PAS 36
IMPAIRMENT
OF ASSETS
CORE PRINCIPLE
• If the carrying amount of an asset is greater
than its recoverable amount, the asset is
impaired. The excess is impairment loss.
• No asset shall be carried above its
recoverable amount
COMPUTATION OF IMPAIRMENT LOSS
Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx
• Recoverable amount is the amount to be recovered through use or
sale of an asset. It is the higher of an asset’s:
a. Fair value less costs of disposal, and
b. Value in use
Value in use is the present value of the future cash flows expected to
be derived from an asset or cash-generating unit.
IDENTIFYING AN ASSET THAT MAY BE
IMPAIRED
• 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.
• If there is no indication that an asset may be
impaired, an entity is not required to estimate the
recoverable amount of the asset.
INDICATIONS OF IMPAIRMENT
I. External sources of information
a. Significant decline in the asset’s value more than what is expected as a result of passage of time of normal use.
b. Significant changes in technological, market, economic or legal environment in which the entity operates or in the
market to which an asset is dedicated.
c. Increase in market interest rates or other market rates of return on investments which are likely to affect discount
rates used in calculating asset’s value in use and decrease asset’s recoverable amount materially.
d. Carrying amount of the net assets is more than its market capitalization.
II. Internal sources of information
e. Evidence of obsolescence or physical damage
f. Significant change with adverse effect to the entity has taken place or will take place, which will affect expected
use of asset, e.g., discontinuance, disposal, restructuring plans.
g. Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will
be, worse than expected.
REQUIRED TESTING FOR IMPAIRMENT
• The following assets are required to be tested for
impairment at least annually, whether or not there
are indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
MEASURING RECOVERABLE AMOUNT
• Recoverable amount is the higher of the asset’s fair
value less costs of disposal and value in use.
• However, 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.
VALUE IN USE
• Value in use is the present value of the future cash flows expected to
be derived from an asset or cash-generating unit.
Any residual value of the asset and disposal costs should be
included in estimating future cash inflows and outflows.
Cash flow projections shall cover a maximum period of 5 years.
Projections beyond 5 years are extrapolated.
The discount rate to be used shall be a pre-tax rate
VALUE IN USE - CONTINUATION
When making estimates of future cash flows for purposes of
computing value in use:
Exclude cash flows arising from: Include cash flows arising from:
1. Future restructurings not yet committed 1. Revenues to be derived from the
2. Improving or enhancing the asset’s continuing use of the asset
performance 2. Day-to-day costs of using the asset
3. Income taxes 3. Any residual value of the asset and
4. Financing activities disposal costs
RECOGNIZING AND MEASURING AN IMPAIRMENT LOSS
• Impairment loss is recognized in profit or loss, unless
the asset is carried at revalued amount, in which case
revaluation surplus is decreased first and any excess
is recognized in profit or loss. The decrease in the
revaluation surplus is recognized in other
comprehensive income.
DEPRECIATION AFTER IMPAIRMENT
• After the recognition of an impairment loss, the
depreciation (amortization) 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.
CASH-GENERATING UNIT (CGU)
• Cash-generating unit (CGU) 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.
IMPAIRMENT OF INDIVIDUAL ASSETS
INCLUDED IN A CGU
• Assets whose recoverable amount can be determined
reliably are tested for impairment individually.
• Assets whose recoverable amount cannot be determined
reliably (e.g., assets that do not generate their own cash
flows) are included in a CGU. The CGU is the one tested
for impairment.
ALLOCATING GOODWILL TO CGU’S
• For purposes of impairment testing, goodwill
acquired in a business combination shall be
allocated to each of the acquirer’s CGU in the
year of business combination.
IMPAIRMENT LOSS FOR A CGU
• The impairment loss on a CGU shall be allocated
1. First, to any goodwill allocated to the CGU
2. Then, to the other assets of the unit pro rata on the basis of the
carrying amount of each asset in the unit.
END
