Our first article in the Insights into IAS 36 series provides an 'at a glance' overview of IAS 36's main requirements and outlines the major steps in applying those requirements.
Objective of IAS 36
The objective of IAS 36 is to outline the procedures an entity should apply to ensure the carrying values of all its assets are not stated above their recoverable amounts (the amounts to be recovered through use or sale of the assets). To accomplish this objective, IAS 36 provides guidance on:
- the level at which to review for impairment (eg individual asset level, cash-generating units (CGU) level or groups of CGUs)
- if and when a quantitative impairment test is required, including the indicator-based approach for an individual asset that is not goodwill, an indefinite life intangible asset or intangible asset not yet ready for use
- how to perform the quantitative impairment test by estimating the asset’s (or CGU’s) recoverable amount
- how to recognise and reverse an impairment loss
- when and under what circumstances an entity must reverse an impairment loss, and
- the detailed disclosure requirements (both in the case of
impairment and also in the absence of impairment).
IAS 36: Key definitions
IAS 36 defines key terms that are essential to understanding its guidance. The most significant definitions are highlighted below:
- Carrying amount - The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.
- Impairment loss - The amount by which the carrying amount of asset or a CGU exceeds its recoverable amount.
- Recoverable amount - The higher of an asset or CGU’s fair value less costs of disposal (FVLCOD) and its value in use (VIU).
- Value in use - The present value of the future cash flows expected to be derived from an asset or CGU.
IAS 36’s step by step impairment approach
IAS 36 prescribes the procedures that an entity applies to ensure that assets are carried at no more than their recoverable amounts (the impairment review). Very broadly, the impairment review comprises:
- an assessment phase, and
- a testing phase, if required.
We use the phrase ‘impairment review’ to encompass both the assessment and testing phase. In the assessment phase management:
- identifies the assets within the scope of IAS 36
- identifies the assets for which a quantified impairment test is required. Goodwill, indefinite life intangibles and those not available for use are tested at least annually, even if there is no indication they might be impaired. Other assets are assessed and are tested only if one or more indicators are identified
- determines which assets will be tested individually and which as part of a CGU or group of CGUs, and identifies the CGUs to which assets belong (we refer to this as the ‘structure’ of the impairment review). IAS 36 requires that an entity tests individual assets wherever possible; however, it is usually not possible to determine the recoverable amount for an individual asset. As a result, more times than not, management must identify the CGU (or groups of CGUs) to which the individual asset relates. Additionally, management must allocate goodwill and corporate assets to a CGU (or groups of CGUs) for the purpose of applying IAS 36.
These steps determine the scope of the quantified impairment testing (the testing phase). In the testing phase management:
- estimates the recoverable amount for the assets and CGUs as required
- compares the recoverable amount to the carrying amount, and
- records (or reverses, if applicable) any impairment loss, to the individual assets, or allocated among the assets in impaired
CGUs in accordance with IAS 36’s guidance.
With this in mind, the following step-by-step guide is useful in applying IAS 36: