International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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a headquarters building, it could not be said for a central IT facility. We have already noted
at 2.1.3 above that a decline in value of the asset itself may not trigger a need for an
impairment review and it may be obvious that the CGUs of which corporate assets are a
part are not showing any indications of impairment – unless, of course, management has
decided to dispose of the asset. It is most likely that a corporate asset will show indications
of impairment if the CGU or group of CGUs to which it relates are showing indications
and this is reflected in the methodology by which corporate assets are tested.
If possible, the corporate assets are to be allocated to individual CGUs on a ‘reasonable
and consistent basis’. [IAS 36.102]. This is not expanded upon and affords some flexibility,
although plainly consistency is vital; the same criteria must be applied at all times. If the
carrying value of a corporate asset can be allocated on a reasonable and consistent basis
between individual CGUs, each CGU has its impairment test done separately and its
carrying value includes its share of the corporate asset. If the corporate asset’s carrying
value cannot be allocated to an individual CGU, there are three steps to consider. As
noted above, indicators of impairment for corporate assets that cannot be allocated to
individual CGUs are likely to relate to the CGUs that use the corporate asset as well.
First the CGU is tested for impairment and any impairment is recognised. Then the
group of CGUs is identified to which, as a group, all or part of the carrying value of the
corporate asset can be allocated. This group must include the CGU that was the subject
of the first test. Finally, all CGUs in this group have to be tested to determine if the
group’s carrying value (including the allocation of the corporate asset’s carrying value)
is in excess of the group’s recoverable amount. [IAS 36.102]. If it is not sufficient, the
impairment loss will be allocated pro-rata, subject to the limitations of paragraph 105 of
IAS 36, to all assets in the group of CGUs and the allocated portion of the corporate
asset, as described at 11.2 below.
Some entities include a charge for the use of corporate assets rather than allocating the
assets to CGUs and CGU groups. This is an acceptable approximation as long as entities
ensure that the allocation is reasonable and that the total charge has the same NPV as the
carrying amount of those assets and there is no impairment. Otherwise, there could be
double counting or the omission of assets or cash outflows from CGUs or the misallocation
of impairment to the assets of the CGU. Overheads are discussed further at 7.1.7 below.
Impairment of fixed assets and goodwill 1451
In IAS 36’s accompanying section of illustrative examples, Example 8 has a fully worked
example of the allocation of corporate assets and calculation of a VIU. [IAS 36.IE69-IE79].
The table below is included in it, and serves to illustrate the allocation of the corporate
asset to CGUs:
Example 20.9: Allocation of corporate assets
An entity comprises three CGUs and a headquarters building. The carrying amount of the headquarters
building of 150 is allocated to the carrying amount of each individual cash-generating unit. A weighted
allocation basis is used because the estimated remaining useful life of A’s cash-generating unit is 10 years,
whereas the estimated remaining useful lives of B and C’s cash-generating units are 20 years.
Schedule 1. Calculation of a weighted allocation of the carrying amount of the headquarters building
End of 20X0
A
B
C
Total
Carrying amount
100
150
200 450
Remaining useful life
10 years
20 years
20 years
Weighting based on useful life
1
2
2
Carrying amount after weighting
100
300
400
800
Pro-rata allocation of the building
(100/800)=
(300/800)=
(400/800)=
12%
38%
50% 100%
Allocation of the carrying amount of the
building (based on pro-rata above)
19
56
75
150
Carrying amount (after allocation of the
building) 119
206
275
600
The allocation need not be made on carrying value or financial measures such as revenue
– employee numbers or a time basis might be a valid basis in certain circumstances.
One effect of this pro-rata process is that the amount of the head office allocated to
each CGU will change as the useful lives and carrying values change. In the above
example, the allocation of the head office to CGU A will be redistributed to CGUs B and
C as A’s remaining life shortens. Similar effects will be observed if the sizes of any other
factor on which the allocation to the CGUs is made change relative to one another.
5 RECOVERABLE
AMOUNT
The standard requires the carrying amount of the asset or CGU to be compared with
the recoverable amount, which is the higher of VIU and FVLCD. [IAS 36.18]. If either the
FVLCD or the VIU is higher than the carrying amount, no further action is necessary as
the asset is not impaired. [IAS 36.19]. Recoverable amount is calculated for an individual
asset, unless that asset does not generate cash inflows that are largely independent of
those from other assets or groups of assets, in which case the recoverable amount is
determined for the CGU to which the asset belongs. [IAS 36.22].
Recoverable amount is the higher of FVLCD and VIU. IAS 36 defines VIU as the present
value of the future cash flows expected to be derived from an asset or CGU. FVLCD is
the fair value as defined in IFRS 13 – Fair Value Measurement, the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, less the costs of disposal. [IAS 36.6].
1452 Chapter 20
Estimating the VIU of an asset involves estimating the future cash inflows and outflows
that will be derived from the use of the asset and from its ultimate disposal, and
discounting them at an appropriate rate. [IAS 36.31]. There are complex issues involved in
determining the cash flows and choosing a discount rate and often there is no agreed
methodology to follow (see
7.1 and
7.2 below for a discussion of some of
these difficulties).
It may be possible to estimate FVLCD even in the absence of quoted prices in an active
market for an identical asset but if there is no basis for making a reliable estimate then
the value of an asset must be based on its VIU. [IAS 36.20].
There are two practical points to emphasise. First, IAS 36 allows the use of estimates,
averages and computational shortcuts to provide a reasonable approximation of FVLCD
or VIU. [IAS 36.23]. Second, if the FVLCD is greater than the asset’s carrying value, no VIU
calculation is necessary. It is not uncommon for the FVLCD of an asset to be readily
is the case with many property assets held by entities. If the FVLCD of the asset is lower
than its carrying value then the recoverable amount will have to be calculated by
reference to the CGU of which the asset is a part. However, as explained at 2.1.3 above,
it may be obvious that the CGU to which the property belongs has not suffered an
impairment. In such a case it would not be necessary to assess the recoverable amount
of the CGU.
5.1
Impairment of assets held for sale
The standard describes circumstances in which it may be appropriate to use an asset or
CGU’s FVLCD without calculating its VIU, as the measure of its recoverable amount.
There may be no significant difference between FVLCD and VIU, in which case the
asset’s FVLCD may be used as its recoverable amount. This is the case, for example, if
management is intending to dispose of the asset or CGU, as apart from its disposal
proceeds there will be few if any cash flows from further use. [IAS 36.21].
The asset may also be held for sale as defined by IFRS 5, by which stage it will be outside
the scope of IAS 36, although IFRS 5 requires such assets to be measured immediately
before their initial classification as held for sale ‘in accordance with applicable IFRSs’.
[IFRS 5.18]. A decision to sell is a triggering event for an impairment review, which means
that any existing impairment will be recognised at the point of classification and not be
rolled into the gain or loss on disposal of the asset. See Chapter 4 for a description of
the subsequent measurement of the carrying amounts of the assets.
Clearly IFRS 5’s requirement to test for impairment prior to reclassification is intended to
avoid impairment losses being recognised as losses on disposal. However, one effect is that
this rule may require the recognition of impairment losses on individual assets that form
part of a single disposal group subsequently sold at a profit, as in the following example.
Example 20.10: Impairment of assets held for sale
Entity A decided to sell three assets in one transaction to the same acquirer. Each asset had been part of
a different CGU. The decision to sell was made on 20 December 20X0, just prior to Entity A’s year end
of 31 December. The assets met IFRS 5’s requirements for classification as a disposal group on
10 January 20X1.
Impairment of fixed assets and goodwill 1453
The information about the carrying amounts and fair values less cost of disposal of individual assets at
20 December 20X0 and the disposal group on 10 January 20X1 is summarised below. There was no change
in the fair values of these assets between the two dates.
Asset
Carrying
FVLCD of
Aggregate of
Fair value of
amount
separate assets
the lower of
the group
the carrying
amount and
FVLCD
€
€
€
€
X 4,600
4,300
4,300
n/a
Y 5,700
5,800
5,700
n/a
Z 2,400
2,500
2,400
n/a
Total 12,700
12,600
12,400
12,600
Although these assets were classified as held for sale subsequent to the year end, the decision to sell them
was an indicator of impairment. Accordingly, it is necessary to determine whether the three assets together
comprise a new CGU. If so, impairment would be assessed on the three assets together, prior to
reclassification and remeasurement under IFRS 5.
If the three assets together do not comprise a CGU, they would have to be tested for impairment individually
at the year end, which would result in an impairment loss on Asset X of €300. As there is no change in the
recoverable amount between the year end and immediately before the classification under IFRS 5, the
aggregate value of these assets prior to classification under IFRS 5 would be €12,400 (4,300 + 5,700 + 2,400).
The FVLCD of the disposal group at the date of the first application of IFRS 5 (10 January 20X1) is €12,600.
Therefore, according to the measurement criteria under IFRS 5 the carrying amount of the disposal group
remains at €12,400 and the impairment loss previously recognised on Asset X would only be reversed, should
the FVLCD of the disposal group exceed €12,600.
IAS 36 does not allow an asset to be written down below the higher of its VIU or FVLCD.
[IAS 36.105]. An entity might, however, expect to sell a CGU for less than the apparent
aggregate FVLCD of individual assets, e.g. because the potential buyer expects further
losses. If this happens, the carrying amount of the disposal group under IFRS 5 is capped
at its FVLCD so the impairment loss is allocated to all non-current assets, even if their
carrying amounts are reduced below their FVLCD. See Chapter 4.
6
FAIR VALUE LESS COSTS OF DISPOSAL
IFRS 13 specifies how to measure fair value, but does not change when fair value is
required or permitted under IFRS. IFRS 13 is discussed in detail in Chapter 14.
The standard defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. It is explicitly an exit price. [IFRS 13.2]. When measuring FVLCD, fair
value is measured in accordance with IFRS 13. Costs of disposal are calculated in
accordance with IAS 36.
IFRS 13 specifically excludes VIU from its scope. [IFRS 13.6].
Fair value, like FVLCD, is not an entity-specific measurement but is focused on market
participants’ assumptions for a particular asset or liability. [IFRS 13.11]. For non-financial
assets, fair value has to take account of the highest and best use by a market participant to
which the asset could be put. [IFRS 13.27]. An entity’s current use of a non-financial asset is
1454 Chapter 20
presumed to be its highest and best use unless market or other factors suggest that a
different use by market participants would maximise the value of the asset. [IFRS 13.29].
Entities are exempt from the disclosures required by IFRS 13 when the recoverable
amount is FVLCD. [IFRS 13.7(c)]. IAS 36’s disclosure requirements are broadly aligned with
those of IFRS 13. See IAS 36’s disclosure requirements at 13 below.
While IFRS 13 makes it clear that transaction costs are not part of a fair value
measurement, in all cases, FVLCD should take account of estimated disposal costs.
These include legal costs, stamp duty and other transaction taxes, costs of removing the
asset and other direct incremental costs. Business reorganisation costs and employee
termination costs (as defined in IAS 19, see Chapter 31) may not be treated as costs of
disposal. [IAS 36.28].
If the disposal of an asset would entail the buyer assuming a liability and there is only a
single FVLCD for both taken together, then, to enable a meaningful comparison, the
obligation must also be taken into account in calculating VIU and the carrying value of
the asse
t. This is discussed at 4.1 above. [IAS 36.29, 78].
6.1 Estimating
FVLCD
IFRS 13 does not limit the types of valuation techniques an entity might use to measure
fair value but instead focuses on the types of inputs that will be used. The standard
requires the entity to use the valuation technique that ‘maximis[es] the use of relevant
observable inputs and minimis[es] the use of unobservable inputs’. [IFRS 13.61]. The
objective is that the best available inputs should be used in valuing the assets. These
inputs could be used in any valuation technique provided they are consistent with (one
of) the three valuation approaches in the standard: the market approach, the cost
approach and the income approach. [IFRS 13.62]. IFRS 13 does not place any preference
on the techniques that are used as long as the entity achieves the objective of a fair value
measurement, which means it must use the best available inputs. In some cases, a single
valuation technique will be appropriate, while in other cases, multiple valuation
techniques will need to be used to meet this objective. An entity must apply the
valuation technique(s) consistently. A change in a valuation technique is considered a
change in an accounting estimate in accordance with IAS 8 – Accounting Policies,
Changes in Accounting Estimates and Errors. [IFRS 13.66].
The market approach uses prices and other relevant information generated by market
transactions involving identical or comparable (i.e. similar) assets, liabilities or a group
of assets and liabilities, such as a business. [IFRS 13.B5]. For items within scope of IAS 36,
market techniques will usually involve market transactions in comparable assets or, for
certain assets valued as businesses, market multiples derived from comparable
transactions. [IFRS 13.B5, B6].
The cost approach reflects the amount that would be required currently to replace the
service capacity of an asset (i.e. current replacement cost). It is based on what a market
participant buyer would pay to acquire or construct a substitute asset of comparable
utility, adjusted for obsolescence. Obsolescence includes physical deterioration,
technological (functional) and economic obsolescence so it is not the same as
depreciation under IAS 16. [IFRS 13.B8, B9]. See also 6.1.2 below.