IAS 36: Impairment of assets
Recoverable amount, value in use, impairment losses and how they are spread across a cash-generating unit.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: An impairment is a write-down of an asset because it is worth less than the figure in the accounts.
Why you need it: The accounts must not show an asset at more than it is worth.
What you do: Find the recoverable amount. This is the higher of (a) what the asset could be sold for, minus selling costs, and (b) the value of the cash it will earn in future. If the carrying amount is higher than the recoverable amount, write the asset down to the recoverable amount. The difference is an impairment loss, and it reduces profit.
Example. A shop’s fittings are in the accounts at £200,000. The shop is losing money. The recoverable amount is £120,000. Impairment loss = £200,000 − £120,000 = £80,000. The fittings are now shown at £120,000.
Key words
- Impairment
- A write-down of an asset because it is worth less than the value shown in the accounts. The write-down is an expense.Example: Shop fittings are in the accounts at £200,000, but they are only worth £120,000. The impairment is £80,000.
- Recoverable amount
- The higher of: (a) what an asset could be sold for, minus selling costs, and (b) the value of the cash it will bring in if the business keeps using it.Example: A machine could be sold for £90,000 or used to generate cash worth £87,829. The recoverable amount is £90,000.
- Value in use
- The value today of the cash an asset will bring in if the business keeps using it. It is worked out by discounting the future cash flows.Example: Cash flows of £40,000, £35,000 and £30,000 discounted at 10% give a value in use of £87,829.
- Cash-generating unit (CGU)
- The smallest group of assets that produces cash on its own. Assets are tested for impairment as a group when they cannot be tested one by one.Example: One shop, with its fittings, equipment and share of goodwill, can be a cash-generating unit.
- Headroom
- The amount by which an asset’s recoverable amount is higher than its value in the accounts. Small headroom means a small change could cause an impairment.Example: Goodwill of £84m and recoverable amount of £90.2m gives headroom of £6.2m (about 7%).
Learn
An asset is impaired when the figure in the accounts (its carrying amount) is more than the business could get back from it. IAS 36 makes sure assets are not shown at more than they are worth.
When to test
- At every year end, look for signs (indicators) that an asset may be impaired. Signs from outside the business: its market value has fallen, interest rates have gone up, or the company’s shares are worth less than its net assets. Signs from inside: damage, the asset is out of date, a plan to close part of the business, or worse results than expected.
- If there is a sign, do the test.
- Goodwill, and intangible assets with no end date, are tested every year, even with no signs.
The test
Value in use is the present value of the cash the asset will produce in future. Divide each year’s cash by (1 + r)n, where r is the interest rate and n is the year number.
Example: Carrying amount £100,000. Fair value − costs to sell = £70,000. Value in use = £85,000. Recoverable amount = the higher = £85,000. Impairment loss = £100,000 − £85,000 = £15,000.
Recording the loss
Debit Impairment loss (an expense in profit or loss). Credit the asset. If the asset was revalued before, first take the loss off its revaluation surplus. Only the amount left over goes to profit or loss.
Cash-generating units (CGUs)
Many assets do not produce cash on their own. They are tested together as a group, called a cash-generating unit, such as a factory or a shop. Goodwill is shared out between CGUs. If a CGU is impaired, the loss is taken off:
- Goodwill first.
- Then the other assets, in proportion to their carrying amounts. No asset can go below the highest of: its fair value − costs to sell, its value in use, and zero.
Reversals
If things get better later, an impairment on most assets can be reversed. The asset can go back up to the figure it would have had with no impairment. An impairment of goodwill is never reversed.
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Videos from YouTube tutors
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Worked example
A single asset. A machine has a carrying amount of £120,000. It could be sold for £92,000 with £2,000 of selling costs. It will produce cash flows of £40,000, £35,000 and £30,000 over the next three years. The discount rate is 10%.
| Year | Cash flow £ | Discount factor at 10% | Present value £ |
|---|---|---|---|
| 1 | 40,000 | 1 ÷ 1.10 | 36,364 |
| 2 | 35,000 | 1 ÷ 1.10² | 28,926 |
| 3 | 30,000 | 1 ÷ 1.10³ | 22,539 |
| Value in use | 87,829 |
Fair value less costs of disposal = £92,000 − £2,000 = £90,000. That is higher than value in use, so the recoverable amount is £90,000. Impairment loss = £120,000 − £90,000 = £30,000.
A CGU. A division has goodwill of £50,000, property, plant and equipment of £300,000 and other intangibles of £150,000 (£500,000 in total). Its recoverable amount is £380,000, so the loss is £120,000.
| Asset | Carrying amount £ | Loss allocated £ | After impairment £ |
|---|---|---|---|
| Goodwill | 50,000 | 50,000 | 0 |
| Property, plant and equipment | 300,000 | 46,667 | 253,333 |
| Other intangibles | 150,000 | 23,333 | 126,667 |
| Total | 500,000 | 120,000 | 380,000 |
Goodwill takes the first £50,000. The remaining £70,000 is split 300:150 between the other assets.
Practice questions
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