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1、Chapter 13 Impairment of assets Prepared by Mark Vallely,Learning objectives,Explain the purpose of the impairment test for assets (p. 634) Assess when to undertake an impairment test (p. 635) Explain how to undertake an impairment test for an individual asset (p. 637) Identify a cash-generating uni
2、t, and account for an impairment loss for a cash-generating unit not including goodwill (p. 645) Account for the impairment of goodwill (p. 652) Account for reversals of impairment losses (p. 659) Apply the disclosure requirements of AASB 136 (p. 663).,Introduction to AASB 136,Entities are required
3、to conduct impairment tests to ensure their assets are not overstated An impairment loss results when an assets carrying amount (CA) is more than its recoverable amount (RA) Not all assets require this test. Notable exclusions include: Inventories Deferred tax assets Assets held for resale,Recovery
4、can be from disposal of the asset OR from future use of the asset (including is ultimate disposal),When to undertake an impairment test,For most assets it is not necessary to conduct impairment tests every year Assets must be tested for impairment when there is an indication (or evidence) of impairm
5、ent The following assets must be tested annually for impairment: Intangibles with indefinite useful lives Intangibles not yet available for use Goodwill acquired in a business combination,Reason annual testing required the CA of these assets is more uncertain than that of other assets,When to undert
6、ake an impairment test Collecting evidence of impairment,Indicators are listed within AASB 136 and are classified into two groups internal and external These are considered the minimum indicators management shall consider External sources Decline in market value e.g. technological advancements Adver
7、se changes in entitys environment/ market e.g. a competitor may have patented a new product, resulting in a permanent fall in market share of the entity Increases in interest rates affects the PV of future cash flows Market capitalisation,When to undertake an impairment test Collecting evidence of i
8、mpairment,Internal sources Obsolescence or physical damage Change in asset use has the asset become idle? Economic performance of the asset worse than expected? Cash outflows are higher than expected e.g. maintenance costs Cash inflows are lower than expected,Impairment test for an individual asset,
9、Impairment test for an individual asset,The previous diagram shows there are two possible amounts against which the carrying amount can be tested for impairment Fair value less costs of disposal (FV-CD) Value in use (VIU) Not always necessary to measure both amounts when testing for impairment If ei
10、ther one of these two amounts is higher than the carrying amount, the asset is not impaired When FV-CD CA there is no need to calculate the VIU of the asset Special allowances are made to accommodate annually tested assets to reduce the burden of in-depth calculations,VIU more difficult to calculate
11、 than FV-CD,Impairment test for an individual asset Fair value less costs to sell,Fair value,Fair value is measured in accordance with AASB 13 Fair Value Measurement An exit price Measured using a relevant valuation technique Using observable or unobservable inputs (the value hierarchy) Refer to cha
12、pter 5 for a detailed discussion,Costs of disposal,AASB 136 (para. 28) Costs of disposal include: Legal fees Stamp duty / transaction taxes Costs of removing the asset Direct incremental costs to bring the asset to a saleable condition,Impairment test for an individual asset Value in use,Defined as:
13、 “ the present value of future cash flows expected to be derived from an asset or cash-generating unit” Five elements when calculating value in use Estimate of future cash flows Expectations about possible variations in amount or timing of future cash flows Time value of money Price for bearing unce
14、rtainty inherent in asset Other factors such as illiquidity,Time value of money use the current market risk-free rate Factors (b), (d) and (e) can be reflected in cash flow estimates OR in the discount rate Be careful not to double count!,Impairment test for an individual asset Value in use,Determin
15、ing the future cash flows Objective overall is to estimate future cash flows; and apply a discount rate Projections should be based on managements best estimates. External evidence should be given greater weight than reliance on managements expectations Projections should be based on most recent bud
16、gets/forecasts. Such projections should cover a maximum period of 5 years Cash inflows should include Those from the continuing use of the asset As well as those expected on the disposal of the asset. Cash outflows must also be taken into account,Impairment test for an individual asset Value in use,Determining the future cash flows Projected cash flows must be estimated for the asset in its current condition Disregard possible future reconditioning / asset e
