impairment of assets notes

TPS – FINANCIAL REPORTING MODULE 5

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notes IMPAIRMENT OF ASSETS

5.1 INTRODUCTION Normally systematic depreciation or amortisation ensures that assets are not overstated but circumstances can arise which cause assets to decline in value. This makes it unlikely that the entity will be able to recover the current book value (the carrying amount) of the asset. If the carrying amount cannot be recovered the asset is said to be impaired. IAS 36 deals with the impairment of assets. The objective of the standard is to prescribe the procedures that a company applies to ensure that its assets are carried at no more than their recoverable amount ie the amount to be recovered through use or sale of the assets. There are no fundamental differences between UK and international accounting standards dealing with the impairment of assets. 5.2 LEARNING OUTCOMES

After completing this module you should be able to:

(i) define an impairment and describe when an impairment review is necessary;

(ii) calculate an impairment loss for an individual asset and a cash-generating unit;

(iii) account for an impairment loss and the reversal of an impairment loss;

(iv) describe the disclosure of an impairment loss; and

(v) explain the main differences between IAS 36 and FRS 11

This will help you address learning outcomes one, two, three and six of the syllabus.

5.3 SCOPE OF THE STANDARD AND DEFINITION OF IMPAIRMENT

IAS 36 applies to all assets except: stocks and construction contracts (IAS 2 and 11) deferred tax assets (IAS 12) assets arising from employee benefits (IAS 19) most financial assets (IFRS 9) investment properties at fair value (IAS 40) non-current assets classified as held for sale (IFRS 5) The main types of assets it does apply to are property, plant and equipment, and intangible assets, includinggoodwill. An impairment arises where the recoverable amount of the asset falls below its carrying amount.

Recoverable amount is defined as the higher of an asset’s: - fair value less costs to sell (NFV) and

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notes - value in use (VU).

NFV is the sales price of an asset in an arm’s length transaction less the costs of disposal.

VU is the present value (PV) of future cash flows expected to arise from the asset over its remaining life and from its disposal. In other words we are looking at the financial outcome of the two choices a company has with an asset:

keep it (VU), or sell it (NFV).

The higher is taken as it is assumed that the company will opt for the more beneficial outcome.

Example 1

A fixed asset was acquired in January 2008 for £200,000. Depreciation policy is 15% straight line with a nil estimated residual value. At 1 January 2011 the NFV of the asset is £95,000 and the value in use is estimated at £87,000.

Required: Calculate the amount of any impairment at 1 January 2011.

Solution NBV (carrying amount) of asset at 1.1.11 Cost £200,000 Less: depreciation 2008-10 (200,000 x 15% x 3 years) 90,000 NBV – 1.1.11 £110,000 Recoverable amount This is measured as the higher of NFV and VU (higher of £95,000 and £87,000) ie £95,000. As the recoverable amount is £95,000, there has been an impairment of £15,000 (carrying amount of £110,000 less £95,000). 5.4 REQUIREMENT FOR IMPAIRMENT REVIEWS

The directors of a company should assess at each balance sheet date whether there are indications of impairment. If there are, the recoverable amount should be calculated (para 9). Para 12 details some external and internal sources of information that might indicate an impairment eg falls in market values, changes in legislation, physical damage of an asset, operating losses, new competition. Para 10 has additional requirements for intangible assets and goodwill. A company should estimate the recoverable amount of the following assets at least annually even if there is no indication that the asset is impaired: (a) an intangible asset with an indefinite useful life; and

(b) an intangible asset not yet available for use.

In addition, goodwill acquired in a business combination should be tested for impairment annually.

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notes You should now be able to achieve the first learning objective of the module.

5.5 MEASUREMENT OF RECOVERABLE AMOUNT

Impairment calculations in practice can be complex. This module provides an overview of the impairment process and its application in more straightforward situations. The impairment review requires us to compare the carrying amount (which we will

know as it is the NBV figure in the current accounts) with the recoverable amount (the higher of NFV and VU). We therefore require to know NFV and VU. Note that if either of these is higher than the carrying amount no impairment has occurred and we do not need to find the other figure. It is often easiest (and quickest) to identify NFV first and compare it to carrying amount. If NRV exceeds the carrying amount, no impairment has occurred and there is no need to calculate VU.

If NFV cannot be established (perhaps because the asset is specialised) or it is lower than carrying amount, VU will have to be calculated.

(a) Calculation of fair value less costs to sell NFV is the amount the asset could be sold for less any direct selling costs.

Where there is an active market, NFV will be based on market value or, if there is no active market, the best information available. The NFV will often be easier to find than the VU as there is no calculation involved in arriving at NFV.

If the asset is specialised it may not be possible to estimate fair value. Costs of sale include such items as legal costs and costs of removing the

asset. (b) Calculation of value in use VU is the discounted future cash flow that the asset will generate. This is a

two stage process involving: (i) estimation of the future cash flows from continuing use and ultimate

disposal, and (ii) applying an appropriate discount rate.

Paragraphs 30 to 57 of IAS 36 deal with this issue. Cash flows Cash flows, consistent with budgets and plans and based on reasonable

assumptions, should be estimated. Cash flows extending beyond formal budgets and plans (normally extending for a maximum of 5 years) should assume a steady or declining growth rate. The growth rate assumed should not normally exceed the long-term average growth rate of the products, industries or country in which the business operates (approximately 2.75% in real terms for the UK at Q3 2010), or the market in which the asset is used. If appropriate the growth rate may be zero or negative.

Cash flows should be net (cash inflows net of the outflows necessarily

incurred to generate the cash inflow) and pre-interest and tax. Cash flows should include an estimate of the amount to be received (or paid) on disposal of the asset.

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notes The cash flow should exclude savings or benefits arising from a future restructuring to which the company is not yet committed. They should also exclude future capital expenditure and the related benefits from this. This is because we are assessing the asset now – in its current state and use.

Discount rate The discount rate should be an estimate of the pre-tax rate the market

would expect reflecting the time value of money and the risks specific to the asset. If a business has several different assets they may not be equally risky and therefore different discount rates should be used. Current market transactions in similar assets will give an estimation of the appropriate rate.

The discount rate and cash flows should be consistent. If the discount rate includes the effect of price increases due to general inflation, future cash flows are estimated in nominal terms, ie including inflation. If discount rates exclude general inflation, cash flows are estimated in real terms ie excluding the impact of likely future inflation.

PV The present value of the future cash flows is then calculated which gives the

value in use.

5.6 CASH-GENERATING UNITS (CGUs)

Ideally, recoverable amount should be calculated for each individual asset that may be impaired. In practice few individual assets generate separate cash flows and it is not possible to calculate their VU. Under IAS 36 the recoverable amount of an individual asset cannot be determined if: (a) its value in use cannot be estimated to be close to its NFV (eg an asset with

a scrap value (negligible NFV) may still help generate cash flows for the business); and

(b) the asset does not generate cash inflows that are largely independent of

those from other assets. If the value in use is estimated to be close to NFV, NFV can be taken to be its recoverable amount. If it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the CGU to which it belongs should be estimated. Paragraphs 65 to 103 deal with CGUs. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows generated by other assets or CGUs. As the cash flows can be identified VU can be calculated. Examples of cash-generating units might be:

an individual supermarket in a supermarket chain an oilfield a factory tax department in an accounting firm

A company should identify the maximum number of realistic CGUs, which in turn means that fewer assets should be included within each CGU

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notes The following points should be noted in calculating the carrying amount of a CGU:

(i) includes only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, to the CGU and that will generate the future cash flows. This will normally include tangible and intangible fixed assets and goodwill (see (iii) below);

(ii) exclude liabilities unless the recoverable amount cannot be determined without considering the liability eg if a CGU has an obligation to repair goods under warranty the NFV (and hence recoverable amount) will reflect this obligation as it is unlikely the CGU would be sold without transferring the liability at the same time. The liability should be included and the cash flows should reflect estimated repair costs under warranty. This will give consistency in the way carrying amount, NFV and VU are calculated.

(iii) goodwill should be allocated to individual CGUs if they benefit from synergies of the business combination. Section 5.9 deals with goodwill in more detail.

(iv) corporate assets (assets such as head office buildings, central computing facilities etc which serve more than one CGU) should be allocated to CGUs if possible. Refer to 5.9 where this is not possible.

Example 2

Jackson Ltd (Jackson) acquired 100% of the ordinary share capital of James Ltd (James) for £10 million on 1 January 2004. This figure included £960,000 for goodwill. Jackson is preparing group accounts for the year to 31 December 2010 and due to a decline in market conditions has decided to carry out an impairment review of the fixed assets and goodwill of James. James operates in two distinct business areas which are largely independent – one is services to the oil industry and the other is the operation of a rail franchise. The following assets have been attributed to these activities as follows: Oil Rail services franchise £’000 £’000 Fixed assets Tangible 10,000 6,900 Intangible - 1,200 10,000 8,100 All fixed assets are held at depreciated cost.

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notes The following items have still to be allocated: (a) head office property with a net book value of £3,200,000. It

is estimated that this can be split 60:40 between oil and rail. (b) goodwill – it is estimated that 75% of this relates to the rail

franchise and the remainder to oil.

The directors estimate that the rail franchise has a NFV of £7,500,000 and oil services a NFV of £9,600,000. The intangible asset in the rail franchise relates to the NBV of the operating license associated with the franchise. The following pre-tax cash flows have been estimated for each CGU: Oil Rail Year services franchise £’000 £’000 2011 3,000 4,200 2012 2,800 3,400 2013 2,800 3,400* 2014 4,800* * the rail franchise expires at the end of 2013 and the oil services division will be wound up in 2014. The pre-tax market rate of return for oil services is estimated at 15% and 20% for the rail franchise.

Required: (i) Calculate the total net assets for each CGU; (ii) Calculate the value in use for each CGU; (iii) Calculate the impairment (if any) for each CGU.

Note: The present value of £1 at the end of each year using a discount rate of 15% and 20% is as follows: End of year Amount at 15% Amount at 20%

£ £ 1 0.870 0.833 2 0.756 0.694 3 0.658 0.579 4 0.572 0.482

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notes Solution (i) Total net assets Oil Rail services franchise £000 £000 (ii) Calculation of value in use This is based on discounted cash flows. These can be calculated (to nearest

£000) as: Oil Rail services franchise £000 £000 9,315 7,828 Workings: Value in use Oil services Rail franchise Year Discount Cash PV Discount Cash PV factor flow factor flow (15%) (20%) £000 £000 £000 £000 2011 0.870 3,000 2,610 0.833 4,200 3,499 2012 0.756 2,800 2,117 0.694 3,400 2,360 2013 0.658 2,800 1,842 0.579 3,400 1,969 2014 0.572 4,800 2,746 ____ 9,315 7,828 (iii) Calculation of impairment Oil Rail services franchise £000 £000

You will now be able to achieve the second learning objective of this module.

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notes 5.7 ACCOUNTING FOR AN IMPAIRMENT LOSS

Loss for an individual asset (para 58 – 64) the asset should be written-down to recoverable amount if this is below the

carrying amount. the loss should be an expense in profit or loss, except when the asset has been

previously revalued. if the asset is carried at revalued amount the impairment loss should be treated

as a revaluation loss per IAS 16 or IAS 38, hence a debit to the revaluation reserve in the first instance with any excess loss taken to profit or loss

if the impaired asset has been revalued the impairment loss should be treated as a new revaluation. If the asset is at cost the impairment loss is additional depreciation.

after the impairment loss has been recognised depreciation is based on the adjusted carrying amount of the asset.

Loss for CGU (para 104 – 108) the loss should be allocated by writing-down assets in the CGU in the

following order: (a) first, any goodwill allocated to the CGU; (b) then, to other assets in the CGU pro-rata on carrying amount.

In carrying out (b) no individual assets in the CGU should be written-down below the highest of:

(a) its NFV (if determinable); (b) its VU (if determinable); and (c) zero.

Applying (a) and (b) means that no asset is written-down below a known value. In this case, the amount of loss not deducted from the carrying amount of the individual asset is spread pro rata over other assets in the unit. The other rules above relating to individual assets apply to a CGU eg loss to profit or loss/revaluation reserve.

Example 3

How would the impairment of the assets of James in example 2 be recorded as at 31 December 2010?

Solution There is no indication that any specific assets are impaired. The assets are held at cost therefore losses go to profit or loss. The write-down should be treated as additional depreciation. Oil services The impairment loss would first be allocated to the goodwill (£240,000) and

then to tangible fixed assets (remaining loss of £2,320,000). Each tangible fixed asset would be written-down by 19.46% (2,320/(10,000 + 1,920)).

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notes £000 £000 Rail franchise The impairment should first be allocated to goodwill, then to the other

assets. No distinction is made between intangible and tangible assets – the impairment loss is allocated proportionately.

Once goodwill has been written-off, the remaining impairment loss of £1,552,000 (£2,272,000 - £720,000) needs to be pro-rated between the remaining assets. NBV of remaining assets Rail £’000 Directly attributable - tangible 6,900 - intangible 1,200 Head office - tangible 1,280 9,380 The allocation of the loss is as follows: Working NBV % Loss allocated Tangible fixed assets 8,180 87.2 1,353 Intangible fixed assets 1,200 12.8 199 9,380 100.0 1,552

Example 4

Assume in the rail franchise of James it was known that the operating licence (the intangible asset) had a net fair value (NFV) of £1,100,000. As the licence does not itself generate cash flow it is not possible to calculate its VU. What effect would this have on the write-off of the impairment loss?

Solution The goodwill should still be written-off. The operating licence should not be written-down below the higher of NFV (£1.1m) and VU (not available) ie by a maximum of £100,000 (£1.2m - £1.1m). The remainder of the loss should be allocated to the remaining tangible fixed assets pro rata.

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notes The required journal would be: £’000 £’000 5.8 REVERSAL OF A PAST IMPAIRMENT LOSS

A company should assess at each balance sheet date whether a previously recognised impairment loss on an asset other than goodwill may no longer exist or has decreased. If so, recoverable amount should be recalculated. Paragraph 111 details indications of reversal – they are essentially the opposite of the indicators of impairment.

Accounting for a reversal of an impairment loss is essentially the opposite of accounting for the original loss. Paragraphs 114 – 125 of IAS 36 deal with this.

Reversal for an individual asset

the asset should be increased to a maximum of its carrying amount (net of depreciation) had no original impairment occurred. Any increase above this figure is a revaluation not the reversal of an impairment loss. For a revaluation the company should apply the IAS relating to that asset.

the reversal should be credited to profit or loss and treated as income unless the asset is carried at revalued amount in which case it should be treated as an upward revaluation (refer to module 3).

depreciation should be based on the revised carrying amount after the reversal of the impairment.

Reversal for a CGU the reversal should be applied by increasing the carrying amount of assets

(except for goodwill), pro-rata. entries in profit or loss/revaluation reserve are as for individual assets. in allocating a reversal no individual asset in a CGU should be increased above

the lower of: (a) recoverable amount (if determinable); and (b) the carrying amount (net of depreciation) had no original impairment

loss arisen. the remaining reversal is spread amongst the remaining assets, except for

goodwill. Goodwill An impairment loss on goodwill cannot be reversed. This is because the reversal is likely to be due to the creation of internally generated goodwill and under IAS 38 ‘Intangible Assets’ internally generated goodwill cannot be recognised.

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notes Example 5

A CGU comprising a factory, plant and equipment etc and associated goodwill became impaired because its products became out of date and unattractive compared to those of competitors. The recoverable amount fell to £25m at 31 December 2006, resulting in an impairment loss of £15m, allocated as follows: Carrying amounts Carrying amounts before impairment after impairment based on HC

£m £m Goodwill 10 - Factory 12 10 Plant and machinery 18 15 Total 40 25 The impairment loss of £15m was recognised in profit or loss as the assets were at historic cost. By 31 December 2010 the entity had improved its product range substantially by adding new models and the recoverable amount of the CGU increased to £30m. The carrying amounts of the factory and plant and machinery at 31 December 2010 are as follows: Based on Had no impairment impairment values occurred £m £m Factory 9.0 10.8 Plant and machinery 12.0 14.4 The recoverable amount of the plant and machinery is estimated to be £13m. The recoverable amount of the factory is estimated to be £15m. Goodwill is estimated to be worth around £2m.

Required: Explain how the reversal of the impairment loss should be accounted for.

Solution

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notes You should now be able to achieve the third learning objective for this module. 5.9 ALLOCATION OF GOODWILL

Section 5.6 covered the situation where it was possible to allocate goodwill to an individual CGU. Where this is not possible goodwill should be allocated to a group or groups of CGUs. Each group of CGUs must:

(a) represent the lowest level in the company that goodwill is monitored for internal management purposes; and

(b) be no larger than an operating segment under IFRS 8 (covered in module 14).

Where goodwill cannot be allocated to individual CGUs:

(i) calculate any impairment of the assets (excluding goodwill) of the individual CGUs (the ‘smaller’ CGUs);

(ii) identify the smallest group or groups of CGUs (which may be the whole company) to which goodwill can be allocated on a reasonable basis (the ‘larger’ CGU); and

(iii) compare the recoverable amount of the larger CGU to its carrying amount (including the carrying amount of allocated goodwill) and recognise any impairment loss. The impairment loss at this stage must relate to the goodwill.

Example 6

A company operates three department stores each of which is a separate cash generating unit. The three stores were bought from a competitor several years ago when goodwill of £2m arose. The directors of the company are concerned that the stores and the goodwill may be impaired. Relevant information at 31 March 2011is as follows: A B C £m £m £m Carrying amount 4.1 5.6 3.8 NFV 3.8 6.0 2.9 Value in use 4.3 5.8 3.2 It has not been possible to allocate goodwill to individual stores. The three stores form the smallest CGU to which the goodwill can be allocated and management monitor goodwill at this level. The recoverable amount of the three stores together is estimated at £13.8m. There has been no previous impairment of goodwill.

Required: Calculate any impairments that arise.

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notes Solution As the goodwill cannot be directly allocated, impairment of each individual store (CGU) is calculated excluding goodwill.

A B C £m £m £m Carrying amount 4.1 5.6 3.8 Recoverable amount (higher of NFV & VU) 4.3 6.0 3.2 Impairment - - (0.6) Goodwill has to be tested on the totals for the three stores (‘the larger CGU’). Total £m Carrying amount (£4.1m + £5.6m + £3.8m) 13.5 less: impairment (0.6) add: goodwill 2.0 Total carrying amount including goodwill 14.9 Recoverable amount 13.8 ___ Impairment 1.1 Goodwill should be reduced by £1.1m to £0.9m. The same approach should be adopted for corporate assets that cannot be directly allocated to a CGU. 5.10 DISCLOSURE

There are extensive disclosures requirements in IAS 36.

The principal disclosures (paras 126-137 of IAS 36) are:

for each class of asset: (a) impairment losses and reversals reported in profit or loss and the line

items these are included in; (b) impairment losses and reversals taken to revaluation reserve (and

reported through other comprehensive income) and the line items these are included in.

if an impairment loss or reversal in the year on an individual asset or CGU is

material to the financial statements as a whole: (a) description of circumstances; (b) amount of loss or reversal; (c) for an individual asset – nature of the asset; (d) for a CGU, a description of the CGU; (e) whether recoverable amount is NFV or VU; (f) if NFV, basis used to estimate NFV; and (g) if VU, discount rate used.

if other impairment losses/reversals are material in aggregate: (a) main classes of assets affected; and (b) description of circumstances.

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notes Overleaf is an extract from the financial statements of Vodafone for the year to 31 March 2010.

Impairment

Impairment losses

The net impairment losses recognised in the consolidated income statement, as a separate line item within operating profit, in respect of goodwill and licences and spectrum fees are as follows:

Cash generating unit

Reportable segment

2010 £m

2009 £m

India India 2,300 -

Spain Spain - 3,400

Turkey Other Africa and Central Europe (200) 2,250

Ghana Other Africa and Central Europe - 250

2,100 5,900

Year ended 31 March 2010

The net impairment losses were based on value in use calculations. The pre-tax adjusted discount rate used in the most recent value in use in the year ended 31 March 2010 calculation are as follows:

Pre-tax adjusteddiscount rate

India 13.8%

Turkey 17.6% India During the year ended 31 March 2010 the goodwill in relation to the Group’s operations in India was impaired by £2,300 million primarily due to intense price competition following the entry of a number of new operators into the market. The pre-tax risk adjusted discount rate used in the previous value in use calculation at 31 March 2009 was 12.3%. Turkey During the year ended 31 March 2010, impairment losses of £200 million, previously recognised in respect of intangible assets in relation to the Group’s operations in Turkey, were reversed. The reversal was in relation to licenses and spectrum and was a result of favourable changes in the discount rate. The cash flow projections within the business plans used for impairment testing were substantially unchanged from those used at 31 March 2009. The pre-tax risk adjusted discount rate used in the previous value in use calculation at 31 March 2009 was 19.5%. You should now be able to meet the fourth learning outcome of the module.

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notes 5.11 FINANCIAL REPORTING STANDARDS

FRS 11 adopts the same general approach to impairment reviews as IAS 36. The main differences are: under FRS 11 an impairment loss is written-off in the order goodwill,

intangible fixed assets and finally tangible fixed assets. In IAS 36 intangible and tangible fixed assets are grouped together.

Example 7

In example 3 the rail franchise was impaired by £2,272,000. Following IAS 36 this was allocated as follows:

Carrying Impairment Remaining Amount Balance £’000 £’000 £’000 Goodwill 720 (720) - Intangible assets (12.8%) 1,200 (199) 1,001 Tangible assets (87.2%) 8,180 (1,353) 6,827 10,100 2,272 7,828 Under FRS 11 intangible assets should be fully eliminated before any

amount is deducted from tangible assets. This gives: Carrying Impairment Remaining Amount Balance £’000 £’000 £’000 Goodwill 720 (720) - Intangible assets 1,200 (1,200) - Tangible assets 8,180 (352) 7,828 10,100 2,272 7,828 Under FRS 11 an impairment loss in goodwill may be reversed subject to

certain strict conditions. This is not possible in IAS 36. Similar restrictions apply to the reversal of an impairment loss on intangible assets under FRS 11.

FRS 11 requires an intangible asset being amortised over more than 20 years to be tested for impairment annually. IAS 36 only requires this for intangible assets with indefinite useful lives.

You should now be able to achieve the firth learning objective for this module.

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notes 5.12 SUMMARY MODULES 3, 4 AND 5

1 RECOGNITION AND CLASSIFICATION

GENERAL CONSIDERATIONS Recognition criteria Definition of Definition of (framework for an asset: a fixed asset: preparation and resource controlled held for continuing presentation of FS). by the enterprise use. as a result of past events and from which future benefits are expected to flow.

CLASSIFICATION Intangible Tangible Investment property - identifiable - property, plant - held to earn non-monetary and equipment rentals and/ or asset without held by an enterprise capital appreciation physical substance for use in production, rather than for IAS 38. supply of goods and business use services, rental to IAS 40. others or administrative purpose IAS 16. Separately Internally acquired generated Acquired when business is research development bought OTHER STANDARDS Borrowing costs Business combinations IAS 23 IFRS 3

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notes 2 VALUATION CHOICE

Initial and subsequent expenditure All assets in same class fair value purchase price => market value; or directly attributable costs => depreciated replacement cost

eg cost of site preparation and clearance; installation costs; INTANGIBLES TANGIBLES professional fees; delivery & handling costs.

Only permissible borrowing costs for assets where

(IAS 23) active market exists directly attributable to the acquisition, construction or INVESTMENT production of the asset PROPERTIES valuation assessed: annually if FV model used

HISTORIC COST VALUATION

PROPERTY, PLANT & EQUIPMENT

Regularly so no material difference between carrying value and fair value.

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notes 3 GAIN OR LOSS ON REVALUATION GAIN LOSS To revaluation reduces RR to zero reserve unless balance to P/L A/C reversal of loss previously recognised in P + L A/C 4 DEPRECIATION AND AMORTISATION

REQUIREMENT All fixed assets with a finite useful

life must be depreciated

Factors to consider carrying value useful economic life residual value Exception: investment properties under fair value

model are not depreciated

Investment Properties

To profit or loss if FV model used

Intangibles, property, plant and equipment

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notes 5 IMPAIRMENTS (IAS 36) Objective: Asset should be carried at no more than its recoverable

amount

RECOVERABLE AMOUNT

= higher of NFV VU Selling price Present value of less costs of estimated future disposals cash flows expected to arise from the continuing use of an asset and from its disposal at end of its useful life An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

IMPAIRMENT REVIEWS

Indications of IAS 38 Intangibles annually for: Impairment - not available for use

- indefinite useful lives IFRS 3 Goodwill

- annually

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notes MEASUREMENT OF RECOVERABLE

AMOUNT INDIVIDUAL CGUs CORPORATE ASSETS ASSETS AND GOODWILL A group of assets allocate to individual CGUs that generates cash if possible flows that are if allocation not largely independent possible to of cash flows from individual CGUs other CGUs test for impairment - directly attributable on combined basis assets - assets that can be allocated on a reasonable and consistent basis - excludes most liabilities

IMPAIRMENT LOSS

ALLOCATION RECOGNITION

(1) Goodwill Assets Held at HC => P+L A/C

(2) Pro-Rata to other assets But

Assets Held at Valuation

(3) No individual assets should be written down below recoverable amount

(1) Impairment to depreciated carrying amount before impairment => RR

(2) Impairment below this =>P & L A/C

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notes REVERSAL OF IMPAIRMENT LOSS

Reverses original treatment

but a) goodwill – not permitted b) Carrying value of assets restricted to what carrying value would

have been had no impairment occurred. UK FRS 11 Loss for CGU - goodwill, then - intangibles, and - balance to tangibles Loss on goodwill and intangibles may be reversed in specific

circumstances

HELD FOR SALE ASSETS

ACCOUNTING REQUIREMENTS reclassifying as HFS (transfer) value at lower CA and NFV stop depreciating at each BS

- Check NFV

Lower higher impairment can reverse any earlier

impairment

CRITERIA Sale highly probable approved by management available to sell actively marketed realistic price sale expected within 12 months

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notes 5.13 SOLUTION TO MODULE EXAMPLES

Solution to Example 2 (i) Total net assets Oil Rail services franchise £000 £000 As allocated 10,000 8,100 Head office 1,920 1,280 Goodwill 240 720 Total net assets 12,160 10,100 (iii) Calculation of impairment Oil Rail services franchise £000 £000

Carrying amount of net assets 12,160 10,100 Market value (NFV) 9,600 7,500 Value in use 9,315 7,828 Recoverable amount 9,600 7,828 Impairment (£12,160 – £9,600) 2,560

(£10,100 – £7,828) 2,272

Solution to Example 3 There is no indication that any specific assets are impaired. The assets are held at cost therefore losses go to profit or loss. The write-down should be treated as additional depreciation. Oil services The impairment loss would first be allocated to the goodwill (£240,000) and

then to tangible fixed assets (remaining loss of £2,320,000). Each tangible fixed asset would be written-down by 19.46% (2,320/(10,000 + 1,920)).

£000 £000 Dr P/L – impairment loss 2,560 Cr Goodwill 240 Tangible fixed assets – acc depreciation 2,320 being recognition of impairment loss

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notes Rail franchise The impairment should first be allocated to goodwill, then to the other

assets. No distinction is made between intangible and tangible assets – the impairment loss is allocated proportionately.

Dr P/L – impairment loss 2,272 Cr Goodwill 720 Intangible assets – acc depreciation 199 Tangible fixed assets – acc depreciation 1,353 being recognition of impairment loss Solution to Example 4 The goodwill should still be written-off. The operating licence should not be written-down below the higher of NFV (£1.1m) and VU (not available) ie by a maximum of £100,000 (£1.2m - £1.1m). The remainder of the loss should be split between the remaining tangible fixed assets. The required journal would be: £’000 £’000 Dr P/L – impairment loss 2,272 Cr Goodwill 720 Intangible assets 100 Tangible fixed assets 1,452 being recognition of impairment loss Solution to Example 5 Goodwill An impairment loss on goodwill cannot be reversed. Goodwill will remain at zero. Factory The value of the factory can be increased by £1.8m (£10.8m less £9m) ie to a maximum of lower of recoverable amount (£15m) and the carrying amount had no impairment occurred (£10.8m). Any increase above this amount is a new revaluation not the reversal of an impairment. Plant and machinery This can be increased by £1m (from £12m to £13m) as recoverable amount is lower than the carrying amount had no impairment occurred.

SOTE TWAWEZA 2012

impairment of assets notes

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