CHAPTER42

IMPAIRMENT OF ASSET
In di vi du al as se t

TE CH NIC AL KN OW LE DG E
itio n of
To kno w the bas ic pri nci ple for the rec ogn
imp air me nt.
disposal
To und ers tan d the con cep t of fair val ue less cos t of
and val ue in use.
. .
To kno w the det erm ina tion of fair val ue.

To kno w the cal cul atio n of.v alu e in use.

To kno w the mea sur eme nt of rec ove rab le am oun t.

~ loss.
To kno w the prop_er acc oun ting for an imp air men
t loss.
To kno w the recognition of a reversal of an impair'!"en

136 8
 l)t'.ll tti ti(lll ..

{1nr11.lit111<'1~t is o foll_ in the marl•et

\\\1t,"l\Jblt ornount is nou, lc~s ti value of on asset so that the
l r.· .. -v-. ion the •
~!~Jtc:'11H'n I of , 1na11c1ol posi lion.. • c~r1)'[Link] arnount ,:n the
..
Th~ Cllr1:v111g· a1uou11t is tl1e n ou n t n t h • h
. :l , t l ',; u n1 .
l\'(\'_gn1zet 111 1e 8taten1e 11t of financi 1 . ic an asset 1s
~l'-'nn1ulnted. depreciatio11 and aulpoSiti~n nft_er deducting
accum uted impairment loss.
P~.\.S 36
Th: l'="COg11itio11 of a11 i~11pai1·1nent loss is covered b p AS 36
whkh t,quarely deals with impairment of assets. Y

The . basic pri11ciple t1nderlying th·e -standard is relatively

$tr~u~J1tfor,yard
'
... .
.
Tht,l~is an cstablr"shed [Link] tl1at an asset shall not be carried
01l of at obot the 1'CCOi-eroble arnount.
l"l

. entit~.. shall ,vrite do,vn the carrying ·amount of an asset

. \n
to the reeo,·erable amount if the carrying amount is not
sposal reco,·erable in full. I
-
If the C:.Ui)ing amount is higher th~ th: reooverable amount, the
a..,~t is jurle,aed to have suffered an rmpamnent I~.. •

The asset shall therefore be reduced by the amount of the

..
IInpairmont loss.
Accounting for impairment
.
In this
th ee main accounting issues to
regard, there are • r
foSS· COnsider, namely: •

a. Indication of possible inlP84:f;!unount

b.. iieasurement of the recover1a s
c.. Recogrution of impainllent os

1369
 In di ca tio n of impairment
An en tity sha ll ass ess at eac h report th
_ing wh e er the re is
an y indication tha t an ass et ma
y be im pa rre •
If an y suc h ind ica tio n ex ist s, the
en tit y sh all eS t im ate the
recoverable am ou nt of the ass et.
'
However, irr esp ect ive of wh eth er
!h
impairment, an ent ity sha ll tes t an in ere i~ an y indica~ion of
ta
indefinite us efu l life or an µI tan gib ng ib le as se t wi th an
le ass et no t ye t available
for use for im pa irm en t .an nu all y by
co mp ari ng the carrying
amount wi th the recoverable am ou nt.

Th e ev en ts an d changes_ in cir cu ms
tan ce s th at lea d to an
impairment of assets ma y be -classifie
d as external an d internal
sources of informati
. on . •
Ex ter na l so ur ce s
a. Significant decrease or d~cline in the
ma
as. a ~s ult of passage of time or normal rke t va lue of the asset
ent:enng the market. use· or a ·new [Link]

b. Significant change in the technolo

• I
economic environment of th b . .gic;::
employed. =1 , •m~ rke t, legal ~r
e usm ess m wh ich the asset 1s
This could be as simple as h
a c an ge• m,. cu• sto me
r tas te.
c. increase in the int ere st r
~v est me nt which wil l 1ik ate or. ma
m calculating the valu· . e1Y affect the rke t rat e of ret urn on
, em use. dis co un t rat e used
d. The "-.. A.J ng a mo un t of ne
C~" 9Vl
the ma rke t cap italizati t ;,aSB eta of the en tity
. .'
A.A£

on. 1s more than

In other words, the c .
• of the ne t assets. arrying am ou nt exceeds the fai• r value
J

]
The market capitalization .
, the ne t ass ets 'of the eritity_ •
sunply me an s the fai r value of C

l
e
13 70
 Internal so urc es _ l ., I
i .''
I, I

Evi den ce of Obsolescence h .

a. . . • . or ys1ca} damage of -an ass et
p
, •
b. Sig nif ica nt cha nge in the ma nn
ass et is use d wi th an ad er or ext ent in which the
the ent ity. For
exa mp le, the ass et is par t 0~erse steffect o_n
or the ass et is idle . a re ruc tun ng or held for sale

f f •. .
c. Evi den ce tha t the economic performance 0 an ass et will be
l
wo rse tha n exp ect ed.
s from the ass et
For e~a11:1ple, the und isc oun ted net cas h flow
7
:, .
ed.
are sig nif ica ntl y wo rse tha n those budget
'

1 The ext er~ al and · in~ ern al ~ou rce s ·of inf or~ atio n are no t
'indications tha t an
.l exh aus tiv e. An ent ity ma y .identify_ oth er •
asset ma y be imp air ed. . . • - .

Measure111ent of rec ov era ble am ou nt

has been imp aire d,
After est abl ish ing evi.d_ence tha t an ass et
erable am oun ~
,r. the nex t ste p is to det erm ine the- _recov
ent loss~ -\{ ,w.,;(,t, Y-\..
pre par ato ry to the rec ogn itio n of an impairm - r1 C\, v'
•
·s the +air•..-valu
• e less
-------- cost
---- _ o1
_:,
of an a_sse t _u1
The recoverable am oun t
1 ..
. ,
__ <J,Ejposal or ya_lYi]![Link]~e, wh ich eve r~ ~i_!~~:r~
Fair va lue · 1~ss c~ st of ~is pos al .
, . •. •. . ould be received to $.~}! an asset or
• Fai r val ue IS the pnc e tha t ~- derly transaction between
t date.
•• li"aid to tra nsf er .a liab ilit y m an;:m en
market par tici pan ts at· the me astal cost dire . I ttributable to
.. . ct y a. .
unit, exclud ing
Cost of disposal is an mc rem en h generating ·
1n
the dis pos al. of an asse~tax or cas e. · .
. ,._ exp ens
fi
'!(ln'ce cost and income , al t stamp duty and
. ~· inc lud e leg cos ' sse t and dire ct
ue • th •
~X ~pl es of cos~ of dis pos st ofcon rem ?~ g e ~e. '
81Inilar transaction tax, co_ diti Oll for S
COst in bri ngi ng the ass et into '. f disposal is e~ual to the
of . alu e less cost o . us cost of•disposal. .
-
In simple term s, fa.J.1' ':' . 0 f an ass et mlll .
exit price or sel ling pric~
137 1
 CB
Fair value hierarc hy
PFRS 13, paragrap h 72, enumerat es fhe fair value hierarchy cs!
or best evidence of fair value as follows: flo•
WJ.
1. Level 1 inputs~ are the quoted prices in an active
market for identica l assets.
A quoted price in an active market provides the most use
reliable evidence of fair value and shall be used- without
adjustme nt. , a.
2. Level 2 inputs are inputs that are observab le either
directly or indirectly . b.
[Link] ·2 inputs include quoted prices fqr similar assets
in an active market and quoted prices. for ident_ical or
similar assets in a market that is not active.
c.
3 .. •Level 3 inputs are u-n:observable input~ for the asset.
Unobserv able inputs are ·usually develope d by the entity
using the best available informatio n'from the entity's own
data.
Co
Active market and principa l market
An a,ctive niarket is a market in which transactio ns for the asset Es
or liability take place with sufficient regularit y and volume
to provide pricing information on an ongoing basis. a.
A prin,cipal market is the market with the greatest volume b.
and level of activity for the asset or liability. •
Th~ market participan ts are •the buyers and sellers in the C.
principal market who are: '
a. Independ ent or unrelateq. parties '
b. Knowledg eable or having a reasonable ··understanding of Es
the transactio n ' •
c. Willing or motivated but not forced and compelled. a.
. '
Value in use - ·,t \Md.,'5~1\\-<lk, , i91\ort
b• .
YQlue. in use ~s measured as the..oresen t value or_discounted
salue of futur~ net cash [Link] (inflows minus outflows) expected
to be derived from an asset. · c.
The cash flows are pretax cash flows and pretax discount rate
is applied in determining the present value. ' • d.
1372
,
calculation of value ~n use
I

j'

I j
[Link] a value in Use calls £ . .
ws and there is the possibilit th.r es bma!es of future cash
f

il~th "overoptimistic" estimate 8Y f at an entity might come up I

I
f
w1 • o cash flows. ' J
I

The following should

_
be considered · d t
.
. . .
1n e erm1n1rtg value 1n '
use: '
!.

a. Cash flow ~rojeCtion_s shall be based on reasonable and

supportable assumptions. _
. '

b. [Link] projections shall bEl based on the most recent

budgets on [Link] forecasts, usually ·up to a maximum
period of 5 years, unles~ a longer period can be justified.
c. Cash flow projections beyond the 5-year period shall be
estimated by extrapolating the 5-year projections using a
steady or declining growth rate each subsequent year, unless
an increasing rate can be justified..•
. .

Composition of estiinates of future cash flows

Estimates of future cash flows include:
, /, '

a. Projections of cash infiou;s from the continuing use of the asset

b. Proiectio~s of cash outfiows necessarily incufrrhed to ge'tnerate
the cash 1n
J . fl ows_, from the
. continuing use
. o t e asse .
. d aid on the disposal of the asset
c. Net cash flow~ receive ?r .an arm's length transaction.
at the end of its useful life m - ·
'

•
Estimates of future cash flows do not include:
• . • to. restructuring to which the
a. Future cash flows relating
entity is not yet committed'. . the asset's
b . • . or enhancing
• ·Future costs of improving
• Performance. . . g activities.
fr O111 financ1n
c. Cash inflows or outflows .

d•• Income tax receipts or payments•.

1373
Di sco un t rat e Jo U
.

ure cas h flows is the

Th e dis cou nt rat e use d in est ima tin g fut
ass ess me nt of the
current pretax ra.t'e tha t refl~cts the cur ren t
to the ass et.
tim e val ue of mo ney and the risk s specific
. csr r:
wh ich fut ure cash • fai r·
Th e dis cou nt rat e sho uld not refl ect risk s for
flow est ima tes have already been adjusted. 1IllP8
. \

Re cog nit ion of i'mpairment_ los s Note

reCO'
s tha t _the carrying beca·
If the recove·rable am oun t of an ass et is les
amount, an imp airm ent loss ha~ occurred. NotE
d im me dia tel y by acc1
Th e im pai rm ent lo$s sha ll be rec ogn ize E
overable amount.
reducing the ass et's car ryin g am oun t to its rec
Ac t
loss and presented
The imp airm ent loss is recognized in pro fit or
1
be c:
•
separately· in the income sta tem ent . or a,
Afte,
Illu str ati on cha r
. ' .

h the following cost the ,

•At ye~-ei;id, an ent ity has a ma chi ner y wit • · . , • basJ
and accum ulated depreciation: ,• • ·• . .

. . 5 000 000
Machihery • 0
rs exp ired ) .. • . 2:00 0:00•
. Accumulated dep reci atio n (5-year life, 2 yea • I - - --
• . · _··3,000,000
Car ryin gam oun t • • - •
.
the machinery is
Due to obso~e~ce~ce ~nd phy sic al dam age ' · ·., · •
found to be impaired.
On
~oll • • ormat·10n'wi th 14
. ine d the 1 1 d:ow ing 1n.1
Th e ent ity has det erm .
res pect t o t he machinery at year-en
Fai r val ue less cos t of disp osa l· 2400,000
Value in use 2:20 0,00 °
"

~e
. .
t
· 137 4

• •
 .J<lui•iutl ent ry
•
~ur1n('nt lo...~
ln\,1
..\L~tunultl tet:l depret~atio
• n 600,000
600.0 00
C~rrying a1UO \tnt , _
1:-.tir ,-:lluc le~s cost of d1sposnl 3.000,000
r, (reco vern bl
n O an1o unt) 2.400,000
Itnp:lh·n1t'llt l°'-~
600,0 00
Note tl1at tlie fair valtl e less cost of disposal is considered the
t't'Ct1'~ra?1: rui!otuit and t1sed in COinputing· the impair1nent loss
~~u$ e 1t 1s lug}1er tl1ru1 the valtte in use.
Note t\1rt!1er tl1at tl1e i111pa.u'111ent loss is adju sted throu gh the
acctm1t1lated depr ecia tio11 accou11t. This is in accordance \vith
Europea11 a11d Ai11erican practice .
..\ctually, P . t\S
. 36 does 11ot specify wl1etl1er the impair1nent shall
be cred ited to the asse t clirectl)r or accu1nulated depr eciat ion
or acctu nula ted impa ir1ne nt loss.
_-\fter tl1e recogiutio11 of an iI11pairn1ent loss, the depreciation
charge for the asse t sl1all be adju sted in future periods to allocate
the reez".sed carryirig· a111.oz1,nt less res1:dual value on a systernat£
c
bosi.t; over the [Link]· nsefll,l life.
-\ccorclingly, tlie adju sted carry ing amo unt which _is equa l to
the fair valu e less cost of disposal of P2,400,000 1s allocated
OYer the rem aini ng usef ul life of 3
year s to get the annual
depreciation of P800 , 000.

Ano ther illustratio;n

On D
ecem ber. 31, .9017
---' , an entit y has .a timachinery with the
following cost and accu mula ted deprecia on: •
Machinery 60,00 0,000
20,00 0,000
Accumulated depreciation
Catryin
• g amou 40,00 0,000
nt
been an impairme of the
'the entit y belie ves that there has . es the fair value nt
less cost
lllachinery and accordingly dete rnun •
of disposal and valu e in use.
f

1375
 is det erm ine d to be
Th e fai r va lue les s co st of dis po sal
P31,000,000.
use of the machine
Th e fut ure cas h flows from the con tin ued ry
are :
over the rem ain ing use ful life of 4 yea rs
_Costs, Ne t
Re ven ue exc lud ing dep rec iat ion cas h flows

24, 000 ,00 0 10, 000 ,00 0 14,ooo,ooo

201 8 12,000,000
26, 000 ,00 0 14, 000 ,00 0
201 9 9,000,000
000 ,00 0
202 0 25, 000 ,00 0 . 16,
15, 000 ,00 0 . 11, 000 ,00 0 4,000,000
2021
90, 000 ,00 0 51, 000 ,00 0 39,000,000

nti ng the net cas h flows

Th e va lue in us e is cal cul ate d by dis cou
at an appropriate discount rat e of 10%.
(b) (ax b)
(a)
PV ofl P11esent ~alue
Ne t cas h flo ws
.90 9 12, 726 ,00 0
201 8 14, 000 ,00 0
.82 6 9,912,000
201 9 12, 000 ,00 0
.75 1 6,759,000
202 0 9,0 00, 000
.68 3 2,732,000
2021 .. 4,0 00, 000
32, 129 ,00 0
39, 000 ,00 0

the PV ~f 1 for one

Th e cas h flow for 201 8 is mu ltip lie d by
the PV of 1 for two
period of .909, the cas h flow for 201 9 by
0 by the PV of· 1 for
per iod s of .826, the cas h flow for 202
for 2021 by (he PVof
thr ee per iod s of .751, and the cas h flow •
1 for four per iod s of .683. •

ov era ble amount

Th e val ue in use of P32 ,12 9,0 00 is the rec
r tha n the fair value
of the ma chi ner y bec aus e thi s is hig he
les s cos t of dis pos al of P31 ,00 0,0 00.

Co ~p ut ati on of im pa irm en t los s

Car ryin g am oun t 40, 000 ,00 0
Recoverable amoll.I\t 32 ,12 9,~

Imp airm ent loss

13 76
Jteversal of a-n imi>airment loss
[Link] ~6, paragraph 114, provid .
recognized for an asset in Prior es that an impairment loss
h,aS been a change in the estimar:~rfs hshall be reversed if there
t e recoverable amount.
In other words, if the recoverable
reviously been impaired turns ·out~:bouhn~ ·oh{ an asset that has
P • t th • e ig er than the current
carryingdatomoun, e carrying .amount of the asset shall be
increase new recoverable amount.

How~ver, PAS 36, paragraph 117, provides that "the increased

carrying-amount of an asset due to a reversal of an impairment
loss shall not exceed the carrying amount that w·ould have been
determined, had no impairment loss been recognized for the
asset in prior years." •

The reversal of the impairment loss shall b~. recognized

immediately as income in the income ~tatement.

But any reversal of an iffipairment _loss on a r~valued asset

shall be credited. to income to the extent that 1t revers~s a
previous revaluation decrease and ·any excess credited
directly to revaluat1on surplus.

Illustration
•
0 n December 31, 201 th statement of financial position
7, e
shows the following balances:
8,000,000
Machinery lifi 2 years expired) 1,600,000
Accumulateddepreciation (l07year e, 6,400,000
carrying amount . .
. t of the machinery is
On the same date the recoverable an;~~~sposal of P5,200,000.
[Link] to be the fair value less cos

1 s77
 to record impair meiit loss
Journa l ent ry
1,200,00 0
Im airment loss . . .
PAccumulated depreciat ion 1,200,000
(6,400,000,- 5,200,000)

t~e r~cover able am~unt of the

O·n Decemb er 31, 2018,_
machinery is P6, 000, 000, m~c~t1 ng a _reversal of impairment
loss.

In this case, the "maxi~ um" ·carryin g amount of the

machine ry should be equal to the carrying amount that would
have been determi ned had there been no impairm ent.
\ .
Would have been carryin g amoun t on Decemb er 31, 2018

Machinery 8,000,000
Accumul ated depreciat ion (8,00Q,000 / 10 x 3 years) 2,400,000
Carrying amount- Decemb er 31, 2018, no impairm ent 5,600,000
. .

Accordingly, the carrying amount of the machine ry cannot

exceed P5,600,0 00.

Therefo re, the carrying amount of P5,600,0 00 is the basis of

the impairm ent rev~rsal and ;not ·the recovera ble amount of
P6,000,0 00 ,

Carryin g amount with impairm ent on Decemb er 31, 2018

Machinery s,000,000
Accumulated deprecia tion-Dec ember 31,. 2017
(1,600,000 + 1,200,000) 2,800,00_Q
Adjusted carrying amount- Decembe r 31 2017 5,200,00°
Depreciation for 2018 (5,200,000 / 8) ' 650,0~
~mount- December 31, 2018
with _impairment

1378
 Journal entries on, D
ecember 31, 2018
• .
1• To record the depre c1at1on for 2018:
Depreciation
Accumul~ted depreciation 650,000
650,000
2. To record the impairm t
en reversal:
Accumulated depreciation
• Gainonreversalofimp~~... 1,050,000
"-Ument
1,050,000
Carry~g amount - no impairment ,
Carrymg amount_ with impa1rment. 5,600,000
. . 4,550,000
Gain on reva-sal of impairment
1,050,000
Revalued asset

On January 1, 2017, the revaluation shows the following:

Replacement
Cost cost Appreciation
Machinery 5,000,000 8,000,000 3,000,000
Accumulated depreciation _
(IO-year life, 4 years expired) 2,000,000 3,200,000 1,200,000
CA I SV I RS 3,000,000 4,800,000 1,800,000

The entries to record the revaluation, annual depreciation and

realization of the revaluatio,n surplus in 2017 are:

1. Machinery 3,000,000 .
. 1,200,000
Accumulated depreciation 1,800,000
Revaluation surplus
• 800,000
2. Depreciation 800,000
Accumulated depreciation
(4,800,00016) •
300,000
3. Revaluation surplus 300,000
Retained earnings
(1,800,000 I 6)

• 1379
 .
Impa1. rment o f rev alu ed as se t- De cem be r 31, 2019

On Decem ber 31 , 2 01 9' thr ee .yea. rs aft d

er rev alu atio n, an
d th
.1m •
par rme nt of th·e ma chi ner y is ind ica te an e recoverable
amount is Pl,050,000.
The gross replacement cost is P3,500,000 com put
ed .by dividing
Pl,0 50, 000 by 30%.

The remaining useful life is 3 yea rs or a rati o of

30% to the total
10-year useful life.

Co mp uta tio n

Per boo k Adjusted Dec rea se

Replacement cost 8,0 00, 000 3,5 00, 000 4,50 0,00 0
Accumulated depreciation - 70% 5,6 00, 000 2,4 50, 000 3,15 0,00 0
Carrying amo unt 2,4 00, 000 1~0 50,0 00 1,35 0,00 0
Machinery
Acc umu late d dep rec iati on- Dec emb er 31, 201 8,0 00, 000
9
(8,000,000 I 10 x 7)
5,60 0,00 0
Car ryin g am oun t-D ece mb er 31, 201 9
Recoverable amo unt 2,40 0,00 0
• 1,05 0,00 0
Imp airm ent loss
1,35 0,00 0
Revaluation surp lus
Realized in 2017, 2018 and 2019 1,80 0,00 0
(1,800,000 / 6 X 3)
900 ,000
Rev alua tion surp lus - Dec em ber 31, 201 9
900 ,000
The imp airm ent loss is cha rge d firs t aga ins
t the rev alu atio n
sur plu s and the rem ain der to exp ens e.

Jou rna l ent ry

Revaluation surp lus
Imp airm ent loss (1,3 50,0 00 - 900 ,000 ) 900 ,00 0
Accumulated depreciation 450 ,00 0
3,1 50, 000
Mac hine ry
4 500 ,000
'
138 0'
fteversal of impairment - revalued asset
020 there is a reversal 0 f • .
In 2 . ' impairment related to the
Jllachine ry.

on Decem~er 31 , 2020 , the recoverable amount of the

Jllacbinery 18 Pl, 200,000 and the gross replacement cost is
pG,000,000 computed by dividing Pl,200,000 by 20%.

The remaining useful life is 2 years or a ratio of 20% to

the total 10-year useful life.

Replacement
Per book cost Increase
Machinery 3,500,000 6,000,000 2,500,000
Aocumulated depreciation-SO% 2,800,000 4,800,000 2,000,000
Carrying amount 700,000 1,200,000 500,000

Journal entries in 2020

1. To record the annual depreciation:

Depreciation (1,050,000 I 3) 350,000

Accumulated depreciation 350,000

• 2,500,P00
2. Machinery 2,000,000
Accumulated depreciation 450,000
. n~~ent
Gain on reversal of unpc:ui~ 50,000
Revaluation surplus
' . that the reversal of an
PAS 36 paragraph 120, reqwres h ll be credited to income
impair~ent loss on a revalued asset los as previously recognized,
• irment s
eq_uaz to the amount o{ impa .on surplus.
and the remainder to revaluati

1381