CIMA F1 Syllabus B. Financial Statements - IAS 36 Impairments - Notes ^{1 / 1}

“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

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.

Dr I/S 5
Cr PPE 5

Impairment of an asset which was previously revalued

When an asset has been previously revalued upwards (and, thus has generated a revaluation reserve specific to that asset), the impairment is firstly offset against the asset-specific revaluation reserve and if there is any excess left, this is then charged to the statement of profit or loss as an expense.

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

Disclosure in Financial Statements

If an asset/multiple assets are impaired, the following things need to be disclosed in the financial statements:

1. The amount of the impairment loss for each asset class impaired

2. An explanation as to what caused the impairment charge for assets that have been significantly impaired

3. An explanation as to whether the recoverable amount is fair value less costs to sell or value in use for significantly impaired assets