Impairment Estimates in Business

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Estimates of future cash flows should be based on reasonable and supportable assumptions that represent management’s best estimate of the economic conditions that will exist over the remaining useful life of the asset.

The discount rate used should be the rate of return that the market would expect from an equally risky investment. However, both the expected future cash flows and the discount rate might be adjusted to allow for uncertainty about the future – such as the business risk associated with the asset and expectations of possible variations in the amount or timing of expected future cash benefits from using the asset

However, an impairment loss recognised in respect of an asset carried at a previously recognised revaluation surplus is recognised in other comprehensive income to the extent that it is covered by that surplus.

Thus it is treated in the same way as a downward revaluation, reducing the revaluation reserve balance relating to that asset in the statement of changes in equity. Impairment not covered by a previously recognised surplus on the same asset is recognised in profit or loss.

Impairment of an asset should be identified and accounted for as follows:

(1) At the end of each reporting period, the entity should assess whether there are any indications that an asset may be impaired.

(2) If there are such indications, the entity should estimate the asset’s recoverable amount.

(3) When the recoverable amount is less than the carrying value of the asset, the entity should reduce the asset’s carrying value to its recoverable amount. The amount by which the value of the asset is written down is an impairment loss

. (4) This impairment loss is recognised as a loss for the period.

 

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However, if the impairment loss relates to an asset that has previously been re-valued upwards, it is first offset against any remaining revaluation surplus for that asset.

When this happens it is reported as other comprehensive income for the period (a negative value) and not charged against profit.

(6) Depreciation charges for the impaired asset in future periods should be adjusted to allocate the asset’s revised carrying amount, minus any residual value, over its remaining useful life (revised if necessary).

It is not always possible to calculate the recoverable amount of individual assets.

Value in use often has to be calculated for groups of assets, because assets may not generate cash flows in isolation from each other.

An asset that is potentially impaired may be part of a larger group of assets which form a cash-generating unit.

 

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IAS 36 defines a cash-generating unit (CGU) as 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.

Goodwill The existence of cash-generating units may be particularly relevant to goodwill acquired in a business combination. Purchased goodwill must be reviewed for impairment annually, and the value of goodwill cannot be estimated in isolation. Often, goodwill relates to a whole business. It may be possible to allocate purchased goodwill across several cash-generating units.

If allocation is not possible, the impairment review is carried out in two stages: Carry out an impairment review on each of the cash-generating units (excluding the goodwill) and recognise any impairment losses that have arisen.

 

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Allocating an impairment loss to the assets of a cash generating unit When an impairment loss arises on a cash-generating unit, the impairment loss is allocated across the assets of the cash-generating unit in the following order:

 In line with IAS 36 - Impairment, first to the goodwill allocated to the cash generating unit;

 Derecognise any of the assets that caused the total loss or that are specifically impaired to the extent that it no longer meets the recognition criteria in line with IAS 16 - PPE (if there is any);

 Next, to the other assets in the cash-generating unit, on a pro-rata basis (i.e. in proportion to the carrying amount of the assets of the cash generating unit).