IAS 36

IMPAIRMENT
OF ASSETS
REVISION
Prepared by BIANCA NEL CA (SA)

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READ THROUGH THIS PAGE BEFORE YOU CONTINUE WITH THE VIDEOS.

Do you know the meaning of SCOPE?

SCOPE (IAS 36.2) (SELF STUDY) Which assets will be covered by the rules of IAS 36?
Hence, which assets will be tested for impairment using
the IAS 36 principles?

The following assets are EXCLUDED from the IAS 36 impairment rules.
Note, these assets can be INCLUDED in the CGU and the CGU can be impaired,
but the individual asset within the CGU will follow its own rules.
What is the meaning of this?
[Read through the list below and refer to the CGU table below.]
IMPORTANT EXCLUSIONS:
• Inventories (IAS 2) (measured @ lower of cost and net realisable value)
• Deferred Tax Assets (IAS12) (recognised when it is probable that
taxable profits will be available against which the deferred tax asset These standards
have their own
can be utilised) rules on how to
• Assets arising from Employee Benefits (IAS 19) account for
• Financial Assets within the scope of IFRS 9 "impairment" /
• Investment Property that is measured at fair value (IAS 40) value decrease
• Non-current assets/disposal groups classified as held for sale (IFRS 5)
(measured @ lower of CA and FV less costs to sell)
• Other exclusions: par 2 (IAS 41 & IFRS 4)

CGU will be explained in PART 3 of this section.

CGU CA before
[Items included in CGU] IMPAIRMENT
TESTING
Building 1 => IAS 16 100
Investment Property => IAS 40 200 SCOPE EXCLUSION, Investment property @ FV
FV MODEL will remain at FV as per IAS 40 principles.
Inventories => IAS 2 300 SCOPE EXCLUSION, Inventory @ Lower of cost or
NRV. Use IAS 2 principles.
Intangible assets => IAS 38 400
CGU Total 1 000
Recoverable Amount 750
(1 000 – 750) IMPAIRMENT 250 ALLOCATE IMPAIRMENT TO THE SEPARATE ASSETS IN CGU

Can only allocate to the Building and the Intangible assets.

Important specific inclusions: Inventory & IP is excluded from the IAS 36 scope.

• Subsidiaries (IFRS 10)

• Associates (IAS 28)
• Joint Ventures (IFRS 11)

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VIDEO: VIDEO:
PART 1 PART 3

IAS 36 CGUs

- future cash flows cannot be attributed to single asset to establish RA on reasonable basis
WHEN? HOW? - smallest identifiable group of assets that generates cash inflows that are largely
INDEPENDENT of cash inflows from other assets/groups of assets

END OF REPORTING PERIOD review if: GOODWILL COMPANY

INDICATORS CASH FLOWS:
1. Independent
EXCEPT [annually]:
CGU 1 CGU 2 2. Cash flow from parties
1. IA (Indefinite useful life) OUTSIDE
2. IA (Not yet available for use) 3. IF: Internal => Has to be
3. Goodwill (NB!) an active market
4. CF calc: management use
ASSET 1 ASSET 2 ASSET 3 best estimate
yes
REVERSALS =
P/L
CA
> RA
= IMPAIRMENT INDICATORS?
NB! Not lower WHAT IS THE STEPS? GOODWILL
OCI than what HCA STEP 1: CALCULATE CA OF CGU
would have Allocate to NOT allocate
IN THE CGU = THERE CAN BE:
been if no CGU to CGU
• LIABILITIES (PPE IFRIC 1 =
HIGHEST: impairment
DISMANTLING COSTS)
FV MINUS COST TO SELL Test Test
• GOODWILL (NB!)
or impairment impairment
VALUE IN USE • HEAD OFFICE COSTS
WHEN ONLY when
GW impaired = STEP 2: CALCULATE RA
INDICATORS INDICATORS
FV [active market] not reversed (HIGHEST OF FV - CTS OR VIU)
&
Step1: Estimate actual CF + incremental costs STEP 3: IDENTIFY IF CA > RA = IMPAIR CGU
ANNUALLY
(current condition) incl./exc. (IAS 36.28-29) STEP 4: ALLOCATE THE IMPAIRMENT TO
Step2: Appropriate THE SEPARATE ASSETS (NB!)
discount rate (Pre-tax) => DO NOT ALLOCATE IMPAIRMENT TO LIABILITIES

Consider changes in: Once impairment loss allocated: [IAS 36.105]

1. Useful life HOW allocate? TEST: CA of individual asset in CGU
2. Dep method 1st = GW not below HIGEST:
3. Res Value 2nd =other assets FV - cts, VIU, Nil
= Yes => IAS 8 = Excess reallocate to other assets in CGU/group pro rata
basis
VIDEO: [REVISED CA LESS RV]/ REMAINING USEFUL LIFE OF ASSET (as @ impairment date)
PART 1
REVISED CA = NEW CA AFTER IMPAIRMENT

30 June 20.16
IMPAIRMENT TEST:
CA = R45 000
Purchase = 1 Jan 20.10 RA = R30 000 31 Dec 20.16
Cost = R100 000 Impairment = R15 000 CA: R30 000 - R3 333 =
N = 10 years 31 Dec 20.15 R26 667

Depreciation for 1 Jul 20.16 - 31 Dec 20.16

R30 000 / 54 months = R555.56 pm
x 6 months = R3 333

VIDEO:
PART 3
What are they? (IAS 36.6)
• Where future cash flows cannot be attributed to a single asset to establish the
recoverable amount on a reasonable basis,
=> Then it is necessary to identify the smallest cash-generating unit (CGU) to which
such cash flows can be attributed

• 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

COMPANY

CGU 1 CGU 2

ASSET 1 ASSET 2 ASSET 3

VIDEO:
PART 2 IAS 36.12 Discussion
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COMPREHENSIVE EXAMPLE:
SOURCE: FAC 4863 TL 104 [2019] Adapted

Electro Ltd owns a factory that was acquired from Solar Ltd on 1 January 20.21 through a business
combination. Goodwill of R192 500 arose on the acquisition of the factory. The factory has two
production lines and each production line represents a cash generating unit. The goodwill of
R192 500 was allocated to the factory and could not be allocated to the individual production lines.

The assets of production line A and B of the factory were as follows on 31 December 20.21:
Production line A Production line B
Fair value less Fair value less
Carrying amount Carrying amount
costs of disposal costs of disposal
R R R R
Machinery 1 188 000 ? 891 000 ?
Equipment 792 000 712 800 737 000 ?
1 980 000 1 628 000

Production line A and B of the factory are housed in a factory building. On 31 December 20.21, the
carrying amount of the factory building amounted to R950 000. 60% of the floor space is used by
production line A and the remaining 40% of the floor space by production line B. The floor space used
by each production line is a reasonable indication of the portion of the factory building devoted to
each production line.

The factory building, machinery and equipment as individual assets cannot generate cash inflows
independently.

At the end of 20.21 a competitor of Electro Ltd announced that they will sell a product similar to the
product manufactured by production line A, at a significantly lower price than what Electro Ltd is
currently selling the product for.

The value in use and fair value less costs of disposal amounted to the following on 31 December 20.21:
Value in use Fair value less costs
of disposal
R R
Production line A 2 244 000 1 760 000
Production line B 2 090 000 1 925 000
Factory building – 910 000
The factory 4 433 000 4 400 000

The fair value less costs of disposal of production line A, production line B and the factory as a whole
was calculated as the amount that an independent third party will pay to acquire all the assets at
31 December 20.21. The fair value less costs of disposal of the factory building was calculated based
on the current replacement cost.

The value in use of production line A, production line B and the factory as a whole was correctly
calculated in terms of IAS 36 Impairment of assets, by discounting future cash flows to a present value
on 31 December 20.21. A discount rate of 9% (pre-tax) was used.

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REQUIRED
Disclose the impairment loss(es) in the profit before tax note of Electro Ltd for the year
ended 31 December 20.21 in terms of IAS 36.126 and .130.

Please note:
• Comparative figures are not required.
• Ignore any normal income tax implications.
• Ignore any Value Added Taxation (VAT) implications.
• Round off all amounts to the nearest Rand.
• Your answer must comply with International Financial Reporting Standards (IFRS).

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COMPREHENSIVE EXAMPLE SOLUTION:

Think with me!!

We need to UNDERSTAND the scenario provided,
BEFORE we start with any calculations.
• There is a FACTORY.
• Within the FACTORY are Production Line A and B (2 separate CGUs).
• Each production line includes Machinery and Equipment.
• The FACTORY is situated in a BUILDING [Factory Building]
• GW can be allocated to the FACTORY [NOT to the separate CGUs]

GW allocated to Factory
NOT separate CGUs
(Prod A & B)
Production Line A Machinery
 CGU Equipment

FACTORY Factory Building

Production Line B Machinery

 CGU Equipment
Factory Building

FACTORY BUILDING = Prod Line A & B are housed in a factory building. The floor space used by each production
line is a reasonable indication of the portion of the factory building devoted to each production line.
 CA of building can be allocated to each Production line (60% Prod A & 40% Prod B) (IAS 36.102(a)).

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There is an INDICATION OF IMPAIRMENT of PRODUCTION LINE A

=> TEST for IMPAIRMENT.

STEP 1: CALCULATE CA OF CGU

STEP 2: CALCULATE RA
(HIGHEST OF FV - CTS OR VIU)
STEP 3: IDENTIFY IF CA > RA = IMPAIR CGU
STEP 4: ALLOCATE THE IMPAIRMENT TO THE SEPARATE ASSETS (NB!)
=> DO NOT ALLOCATE IMPAIRMENT TO LIABILITIES
HOW allocate? 1st = GW [NOT allocated to CGU]; 2nd other assets
Once impairment loss allocated: [IAS 36.105]
TEST: CA of individual asset in CGU
not below HIGEST:
FV - cts, VIU, Nil
=> Excess reallocate to other assets in CGU/group pro rata

GW allocated to Factory
NOT separate CGUs
(Prod A & B)
Production Line A Machinery
 CGU Equipment

FACTORY Factory Building

Production Line B Machinery

 CGU Equipment
Factory Building

FACTORY BUILDING = Prod Line A & B are housed in a factory building. The floor space used
by each production line is a reasonable indication of the portion of the factory building
devoted to each production line.
 CA of building can be allocated to each Production line (60% Prod A & 40% Prod B)

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When we look at the FACTORY as a WHOLE. Within the factory,

PRODUCTION LINE A was impairment.
DO YOU THINK WE NEED TO TEST THE FACTORY FOR
IMPAIRMENT?
RULE
GW should be tested for IMPAIRMENT ANNUALLY AND
A portion of the FACTORY, Prod Line A is now valued less, hence, it might
be that the FACTORY’s value will also decrease.
 TEST THE FACTORY FOR IMPAIRMENT

GW allocated to Factory
NOT separate CGUs
(Prod A & B)
Production Line A Machinery
 CGU Equipment

FACTORY Factory Building

Production Line B Machinery

 CGU Equipment
Factory Building

No impairment loss calculations are necessary for production line B as the CA of

R1 628 000 is LOWER than the RA of R2 090 000 and
there was no indication of impairment.
(RA = higher of the VIU of R2 090 000 and FV less costs of disposal of R1 925 000)

Testing cash-generating units with goodwill for impairment

When goodwill relates to a CGU but has NOT been allocated to that unit, the
UNIT shall be tested for impairment, whenever there is an indication that the
unit may be impaired (IAS 36.88). In this question this principle relates to the CGU
production line A and production line B. It is stated in the question that goodwill
could NOT be allocated to both the production lines.
Therefore, an impairment loss was to be tested for production line A, since an
indication of impairment was identified.

A CGU to which goodwill has been allocated shall be tested for impairment
annually and whenever there is an indication that the unit may be impaired, by
comparing the CA of the unit, including the goodwill, with the RA of the unit (IAS
36.90).

In this question this principle relates to the factory. It is stated in the question
that goodwill has been allocated to the factory. Therefore, an impairment loss
will be tested for the factory annually even if there is no indication of
impairment.

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EXAM TECHNIQUE:
1. Add the template
2. Plan how you will attempt the question [What do you need to calculate when and how?]
3. Transfer ALL your calculations to the Template

Lecturers comment:
OPEN your IAS 36 at the disclosure section, ensure that you are able to tick off
all the relevant paragraphs that should be disclosed.
You do not have to include the reference to the specific paragraphs, the IAS
36.130(a)…. Etc. This is to indicate to you where this is stipulated in IAS 36.

ELECTRO LTD
NOTES FOR THE YEAR ENDING 31 DECEMBER 20.21
1. Profit before tax

The following items are included in profit before tax:

R
Impairment loss:
Production line A: 306 000
- Included in cost of sales (IAS 36.126):
- Factory building [C2] (IAS 36.130(d)) 24 000
- Machinery [C2] 202 800
- Equipment [C2] 79 200
Factory:
- Included in cost of sales: – Goodwill [C3] 11 500

IAS 36.130(d) Impairment tests were applied to production line A, as well as to the factory
(description of CGU)
IAS 36.130(a) An impairment test was applied to production line A since a competitor is going
to sell the same products as produced by production line A at much lower
prices. An impairment test was applied to the factory as goodwill is allocated to
this factory. (Events and circumstances that led to recognition of impairment
loss)
IAS 36.130(e) The recoverable amount of production line A was the value in use thereof,
except for equipment and the factory building that had a fair value less costs of
disposal, which was higher than the allocated value in use thereof. (Whether
recoverable amount of asset is the value in use or fair value less costs of
disposal)
IAS 36.130(g) The recoverable amount of the factory was the value in use thereof. A discount
rate of 9% is used to calculate the value in use

Where the recoverable amount was determined at the FV less costs to sell of disposal
(equipment and factory building), then IAS36.130(f), relating to IFRS13 hierarchy,
would apply.

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ONLY Prod. line A

STEP 1:
Calc CA of CGU
C1 CALCULATE IMPAIRMENT LOSS: PRODUCTION LINE A
Carrying amount 2 550 000
- Given (1 080 000 + 720 000) 1 980 000
STEP 2: - Factory building (950 000 x 60%) 570 000
Calc RA of CGU
Recoverable amount (higher) 2 244 000
- Value in use (given) 2 244 000
STEP 3: - Fair value less costs of disposal (given) 1 760 000
Calc Impairment loss Impairment loss 306 000

4.1 Calc the CA AFTER impairment

STEP 4: 4.2 Determine the HIGHEST amount between the FV-cts, VIU or Nil or each asset
Allocate Impairment Loss to assets 4.3 CA AFTER impairment MAY not be BELOW the HIGHTEST amount determined in
STEP 4.2 above
4.4 If the CA AFTER impairment is BELOW the highest amount, allocate to other assets

C2 ALLOCATE IMPAIRMENT LOSS TO ASSETS STEP 4.1 STEP 4.2 STEP 4.3 STEP 4.4
MAX
ONLY Prod. line A CA BEFORE CA AFTER Highest of FV- CA AFTER
Allocation Test IAS 36.105 Impairment
Impairment Impairment cts, VIU, Nil Impairment
amount
Machinery 1 188 000 142 560 1 045 440 880 000 Not below highest 202 800 985 200 1 698 000
Equipment 792 000 95 040 696 960 712 800 Limited to R712 800 79 200 712 800
Factory Building 570 000 68 400 501 600 546 000 Limited to R546 000 24 000 546 000
2 550 000 306 000 Test IAS 36.105 306 000 2 244 000

Why test FACTORY FOR IMPAIRMENT?

GW* should be tested for IMPAIRMENT ANNUALLY
AND
A portion of the FACTORY, Prod Line A is now valued less, hence, it might be
that the FACTORY’s value will also decrease.
*GW allocated to factory

C3 IMPAIRMENT TESTING OF FACTORY

Carrying amount 4 444 500
- Production line A (1 980 000 – 202 800 [C2] – 79 200 [C2]) 1 698 000
- Production line B (given) 1 628 000
- Factory building [950 000 – 24 000 [C2]] (refer IAS 36.IE8) 926 000
- Goodwill (given) 192 500

Recoverable amount (higher) 4 433 000

- Value in use (given) 4 433 000
- Fair value less costs of disposal (given) 4 400 000
Impairment loss
Allocated to goodwill in full 11 500

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