6/23/2012

IAS 36 Impairment of assets Determining Recoverable amount and Value in Use

Recoverable Amount If fair value less costs to sell or value in use is more than carrying amount, it is not necessary to calculate If fair value less costs to sell cannot be determined, then recoverable amount is value in use. For assets to be disposed of, recoverable amount is fair value less costs to sell. If there is a binding sale agreement, use the price under that agreement less costs of disposal. If there is an active market for that type of asset, use market price less costs of disposal. If there is no active market, the best estimate of the asset's selling price less costs of disposal. Value in use (should reflect) estimate of the future cash flows the entity expects to derive from the asset in an arm's length transaction; expectations about possible variations in the amount or timing of those future cash flows and the time value of money price for bearing the uncertainty inherent in the asset and other factors such as illiquidity Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts (not go beyond five years) Assess reasonableness of assumptions by examining causes of differences between past cash flow projections and actual should relate to the asset in its current condition future restructurings and enhancements should not be anticipated should not include cash inflows or outflows from financing activities, or income tax receipts or payments.
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6/23/2012

IAS 36 Impairment of assets Determining Discount Rate and Cash Generating units
Discount rate should be pre-tax rate that reflects current market assessments of time value of money and the risks specific to the asset. should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that investors would require if they were to choose an investment that would generate equivalent cash flows If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow risk like the enterprise's own weighted average cost of capital; the enterprise's incremental borrowing rate; and other market borrowing rates. Cash-Generating Units (CGU) Recoverable amount should be determined for the individual asset, if possible. If it is not possible to determine the recoverable amount for the individual asset, then determine recoverable amount for the asset's cash-generating unit (CGU). The CGU is the smallest identifiable group of assets: that generates cash inflows from continuing use, and that are largely independent of the cash inflows from other assets or groups of assets.

6/23/2012

IAS 36 Impairment of assets Goodwill Impairment Testing and Impairment Loss

Goodwill Impairment Testing Goodwill must be allocated to each of acquirer's CGUs /groups that are expected to benefit from the synergies of combination Goodwill so allocated shall represent lowest level within entity at which goodwill is monitored for internal management purposes Tested for impairment at least annually by comparing carrying amount of unit, including goodwill, with recoverable amount If recoverable amount of unit exceeds carrying amount of unit, the unit and goodwill allocated to that unit is not impaired. If carrying amount of unit exceeds recoverable amount of unit, entity must recognize an impairment loss. Impairment loss (Allocated in the following order:) first, reduce the carrying amount of any goodwill allocated to the CGU (group of units); and then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis. Carrying amount of an asset should not be reduced below the highest of its fair value less costs to sell / Value in use (if determinable) and zero. If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit
Summary

Indications that asset may be impaired If yes, estimate recoverable amount If recoverable amount < carrying amount

a) internal and external impairment indicators b) recoverable amount < carrying amount higher of net selling price and value in use reduce carrying amount to recoverable amount
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