International Accounting Standard 36 Impairment of Assets (IAS 36) is set out in paragraphs 1–141 and Appendices A–C. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 36 should be read in the context of its objective and the Basis for Conclusions, the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. [Refer:IAS 8 paragraphs 10–12]
1 | The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures. |
2 | This Standard shall be applied in accounting for the impairment of all assets, other than:
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3 | This Standard does not apply to inventories, assets arising from construction contracts, deferred tax assets, assets arising from employee benefits, or assets classified as held for sale (or included in a disposal group that is classified as held for sale) [Refer:IFRS 5 paragraphs 6–14] because existing IFRSs applicable to these assets contain requirements for recognising and measuring these assets. |
4 | This Standard applies to financial assets classified as:E1
For impairment of other financial assets, refer to IFRS 9. [Refer:IFRS 9 Section 5.5] |
| E1 | [IFRIC® Update, January 2013, Agenda Decision, ‘IAS 28 Investment in Associates—Impairment of investments in associates in separate financial statements’ In the July 2012 meeting, the Interpretations Committee received an update on the issues that have been referred to the IASB and that have not yet been addressed. The Interpretations Committee asked the staff to update the analysis and perform further outreach on an issue about the impairment of investments in associates in separate financial statements. More specifically, the issue is whether, in its separate financial statements, an entity should apply the provisions of IAS 36 Impairment of Assets or IAS 39 Financial Instruments: Recognition and Measurement to test its investments in subsidiaries, joint ventures, and associates carried at cost for impairment. The Interpretations Committee noted that according to paragraph 38 of IAS 27 Consolidated and Separate Financial Statements an entity, in its separate financial statements, shall account for investments in subsidiaries, joint ventures and associates either at cost or in accordance with IAS 39 (paragraph 10 of IAS 27 (2011) has superseded paragraph 38 of IAS 27 (2008)). The Interpretations Committee also noted that according to paragraphs 4 and 5 of IAS 36 and paragraph 2(a) of IAS 39, investments in subsidiaries, joint ventures, and associates that are not accounted for in accordance with IAS 39 are within the scope of IAS 36 for impairment purposes. Consequently, in its separate financial statements, an entity should apply the provisions of IAS 36 to test for impairment its investments in subsidiaries, joint ventures, and associates that are carried at cost in accordance with paragraph 38(a) of IAS 27 (2008) or paragraph 10(a) of IAS 27 Separate Financial Statements (2011). The Interpretations Committee concluded that in the light of the existing IFRS requirements an interpretation or an amendment to IFRSs was not necessary and consequently decided not to add this issue to its agenda.] |
5 | This Standard does not apply to financial assets within the scope of IFRS 9, [Refer:IFRS 9 paragraphs 2.1–2.7 and B2.1–B2.6] investment property measured at fair value within the scope of IAS 40, [Refer:IAS 40 paragraphs 33–55] or biological assets related to agricultural activity measured at fair value less costs to sell within the scope of IAS 41. [Refer:IAS 41 paragraphs 12–25] However, this Standard applies to assets that are carried at revalued amount (ie fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses) in accordance with other IFRSs, such as the revaluation model [Refer:IAS 16 paragraph 31] in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. The only difference between an asset’s fair value and its fair value less costs of disposal is the direct incremental costs attributable to the disposal of the asset.
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6 | The following terms are used in this Standard with the meanings specified: Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. A cash‑generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.E2 Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash‑generating unit under review and other cash‑generating units. Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash‑generating unit, excluding finance costs and income tax expense. Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value. Depreciation (Amortisation) is the systematic allocation of the depreciable amount of an asset over its useful life.1 Fair value is 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. (See IFRS 13 Fair Value Measurement.) An impairment loss is the amount by which the carrying amount of an asset or a cash‑generating unit exceeds its recoverable amount. The recoverable amount of an asset or a cash‑generating unit is the higher of its fair value less costs of disposal and its value in use. Useful life is either:
Value in use is the present value of the future cash flows expected to be derived from an asset or cash‑generating unit. |
| E2 | [IFRIC® Update, March 2007, Agenda Decision, ‘IAS 36 Impairment of Assets—Identifying cash‑generating units in the retail industry’ The IFRIC was asked to develop an Interpretation on whether a cash‑generating unit (CGU) could combine more than one individual store location. The submitter developed possible considerations including shared infrastructures, marketing and pricing policies, and human resources. The IFRIC noted that IAS 36 paragraph 6 (and supporting guidance in paragraph 68) requires identification of CGUs on the basis of independent cash inflows rather than independent net cash flows and so outflows such as shared infrastructure and marketing costs are not considered. The IFRIC took the view that developing guidance beyond that already given in IAS 36 on whether cash inflows are largely independent would be more in the nature of application guidance and therefore decided not to add this item to its agenda.] |
7 | Paragraphs 8–17 specify when recoverable amount shall be determined. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash‑generating unit. The remainder of this Standard is structured as follows:
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8 | An asset is impaired when its carrying amount exceeds its recoverable amount. Paragraphs 12–14 describe some indications that an impairment loss may have occurred. If any of those indications is present, an entity is required to make a formal estimate of recoverable amount. Except as described in paragraph 10, this Standard does not require an entity to make a formal estimate of recoverable amount if no indication of an impairment loss is present. |
9 | An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. |
10 | Irrespective of whether there is any indication of impairment, an entity shall also:
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11 | The ability of an intangible asset to generate sufficient future economic benefits to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after it is available for use. Therefore, this Standard requires an entity to test for impairment, at least annually, the carrying amount of an intangible asset that is not yet available for use. |
12 | In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications: External sources of information
Internal sources of information
Dividend from a subsidiary, joint venture or associate
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13 | The list in paragraph 12 is not exhaustive. An entity may identify other indications that an asset may be impaired and these would also require the entity to determine the asset’s recoverable amount or, in the case of goodwill, perform an impairment test in accordance with paragraphs 80–99. |
14 | Evidence from internal reporting that indicates that an asset may be impaired includes the existence of:
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15 | As indicated in paragraph 10, this Standard requires an intangible asset with an indefinite useful life [Refer:IAS 38 paragraph 88] or not yet available for use and goodwill to be tested for impairment, at least annually. Apart from when the requirements in paragraph 10 apply, the concept of materiality [Refer:Conceptual Framework paragraph 2.11] applies in identifying whether the recoverable amount of an asset needs to be estimated. For example, if previous calculations show that an asset’s recoverable amount is significantly greater than its carrying amount, the entity need not re‑estimate the asset’s recoverable amount if no events have occurred that would eliminate that difference. Similarly, previous analysis may show that an asset’s recoverable amount is not sensitive to one (or more) of the indications listed in paragraph 12. |
16 | As an illustration of paragraph 15, if market interest rates or other market rates of return on investments have increased during the period, an entity is not required to make a formal estimate of an asset’s recoverable amount in the following cases:
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17 | If there is an indication that an asset may be impaired, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value for the asset needs to be reviewed and adjusted in accordance with the Standard applicable to the asset, even if no impairment loss is recognised for the asset. |
18 | This Standard defines recoverable amount as the higher of an asset’s or cash‑generating unit’s fair value less costs of disposal and its value in use. [Refer:Basis for Conclusions paragraphs BCZ23–BCZ27] Paragraphs 19–57 set out the requirements for measuring recoverable amount. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash‑generating unit. |
19 | It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. |
20 | It may be possible to measure fair value less costs of disposal, even if there is not a quoted price in an active market [Refer:IFRS 13 Appendix A (definition of active market)] for an identical asset. [Refer:IFRS 13 paragraph 76] However, sometimes it will not be possible to measure fair value less costs of disposal because there is no basis for making a reliable estimate of the price at which an orderly transaction to sell the asset would take place between market participants at the measurement date under current market conditions. [Refer:IFRS 13 paragraphs 2 and 62] In this case, the entity may use the asset’s value in use as its recoverable amount. |
21 | If there is no reason to believe that an asset’s value in use materially exceeds its fair value less costs of disposal, the asset’s fair value less costs of disposal may be used as its recoverable amount. This will often be the case for an asset that is held for disposal. This is because the value in use of an asset held for disposal will consist mainly of the net disposal proceeds, as the future cash flows from continuing use of the asset until its disposal are likely to be negligible. |
22 | Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash‑generating unit to which the asset belongs (see paragraphs 65–103), unless either:
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23 | In some cases, estimates, averages and computational short cuts may provide reasonable approximations of the detailed computations illustrated in this Standard for determining fair value less costs of disposal or value in use. |
24 | Paragraph 10 requires an intangible asset with an indefinite useful life [Refer:IAS 38 paragraph 88] to be tested for impairment annually by comparing its carrying amount with its recoverable amount, irrespective of whether there is any indication that it may be impaired. However, the most recent detailed calculation of such an asset’s recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period, provided all of the following criteria are met:
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25–27 | [Deleted] |
28 | Costs of disposal, other than those that have been recognised as liabilities, are deducted in measuring fair value less costs of disposal. Examples of such costs are legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits (as defined in IAS 19) and costs associated with reducing or reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset. |
29 | Sometimes, the disposal of an asset would require the buyer to assume a liability and only a single fair value less costs of disposal is available for both the asset and the liability. Paragraph 78 explains how to deal with such cases. |
30 | The following elements shall be reflected in the calculation of an asset’s value in use:
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31 | Estimating the value in use of an asset involves the following steps:
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32 | The elements identified in paragraph 30(b), (d) and (e) can be reflected either as adjustments to the future cash flows or as adjustments to the discount rate. [Refer:paragraphs 55–57 and Basis for Conclusions paragraph BC56(b)] Whichever approach an entity adopts to reflect expectations about possible variations in the amount or timing of future cash flows, the result shall be to reflect the expected present value of the future cash flows, ie the weighted average of all possible outcomes. Appendix A provides additional guidance on the use of present value techniques in measuring an asset’s value in use. |
33 | In measuring value in use an entity shall:E3
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| E3 | [IFRIC® Update, November 2010, Agenda Decision, ‘IAS 36 Impairment of Assets—Calculation of value in use’ The Committee received a request for clarification on whether estimated future cash flows expected to arise from dividends, that are calculated using dividend discount models (DDMs), are an appropriate cash flow projection when determining the calculation of value in use of a cash generating unit (CGU) in accordance with paragraph 33 of IAS 36. The Committee noted that paragraphs 30–57 and paragraphs 74–79 of IAS 36 provide guidance on the principles to be applied in calculating value in use of a CGU. The Committee observed that calculations using a DDM which values shares at the discounted value of future dividend payments, may be appropriate when calculating value in use of a single asset, for example when an entity applies IAS 36 in determining whether an investment is impaired in the separate financial statements of an entity. The Committee understands that some DDMs may focus on future cash flows that are expected to be available for distribution to shareholders, rather than future cash flows from dividends. Such a DDM could be used to calculate value in use of a CGU in consolidated financial statements, if it is consistent with the principles and requirements in IAS 36. The Committee noted that the current principles in IAS 36 relating to the calculation of value in use of a CGU are sufficient and that any guidance that it could provide would be in the nature of application guidance. Consequently, the Committee decided not to add the issue to its agenda.] |
34 | Management assesses the reasonableness of the assumptions on which its current cash flow projections are based by examining the causes of differences between past cash flow projections and actual cash flows. Management shall ensure that the assumptions on which its current cash flow projections are based are consistent with past actual outcomes, provided the effects of subsequent events or circumstances that did not exist when those actual cash flows were generated make this appropriate. [Refer:Basis for Conclusions paragraphs BC62–BC65] |
35 | Detailed, explicit and reliable financial budgets/forecasts of future cash flows for periods longer than five years are generally not available. For this reason, management’s estimates of future cash flows are based on the most recent budgets/forecasts for a maximum of five years. Management may use cash flow projections based on financial budgets/forecasts over a period longer than five years if it is confident that these projections are reliable and it can demonstrate its ability, based on past experience, to forecast cash flows accurately over that longer period. |
36 | Cash flow projections until the end of an asset’s useful life are estimated by extrapolating the cash flow projections based on the financial budgets/forecasts using a growth rate for subsequent years. This rate is steady or declining, unless an increase in the rate matches objective information about patterns over a product or industry lifecycle. If appropriate, the growth rate is zero or negative. |
37 | When conditions are favourable, competitors are likely to enter the market and restrict growth. Therefore, entities will have difficulty in exceeding the average historical growth rate over the long term (say, twenty years) for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used. |
38 | In using information from financial budgets/forecasts, an entity considers whether the information reflects reasonable and supportable assumptions and represents management’s best estimate of the set of economic conditions that will exist over the remaining useful life of the asset. |
39 | Estimates of future cash flows shall include:
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40 | Estimates of future cash flows and the discount rate [Refer:paragraphs 55–57] reflect consistent assumptions about price increases attributable to general inflation. Therefore, if the discount rate includes the effect of price increases attributable to general inflation, future cash flows are estimated in nominal terms. If the discount rate excludes the effect of price increases attributable to general inflation, future cash flows are estimated in real terms (but include future specific price increases or decreases). |
41 | Projections of cash outflows include those for the day‑to‑day servicing of the asset as well as future overheads that can be attributed directly, or allocated on a reasonable and consistent basis, to the use of the asset. |
42 | When the carrying amount of an asset does not yet include all the cash outflows to be incurred before it is ready for use or sale, the estimate of future cash outflows includes an estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale. For example, this is the case for a building under construction or for a development project that is not yet completed. |
43 | To avoid double‑counting, estimates of future cash flows do not include:
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44 | Future cash flows shall be estimated for the asset in its current condition. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from:
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45 | Because future cash flows are estimated for the asset in its current condition, value in use does not reflect:
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46 | A restructuring is a programme that is planned and controlled by management and materially [Refer:Conceptual Framework paragraph 2.11] changes either the scope of the business undertaken by an entity or the manner in which the business is conducted. IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains guidance clarifying when an entity is committed to a restructuring. [Refer:IAS 37 paragraphs 71–79] |
47 | When an entity becomes committed to a restructuring, some assets are likely to be affected by this restructuring. Once the entity is committed to the restructuring:
Illustrative Example 5 illustrates the effect of a future restructuring on a value in use calculation. |
48 | Until an entity incurs cash outflows that improve or enhance the asset’s performance, estimates of future cash flows do not include the estimated future cash inflows that are expected to arise from the increase in economic benefits associated with the cash outflow (see Illustrative Example 6). |
49 | Estimates of future cash flows include future cash outflows necessary to maintain the level of economic benefits expected to arise from the asset in its current condition. When a cash‑generating unit consists of assets with different estimated useful lives, all of which are essential to the ongoing operation of the unit, the replacement of assets with shorter lives is considered to be part of the day‑to‑day servicing of the unit when estimating the future cash flows associated with the unit. Similarly, when a single asset consists of components with different estimated useful lives, the replacement of components with shorter lives is considered to be part of the day‑to‑day servicing of the asset when estimating the future cash flows generated by the asset. |
50 | Estimates of future cash flows shall not include:
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51 | Estimated future cash flows reflect assumptions that are consistent with the way the discount rate [Refer:paragraphs 55–57] is determined. Otherwise, the effect of some assumptions will be counted twice or ignored. Because the time value of money is considered by discounting the estimated future cash flows, these cash flows exclude cash inflows or outflows from financing activities. Similarly, because the discount rate is determined on a pre‑tax basis, future cash flows are also estimated on a pre‑tax basis. |
52 | The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life shall be the amount that an entity expects to obtain from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal. |
53 | The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life is determined in a similar way to an asset’s fair value less costs of disposal, except that, in estimating those net cash flows:
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53A | Fair value [Refer:IFRS 13 Appendix A (definition of fair value)] differs from value in use. Fair value reflects the assumptions market participants [Refer:IFRS 13 Appendix A (definition of market participants)] would use when pricing the asset. [Refer:IFRS 13 paragraphs 3 and 22] In contrast, value in use reflects the effects of factors that may be specific to the entity and not applicable to entities in general. For example, fair value does not reflect any of the following factors to the extent that they would not be generally available to market participants:
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54 | Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate [Refer:paragraphs 55–57] appropriate for that currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation. |
55 | The discount rate (rates) shall be a pre‑tax rate (rates) [Refer:Basis for Conclusions paragraphs BCZ84 and BCZ85] that reflect(s) current market assessments of:
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56 | A rate that reflects current market assessments of the time value of money and the risks specific to the asset is the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to derive from the asset. This rate is estimated from the rate implicit in current market transactions for similar assets or from the weighted average cost of capital of a listed entity that has a single asset (or a portfolio of assets) similar in terms of service potential and risks to the asset under review. However, the discount rate(s) used to measure an asset’s value in use shall not reflect risks for which the future cash flow estimates have been adjusted. Otherwise, the effect of some assumptions will be double‑counted. |
57 | When an asset‑specific rate is not directly available from the market, an entity uses surrogates to estimate the discount rate. Appendix A provides additional guidance on estimating the discount rate in such circumstances. [Refer:paragraphs A15–A21]
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58 | Paragraphs 59–64 set out the requirements for recognising and measuring impairment losses for an individual asset other than goodwill. Recognising and measuring impairment losses for cash‑generating units and goodwill are dealt with in paragraphs 65–108. |
59 | If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss. |
60 | An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for example, in accordance with the revaluation model in IAS 16 [Refer:IAS 16 paragraph 31]). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard. |
61 | An impairment loss on a non‑revalued asset is recognised in profit or loss. However, an impairment loss on a revalued asset is recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset. Such an impairment loss on a revalued asset reduces the revaluation surplus for that asset. |
62 | When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another Standard. |
63 | After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. |
64 | If an impairment loss is recognised, any related deferred tax assets or liabilities are determined in accordance with IAS 12 by comparing the revised carrying amount of the asset with its tax base (see Illustrative Example 3). |
65 | Paragraphs 66–108 and Appendix C set out the requirements for identifying the cash‑generating unit to which an asset belongs and determining the carrying amount of, and recognising impairment losses for, cash‑generating units and goodwill. |
66 | If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. 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 to which the asset belongs (the asset’s cash‑generating unit). |
67 | The recoverable amount of an individual asset cannot be determined if:
In such cases, value in use and, therefore, recoverable amount, can be determined only for the asset’s cash‑generating unit.
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68 | As defined in paragraph 6, an asset’s cash‑generating unit is the smallest group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.E4 Identification of an asset’s cash‑generating unit involves judgement. If recoverable amount cannot be determined for an individual asset, an entity identifies the lowest aggregation of assets that generate largely independent cash inflows.
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| E4 | [IFRIC® Update, March 2007, Agenda Decision, ‘IAS 36 Impairment of Assets—Identifying cash‑generating units in the retail industry’ The IFRIC was asked to develop an Interpretation on whether a cash‑generating unit (CGU) could combine more than one individual store location. The submitter developed possible considerations including shared infrastructures, marketing and pricing policies, and human resources. The IFRIC noted that IAS 36 paragraph 6 (and supporting guidance in paragraph 68) requires identification of CGUs on the basis of independent cash inflows rather than independent net cash flows and so outflows such as shared infrastructure and marketing costs are not considered. The IFRIC took the view that developing guidance beyond that already given in IAS 36 on whether cash inflows are largely independent would be more in the nature of application guidance and therefore decided not to add this item to its agenda.] |
69 | Cash inflows are inflows of cash and cash equivalents received from parties external to the entity. In identifying whether cash inflows from an asset (or group of assets) are largely independent of the cash inflows from other assets (or groups of assets), an entity considers various factors including how management monitors the entity’s operations (such as by product lines, businesses, individual locations, districts or regional areas) or how management makes decisions about continuing or disposing of the entity’s assets and operations. Illustrative Example 1 gives examples of identification of a cash‑generating unit. |
70 | If an active market exists for the output produced by an asset or group of assets, that asset or group of assets shall be identified as a cash‑generating unit, even if some or all of the output is used internally. If the cash inflows generated by any asset or cash‑generating unit are affected by internal transfer pricing, an entity shall use management’s best estimate of future price(s) that could be achieved in arm’s length transactions in estimating:
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71 | Even if part or all of the output produced by an asset or a group of assets is used by other units of the entity (for example, products at an intermediate stage of a production process), this asset or group of assets forms a separate cash‑generating unit if the entity could sell the output on an active market. This is because the asset or group of assets could generate cash inflows that would be largely independent of the cash inflows from other assets or groups of assets. In using information based on financial budgets/forecasts that relates to such a cash‑generating unit, or to any other asset or cash‑generating unit affected by internal transfer pricing, [Refer:Basis for Conclusions paragraphs BC116–BC118] an entity adjusts this information if internal transfer prices do not reflect management’s best estimate of future prices that could be achieved in arm’s length transactions. |
72 | Cash‑generating units shall be identified consistently from period to period for the same asset or types of assets, unless a change is justified. |
73 | If an entity determines that an asset belongs to a cash‑generating unit different from that in previous periods, or that the types of assets aggregated for the asset’s cash‑generating unit have changed, paragraph 130 requires disclosures about the cash‑generating unit, if an impairment loss is recognised or reversed for the cash‑generating unit. |
74 | The recoverable amount of a cash‑generating unit is the higher of the cash‑generating unit’s fair value less costs of disposal and its value in use. For the purpose of determining the recoverable amount of a cash‑generating unit, any reference in paragraphs 19–57 to ‘an asset’ is read as a reference to ‘a cash‑generating unit’. |
75 | The carrying amount of a cash‑generating unit shall be determined on a basis consistent with the way the recoverable amount of the cash‑generating unit is determined. |
76 | The carrying amount of a cash‑generating unit:
This is because fair value less costs of disposal and value in use of a cash‑generating unit are determined excluding cash flows that relate to assets that are not part of the cash‑generating unit and liabilities that have been recognised (see paragraphs 28 and 43). |
77 | When assets are grouped for recoverability assessments, it is important to include in the cash‑generating unit all assets that generate or are used to generate the relevant stream of cash inflows. Otherwise, the cash‑generating unit may appear to be fully recoverable when in fact an impairment loss has occurred. In some cases, although some assets contribute to the estimated future cash flows of a cash‑generating unit, they cannot be allocated to the cash‑generating unit on a reasonable and consistent basis. This might be the case for goodwill or corporate assets such as head office assets. Paragraphs 80–103 explain how to deal with these assets in testing a cash‑generating unit for impairment. |
78 | It may be necessary to consider some recognised liabilities to determine the recoverable amount of a cash‑generating unit. This may occur if the disposal of a cash‑generating unit would require the buyer to assume the liability. In this case, the fair value less costs of disposal (or the estimated cash flow from ultimate disposal) of the cash‑generating unit is the price to sell the assets of the cash‑generating unit and the liability together, less the costs of disposal. To perform a meaningful comparison between the carrying amount of the cash‑generating unit and its recoverable amount, the carrying amount of the liability is deducted in determining both the cash‑generating unit’s value in use and its carrying amount.E5
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| E5 | [IFRIC® Update, May 2016, Agenda Decision, ‘IAS 36 Impairment of Assets—Recoverable amount and carrying amount of a cash-generating unit’ The Interpretations Committee received a request to clarify the application of paragraph 78 of IAS 36 Impairment of Assets. This paragraph sets out the requirements for considering recognised liabilities in determining the recoverable amount of a cash-generating unit (CGU) within the context of an impairment test for a CGU. The submitter questioned the approach set out in paragraph 78 of IAS 36, which requires an entity to deduct the carrying amount of any recognised liabilities in determining both the CGU’s carrying amount and its value in use (VIU). The submitter asked whether an alternative approach should be required. The Interpretations Committee observed that when an entity needs to consider a recognised liability to determine the recoverable amount of a CGU (which may occur if the disposal of a CGU would require the buyer to assume the liability), paragraph 78 of IAS 36 requires the entity to deduct the carrying amount of the recognised liability in determining both the CGU’s carrying amount and its VIU. This approach of determining both the CGU’s carrying amount and its VIU by deducting the same carrying amount of the recognised liability makes the comparison between the CGU’s carrying amount and the CGU’s recoverable amount meaningful. The Interpretations Committee observed that the approach in paragraph 78 of IAS 36 for considering recognised liabilities provides a straightforward and cost-effective method to perform a meaningful comparison of the measures involved in an impairment test for a CGU. In the light of the existing requirements in IFRS Standards, the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.] |
79 | For practical reasons, the recoverable amount of a cash‑generating unit is sometimes determined after consideration of assets that are not part of the cash‑generating unit (for example, receivables or other financial assets) or liabilities that have been recognised (for example, payables, pensions and other provisions). In such cases, the carrying amount of the cash‑generating unit is increased by the carrying amount of those assets and decreased by the carrying amount of those liabilities. |
80 | For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s cash‑generating units, or groups of cash‑generating units, that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated shall:
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81 | Goodwill recognised in a business combination is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. Goodwill does not generate cash flows independently of other assets or groups of assets, and often contributes to the cash flows of multiple cash‑generating units. Goodwill sometimes cannot be allocated on a non‑arbitrary basis to individual cash‑generating units, but only to groups of cash‑generating units. As a result, the lowest level within the entity at which the goodwill is monitored for internal management purposes sometimes comprises a number of cash‑generating units to which the goodwill relates, but to which it cannot be allocated. References in paragraphs 83–99 and Appendix C to a cash‑generating unit to which goodwill is allocated should be read as references also to a group of cash‑generating units to which goodwill is allocated. |
82 | Applying the requirements in paragraph 80 results in goodwill being tested for impairment at a level that reflects the way an entity manages its operations and with which the goodwill would naturally be associated. Therefore, the development of additional reporting systems is typically not necessary. |
83 | A cash‑generating unit to which goodwill is allocated for the purpose of impairment testing may not coincide with the level at which goodwill is allocated [Refer:IAS 21 paragraph 47] in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates for the purpose of measuring foreign currency gains and losses. [Refer:IAS 21 Basis for Conclusions paragraphs BC29–BC32] For example, if an entity is required by IAS 21 to allocate goodwill to relatively low levels for the purpose of measuring foreign currency gains and losses, it is not required to test the goodwill for impairment at that same level unless it also monitors the goodwill at that level for internal management purposes. |
84 | If the initial allocation of goodwill acquired in a business combination cannot be completed before the end of the annual period in which the business combination is effected, that initial allocation shall be completed before the end of the first annual period beginning after the acquisition date. |
85 | In accordance with IFRS 3 Business Combinations, if the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected, the acquirer: [Refer:IFRS 3 paragraph 45]
In such circumstances, it might also not be possible to complete the initial allocation of the goodwill recognised in the combination before the end of the annual period in which the combination is effected. When this is the case, the entity discloses the information required by paragraph 133. |
86 | If goodwill has been allocated to a cash‑generating unit and the entity disposes of an operation within that unit, the goodwill associated with the operation disposed of shall be:
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87 | If an entity reorganises its reporting structure in a way that changes the composition of one or more cash‑generating units to which goodwill has been allocated, the goodwill shall be reallocated to the units affected. This reallocation shall be performed using a relative value approach similar to that used when an entity disposes of an operation within a cash‑generating unit, unless the entity can demonstrate that some other method better reflects the goodwill associated with the reorganised units.
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88 | When, as described in paragraph 81, goodwill relates to a cash‑generating unit but has not been allocated to that unit, the unit shall be tested for impairment, whenever there is an indication that the unit may be impaired, by comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount. Any impairment loss shall be recognised in accordance with paragraph 104. |
89 | If a cash‑generating unit described in paragraph 88 includes in its carrying amount an intangible asset that has an indefinite useful life [Refer:IAS 38 paragraph 88] or is not yet available for use and that asset can be tested for impairment only as part of the cash‑generating unit, paragraph 10 requires the unit also to be tested for impairment annually. |
90 | A cash‑generating unit to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the 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 shall recognise the impairment loss in accordance with paragraph 104. |
91–95 | [Deleted] |
96 | The annual impairment test for a cash‑generating unit to which goodwill has been allocated may be performed at any time during an annual period, provided the test is performed at the same time every year. Different cash‑generating units may be tested for impairment at different times. However, if some or all of the goodwill allocated to a cash‑generating unit was acquired in a business combination during the current annual period, that unit shall be tested for impairment before the end of the current annual period. |
97 | If the assets constituting the cash‑generating unit to which goodwill has been allocated are tested for impairment at the same time as the unit containing the goodwill, they shall be tested for impairment before the unit containing the goodwill. Similarly, if the cash‑generating units constituting a group of cash‑generating units to which goodwill has been allocated are tested for impairment at the same time as the group of units containing the goodwill, the individual units shall be tested for impairment before the group of units containing the goodwill. |
98 | At the time of impairment testing a cash‑generating unit to which goodwill has been allocated, there may be an indication of an impairment of an asset within the unit containing the goodwill. In such circumstances, the entity tests the asset for impairment first, and recognises any impairment loss for that asset before testing for impairment the cash‑generating unit containing the goodwill. Similarly, there may be an indication of an impairment of a cash‑generating unit within a group of units containing the goodwill. In such circumstances, the entity tests the cash‑generating unit for impairment first, and recognises any impairment loss for that unit, before testing for impairment the group of units to which the goodwill is allocated. |
99 | The most recent detailed calculation made in a preceding period of the recoverable amount of a cash‑generating unit to which goodwill has been allocated may be used in the impairment test of that unit in the current period provided all of the following criteria are met:
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100 | Corporate assets include group or divisional assets such as the building of a headquarters or a division of the entity, EDP equipment or a research centre. The structure of an entity determines whether an asset meets this Standard’s definition of corporate assets for a particular cash‑generating unit. The distinctive characteristics of corporate assets are that they do not generate cash inflows independently of other assets or groups of assets and their carrying amount cannot be fully attributed to the cash‑generating unit under review. |
101 | Because corporate assets do not generate separate cash inflows, the recoverable amount of an individual corporate asset cannot be determined unless management has decided to dispose of the asset. As a consequence, if there is an indication that a corporate asset may be impaired, recoverable amount is determined for the cash‑generating unit or group of cash‑generating units to which the corporate asset belongs, and is compared with the carrying amount of this cash‑generating unit or group of cash‑generating units. Any impairment loss is recognised in accordance with paragraph 104. |
102 | In testing a cash‑generating unit for impairment, an entity shall identify all the corporate assets that relate to the cash‑generating unit under review. If a portion of the carrying amount of a corporate asset:
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103 | Illustrative Example 8 illustrates the application of these requirements to corporate assets. |
104 | An impairment loss shall be recognised for a cash‑generating unit (the smallest group of cash‑generating units to which goodwill or a corporate asset has been allocated) if, and only if, the recoverable amount of the unit (group of units) is less than the carrying amount of the unit (group of units). The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:
These reductions in carrying amounts shall be treated as impairment losses on individual assets and recognised in accordance with paragraph 60. |
105 | In allocating an impairment loss in accordance with paragraph 104, an entity shall not reduce the carrying amount of an asset below the highest of:
The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit (group of units). |
106 | If it is not practicable to estimate the recoverable amount of each individual asset of a cash‑generating unit, this Standard requires an arbitrary allocation of an impairment loss between the assets of that unit, other than goodwill, because all assets of a cash‑generating unit work together. |
107 | If the recoverable amount of an individual asset cannot be determined (see paragraph 67):
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108 | After the requirements in paragraphs 104 and 105 have been applied, a liability shall be recognised for any remaining amount of an impairment loss for a cash‑generating unit if, and only if, that is required by another IFRS. |
109 | Paragraphs 110–116 set out the requirements for reversing an impairment loss recognised for an asset or a cash‑generating unit in prior periods. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash‑generating unit. Additional requirements for an individual asset are set out in paragraphs 117–121, for a cash‑generating unit in paragraphs 122 and 123 and for goodwill in paragraphs 124 and 125. |
110 | An entity shall assess at the end of each reporting period whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset. |
111 | In assessing whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased, an entity shall consider, as a minimum, the following indications: External sources of information
Internal sources of information
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112 | Indications of a potential decrease in an impairment loss in paragraph 111 mainly mirror the indications of a potential impairment loss in paragraph 12. |
113 | If there is an indication that an impairment loss recognised for an asset other than goodwill may no longer exist or may have decreased, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value may need to be reviewed and adjusted in accordance with the IFRS applicable to the asset, even if no impairment loss is reversed for the asset. |
114 | An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If this is the case, the carrying amount of the asset shall, except as described in paragraph 117, be increased to its recoverable amount. That increase is a reversal of an impairment loss. |
115 | A reversal of an impairment loss reflects an increase in the estimated service potential of an asset, either from use or from sale, since the date when an entity last recognised an impairment loss for that asset. Paragraph 130 requires an entity to identify the change in estimates that causes the increase in estimated service potential. Examples of changes in estimates include:
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116 | An asset’s value in use may become greater than the asset’s carrying amount simply because the present value of future cash inflows increases as they become closer. However, the service potential of the asset has not increased. Therefore, an impairment loss is not reversed just because of the passage of time (sometimes called the ‘unwinding’ of the discount), even if the recoverable amount of the asset becomes higher than its carrying amount. [Refer:Basis for Conclusions paragraph BCZ186] |
117 | The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years. |
118 | Any increase in the carrying amount of an asset other than goodwill above the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years is a revaluation. In accounting for such a revaluation, an entity applies the IFRS applicable to the asset. |
119 | A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another IFRS (for example, the revaluation model [Refer:IAS 16 paragraphs 31–42] in IAS 16). Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with that other IFRS. |
120 | A reversal of an impairment loss on a revalued asset is recognised in other comprehensive income and increases the revaluation surplus for that asset. However, to the extent that an impairment loss on the same revalued asset was previously recognised in profit or loss, a reversal of that impairment loss is also recognised in profit or loss. |
121 | After a reversal of an impairment loss is recognised, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. |
122 | A reversal of an impairment loss for a cash‑generating unit shall be allocated to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets. These increases in carrying amounts shall be treated as reversals of impairment losses for individual assets and recognised in accordance with paragraph 119. |
123 | In allocating a reversal of an impairment loss for a cash‑generating unit in accordance with paragraph 122, the carrying amount of an asset shall not be increased above the lower of:
The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit, except for goodwill. |
124 | An impairment loss recognised for goodwill shall not be reversed in a subsequent period. |
125 | IAS 38 Intangible Assets prohibits the recognition of internally generated goodwill. [Refer:IAS 38 paragraphs 48–50] Any increase in the recoverable amount of goodwill in the periods following the recognition of an impairment loss for that goodwill is likely to be an increase in internally generated goodwill, rather than a reversal of the impairment loss recognised for the acquired goodwill. |
126 | An entity shall disclose the following for each class of assets: [Refer:paragraph 127]
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127 | A class of assets is a grouping of assets of similar nature and use in an entity’s operations.
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128 | The information required in paragraph 126 may be presented with other information disclosed for the class of assets. For example, this information may be included in a reconciliation of the carrying amount of property, plant and equipment, at the beginning and end of the period, as required by IAS 16. [Refer:IAS 16 paragraph 73(e)] |
129 | An entity that reports segment information in accordance with IFRS 8 shall disclose the following for each reportable segment: [Refer:IFRS 8 paragraph 11]
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130 | An entity shall disclose the following for an individual asset (including goodwill) or a cash‑generating unit, for which an impairment loss has been recognised or reversed during the period:
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131 | An entity shall disclose the following information for the aggregate impairment losses and the aggregate reversals of impairment losses recognised during the period for which no information is disclosed in accordance with paragraph 130:
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132 | An entity is encouraged to disclose assumptions used to determine the recoverable amount of assets (cash‑generating units) during the period. However, paragraph 134 requires an entity to disclose information about the estimates used to measure the recoverable amount of a cash‑generating unit when goodwill or an intangible asset with an indefinite useful life [Refer:IAS 38 paragraph 88] is included in the carrying amount of that unit. |
133 | If, in accordance with paragraph 84, any portion of the goodwill acquired in a business combination during the period has not been allocated to a cash‑generating unit (group of units) at the end of the reporting period, the amount of the unallocated goodwill shall be disclosed together with the reasons why that amount remains unallocated.
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134 | An entity shall disclose the information required by (a)–(f) for each cash‑generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives:
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135 | If some or all of the carrying amount of goodwill or intangible assets with indefinite useful lives [Refer:IAS 38 paragraph 88] is allocated across multiple cash‑generating units (groups of units), and the amount so allocated to each unit (group of units) is not significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives, that fact shall be disclosed, together with the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to those units (groups of units). In addition, if the recoverable amounts of any of those units (groups of units) are based on the same key assumption(s) and the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to them is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives, an entity shall disclose that fact, together with:
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136 | The most recent detailed calculation made in a preceding period of the recoverable amount of a cash‑generating unit (group of units) may, in accordance with paragraph 24 or 99, be carried forward and used in the impairment test for that unit (group of units) in the current period provided specified criteria are met. When this is the case, the information for that unit (group of units) that is incorporated into the disclosures required by paragraphs 134 and 135 relate to the carried forward calculation of recoverable amount. |
137 | Illustrative Example 9 illustrates the disclosures required by paragraphs 134 and 135. |
138 | [Deleted] |
139 | An entity shall apply this Standard: [Refer:Basis for Conclusions paragraphs BC211–BC226]
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140 | Entities to which paragraph 139 applies are encouraged to apply the requirements of this Standard before the effective dates specified in paragraph 139. However, if an entity applies this Standard before those effective dates, it also shall apply IFRS 3 and IAS 38 (as revised in 2004) at the same time. |
140A | IAS 1 Presentation of Financial Statements (as revised in 2007) amended the terminology used throughout IFRSs. In addition it amended paragraphs 61, 120, 126 and 129. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period. |
140B | IFRS 3 (as revised in 2008) amended paragraphs 65, 81, 85 and 139, deleted paragraphs 91–95 and 138 and added Appendix C. An entity shall apply those amendments for annual periods beginning on or after 1 July 2009. If an entity applies IFRS 3 (revised 2008) for an earlier period, the amendments shall also be applied for that earlier period. |
140C | Paragraph 134(e) was amended by Improvements to IFRSs issued in May 2008. An entity shall apply that amendment for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact. |
140D | Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (Amendments to IFRS 1 First‑time Adoption of International Financial Reporting Standards and IAS 27), issued in May 2008, added paragraph 12(h). An entity shall apply that amendment prospectively for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the related amendments in paragraphs 4 and 38A of IAS 27 for an earlier period, it shall apply the amendment in paragraph 12(h) at the same time. |
140E | Improvements to IFRSs issued in April 2009 amended paragraph 80(b). An entity shall apply that amendment prospectively for annual periods beginning on or after 1 January 2010. Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact. |
140F | [Deleted] |
140G | [Deleted] |
140H | IFRS 10 and IFRS 11, issued in May 2011, amended paragraph 4, the heading above paragraph 12(h) and paragraph 12(h). An entity shall apply those amendments when it applies IFRS 10 and IFRS 11. |
140I |
140J | In May 2013 paragraphs 130 and 134 and the heading above paragraph 138 were amended. An entity shall apply those amendments retrospectively for annual periods beginning on or after 1 January 2014. Earlier application is permitted. An entity shall not apply those amendments in periods (including comparative periods) in which it does not also apply IFRS 13. |
140K | [Deleted] |
140L | IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraph 2. An entity shall apply that amendment when it applies IFRS 15. |
140M | IFRS 9, as issued in July 2014, amended paragraphs 2, 4 and 5 and deleted paragraphs 140F, 140G and 140K. An entity shall apply those amendments when it applies IFRS 9. |
140N | IFRS 17, issued in May 2017, amended paragraph 2. Amendments to IFRS 17, issued in June 2020, further amended paragraph 2. An entity shall apply that amendment when it applies IFRS 17. |
141 | This Standard supersedes IAS 36 Impairment of Assets (issued in 1998). |
This appendix is an integral part of the Standard. It provides guidance on the use of present value techniques in measuring value in use. Although the guidance uses the term ‘asset’, it equally applies to a group of assets forming a cash‑generating unit.
A1 | The following elements together capture the economic differences between assets:
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A2 | This appendix contrasts two approaches to computing present value, either of which may be used to estimate the value in use of an asset, depending on the circumstances. Under the ‘traditional’ approach, adjustments for factors (b)–(e) described in paragraph A1 are embedded in the discount rate. Under the ‘expected cash flow’ approach, factors (b), (d) and (e) cause adjustments in arriving at risk‑adjusted expected cash flows. Whichever approach an entity adopts to reflect expectations about possible variations in the amount or timing of future cash flows, the result should be to reflect the expected present value of the future cash flows, ie the weighted average of all possible outcomes. |
A3 | The techniques used to estimate future cash flows and interest rates will vary from one situation to another depending on the circumstances surrounding the asset in question. However, the following general principles govern any application of present value techniques in measuring assets:
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A4 | Accounting applications of present value have traditionally used a single set of estimated cash flows and a single discount rate, often described as ‘the rate commensurate with the risk’. In effect, the traditional approach assumes that a single discount rate convention can incorporate all the expectations about the future cash flows and the appropriate risk premium. Therefore, the traditional approach places most of the emphasis on selection of the discount rate. |
A5 | In some circumstances, such as those in which comparable assets can be observed in the marketplace, a traditional approach is relatively easy to apply. For assets with contractual cash flows, it is consistent with the manner in which marketplace participants describe assets, as in ‘a 12 per cent bond’. |
A6 | However, the traditional approach may not appropriately address some complex measurement problems, such as the measurement of non‑financial assets for which no market for the item or a comparable item exists. A proper search for ‘the rate commensurate with the risk’ requires analysis of at least two items—an asset that exists in the marketplace and has an observed interest rate and the asset being measured. The appropriate discount rate for the cash flows being measured must be inferred from the observable rate of interest in that other asset. To draw that inference, the characteristics of the other asset’s cash flows must be similar to those of the asset being measured. Therefore, the measurer must do the following:
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A7 | The expected cash flow approach is, in some situations, a more effective measurement tool than the traditional approach. In developing a measurement, the expected cash flow approach uses all expectations about possible cash flows instead of the single most likely cash flow. For example, a cash flow might be CU100, CU200 or CU300 with probabilities of 10 per cent, 60 per cent and 30 per cent, respectively. The expected cash flow is CU220. The expected cash flow approach thus differs from the traditional approach by focusing on direct analysis of the cash flows in question and on more explicit statements of the assumptions used in the measurement. |
A8 | The expected cash flow approach also allows use of present value techniques when the timing of cash flows is uncertain. For example, a cash flow of CU1,000 may be received in one year, two years or three years with probabilities of 10 per cent, 60 per cent and 30 per cent, respectively. The example below shows the computation of expected present value in that situation.
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A9 | The expected present value of CU892.36 differs from the traditional notion of a best estimate of CU902.73 (the 60 per cent probability). A traditional present value computation applied to this example requires a decision about which of the possible timings of cash flows to use and, accordingly, would not reflect the probabilities of other timings. This is because the discount rate in a traditional present value computation cannot reflect uncertainties in timing. |
A10 | The use of probabilities is an essential element of the expected cash flow approach. Some question whether assigning probabilities to highly subjective estimates suggests greater precision than, in fact, exists. However, the proper application of the traditional approach (as described in paragraph A6) requires the same estimates and subjectivity without providing the computational transparency of the expected cash flow approach. |
A11 | Many estimates developed in current practice already incorporate the elements of expected cash flows informally. In addition, accountants often face the need to measure an asset using limited information about the probabilities of possible cash flows. For example, an accountant might be confronted with the following situations:
In each case, the estimated expected cash flow is likely to provide a better estimate of value in use than the minimum, most likely or maximum amount taken alone. |
A12 | The application of an expected cash flow approach is subject to a cost‑benefit constraint. In some cases, an entity may have access to extensive data and may be able to develop many cash flow scenarios. In other cases, an entity may not be able to develop more than general statements about the variability of cash flows without incurring substantial cost. The entity needs to balance the cost of obtaining additional information against the additional reliabilityE6 that information will bring to the measurement. |
| E6 | [The term ‘faithful representation’, which was used in the Conceptual Framework issued in 2010 and is also used in the revised version of the Conceptual Framework issued in 2018, encompasses the main characteristics that the Framework called ‘reliability’ (refer Conceptual Framework paragraphs 2.12–2.19 and Basis for Conclusions paragraphs BC2.21–BC2.31).] |
A13 | Some maintain that expected cash flow techniques are inappropriate for measuring a single item or an item with a limited number of possible outcomes. They offer an example of an asset with two possible outcomes: a 90 per cent probability that the cash flow will be CU10 and a 10 per cent probability that the cash flow will be CU1,000. They observe that the expected cash flow in that example is CU109 and criticise that result as not representing either of the amounts that may ultimately be paid. |
A14 | Assertions like the one just outlined reflect underlying disagreement with the measurement objective. If the objective is accumulation of costs to be incurred, expected cash flows may not produce a representationally faithful [Refer:Conceptual Framework paragraphs 2.12 and 2.13] estimate of the expected cost. However, this Standard is concerned with measuring the recoverable amount of an asset. The recoverable amount of the asset in this example is not likely to be CU10, even though that is the most likely cash flow. This is because a measurement of CU10 does not incorporate the uncertainty of the cash flow in the measurement of the asset. Instead, the uncertain cash flow is presented as if it were a certain cash flow. No rational entity would sell an asset with these characteristics for CU10. |
A15 | Whichever approach an entity adopts for measuring the value in use of an asset, interest rates used to discount cash flows should not reflect risks for which the estimated cash flows have been adjusted. Otherwise, the effect of some assumptions will be double‑counted. |
A16 | When an asset‑specific rate is not directly available from the market, an entity uses surrogates to estimate the discount rate. The purpose is to estimate, as far as possible, a market assessment of:
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A17 | As a starting point in making such an estimate, the entity might take into account the following rates:
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A18 | However, these rates must be adjusted:
Consideration should be given to risks such as country risk, currency risk and price risk. |
A19 | The discount rate is independent of the entity’s capital structure and the way the entity financed the purchase of the asset, because the future cash flows expected to arise from an asset do not depend on the way in which the entity financed the purchase of the asset. |
A20 | Paragraph 55 requires the discount rate used to be a pre‑tax rate. Therefore, when the basis used to estimate the discount rate is post‑tax, that basis is adjusted to reflect a pre‑tax rate. |
A21 | An entity normally uses a single discount rate for the estimate of an asset’s value in use. However, an entity uses separate discount rates for different future periods where value in use is sensitive to a difference in risks for different periods or to the term structure of interest rates. |
The amendment in this appendix shall be applied when an entity applies IAS 16 Property, Plant and Equipment (as revised in 2003). It is superseded when IAS 36 Impairment of Assets (as revised in 2004) becomes effective. This appendix replaces the consequential amendments made by IAS 16 (as revised in 2003) to IAS 36 Impairment of Assets (issued in 1998). IAS 36 (as revised in 2004) incorporates the requirements of the paragraphs in this appendix. Consequently, the amendments from IAS 16 (as revised in 2003) are not necessary once an entity is subject to IAS 36 (as revised in 2004). Accordingly, this appendix is applicable only to entities that elect to apply IAS 16 (as revised in 2003) before its effective date.
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The text of this appendix has been omitted from this volume.
This appendix is an integral part of the Standard.
C1 | In accordance with IFRS 3 (as revised in 2008), the acquirer measures and recognises goodwill as of the acquisition date as the excess of (a) over (b) below:
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C2 | Paragraph 80 of this Standard requires goodwill acquired in a business combination to be allocated to each of the acquirer’s cash‑generating units, or groups of cash‑generating units, expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units, or groups of units. It is possible that some of the synergies resulting from a business combination will be allocated to a cash‑generating unit in which the non‑controlling interest does not have an interest. |
C3 | Testing for impairment involves comparing the recoverable amount of a cash‑generating unit with the carrying amount of the cash‑generating unit. |
C4 | If an entity measures non‑controlling interests as its proportionate interest in the net identifiable assets of a subsidiary at the acquisition date, rather than at fair value, goodwill attributable to non‑controlling interests is included in the recoverable amount of the related cash‑generating unit but is not recognised in the parent’s consolidated financial statements. As a consequence, an entity shall gross up the carrying amount of goodwill allocated to the unit to include the goodwill attributable to the non‑controlling interest. This adjusted carrying amount is then compared with the recoverable amount of the unit to determine whether the cash‑generating unit is impaired. |
C5 | Paragraph 104 requires any identified impairment loss to be allocated first to reduce the carrying amount of goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. |
C6 | If a subsidiary, or part of a subsidiary, with a non‑controlling interest is itself a cash‑generating unit, the impairment loss is allocated between the parent and the non‑controlling interest on the same basis as that on which profit or loss is allocated. |
C7 | If a subsidiary, or part of a subsidiary, with a non‑controlling interest is part of a larger cash-generating unit, goodwill impairment losses are allocated to the parts of the cash‑generating unit that have a non‑controlling interest and the parts that do not. The impairment losses should be allocated to the parts of the cash‑generating unit on the basis of:
In those parts that have a non‑controlling interest, the impairment loss is allocated between the parent and the non‑controlling interest on the same basis as that on which profit or loss is allocated. |
C8 | If an impairment loss attributable to a non‑controlling interest relates to goodwill that is not recognised in the parent’s consolidated financial statements (see paragraph C4), that impairment is not recognised as a goodwill impairment loss. In such cases, only the impairment loss relating to the goodwill that is allocated to the parent is recognised as a goodwill impairment loss. |
C9 | Illustrative Example 7 illustrates the impairment testing of a non‑wholly‑owned cash‑generating unit with goodwill. |
International Accounting Standard 36 Impairment of Assets (as revised in 2004) was approved for issue by eleven of the fourteen members of the International Accounting Standards Board. Messrs Cope and Leisenring and Professor Whittington dissented. Their dissenting opinions are set out after the Basis for Conclusions.
| Sir David Tweedie | Chairman |
| Thomas E Jones | Vice‑Chairman |
| Mary E Barth | |
| Hans‑Georg Bruns | |
| Anthony T Cope | |
| Robert P Garnett | |
| Gilbert Gélard | |
| James J Leisenring | |
| Warren J McGregor | |
| Patricia L O’Malley | |
| Harry K Schmid | |
| John T Smith | |
| Geoffrey Whittington | |
| Tatsumi Yamada |
Recoverable Amount Disclosures for Non-Financial Assets was approved for issue by fifteen members of the International Accounting Standards Board (IASB). Mr Kabureck abstained from voting in view of his recent appointment to the IASB.
| Hans Hoogervorst | Chairman |
| Ian Mackintosh | Vice-Chairman |
| Stephen Cooper | |
| Philippe Danjou | |
| Martin Edelmann | |
| Jan Engström | |
| Patrick Finnegan | |
| Amaro Luiz de Oliveira Gomes | |
| Gary Kabureck | |
| Prabhakar Kalavacherla | |
| Patricia McConnell | |
| Takatsugu Ochi | |
| Darrel Scott | |
| Chungwoo Suh | |
| Mary Tokar | |
| Wei‑Guo Zhang |
| 1 | In the case of an intangible asset, the term ‘amortisation’ is generally used instead of ‘depreciation’. The two terms have the same meaning. (back) |
| 2 | Once an asset meets the criteria to be classified as held for sale (or is included in a disposal group that is classified as held for sale), it is excluded from the scope of this Standard and is accounted for in accordance with IFRS 5 Non‑current Assets Held for Sale and Discontinued Operations. (back) |