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Chapter 27
IMPAIRMENT OF ASSETS (IAS 36)
SCOPE
The purpose of the Standard is to ensure that assets are carried at no more than their recoverable amount. If an asset’s carrying value exceeds the amount that could
be received through use or through selling the asset, then the asset is impaired and IAS 36 requires an entity to make provision for the impairment loss. IAS 36 also
sets out the situations where an entity can reverse an impairment loss. Certain assets are not covered by the Standard, including
• Inventories (IAS 2)
• Assets arising from construction contracts (IAS 11)
• Deferred tax assets (IAS 12)
• Assets arising from employee benefits (IAS 19)
• Financial assets dealt with under IAS 39 or IFRS 9
• Investment property carried at fair value under IAS 40
• Biological assets carried at fair value (IAS 41)
• Assets arising from insurance contracts (IFRS 4)
• Assets that are held for sale (IFRS 5)
The Standard does apply to
• Subsidiaries, associates, and joint ventures
• Property, plant, and equipment
• Investment property carried at cost
• Intangible assets and goodwill
(in accordance with IAS 36)
DEFINITIONS OF KEY TERMS
Recoverable amount of an asset or a cash-generating unit. The higher of its fair value less costs to sell and its value in use.
Value-in-use. The discounted present value of the future cash flows expected to arise from an asset or a cash-generating unit.
Cash-generating unit. The smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.
Fair value less costs to sell. The amount obtainable from the sale of an asset or cash-generating unit in an arm’s-length transaction between knowledgeable,
willing parties, less the costs of disposal.
Impairment loss. The amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.
IDENTIFYING AN IMPAIRMENT LOSS
An entity has to assess at the end of each reporting period whether there is any indication that an asset is impaired.
Additionally, even if there is no indication of any impairment, these assets should be tested for impairment:
• An intangible asset that has an indefinite useful life
• An intangible asset that is not yet available for use
• Goodwill that has been acquired in a business combination
IAS 36 sets out the events that might indicate that an asset is impaired. These are
• External sources, such as a decline in market value, increases in market interest rates, the carrying amount of net assets being valued at more than the stock
market value of the entity, and economic, legal, or technological changes that have had an adverse affect on the entity
• Internal sources of information, such as physical damage to an asset, or its obsolescence, or an asset becoming idle, or if the asset is part of a restructuring, or if
the entity’s performance has suffered during the period, or if there has been a significant decline or reduction in the cash flows generated or to be generated
from the asset
If there is an indication that an asset is impaired, the asset’s useful life, depreciation, or residual value may need adjusting.
Facts
CASE STUDY 1
An entity has purchased the whole of the share capital of another entity for a purchase consideration of $20 million. The goodwill arising on the transaction