intangible assets with an indefinite useful life .............................................. 1540
List of examples
Example 20.1:
Identification of cash-generating units and largely
independent cash inflows ................................................................. 1435
Example 20.2:
Identification of cash-generating units .......................................... 1436
Example 20.3:
Omni-channel business model ........................................................ 1438
Example 20.4:
Identification of cash-generating units – grouping of assets ..... 1439
Example 20.5:
Identification of cash-generating units – single product
entity .................................................................................................... 1440
Example 20.6:
Identification of cash-generating units – internally-used
products ................................................................................................ 1442
Example 20.7:
The effects of working capital on impairment tests .................... 1447
Example 20.8:
Cash flow hedges and testing for impairment .............................. 1449
Example 20.9:
Allocation of corporate assets .......................................................... 1451
Example 20.10:
Impairment of assets held for sale ................................................... 1452
Example 20.11:
Distinguishing enhancement and maintenance
expenditure .......................................................................................... 1463
Example 20.12:
Transfer prices .................................................................................... 1466
Example 20.13:
Calculating a discount rate ............................................................... 1472
Example 20.14:
Impairment calculations using pre- and post-tax cash
flows and discount rates .................................................................... 1477
Example 20.15:
Calculating pre-tax discount rates from post-tax VIUs .............. 1482
Example 20.16:
Different project risks and CGUs .................................................... 1484
Example 20.17:
Effect of entity default risk on its WACC ...................................... 1485
Example 20.18:
Identifying synergies .......................................................................... 1491
Example 20.19:
Allocating goodwill and identifying CGUs .................................... 1491
Example 20.20:
Allocating goodwill to more than one CGU .................................. 1492
Example 20.21:
Impact of shortened accounting period ......................................... 1496
Example 20.22:
Testing for impairment of goodwill allocated in the period
after acquisition after the annual impairment testing date ........ 1497
Example 20.23:
Apparent ‘day one’ impairment arising from recognition of
deferred tax in a business combination ......................................... 1499
Example 20.24:
Impairment testing assets whose fair value reflects tax
amortisation benefits ......................................................................... 1501
Example 20.25:
Impairment testing assets whose fair value reflects tax
amortisation benefits (continued) ................................................... 1502
Example 20.26:
Goodwill attributable to the disposal of an operation
based on relative values .................................................................... 1504
Example 20.27:
Reallocation of goodwill to CGUs based on relative values ...... 1505
1426 Chapter 20
Example 20.28:
Reallocation of goodwill to CGUs based on relative
current values of notional goodwill ................................................ 1506
Example 20.29:
A CGU with goodwill and non-controlling interest .................... 1510
Example 20.30:
Non-controlling interests measured initially at fair value .......... 1512
Example 20.31:
Measurement and allocation of goodwill impairment
losses when there are non-controlling interests .......................... 1514
Example 20.32:
Recognition of an impairment loss creates a deferred tax
asset ....................................................................................................... 1519
Example 20.33:
Individually impaired assets within CGUs ..................................... 1520
Example 20.34:
Impairment of goodwill ..................................................................... 1521
Example 20.35:
Double counted losses ....................................................................... 1523
Example 20.36:
Reversal of impairment losses ......................................................... 1523
Example 20.37:
A subgroup with goodwill that is not an operating segment for
the group ............................................................................................... 1528
Example 20.38:
Monitoring goodwill arising from acquisitions by
subsidiaries ........................................................................................... 1528
Example 20.39:
Group reorganisations and impairment ......................................... 1530
Example 20.40:
Joint ventures are part of larger CGU ............................................. 1535
1427
Chapter 20
Impairment of fixed
assets and goodwill
1 INTRODUCTION
In principle an asset is impaired when an entity will not be able to recover that asset’s
carrying value, either through using it or selling it. If circumstances arise which indicate
assets might be impaired, a review should be undertaken of their cash generating
abilities either through use or sale. This review will produce an amount which should
be compared with the assets’ carrying value, and if the carrying value is higher, the
difference must be written off as an impairment in the statement of comprehensive
income. The provisions within IAS 36 – Impairment of Assets – that set out exactly how
this is to be done, and how the figures involved are to be calculated, are detailed and
quite complex.
1.1
The theory behind the impairment review
The purpose of the impairment review is to ensure that intangible assets, including
goodwill, and tangible assets are not carried at a figure greater than their recoverable
amount (RA). This recoverable amount is compared with the carrying value (or carrying
amount (CA)) of the asset to determine if the asset is impaired.
Recoverable amount is defined as the higher of fair value less costs of disposal (FVLCD)
and value in use (VIU); the underlying concept being that an asset should not be carried
at more than the amount it could raise, either from selling it now or from using it.
Fair value less costs of disposal essentially means what the ass
et could be sold for, having
deducted costs of disposal (incrementally incurred direct selling costs). Value in use is
defined in terms of discounted future cash flows, as the present value of the cash flows
expected from the future use and eventual sale of the asset at the end of its useful life.
As the recoverable amount is to be expressed as a present value, not in nominal terms,
discounting is a central feature of the impairment test.
1428 Chapter 20
Diagrammatically, this comparison between carrying value and recoverable amount,
and the definition of recoverable amount, can be portrayed as follows:
Compared
Carrying Value
Recoverable Amount
with
Higher of
Fair Value Less
and
Value In Use
Costs of Disposal
It may not always be necessary to identify both VIU and FVLCD, as if either of VIU or
FVLCD is higher than the carrying amount then there is no impairment and no write-
down is necessary. Thus, if FVLCD is greater than the carrying amount then no further
consideration need be given to VIU, or to the need for an impairment write down. The
more complex issues arise when the FVLCD is not greater than the carrying value, and
so a VIU calculation is necessary.
1.2
Key features of the impairment review
Although an impairment review might theoretically be conducted by looking at
individual assets, this will not always be possible. Goodwill does not have a separate
FVLCD at all. Even if FVLCDs can be obtained for individual items of property, plant
and equipment, estimates of VIUs usually cannot be. This is because the cash flows
necessary for the VIU calculation are not usually generated by single assets, but by
groups of assets being used together.
Often, therefore, the impairment review cannot be done at the level of the individual asset
and it must be applied to a group of assets. IAS 36 uses the term cash generating unit (CGU)
for the smallest identifiable group of assets that together have cash inflows that are largely
independent of the cash inflows from other assets and that therefore can be the subject of
a VIU calculation. This focus on the CGU is fundamental, as it has the effect of making the
review essentially a business-value test. Goodwill cannot always be allocated to a CGU and
may therefore be allocated to a group of CGUs. IAS 36 has detailed guidance in respect of
the level at which goodwill is tested for impairment which is discussed at 8 below.
Most assets and CGUs need only be tested for impairment if there are indicators of
impairment. The ‘indications’ of impairment may relate to either the assets themselves
or to the economic environment in which they are operated. IAS 36 gives examples of
indications of impairment, but makes it clear this is not an exhaustive list, and states
explicitly that the entity may identify other indications that an asset is impaired, that
would equally trigger an impairment review. [IAS 36.13]. There are more onerous
requirements for goodwill, intangible assets with an indefinite useful life and intangible
assets that are not available for use on the reporting date. These must be tested for
impairment at least on an annual basis, irrespective of whether there are any impairment
indicators. This is because the first two, goodwill and indefinite-lived intangible assets,
are not subject to annual amortisation while it is argued that intangible assets are
intrinsically subject to greater uncertainty before they are brought into use. Impairment
losses are recognised as expenses in profit or loss except in the case of an asset carried
Impairment of fixed assets and goodwill 1429
at a revalued amount where the impairment loss is recorded first against any previously
recognised revaluation gains in respect of that asset in other comprehensive income.
Figure 20.1 below illustrates the key stages in the process of measuring and recognising
impairment losses under IAS 36. The key components of the diagram are discussed in
detail in the remainder of this chapter.
Figure 20.1: Determining and accounting for impairment
Are there
No
any indicators of
impairment?
Yes
Is
the asset
Can RA of
an intangible asset,
Determine RA
individual asset be
other than goodwill, with
estimated?
indefinite useful life
Yes
Yes
or not available
for use?
No
No
No
Identify CGU to which
Yes
No
Is CA>RA?
Is the asset
the asset belongs
goodwill?
Yes
If goodwill cannot be
allocated to
Reduce CA to RA
an individual CGU,
by recording an
allocate it to
impairment
a group of CGUs
Is CA>RA
No
for CGU or group
of CGUs?
Yes
Reduce CA of goodwill first
After goodwill is fully impaired,
reduce other assets of CGU
pro rata on the basis of their
carrying amounts
End
1430 Chapter 20
The entity assesses, at each reporting date, whether an impairment assessment is
required and acts accordingly:
• If there is an indication that an asset may be impaired, an impairment test is required.
• For goodwill, intangible assets with an indefinite useful life and intangible
assets that are not available for use on the reporting date an annual impairment
test is required.
• An asset is assessed for impairment either at an individual asset level or the level
of a CGU depending on the level at which the recoverable amount can be
determined, meaning the level at which independent cash inflows are generated.
• If the impairment test is performed at a CGU level then the entity needs to be
divided into CGUs.
• After the identification of the CGUs, the carrying amount of the CGUs is determined.
• If goodwill is not monitored at the level of an individual CGU, then it is allocated
to the group of CGUs that represent the lowest level within the entity at which
goodwill is monitored for internal management purposes, but not at a level that is
larger than an operating segment.
• The recoverable amount of the asset or CGU assessed for impairment is
established and compared with the carrying amount.
• The asset or CGU is impaired if its carrying amount exceeds its recoverable
amount, defined as the higher of FVLCD and VIU.
• For assets carried at cost, any impairment loss is recognised as an expense in profit
or loss.
• For assets carried at revalued amount, any impairment loss is recorded first against
any previously recognised revaluation gains in other comprehensive income in
respect of that asset.
• Impairment losses in a CGU are first recorded against goodwill and second, if the
goodwill has been written off, on a
pro-rata basis to the carrying amount of other
assets in the CGU. However, the carrying amount of an asset should not be reduced
below the highest of its fair value less costs of disposal, value in use or zero. If the
preceding rule is applied, further allocation of the impairment loss is made pro rata
to the other assets of the unit (group of units).
• Extensive disclosure is required for the impairment test and any impairment loss
that has been recognised.
• An impairment loss for an asset other than goodwill recognised in prior periods
must be reversed if there has been a change in the estimates used to determine the
asset’s recoverable amount.
1.3 Scope
The standard is a general impairment standard and its provisions are referred to in other
standards, for example IAS 16 – Property, Plant and Equipment, IAS 38 – Intangible
Assets – and IFRS 3 – Business Combinations – where impairment is to be considered.
Impairment of fixed assets and goodwill 1431
The standard has a general application to all assets, but the following are outside its scope:
• inventories (IAS 2 – Inventories);
• contract assets and assets arising from costs to obtain or fulfil a contract that are
recognised in accordance with IFRS 15;
• deferred tax assets (IAS 12 – Income Taxes);
• assets arising from employee benefits under IAS 19 – Employee Benefits;
• financial assets that are included in the scope of IFRS 9 – Financial Instruments;
• investment property that is measured at fair value under IAS 40 – Investment
Property;
• biological assets under IAS 41 – Agriculture, except bearer plants, e.g. apple
trees, which are in the scope of IAS 16 and therefore fall under the IAS 36
impairment guidance;
• deferred acquisition costs and intangible assets arising from an insurer’s
contractual rights under insurance contracts within the scope of IFRS 4 –
Insurance Contracts; and
• non-current assets (or disposal groups) classified as held for sale in accordance
with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations.
[IAS 36.2].
This, the standard states, is because these assets are subject to specific recognition
and measurement requirements. [IAS 36.3]. The effect of these exclusions is to reduce
the scope of IAS 36. While investment properties measured at fair value are exempt,
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 281