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Implementation and Applications of
IFRS on Asset Impairment and Asset
Held For Sale
Vienna, March 14, 2006
By Thierry Bertrand, Partner, E&Y
Olivier Lemaire, Partner, E&Y
Renaud Breyer, Manager, E&Y
A. Asset impairment
Indicators of impairment
Recoverable amount
Cash-generating units (« CGUs »)
Impairment measurement
First-time adoption issues
B. Non current asset held for sale
Classification as held for sale
Asset held for sale and discontinued operations
Refresh – IAS 36 does not deal with the
impairment of …
assets arising from construction contracts
deferred tax assets
assets arising from employee benefits
financial assets (other than subsidiaries, associates and joint
• investment properties, if measured at fair value
• biological assets related to agricultural activity,
if measured at fair value less point-of-sale costs
IAS 36 applies to all other assets including goodwill, intangible assets
with undefinite useful live, intangible assets with finite useful life,
tangible assets, …
Refresh - When is an impairment review
• Companies need to consider, at each balance sheet
date, whether there is any indication that an asset may
be impaired
– If there is, a full impairment review is needed to estimate the
recoverable amount of the asset
– Otherwise, no further action is required
Refresh - Indications of impairment –
• A significant decline in the asset’s market value
• A significant adverse change in the technological, market,
economic or regulatory environment in which the
company operates
• An increase in interest rates or other market rates of
return that affect the return required on the company’s
• The company’s reported net assets exceed its market
Refresh - Indications of impairment –
• Obsolescence or physical damage affecting the asset
• Significant changes affecting the asset, such as plans to
discontinue or restructure certain activities
• Internal reporting systems showing or predicting poor
performance from particular assets or business units
Refresh - Impairment review
• At the end of each annual reporting period, irrespective of
whether any indication of potential impairment exists, an
entity shall:
– estimate the recoverable amount of intangible assets with an
indefinite useful life or not yet available for use; however, the
most recent detailed calculation of recoverable amount made in
the preceding period may be used in the current period provided
specific criteria are met
– test goodwill acquired in a business combination for impairment
Indicators of impairment
Scenario 1
• Group A, a conglomerate operating in very diversified
industries, has acquired Entity B in September 20X4.
• Entity B specializes in performing technical inspections and
surveys of ships.
• As a result of the business combination, Group A has
recognized a trademark and goodwill.
• The trademark was fair valued using the royalty relief method.
• The trademark is protected over a period of 20 years and can
be renewed for an insignificant cost; therefore, it has an
indefinite useful life.
Indicators of impairment
Scenario 1 (Cont)
• The goodwill arising on the acquisition of B remains
allocated to Entity B, as a group of CGUs.
• The CFO has decided to use the following as indicators of
– Significant adverse changes in the regulatory environment in which
Entity B operates
– Significant decline in the budgeted cash flows
– Significant decline of the market share
Indicators of impairment
Scenario 1 (Cont)
• At the end of 20X5: the CFO looked at the above indicators and he
decided there is no need to perform an impairment test due to the
– The market share has slightly increased by 0.8 % compared to prior year
– No changes occurred in the regulatory environment in which the company
– The budgeted cash flows reflect the increase in the market share and the
steady growth of the shipping industry in which most of the company’s
clients are operating.
• No impairment test has been performed since September 20X4. Should
we be concerned about this?
Indicators of impairment
• The Group should perform an impairment test. According to
IAS 36.10, an entity shall test an intangible asset with
indefinite useful life and the goodwill for impairment
annually, irrespective of whether there is an indication of
• In the case described, it means that although the
circumstances point out that there is no need for an
impairment test to be performed, the test should be
performed anyway because the asset is not amortised.
Indicators of impairment
Solution (Cont)
• This impairment test may be performed at any time during
the year, provided it is performed at the same time every
• The impairment test for the brand may be performed at a
different time than the test for goodwill, but for practical
reasons it would be more relevant to perform both tests at
the same time.
Recoverable amount – definitions
• The objective of the impairment test is to ensure that the
carrying value of an asset is not greater that its
recoverable amount
– Recoverable amount is the higher of an asset’s net selling
price and its value in use
– Net selling price is the amount obtainable from the sale of an
asset in an arm’s length transaction between knowledgeable,
willing parties, less the costs of disposal
– Value in use is the present value of estimated future cash flows
expected to arise from the continuing use of an asset and its
disposal at the end of its useful life
Recoverable amount – Value in use test
Identify ‘cash generating units’
Allocate assets to these units
Forecast future cash flows for each unit
Identify discount rate and discount the cash flows
Compare resulting value in use with carrying value
Write down as necessary to reflect any impairment loss
thus identified
Recoverable amount – Value in use
• The following elements should be reflected in the
calculation of an asset’s value in use:
– an estimate of the future cash flows an entity expects to derive
from the asset
– the time value of money
– expectations about possible variations in the amount and/or
timing of those future cash flows
– the price for bearing the uncertainty inherent in the asset
– other factors, such as illiquidity
The use of assumptions is an essential element of the
expected cash flow method !
Cash generating units
• Defined as the smallest identifiable group of assets that
generates cash flows from continuing use that are largely
independent of the cash flows from other assets or groups
of assets
• Identification of units should be based on judgement,
influenced by how they are monitored internally
• Once chosen, units should be consistently defined
thereafter unless there are good reasons for change
Cash generating units
• Determination is not conditioned upon existence of
indicators of impairment
• Judgement and very good knowledge of the industry and
of the organisation of the company are required
• Varying approaches in practice in various entities may be
• Determination should be done at the lowest level
• Independent cash inflows does not necessarily mean
external cash inflows
Cash generating units – determination
Scenario 1
• A tour operator owns three hotels of a similar class, offering the
same facilities, near the beach at a large holiday resort.
• These hotels are advertised as alternatives in the operator's
brochure, at the same price.
• Holidaymakers are frequently transferred from one to another and
there is a central booking system for independent travelers.
• The reporting system of the tour operator allows it to identify the cash
flows generated by each of these hotels.
• The three hotels can be regarded as offering genuinely substitutable
products by a sufficiently high proportion of potential guests and can
be grouped together as a single cash-generating unit. The hotels are
run as a single hotel on three sites.
Cash generating units – determination
Scenario 2
• A luxury-clothing producer M owns three stores in the same city (although in
different neighbourhoods) and 20 stores in other cities.
• All stores are managed in the same way and all stores purchase from the same
factory owned by M. Pricing, advertising, marketing and human resources
policies (except for hiring specific sales staff) are managed centrally by M.
• The management does not have any intention to sell any of these stores
because of their strategic location.
• Frequent transfers of products take place between the three stores in order to
satisfy customers’ demands and the customers have no preferences between
the three stores as long as they find the product they want in any of them.
It is likely that the cash inflows generated by one store alone are not
independent of the cash inflows generated by the other stores located in the
same city.
Therefore, we may consider that a clothing retailer with an established brand
name would be justified in treating its three stores in same city as a single CGU.
Cash generating units – determination
Scenario 3
• A gas industry company has a certain number of customer contracts
for whose fulfilment it uses several gas fields located in the same
geographical area.
• The gas fields are not dedicated to a particular contract.
• The company is using the same distribution network (pipelines, etc)
for all the gas fields.
• The gas field that will be the delivery source will depend on the
company’s centralised allocation decision.
• The three gas fields represent a cash-generating unit
Cash generating units – Allocation
• Attribute all identifiable assets and liabilities to the
appropriate cash generating units
– Exclude tax assets and liabilities, interest – bearing debt, and
other items relating wholly to financing
• For items, such as corporate assets and goodwill, that
cannot be allocated or apportioned to individual cash
generating units, a second value in use test at a higher
level of aggregation may be needed
• Ensure that the allocation of carrying values is done on
the same basis
Cash generating units – Allocation
• Goodwill should be tested for impairment as part of the
impairment testing the CGU to which it relates (annually
and whenever there is an indication that it may be
• The carrying amount of goodwill should be allocated to
each of the smallest CGU to which a portion of that
carrying amount can be allocated on a “reasonable and
consistent basis”
– Allocation is consistent with the lowest level at which
management monitors the return on investment
– The CGU cannot be larger than a segment based either on
primary or secondary reporting format
Impairment measurement
Forecast cash flows should:
• Include all the relevant cash flows of that particular asset
or cash generating unit
• Reflect the asset or unit in its present state
• Exclude cash flows relating to tax and financing
• Be consistent with up-to-date budgets and plans
• Beyond the period covered by budgets, assume only
steady state or declining growth
Impairment measurement (cont’d)
Discount rate should be:
• The current market rate appropriate for the risks specific
to the asset or cash generating unit
• Pre-tax
• Consistent with the forecast’s treatment of inflation
• Determined after considering
The company’s weighted average cost of capital
The company’s incremental borrowing rate
Other market borrowing rates
The adjustments needed to reflect different risks
Impairment measurement – individual
• If the carrying amount of an asset exceeds its
recoverable amount, it should be written down
– The reduction in value – the impairment loss – is normally
expensed in the income statement
– If the asset had been revalued, the impairment loss is treated as
a revaluation decrease
– An asset should not be written down below zero unless it is
required to recognise a liability under another standard
– The new carrying amount forms the basis for future depreciation
and revised deferred tax balances
Impairment measurement – cash generating
• The impairment loss should be allocated:
– First to any goodwill in the unit
– Then, on a pro rata basis, against the other assets in the unit, but
not so as to write down any below the highest of
• its net selling price (if determinable)
• its value in use (if determinable)
• Zero
– Any amount remaining unallocated should only be treated as a
liability if required by another standard
Impairment measurement – Reversal of an
impairment loss
• In subsequent periods, companies should look for
indications that an impairment loss has reversed
Increase in an asset’s market value
Favourable changes in the company’s environment
Decreases in interest rates/other rates of return
Favourable changes within the company
Improved performance of the asset
• If these exist, the recoverable amount should be
re-estimated, and the loss reversed if appropriate
Impairment measurement – Reversal of an
impairment loss
• The reversal is limited to the amount that brings the asset
back to the carrying amount it would now be stated as if no
loss had been recognised
• The reversal is credited to the income statement, or treated as
a revaluation increase for revalued assets
• In a cash generating unit, it should be allocated pro rata to
assets other than goodwill to restore them to their previous
amounts, only if
– The loss was caused by a specific external event of an exceptional
nature that will not recur, and
– That specific event has now been reversed
• The reversal of the impairment loss recognised for goodwill is
First-time adoption issues
Impacts of IAS 36 on financial reporting:
• As IAS 36 prescribes very precise indicators for triggering
impairment tests, entities will probably have to perform such tests
more frequently than under previous GAAP.
• The lower-level aggregation of assets may lead to the recognition of
impairment losses that do not arise under existing local GAAP.
• IAS 1 requires that all amortization amounts and impairment losses
are reported under results from continuing operations in the income
• IAS 36 prescribes numerous disclosures relating to the impairment of
assets, even if they are of confidential nature
First-time adoption issues (cont’d)
• Except for goodwill, first-time adopters have the benefit of
a number of exemptions from the requirement of full
restatement of opening IFRS balance sheet, in particular
the fair value as deemed cost for fixed assets.
• Impairment test is required if there is any indication that
an asset is impaired. If a first-time adopter recognise or
reverse any impairment losses, it should disclose
detailed information.
Refresh – Classification as held for sale
• A non current asset is classified as held for sale if its carrying amount
will be recovered principally through a sale transaction rather than
through continuing use
• It must be available for immediate sale, and sale must be highly
probable, which requires that
management is committed to a plan to sell it
an active programme to fulfil the plan has been started
it must be being marketed at a reasonable price
a completed sale within a year must be expected
significant changes to the plan must be unlikely
• Non current asset held for sale is different from assets to be
Classification as Held for Sale – Scenario
• Good Group acquires through foreclosure a property comprising land and
buildings that it intends to sell.
• After the renovations are completed and the property is classified as held for
sale but before a firm purchase commitment is obtained, Good Group
becomes aware of environmental damage requiring remediation. The Good
Group still intends to sell the property immediately after the remediation is
• Did Good Group corrrectly classify the property as held for sale?
• No, Good Group did not correctly classify the property. Even if Good Group
still intends to sell the property after the remediation is completed, Good
Group does not have the ability to transfer the property to a buyer until after
the remediation is completed. The delay in the timing of the transfer of the
property imposed by others before a firm purchase commitment is obtained
demonstrates that the property is not available for immediate sale (different
requirements could apply if this happened after a firm commitment is
obtained). The criterion of IFRS 5.7 has not been met. The property should
be reclassified as held and used.
• Once classified as held for sale, assets or disposal
groups are valued at:
Carrying Value
Lower of:
(Fair value - Selling Costs)
• Depreciation is discontinued
• Initial and subsequent changes in value treated as
No Previous Revaluation
Previous Revaluation
• Initial change in CV recognised
in P&L
• Subsequent decrease in value
recognised in P&L
• Subsequent increase in value
recognised in P&L
• Initial changes in CV recognised
in revaluation reserve until used,
then P&L.
• Subsequent decrease in value
recognised in revaluation
reserve until used, then P&L.
• Subsequent increase in value to
reverse write-down recorded
– Only up to reversal of the
impairment loss recognised
Assets Held for Sale and Discontinued
An asset held for sale should not be confused with a
discontinued operation that is a component of an entity that
either has been disposed of, or is classified as held for
sale, and
(a) represents a separate major line of business or
geographical area of operations;
(b) is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of
operations; or
(c) is a subsidiary acquired exclusively with a view to
In such case, the company would present the income
statement of the discontinued operation in one single line in
the consolidated income statement.
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