IAS 36 Impairment of Assets Chicago, June 2011
Overview of presentation Scope Identifying an asset that may be impaired Measuring recoverable amount Recognising and measuring an impairment loss Cash-generating units and goodwill Corporate assets Reversing an impairment loss
Case study 1 Which of the following is in IAS 36 scope? Inventories Property, Plant and Equipment Deferred tax assets Investment property Subsidiaries, associates and joint ventures Intangible assets An acquired in-process R&D?
An asset is impaired when its carrying amount exceeds its recoverable amount
Indicators What triggers impairment testing?
Indications that an impairment loss may have occurred: An asset's market value has declined significantly more than would be expected as a result of the passage of time or norm Significant changes with an adverse effect on the entity in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated Market interest rates or other market rates of return on investments have increased during the period The carrying amount of the net assets of the entity is more than its market capitalisation
Indications that an impairment loss may have occurred: Evidence is available of obsolescence or physical damage of an asset Significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected
Evidence from internal reporting that indicates that an asset may be impaired includes: Cash flows for acquiring the asset, that are significantly higher than those originally budgeted Actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those budgeted A significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing from the asset Operating losses or net cash outflows for the asset, when current period amounts are aggregated with budgeted amounts for the future
Indicators Investment property cost model Exploration and evaluation assets IPR&D IAS 36 impairment testing Long lived tangible assets IAS 39 IFRS 6 IAS 36 Investment in associated companies Indefinite life intangible assets Definite life intangible assets
Testing is also required: 1. annually (at least) An intangible asset Indefinite useful life Not yet available for use Goodwill 2. When assets are reclassified (indefinite > definite life) 3. When goodwill is reallocated
Fair Value Less Costs To Sell (FVLCTS) Recoverable amount (RA) The higher of Value In Use (VIU) The amount obtainable from the sale of an asset in arm's length transaction between knowledgeable, willing parties, less the costs of disposal* Present value of the entity specific future cash flows *Incremental costs directly attributable to the disposal, excluding finance costs and income tax expense.
Recoverable amount The higher 60 50 40 Carrying amount 30 20 FVLCTS VIU 10 0 A B C
Value In Use (VIU) The following elements shall/not be reflected in the calculation of an asset's VIU: YES Expected future cash flows The time value of money The price for bearing the uncertainty inherent in the asset Net cash flows to be received (or paid) for the disposal of the asset at the end of its useful life NO Future restructurings Financing activities Income tax receipts or payments Future investment Improving or enhancing the asset's performance
Value in use Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for that currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation
Value in use Basis for estimates of future cash flows Reasonable and supportable assumptions Most recent financial budgets/forecasts Management approved projections (usually will no exceed 5 year) Cash flow projections beyond the above period, using a steady or declining growth rate Should take into account the remaining useful life and salvage value for stand alone assets
Value in use To avoid double-counting, estimates of future cash flows do not include: cash inflows from assets that generate cash inflows that are largely independent of the cash inflows from the asset under review cash outflows that relate to obligations that have been recognised as liabilities
Value in use The discount rate shall be a pre-tax rate that reflect current market assessments of: the time value of money the risks specific to the asset
Recoverable amount VIU Entity specific cash flows Discount rate Pre-tax calculation Tax assets and tax liabilities Exclude working capital elements to avoid double accounting Exclude improvements Restructuring not allowed Does not consider costs to sell Operating items FVLCTS Market participant WACC Tax consequences are built in Includes working capital Includes improvement Restructuring can be taken in to account Net of expected costs to sell Operating items
IFRS - Diagram Recoverable amount > B.V No Impairment provision to recoverable amount Yes No impairment Reversal if circumstances change
Recognising and measuring an impairment loss An impairment loss shall be recognised immediately in profit or loss Unless unless the asset is carried at revalued amount in accordance with another Standard* *Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard
Recognising and measuring an impairment loss Requires adjustment of related deferred tax balance Depreciation (amortization) charge for the asset shall be adjusted in future periods No liability is recognized unless required by another Standard (onerous contract under IAS 37)
Reversing an impairment loss 1. Positive indicators will require reassessment of impairment loss recognised in prior periods 2. If recoverable amount > carrying value, impairment loss (or part of) is reversed 3. Following reversal, the carrying amount of an asset will not exceed the carrying amount that would have been determined had no impairment loss been recognised in the past 4. A reversal of an impairment loss shall be recognised immediately in profit or loss
Case study 2 31/12/2010 $000 Historical cost 100 Accumulated depreciation (2/10) (20) Carrying amount 80 Impairment loss (16) Carrying amount(recoverable amount) 64 at 31/12/2010 31/12/2011 $000 Historical cost 100 Accumulated depreciation (30) Net 70 Impairment loss (14) Carrying amount after impairment loss 56 16*7/8
Case study 2 31/12/2012 $000 Historical cost 100 Accumulated depreciation (40) Carrying amount 60 MAX Impairment loss (12) 16*6/8 Carrying amount after impairment loss 48 Recoverable amount 65 >48 31/12/2012 $000 Historical cost 100 Accumulated depreciation (40) Carrying amount 60 Impairment loss - Carrying amount 60
CASH GENERATING UNITS (CGU)
Recoverable amount Recoverable amount Can be estimated for individual assets No Test CGU Yes Test individual asset
Recoverable amount (RA) Recoverable amount for individual asset can not be determined, if: 1. VIU = FVLCTS, and 2. It does not generate Cash inflows that are largely independent of those from other assets
Identifying the CGU to which an asset belongs A 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 If an active market exists for the output produced the asset shall be identified as a CGU, even if some or all of the output is used internally
Convenient stores Geographic region Supermarket Wholesaler Store A Store B Store C 1 2 3 A B C
cash-generating unit to which an asset belongs The smallest identifiable group of assets: That is largely independent of cash inflows from other asset s/ CGU s Inflows inter-dependency NOT outflows
Goodwill Allocating goodwill to cash-generating units Goodwill shall be allocated to each of the acquirer s CGUs that is expected to be benefit from the synergies of the combination Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes. The CGU level/ group can not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.
Testing cash-generating units with goodwill for impairment When goodwill relates to a cash-generating unit but has not been allocated to that unit A cash-generating unit to which goodwill has been allocated whenever there is an indication the unit shall be tested for impairment (excluding any goodwill) tested for impairment annually Whenever there is an indication the unit shall be tested for impairment including the goodwill
Group of CGUs (higher level CGU) CGU B CV-40 RA-30 CGU C CV-20 RA-30 CGU A CV-30 RA-50 Convenient Stores department
The impairment loss shall be allocated: Goodwill Other assets In allocating an impairment loss an entity shall not reduce the carrying amount of an asset below the highest of: (if determinable)
Case study 3 31.12.2010 STEP 1 STEP 2 NET $000 $000 $000 $000 goodwill 700 (700) - - An intangible asset 1,000 - (172) 828 machine A 400 - (69) 331 machine B 1,500 - (259) 1,241 Total 3,600 (700) (500) 2,400 recoverable amount 2,400 impairment loss for a cash - generation unit (1,200) 1200-700= 500
Case study 3 Net STEP 3 Net $000 $000 $000 goodwill - - - An intangible asset 828 (8) 820 machine A 331 19 350 MIN machine B 1,241 (11) 1,230 Total 2,400-2,400 828+1241= 2,069
Case study 3 - Reversing an impairment loss for a CGU impairment 31.12.2011 31.12.2011 loss NET B.V $000 $000 $000 $000 goodwill - - - - An intangible asset 4/5 800 (144) 656 800 machine A 7/8 350 (44) 306 350 machine B 7/8 1,313 (236) 1,077 1,313 Total 2,463 (424) 2,039 2463 recoverable amount 3,000 961 (424) MAX
Impairment tests short-cut option An entity could use the most recent detailed calculation made in a preceding period for the current period provided all of the following criteria are met: 1. CGU has not changed significantly 2. RA > CV ( a substantial margin) 3. Remote likelihood for RA(t1) < RA(t0)
Corporate assets are assets other than goodwill that contribute to the future cash flows of both the CGU under review and other CGU s. do not generate cash inflows independently Corporate assets their carrying amount cannot be fully attributed to the CGU under review
Corporate assets cost of corporate assets can be allocated to CGU cannot be allocated to CGU CGU is tested with allocated asset CGU is tested without allocated asset Test higher level CGU to which assets can be allocated
Impairment testing of investments in associates Impairment indicators - IAS 39 (par. 59), Dividend - IAS 36.59 Under IAS 36 RM < > CV, Reversible, however Determining the VIU under IAS 28 (par.33) (1) Its share of the present value of the estimated cash flows + disposal (2) Present value of the estimated future cash flows expected to arise from dividends + disposal Different from U.S GAAP The entire carrying amount of the investment is tested for impairment
Case study 4 Snacks products CGU - Projections of cash flows (in million of $) 2011 2012 2013 2014 2015 Sales of snacks 120 85 110 118 120 Income from investment property 12 15 13 8 8 Gain from sales of AFS investments 4 2-6 5 Reversal of deferred tax liabilities (5) (3) (4) (6) (4) Operating costs (80) (70) (74) (80) (82) Working capital(wc) movements (16) (10) (15) (10) (10) WC opening balance (8) Terminal value Gross pre-tax cash flow 27 19 30 36 37 617 617 Discount factor 0.926 0.857 0.794 0.735 0.681 Present value of cash flows 25 16 24 26 25 Total value in use of CGU 536 Pre-tax discount rate market participants 8% Growth rate 2% Terminal value 420
Case study 4 Carrying amount of snack net assets at 31/12/2010: $ millions Goodwill 28 Brand 70 PPE 84 Investment property 100 Current assets: AFS 25 Trade receivables 10 Inventory 10 Trade payables (12) Borrowings (35) Deferred tax liabilities (35) Carrying amount of Snacks CGU 245 Fair value less costs to sell 150 Value in use 536
Case study 4 - solution Snacks products CGU - Projections of cash flows (in million of $) 2011 2012 2013 2014 2015 Sales of snacks 120 85 110 118 120 Operating costs (80) (70) (74) (80) (82) Working capital(wc) movements (16) (10) (15) (10) (10) WC opening balance (8) Terminal value Gross pre-tax cash flow 16 5 21 28 28 Discount factor 0.877 0.769 0.675 0.592 0.519 Present value of cash flows 14 4 14 17 15 Total value in use of CGU 184 Pre-tax discount rate market participants 14% Growth rate 2% Terminal value 233 233 121
Case study 4 The carrying amounts are: FVLCTS VIU Brand 70 70 Goodwill 32 32 PPE 84 84 Investment property - - AFS investments - - Trade receivables 10 - Inventory 10 - Trade payables (12) - Borrowings - - Deferred tax liabilities (35) - Carrying amount of Snacks CGU 159 186 Recoverable amount 184 [Higher of 184 and 150] Carrying amount 186 [VIU is recoverable amount] Impairment charge 2
Case study 4 - solution second approach Snacks products CGU - Projections of cash flows (in million of $) 2011 2012 2013 2014 2015 Sales of snacks 120 85 110 118 120 Operating costs (80) (70) (74) (80) (82) Working capital(wc) movements (16) (10) (15) (10) (10) WC opening balance - Terminal value Gross pre-tax cash flow 24 5 21 28 28 Discount factor 0.877 0.769 0.675 0.592 0.519 Present value of cash flows 21 4 14 17 15 Total value in use of CGU 192 Pre-tax discount rate market participants 14% Growth rate 2% Terminal value 233 233 121
Case study 4 The carrying amounts are: FVLCTS VIU Brand 70 70 Goodwill 32 32 PPE 84 84 Investment property - - AFS investments - - Trade receivables 10 10 Inventory 10 10 Trade payables (12) (12) Borrowings - - Deferred tax liabilities (35) - Carrying amount of Snacks CGU 159 194 Recoverable amount 192 [Higher of 192 and 150] Carrying amount 194 [VIU is recoverable amount] Impairment charge 2
Summary IFRS Test Measurement basis Impairment loss Reversal Carrying amount One step, RA<>CV RA (higher of FVLCTS or VIU entity specific) Provision to RA Yes, except for goodwill Ability to revalue assets (to fair market value)
Summary IFRS Goodwill Measurement basis Impairment loss Associated companies RA of CGU<>CV of CGU First allocate loss to goodwill then to other assets Different indicators (IAS 39) No allocation to goodwill & PPA Reversible