IAS 36 Decision tree in the Knowledge Base

[CPA Kevin Matt]

Hi,

I referred to the decision tree mentioned in the KB: https://ifrscommunity.com/knowledge-bas ... units-cgu/ wherein it is stated in one of the dialogue box that "Does IAS 36 mandate CGU level impairment testing" which I assume is pointing towards IAS 36.96 i.e. CGU to which goodwill is allocated. If my understanding is correct then what would happen in the case where an asset is impaired but is a part of CGU to which goodwill is not allocated. Going by the decision tree, I arrive at a decision to do nothing but wouldn't it be incorrect?

Let me try to illustrate my concern with the decision tree with an example: There are 3 CGU's, CGU A,B & C. Goodwill of 100 CU is allocated to CGU B & C as the two CGU's benefit from the synergies of the business combination by 100%. There is an asset 'X' as part of CGU A which has the following values: Carrying amount: 100 CU; FVLCD: 80CU & VIU: 60CU. When I run this example through the decision tree I end up with a decision of do nothing.

What I know is that IAS 36 requires a ‘bottom up’ approach to impairment testing. The impairment test is a two-step process:
Step 1: Test the individual asset, or the CGU the asset belongs to if the recoverable amount for the individual asset cannot be determined. Any impairment should be recognised at this step to reduce the carrying amount to the recoverable amount. Testing performed at the CGU level would include goodwill to the extent that goodwill is monitored at this level.
Step 2: Test the CGU or group of CGUs including goodwill. This second stage is a comparison of the recoverable amount with the restated carrying amount after the step 1 impairment test.

The two-stage approach ensures that, where there are indicators of impairment, assets and CGUs within a group of CGUs are tested separately for impairment first, with any impairment recognised before the larger group including goodwill is tested. [IAS 36 para 98].

[CPA Kevin Matt]

I guess my query arise from my understanding that I see IAS 36.9 as an exception to 36.22/67 which is the basis of the decision tree in KB. For the ease of reference:

IAS 36.9: "An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset"

Additionally, just a small clarification to the example in my earlier post: There is no impairment at the level of CGU A as the recoverable amount > Carrying amount.

[CPA Kevin Matt]

Hi,

Any response on this query please? As mentioned in the previous posts I am unclear if the decision tree in the KB should also factor in IAS 36.9 specific guidance.

[Marek Muc]

Your scenario is a bit unclear to me. Could you clarify if asset X generates independent cash inflows? Also, I'm curious as to why you brought up CGUs B and C and goodwill if they aren't relevant to asset X, which seems to be the main focus of your question?

[CPA Kevin Matt]

Hi,

1. Could you clarify if asset X generates independent cash inflows? No, it doesn't generate independent cash flows and is therefore made part of CGU A for impairment testing purposes. For CGU A there is no impairment indicator.
2.Also, I'm curious as to why you brought up CGUs B and C and goodwill if they aren't relevant to asset X, which seems to be the main focus of your question? I did that to basically display that goodwill is not allocated to CGU A which would have otherwise mandated an impairment testing. Anyhow even if CGU A is tested for impairment, there is no impairment at the level of CGU A.

My core question is that if there is an impairment for an individual asset which is part of CGU as it does not generate independent cash flow then should I impair that individual asset according to IAS 36.9 even when the CGU within which the asset is grouped does not show any impairment indication?

[Marek Muc]

If asset X doesn't generate independent cash inflows then you're not able to determine its value in use and recognise impairment the way you illustrated in your scenario.

[JRSB]

How do you know that asset is impaired?

[CPA Kevin Matt]

For instance a leasing contract turned onerous along the course of the lease term...

[Marek Muc]

Does the leased ('underlying') asset generate independent cash inflows?