ACCA SBR ^UK Syllabus C. Reporting The Financial Performance Of A Range Of Entities - IAS 36 Impairments - Notes ^{6 / 16}

“What they’re actually worth” is called the “Recoverable Amount”

So no asset can be in the accounts at MORE than the recoverable amount.

Less is fine, just not more.

So, assets need to be checked that their NBV is not greater than the RA.

If it is then it must be impaired down to the RA

So how do you calculate a Recoverable Amount?

There are 2 things an entity can do with an asset

1. Sell it or

2. Use it

It will obviously choose the one which is most beneficial

So, you'll choose the higher of the following

• FV-CTS

  (Fair value less costs to sell)

• VIU

  (Value in use)

So the higher of the FV - CTS and VIU is called the Recoverable amount

Illustration

In the accounts an item of PPE is carried at 100. 
It’s FV-CTS is 90 and its VIU is 80.

• This means the recoverable amount is 90 (higher of FV-CTS and VIU)

• And that the PPE (100) is being carried at higher than the RA, which is not allowed, and so an impairment of 10 down to the RA is required in the accounts (100 - 90)

Recognition of an Impairment Loss

An impairment loss should be recognised whenever RA is below carrying amount. 

The impairment loss is an expense in the income statement 

Adjust depreciation for future periods.

Here's some boring definitions for you:

• Fair value
  The amount obtainable from the sale of an asset in a bargained transaction between knowledgeable, willing parties.

• Value in use
  The discounted present value of estimated future cash flows expected to arise from:

  - the continuing use of an asset, and from

  - its disposal at the end of its useful life

Fair Value Less Costs to Sell

• If there is a binding sale agreement, use the price under that agreement less costs of disposal

• If there is an active market for that type of asset, use market price less costs of disposal. 

  Market price means current bid price if available, otherwise the price in the most recent transaction

• If there is no active market, use the best estimate of the asset's selling price less costs of disposal (direct added costs only (not existing costs or overhead))

Let's look at VIU in more detail..

The future cash flows:

• Must be based on reasonable  and supportable assumptions

  (the most recent budgets and forecasts)

• Budgets and forecasts should not go beyond five years

• The cashflows should relate to the asset in its current condition 

  – future restructuring to which the entity is not committed and expenditures to improve the asset's performance should not be anticipated

• The cashflows  should not include cash from financing activities, or income tax

• The discount rate used should be the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset

At each balance sheet date, review all assets to look for any indication that an asset may be impaired.

If there is an indication that an asset may be impaired, then you must calculate the asset’s recoverable amount... to see if it is below carrying value

if it is - then you must impair it

Illustration

Asset has carrying value of 100

It has a FV-CTS of 90

It has a VIU of 95

It's recoverable amount is therefore the higher of the 2 = 95 and this is below the carrying value in the books (100) and so needs impairment of 5.

What are the indicators of impairment?

1. Losses / worse economic performance

2. Market value declines

3. Obsolescence or physical damage

4. Changes in technology, markets, economy, or laws

5. Increases in market interest rates

6. Loss of key employees

7. Restructuring / re-organisation

Just to confuse you a little bit more, we do not JUST check for impairment when there has been an indicator (listed above).

We also check the following ANNUALLY regardless of whether there has been an impairment indicator or not:

1. an intangible asset with an indefinite useful life

2. an intangible asset not yet available for use

3. goodwill acquired in a business combination

Reversal of an Impairment Loss

First of all you need to think about WHY the impairment has been reversed..

1. Discount Rate Changes

   Here, no reversal is allowed. So if the discount rate lowers and thus improves the VIU, this is not considered to be a reversal of an impairment.

2. Other

   The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognised

3. Accounting treatment

   Reversal of an impairment loss is consistent with the original treatment of the impairment in terms of whether recognised as income in the income statement or OCI.

Reversal of an impairment loss for goodwill is prohibited.