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International Financial Accounting
Topic 6. IMPAIREMENT (IAS 36)
An impairment is when an asset losses value that is unpredictable.
We have to take IMPAIREMENT TESTS: -Compulsory every year for assets with undefined useful life -When either external or internal source of information indicate it.
1 International Financial Accounting Elisabeth Martinez 2. Calculating “Value in USE” 138 1,012 ! + 186 1,012 ! + 166 1,012 ! + 108 1,012 ! = 𝟓𝟐𝟐 𝑽𝑨𝑳𝑼𝑬 𝑰𝑵 𝑼𝑺𝑬 3. Registering impairement. CASH-GENERATING UNITS (CGU) I. EXAMPLE 2 International Financial Accounting Elisabeth Martinez The Impairments Loss is 30M. The first we need to impair is Goodwill (and therefore cancel out goodwill reserve). Then, we will impair proportionally the rest of the assets.
€20 Goodwill impairment loss TO Goodwill €20 €1 Goodwill reserve (5% 20 Goodwill) TO Retained earnings €1 €4 Impairment loss on investment property €6 Impairement loss on PE TO Acc. Impairment on Investment property €4 TO Acc. Impairment loss on PE €6 4. Reversing an IMPAIRMENT LOSS Any Acc. Impairment can be reversed. There are limitations: • Goodwill can’t be reversed • It should not exceed the carrying amount that would have been determined if had no impairment loss recognized in prior years.
Therefore, the maximum you can reverse will be: The lower of: • It’s recoverable amount or • The carrying amount if it hadn’t been impaired.
I. EXAMPLE 3 International Financial Accounting Elisabeth Martinez We could cancel out some of the previous impairment for Net Assets (since Goodwill is non-recoverable). However, the maximum we can reverse is 20, since 720 is the value if it hadn’t been impaired.
€100 Acc. Impairment TO Impairment loss on Assets €100 TO Impairment loss on Assets €20 THE MAXIMUM IS 20! €20 Acc. Impairment Even though we still have 80 more to reverse, we won’t do it because we have this limit.
II. EXAMPLE CGU: Goodwill: 5 PPE: 10 Total carrying amount: 15 Recoverable amount: 9 PPE useful life in 5 years.
End of year 1 (Impairment loss of Goodwill and proportionally PPE) €5 Goodwill impairment loss TO Goodwill €5 €1 Impairment loss PPE TO Acc. Impairment PPE €1 €0.25 Goodwill reserve TO Retained earnings €0.25 End of year 2.
New recoverable amount is 10. Can I reverse impairment? -Value if hasn’t been impaired: PPE 10 (Depreciation PPE): 2 Carrying amount PPE: 8 €0,8 Acc. Impairment The maximum you can recover is up to 8.
This way: -Goodwill: 0 -PPE: 10 -Acc. Impairment (1) -Acc. Depreciation (1,8) TOTAL Carrying amount: 7,2 TO Impairment reversal 0,8€ 4 International Financial Accounting Elisabeth Martinez III. EXAMPLE (1/6) There is no impairment loss since Value in Use is higher than carrying amount.
40,000 > 35,000 IV. EXAMPLE (2/6) The impairment loss is Book Value-Rec.
35,000-28=7 Proportionally, distribute 7,000 on the value of assets.
€3,000 Impairment loss on IA TO 7,000 ∗ 15,000 = 3,000 35,000 7,000 𝑃𝑃𝐸 = ∗ 20,000 = 4,000 35,000 Acc. Impairment on IA €3,000 €4,000 Impairment loss on PPE TO Acc. Impairment on PPE €4,000 𝐼𝐴 = V. EXAMPLE (3/6) Now, the maximum we can decrease PPE is 2,000. So the 5,000 that are left will be placed on IA, even though it is not proportional.
€5,000 Impairment loss on IA TO €2,000 Impairment loss on PPE TO Acc. Impairment on IA €5,000 Acc. Impairment on PPE €2,000 5 International Financial Accounting Elisabeth Martinez VI. EXAMPLE (4/6) No need to register impairment V. EXAMPLE (5/6) Book value-Recoverable amount = 35,00018,000=17,000 Since RA for PPE is higher than its Carrying Amount, we can’t impair them. We will have to impair IA.
€15,000 Impairment loss on IA TO Acc.
Impairment on IA €15,000 Here we can only decrease 15.000, but in reality it is 17,000. However we can’t do it because of the limitations.
VI. EXAMPLE (6/6) PART A is exactly the same as 3/6.
€5,000 TO Acc. Impairment Impairment loss on IA €5,000 on IA €2,000 Impairment loss on PPE TO Acc. Impairment on PPE €2,000 10 years useful life! CASE 3. Carrying amount: (IA 15-5)+(PPE 20,000-2,000-Acc. Depreciation: 3,600) = 24,400.
26,000-24,400= 1,160 RA, distributed proportionally €656 Acc. Impairment loss on IA TO Reversal of Impairment on IA €656 €944 Acc. Impairment loss on PPE TO Reversal of Acc. Imp on PPE €944 6 International Financial Accounting VII. EXAMPLE (1/2) Elisabeth Martinez Impairment loss: 70-35=35,000 First Asset to be decreased is Goodwill.
The next 25,000: PPE can only by decreased by 2,000 and therefore the next 23,000 will need to be from IA.
However, IA book value is 20,000 and can only be decreased by 20,000.
At then end, we will have 3,000 that should also be decreased by we can’t because of the limits €10,000 Impairment loss Goodwill TO Goodwill €10,000 €2,000 Impairment loss on PPE €20,000 Impairment loss on IA €500 Goodwill reserve TO TO TO Acc. Impairment on PPE €2,000 Acc. Impairment on IA €20,000 Retained earnings €500 VIII. EXAMPLE (2/2) After 2 years, we need to account for depreciation on PPE.
38,000 ∗ 2 = 3,800 20 Therefore, the CA of PPE is 38,000-3,800= 34,200 The impairment reversal is 55,000-34,200=20,800 IA: Carrying amount if hadn’t been impaired: 16,000 =PPE: Carrying amount if hadn’t been impaired: 1,800 We can’t reverse everything because of the limits! €16,000 Acc. Impairment on IA TO €1,800 Acc. Impairment on PPE TO Impairment reversal on IA €16,000 Impairment reversal on PPE €18,000 7 ...