When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and should be adjusted downward to its recoverable amount. The shortfall between the carrying amount of the impaired asset and its recoverable amount is identified as an impairment loss.

FAIR VALUE LESS COSTS OF DISPOSAL

The price that would be received to sell the asset in an orderly transaction between market participants at the measurement date (IFRS 13 definition of fair value), less the direct incremental costs attributable to the disposal of the asset.

Examples of costs of disposal are legal costs, stamp duty and similar transaction taxes, costs of removing the asset (if provision for decommissioning is not recognized), and direct incremental costs to bring an asset into condition for its sale. They exclude finance costs and income tax expense.

 MEASUREMENT OF VALUE IN USE

Estimating the value in use of an asset involves the following steps:

• Estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and
• Applying the appropriate discount rate to these future cash flows.

 Basis for the estimates of future cashflows

Estimates of future cash flows should include:

• Projections of cash inflows from the continuing use of the asset
• Projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset; and
• Net cash flows, if any to be received (or paid) for the disposal of the asset at the end of its useful life.

To avoid double counting. Estimates of future cash flows do not include:

• Financial assets such as receivables; and
• Payables, pensions or provisions.

Estimates of future cash flows should not include:

• Cash inflows or outflows from financing activities or
• Income tax receipts or payments.

Discount Rate

• The discount rate should be a pre-tax rate
• The enterprise may take into account the following rates

1. The enterprise’s weighted average cost of the capital
2. The enterprise’s incremental borrowing rate; and
3. Other market borrowing rates

RECOGNITION OF IMPAIRMENT LOSSES IN FINANCIAL STATEMENTS

Assets carried at historical cost

The impairment loss is charged to profit or loss.

Revalued assets

• If revalued asset’s fair value is its market value and disposal costs are negligible then no need to check impairment loss indication. (If any)
• If revalued asset’s fair value is its market value and disposal costs are not negligible then need to check impairment loss indication. (If any)
• If revalued asset’s fair value is calculated other than the market value (Like discounted Cashflow) then needs to check impairment loss indication. (if any)

The impairment loss should be treated under the appropriate rules of the applicable IFRS. For example, property, plant and equipment (in accordance with IAS 16), first to OCI in respect of any revaluation surplus relating to the asset and then to profit or loss.

CASH GENERATING UNIT

Allocating goodwill to cash-generating units

Goodwill does not generate independent cash flows and therefore its recoverable amount as an individual asset cannot be determined. It is therefore allocated to the cash-generating unit (CGU) to which it belongs and the CGU tested for impairment. Goodwill that cannot be allocated to a CGU on a non-arbitrary basis is allocated to the group of CGUs to which it relates.

General rule

The impairment loss is allocated in the following order

• First to any asset already found impaired separately
• Goodwill allocated to the CGU
• Other assets on a pro-rata basis based on carrying amount

The carrying amount of an asset cannot be reduced below the higher of its recoverable amount (if determinable) and zero. The amount of the impairment loss that would otherwise have been allocated to the asset is allocated to the other assets on a pro rata basis.

If an asset is individually impaired within a Cash-Generating Unit (CGU), the course of action depends on management’s intention. If management intends to replace the specific impaired asset, then it will be impaired separately. However, if management does not wish to replace the asset, impairment assessments are conducted on an overall basis for the CGU.

CORPORATE ASSET

Corporate assets e.g. building of a headquarters or a division of the enterprise, EDP equipment or a research center. Corporate assets are treated in a similar way to goodwill.

The CGU includes corporate assets (or a portion of them) that can be allocated to it on a ‘reasonable and
consistent basis’. Where this is not possible, the assets (or unallocated portion) are tested for impairment as part of the group of CGUs to which they can be allocated on a reasonable and consistent basis.

Allocation of loss with unallocated corporate assets or goodwill

Where not all assets or goodwill will have been allocated to an individual CGU then different levels of
impairment tests are performed to ensure the unallocated assets are tested.

Test of individual CGU’s

Test the individual CGUs (including allocated goodwill and any portion of the carrying amount of corporate assets that can be allocated on a reasonable and consistent basis).

Test of group of CGU’S

Test the smallest group of CGUs that includes the CGU under review and to which the goodwill can be
allocated/a portion of the carrying amount of corporate assets can be allocated on a reasonable and consistent basis.

REVERSAL OF AN IMPAIRMENT LOSS

Entity needs to regularly check if there are signs that an impairment loss recorded for an asset in the past might not be valid anymore or could be less severe. If there are such signs, the company must figure out the current value the asset can recover.

REVERSAL OF AN IMPAIRMENT LOSS FOR AN INDIVIDUAL ASSET

A reversal for a CGU is allocated to the assets of the CGU, except for goodwill, pro rata with the carrying amounts of those assets.

However, the carrying amount of an asset is not increased above the lower of:

• Its recoverable amount (if determinable)
• Its depreciated carrying amount had no impairment loss originally been recognized.

Any amounts left unallocated are allocated to the other assets (except goodwill) pro rata.
The reversal is recognized in profit or loss, except where reversing a loss recognized on assets carried at revalued amounts, which are treated in accordance with the applicable IFRS. For example, an impairment loss reversal on revalued property, plant and equipment reverses the loss recorded in profit or loss and any remainder is credited to OCI (reinstating the revaluation surplus).

REVERSAL OF AN IMPAIRMENT LOSS FOR AN CASH GENERATING UNIT

The reversal is initially allocated to assets other than goodwill. This allocation is done on a pro-rata basis, considering the carrying amount of each individual asset within the cash-generating unit. An impairment loss recognized for goodwill cannot be reversed in subsequent periods.

IMPAIRMENT LOSS AND NON-CONTROLLING INTEREST

Where non-controlling interests are measured at the date of acquisition at the proportionate share of the fair value of the acquiree’s identifiable assets acquired and liabilities assumed (i.e. not at fair value), part of the calculation of the recoverable amount of the CGU relates to the unrecognized non-controlling interest share of the goodwill.

For the purpose of calculating an impairment loss, the carrying amount of the CGU is therefore notionally adjusted to include the non-controlling interests in the goodwill by grossing it up.

The resulting impairment loss calculated is only recognized to the extent of the parent’s share

This adjustment is not required where non-controlling interests are measured at fair value at acquisition.

DISCLOSURE

For each class of assets, the financial statements should disclose:

• Impairment losses recognized in Profit and loss
• Impairment losses reversed in Profit and loss
• Which line item (s) of the statement of comprehensive income
• Impairment losses on revalued assets recognized in other comprehensive income
• Impairment losses on revalued assets reversed in other comprehensive income

Disclosure by reportable segment

• Impairment losses recognized
• Impairment losses reversed

Other Disclosures

If an individual impairment loss (reversal) is material disclose:

• Events and circumstances resulting in the impairment loss
• Amount of the loss or reversal
• 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 of disposal, the level of the fair value hierarchy (IFRS-13) within which the fair value measurement is categorized, the valuation techniques used to measure fair value less costs of disposal and the key assumptions used in the measurement of fair value measurements categorized within ‘Level 2’ and ‘Level 3’ of the fair value hierarchy.
• If recoverable amount has been determined on the basis of value in use, or on the basis of fair value less costs of disposal using a present value technique, disclose the discount rate

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

• Main classes of assets affected
• Main events and circumstances

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