.Determination of impairment of CGUsIncludes 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 Shall generate the future cash inflows used in determining the value in use of the cash generating unit.Carrying amount of the Cash Generating UnitThe carrying amount of any recognized liability, unless the recoverable amount of the CGU cannot be determined without consideration of the liability.

Cash generating unit does not include:To avoid double counting, estimates of future cash flows do not include cash outflows that relate to obligations that have been recognized as liabilities by the CGU, such as payables and provisions.Reason for excluding any recognized liability in determining the carrying amount of a CGUCorporate assetsAssets other than goodwill that contribute to the future cash flows of both the CGU under review and other CGUs.Are group or divisional assets such as head office building, EDP, equipment or research center.Are assets that do not generate cash inflows independently from other assets.

Corporate Assets and their impairmentRecoverable amount of an individual corporate asset cannot be determined unless management decided to dispose of the asset.

If there is an indication that a corporate asset may be impaired, the recoverable amount of the CGU to which the corporate asset belongs is determined and compared with the carrying amount of the CGU.If the recoverable amount of an asset that has previously been impaired turns out to be higher than the assets current carrying amount, the carrying amount of the asset shall increased to its new recoverable amount.

However, the increased carrying amount of an asset due to reversal of an impairment loss shall not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years.

Reversal of the impairment loss shall be recognized immediately in profit or loss.

Any reversal of an impairment loss on a revalued assets shall be treated as revaluation increaseReversal of an Impairment Loss