IMPAIRMENT OF ASSETS (PAS 36)

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ISSUES IN ACCOUNTING FOR AN IMPAIRMENT:

1. Objective and scope of PAS 36 In measuring value in use, the discount rate used should be the pre-tax rate that
2. Indication of possible impairment reflects current market assessments of the time value of money and the risks
3. Measurement of recoverable amount specific to the asset. It is (based on priority):
4. Recognition of impairment loss 1. The current market rate the entity would pay in financing that specific
5. Reversal of impairment loss asset or portfolio;
6. Impairment of cash generating units 2. The entity's own weighted average cost of capital;
7. Disclosures 3. The entity's incremental borrowing rate; or
4. Other market borrowing rates.

OBJECTIVE & SCOPE OF PAS 36:

RECOGNITION OF IMPAIRMENT LOSS
The objective of PAS 36 is to ensure that assets are carried at no more than their
recoverable amount, and to define how recoverable amount is determined. WHEN? If the recoverable value of an asset is lesser than its carrying value, then
the asset is said to be impaired. Needless to say, if the recoverable value is greater
than its carrying amount, there's no, therefore, impairment loss to be recognized.
PAS 36 applies to all assets except for ,
1. Inventories (PAS 2); HOW? If the entity elected to use cost model, impairment loss shall be recognized
2. Assets arising from construction contracts (PAS 11); immediately in profit or loss by reducing the asset's carrying value to its
3. Deferred tax assets (PAS 12); recoverable amount.
4. Assets arising from employee benefits (PAS 19);
5. Financial assets (PAS 39); If the entity, however, uses revaluation model, excess over recoverable amount
6. Investment property carried at fair value (PAS 40); must be directly charged against any revaluation surplus related to the asset before
7. Biological assets carried at fair value (PAS 41); recognizing the impairment loss in profit and loss statement.
8. Insurance contract assets (PFRS 4); and
9. Non-current assets held for sale (PFRS 5). PAS 36 doesn't specify whether the impairment shall be directly credited to the
asset or its accumulated depreciation. In accordance with European and US
Therefore, PAS 36 applies to (among other assets): GAAP, impairment loss is adjusted through crediting accumulated depreciation
1. Property, plant and equipment; account.
2. Investment property carried at cost;
3. Intangible assets; and COST MODEL:
4. Investments in subsidiaries, associates, and joint ventures carried at cost.
*Recoverable Value XX
Less: Carrying Value of Asset (XX)
INDICATION OF POSSIBLE IMPAIRMENT:
Impairment Loss (XX)
External sources (among others):
1. Market value of the asset declines; Impairment Loss XX
2. Negative changes in technology, markets, economy, or laws; Accumulated Depreciation XX
3. Increases in market interest rates; and #
4. Company stock price is below its book value.
REVALUATION MODEL:
Internal sources (among others):
1. Obsolescence or physical damage of an asset; *Recoverable Value XX
2. Asset is part of a restructuring or held for disposal; Less: Carrying Value of Asset (XX)
3. Worse economic performance than expected.
Excess over recoverable cost (XX)
MEASUREMENT OF RECOVERABLE AMOUNT: Less: Revaluation Surplus, if any XX
Under PAS 36, the recoverable amount of an asset is the higher of its fair value Impairment loss (XX)
less cost to sell and value in use.
Revaluation Surplus
Fair Value Less Cost to sell (or Net Selling Price) Impairment Loss XX
Rules in determining Fair Value: Accumulated Depreciation XX
a. If there's a binding sale agreement, use the agreed price. #
b. If there's no binding sale agreement but there is an active market for that
type of asset, use the market price. Market price means current bid *Recoverable Value = Fair value less cost to sell or Value in use,
price, if available, or the price in the most recent transaction. whichever is higher.
c. If there's no binding sale agreement and the asset is not traded in an
active market, the fair value is the best estimate of price that willing
parties might agreed.
REVERSAL OF IMPAIRMENT LOSS
Composition of Cost to Sell:
Includes: WHEN? If the recoverable value of previously-impaired asset turns out to be
a. legal cost higher than its current carrying value, then the asset shall be increased to its new
b. attributable stamp and transfer taxes recoverable amount. However, PAS 36 further provides that the increase in
c. cost of removing the asset, and carrying amount of an asset due to a reversal of an impairment loss shall not
d. any other cost to bring the asset into a "for-sale" condition. exceed the carrying amount as if the asset does not suffered from impairment.
Excludes:
a. finance cost HOW? If the entity elected to use cost model, a gain on reversal of impairment
b. Attributable income taxes shall be recognized immediately in profit or loss by increasing the value of the
c. termination benefits, and asset to the threshold indicated above.
d. costs incurred following the sale.
If the entity, however, uses revaluation model, the same procedure is observed
Value in Use (or the discounted future cash flows) but the excess of the new recoverable amount over the carrying value as if there's
Rules in calculating projected cash flows: no previous impairment occurred, if any, must be directly credited to revaluation
a. Cash flow projections shall be based on reasonable and supportable surplus and should be amortize in the same basis in PAS 16.
assumptions.
b. Projections shall be based on the most latest budgets on financial
forecast, usually up to maximum period of 5 years, unless a longer COST & REVALUATION MODEL:
period can be justified. *Threshold Value XX
c. Projections beyond 5 years shall be estimated by extrapolating the 5 -year
projections using a steady or declining growth rate each subsequent year, Less: Carrying Value of Asset (XX)
unless an increasing rate can be justified. Gain on reversal of impairment XX
Composition of estimates of future cash flows:
Includes: *Threshold Value = New recoverable amount or Carrying value of asset
a. Cash inflows of continuing use of the asset as if there's no impairment loss previously recognized, whichever is
b. Cash outflows necessary to generate the inflows of cash from continuing lower.
use of the asset
c. Net cash flows on the disposal of the asset at the end of its useful life. Accumulated Depreciation XX
Excludes: Gain on Reversal of impairment XX
a. Cash flows relating to restructuring to which the entity is not yet #
committed
b. Cash flows that arises from enhancing the performance of an asset
c. Cash flows from financing activities, and
d. Related income tax

Impairment Of Assets (PAS 36) Page 1

 If the new recoverable amount is higher than the carrying value as if there's no
previous impairment recognized, the excess must be credited to revaluation
surplus if the company elected to use revaluation model and must be amortized
over the remaining life of the asset. Needless to say, the excess must be ignored
if the company uses the cost model.
EXERCISES:
PROBLEM 1. Honesto company has one division that performs machinery
operations on parts that are sold to contractors. A group of machines have an
aggregate cost and accumulated depreciation on January 1, 2012 as follows:

Machinery 90,000,000
New Recoverable Value XX
Acc. Depreciation 25,000,000
Less: Carrying Value of an asset as if no (XX) Carrying Amount 65,000,000
previous impairment happened
The machines have an average remaining life of 4 years and it has been
Revaluation Surplus XX determined that this group of machines constitutes a cash generating unit. The fair
value less cost to sell of this group of machines in an active market is determined
Appropriate Asset Account XX to be P48,000,000.
Accumulated Depreciation XX
Gain on reversal of impairment XX Based on supportable and reasonable assumptions, the financial forecast for this
Revaluation Surplus XX group of machines reveals the following cash inflows and cash outflows for the
# next 4 years:

Year Cash Inflows Cash Outflows

2012 30,000,000 12,000,000
2013 32,500,000 17,500,000
2014 27,500,000 12,500,000
2015 16,000,000 4,000,000

It is believed that the discount rate of 8% is reflective of time value of money and
the risks specific t the group of machines. (use 3 decimal places in PV factors.

1. The value in use is:

a. 48,000,000 b. 50,325,000 c. 60,000,000 d. 65,000,000
IMPAIRMENT OF CASH GENERATING UNIT
2. The recoverable amount is:
DEFINITION. A cash generating unit is the smallest identifiable group of
assets that generate cash flows from continuing use of that are largely a. 48,000,000 b. 50,325,000 c. 60,000,000 d. 65,000,000
independent of the cash inflows from other group of assets.
3. The impairment loss in 2011 is:
CARRYING AMOUNT OF THE CGU. PAS 36, paragraph 76, provides that the
carrying amount of the CGU includes only those assets that can be directly a. 0 b. 5,000,000 c. 14,675,000 d. 17,000,000
attributed on a reasonable and consistent basis to the CGU. Therefore, it does
not include the carrying amount of any recognized liability, unless the 4. The depreciation for 2012 is:
recoverable amount of the CGU cannot be determined without consideration of
this liability. a. 12,581,250 b. 16,250,000 c. 12,000,000 d. 15,000,000

ALLOCATION OF IMPAIRMENT LOSS. PAS 36 paragraph 104 states that

when an impairment loss is recognized for a CGU, this loss shall be allocated to 5. Assuming in December 2012, the fair value less cost to sell of the group of
the assets of the unit in the ff. order: asset becomes P50,000,000 and its discounted future net cash flows is
a. First, to Goodwill, if any 48,963,000. How much is the gain on reversal, if any, that must be included in
b. Then, to all other noncash assets of the CGU in a prorata basis using the profit or loss in 2012?
their carrying values. a. 12,256,250 b. 11,006,250 c. 11,219,250 d. 0

However, Paragraph 105 provides that the new carrying amount of any asset PROBLEM 2. Editha Company has the following information on January 1,
must not be reduced below its fair value less cost to sell, value in use and 2010 related to its property, plant and equipment:
zero. The amount of impairment loss that would otherwise have been allocated
to the asset shall be allocated prorate to the other assets of the CGU.
Land 30,000,000
Building 300,000,0000
Impairment Loss XX
Acc. Dep. - Building 37,500,000
Less: Goodwill, if any (XX)
Machinery (2 Machines) 400,000,000
Impairment Loss to be allocated to other noncash assets prorata XX
to its carrying values. Acc. Dep. - Machinery 100,000,000

There were no additions or disposals during 2010. Depreciation is computed using

REVERSAL OF IMPAIRMENT LOSS. Paragraph 124 of PAS 36 explicitly the straight line over the 20 years for building and 10 years for the machinery. On
provides that an impairment loss recognized for goodwill shall not be reversed June 30, 2010, all the properties were revalued as:
in a subsequent period.
Asset Replacement Cost Sound Value
Land 40,000,000 40,000,000
DISCLOSURES
Building 500,000,000 425,000,000
• Disclosure by class of assets: Machinery 650,000,000 455,000,000
1. impairment losses recognised in profit or loss
2. impairment losses reversed in profit or loss
3. which line item(s) of the statement of comprehensive income On June 30, 2011, building was revalued at P300,000,000, its fair value at that
4. impairment losses on revalued assets recognised in other comprehensive time. One of the two machines was sold on December 31, 2011 at P250,000,000.
income
5. impairment losses on revalued assets reversed in other comprehensive income 1. What is the revaluation surplus on June 30, 2010?
a. 920,000,000 b. 355,000,000 c. 345,000,000 d. 327,500,000
• Disclosure by reportable segment:
1. impairment losses recognised 2. What is the total depreciation for 2010?
2. impairment losses reversed
a. 55,000,000 b. 66,750,000 c. 72,500,000 d. 90,000,000

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

3. What is the revaluation surplus on December 31, 2010?
1. Events and circumstances resulting in the impairment loss
2. Amount of the loss a. 355,000,000 b. 345,000,000 c. 337,500,000 d. 327,500,000
3. Individual asset: nature and segment to which it relates
4. Cash generating unit: description, amount of impairment loss (reversal) by
class of assets and segment 4. What is the impairment loss on December 31, 2011?
5. If recoverable amount is fair value less costs to sell, disclose the basis for
a. 160,000,000 b. 100,000,000 c. 60,000,000 d. 0
determining fair value
6. f recoverable amount is value in use, disclose the discount rate
5. Gain on sale on December 31, 2011is:
• If impairment losses recognised (reversed) are material in aggregate to the a. 71,250,000 b. 123,750,000 c. (13,750,000) d. 60,000,000
financial statements as a whole, disclose:
1. Main classes of assets affected
2. Main events and circumstances PROBLEM 3. One of the CGUs of Carlo Company is the production of liquor.
On December 31, 2012, Carlo believed that the assets of the CGU are impaired
• Disclose detailed information about the estimates used to measure recoverable based on an analysis of economic indicators.
amounts of cash generating units containing goodwill or intangible assets with
indefinite useful lives. The assets and liabilities of the CGU at carrying amount on December 31, 2012
are:

Impairment Of Assets (PAS 36) Page 2

Cash 4,000,000
Accounts Receivable 6,000,000
Allow. For Doubtful Accounts 1,000,000
Inventory 7,000,000
Building 16,000,000
Acc. Depreciation - Building 4,000,000
Machineries 12,000,000
Acc. Depreciation - Machineries 6,000,000
Goodwill 3,000,000
Accounts Payable 2,000,000
Loans Payable 1,000,000
Total 34,000,000

The entity determined that the value in use of the CGU is P30,000,000. The
accounts receivable are considered collectible, except for those considered
doubtful. The inventory has a fair value of 6,900,000.

1. What is the Impairment loss of the CGU?

a. 0 b. 7,000,000 c. 4,000,000 d. 1,000,000

2. What is the carrying amount of Building after recognizing the impairment

loss?
a. 12,000,000 b. 9,454,545 c. 10,545,454 d. 9,400,000

3. What is the carrying amount of Accounts Receivable after recognizing the

impairment loss?
a. 5,000,000 b. 3,939,394 c. 4,393,939 d. 4,350,000

4. What is the carrying amount of Inventory after recognizing the impairment

loss?
a. 7,000,000 b. 6,900,000 c. 5,515,151 d. 6,151,515

5. What is the carrying amount of Goodwill after recognizing the impairment

loss?
a. 3,000,000 b. 2,363,636 c. 2,636,364 d. 0

PROBLEM 4. Mary Grace Company has two generating units. On December

31, 2010, the assets of one cash generating unit at carrying amount are:

Inventory 200,000
Accounts Receivable 300,000
Plant and equipment 6,000,000
Accumulated Depreciation 2,600,000
Patent 850,000
Goodwill 100,000

The accounts receivable are regarded as collectible and the inventory's fair value
less cost to sell is equal to the carrying amount. The patent has a fair value less
cost to sell of 750,000. On December 31, 2010, Mary Grace Company
undertook impairment testing of the CGU and determined the value in use of the
unit at 4,500,000.

1. What is the impairment loss of the CGU at December 31, 2010?

a. 800,000 b. 700,000 c. 600,000 d. 0

2. What is the amount of Inventory on December 31, 2010?

a. 153,850 b. 167,010 c. 180,000 d. 200,000

3. What is the amount of Accounts Receivable at December 31, 2010?

a. 300,000 b. 250,520 c. 256,700 d. 253,850

4. What is the amount of Patent at December 31, 2010?

a. 850,000 b. 750,000 c. 709,800 d. 727,320

5. What is the amount of Plant and Equipment at December 31, 2010?

a. 3,400,000 b. 2,909,280 c. 2,839,180 d. 2,800,000

ANSWER KEY:

PROB. 1: 1. B 2. B 3. C 4. A 5. B
PROB. 2: 1. B 2. C 3. C 4. D 5. A
PROB. 3: 1. B 2. D 3. A 4. B 5. D
PROB. 4: 1. A 2. D 3. A 4. B 5. D

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