Allocation and Reversal of Impairment Losses (IAS 36)

If the recoverable amount of an asset is less than its carrying amount, the carrying amount must be reduced to its recoverable amount and the difference charged to P/L (or OCI for revalued assets). This is an impairment loss.  Following an impairment loss, subsequent depreciation charge is adjusted to reflect lower carrying amount.

For CGUs, the impairment loss is allocated to goodwill first, and then to the rest of the assets pro rata on the basis of the carrying amount of each asset (IAS 36.104). However, the carrying amount of an asset after allocation of the impairment loss cannot decrease below its recoverable amount (fair value less cost of disposal) or zero. Allocation of goodwill and corporate assets to different CGUs is covered below.

Example: Allocation of impairment loss

Entity A has three CGUs: X, Y and Z. Additionally, there is $10m of goodwill allocated to this group of CGUs. According to IAS 36, goodwill should be tested for impairment at least annually. It order to do this, Entity A needs to calculate the recoverable amount of all three CGUs to see if they ‘cover’ the value of goodwill. Numbers are as follows:

carrying amount of assets152530
recoverable amount173028
impairment of the CGU--2

As we can see, CGU Z is impaired as its recoverable amount is lower by $2m than the carrying amount. The $2m of impairment loss is allocated pro-rata to assets comprising CGU Z.

After the allocation of impairment loss on CGU Z, carrying amounts of assets and their recoverable amounts are calculated as follows:

carrying amount of assets15252868
recoverable amount17302875

The table below shows that, additionally to recognition of $2m of impairment loss on CGU Z, $3m of impairment loss on goodwill should be recognised:

Carrying amount of CGUs X,Y,Z68
Carrying amount of goodwill10
Total carrying amount78
Recoverable amount of CGUs X,Y,Z75
Impairment loss3

Q&A: Allocation of impairment loss to an underperforming asset

Entity A tests a CGU for impairment. The carrying amount of the CGU is $10m, and the estimated recoverable amount is $9m, therefore the CGU is impaired. There is no goodwill allocated to this CGU. When allocating the impairment loss of $ 1m, Entity A plans to allocate $ 0.4m to an obsolete production line which is still working, but at a slower rate than other production lines. Entity A plans to allocate the remaining $0.6m to other assets on the pro rata basis.

Question: Can entity A allocate $ 0.4 million to the obsolete production line?

Answer: No. If this asset belongs to the impaired CGU, it means that this asset doesn’t generate independent cash inflows and its value in use can’t be determined. Entity A should allocate $1m of impairment loss to all assets on a pro rata basis. However, Entity A may want to re-estimate the remaining useful life of this underperforming asset.

The situation would be different if the production line was not used at all.

For impairment testing, goodwill is allocated (IAS 36.80-87) to the CGU that benefits from the synergies of the related business combination. If goodwill cannot be allocated on a non-arbitrary basis to individual CGUs, it is allocated to groups of CGUs.  It may be the case that an ‘old’ CGU benefits from the business combination, even though newly acquired assets are not allocated to this ‘old’ CGU. IAS 36 does not give any guidance on how to allocate goodwill to CGUs. In practice, the most common method is to allocate goodwill in proportion to fair values of allocated assets. But other methods are also acceptable, such as allocation based on difference in fair values of CGUs before and after acquisition of new business.

CGU (or group of CGUs) to which goodwill is allocated can’t be larger than an operating segment identified under IFRS 8 (before aggregation under paragraph IFRS 8.5) and must represent the lowest level within the entity at which the goodwill is monitored for internal management purposes.

On disposal of an operation that is a part of a CGU with goodwill allocated to it, entities should include part of the goodwill in the value of net assets sold. The amount of goodwill ‘sold’ is measured on the basis of the relative value of the operation disposed of and the portion of the CGU retained, unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of (IAS 36.86). This ‘some other method’ may be necessary in a situation when ‘old’ assets within a CGU are disposed of, and they are clearly separate from the assets acquired that ‘generated’ goodwill. IAS 36 is silent on how these ‘relative values’ should be calculated, in practice recoverable amounts are used most often.

Requirements relating to goodwill allocation are set out in paragraphs IAS 36.80-87.

When the CGU to be tested for impairment includes a subsidiary with non-controlling interest, entities should familiarise themselves with Appendix C to IAS 36 and Illustrative examples 7A-7C. In particular, when non-controlling interest is not measured at fair value, entities need to make sure that, for the purpose of impairment testing, goodwill is grossed-up to include also the share of non-controlling interest.

Paragraphs IAS 36.100-103 set out the requirements for allocation of corporate assets for the purpose of impairment testing (see also illustrative example 8 to IAS 36).

Similarly to assessing whether assets are impaired, entities are required to assess, at the end of each reporting period, whether there is any indication that an impairment loss recognised in prior periods should be reversed or partially reversed. Paragraph IAS 36.111 gives a list of minimum indicators to be considered. The list is analogous to IAS 36.12 with a notable exception of comparing the carrying amount of the net assets of the entity to its market capitalisation (IAS 36.12(d)), which is missing in IAS 36.111.

It’s important to note that a reversal of an impairment loss must result from a change in estimates used for calculation of recoverable amount (e.g. cash flows, discount rate). In other words, entities cannot reverse an impairment loss simply because of unwinding of the discount or accumulating depreciation of assets (IAS 36.114-116).

Reversal of an impairment loss on CGU is allocated to individual assets on a pro-rata basis, but the increased carrying amount cannot be higher than the carrying amount that would have been determined (net of depreciation) without impairment loss in previous years. Furthermore, the increased carrying amount of an individual asset cannot be higher than its recoverable amount (IAS 36.122-123).

Impairment loss on goodwill cannot be reversed (IAS 36.124).

See other pages relating to IAS 36:

Scope of IAS 36 Impairment of Assets
IAS 36 Impairment of Assets: Cash-Generating Units (CGU)
IAS 36 Impairment of Assets: Value in Use as the Recoverable Amount
IAS 36 Impairment of Assets: Allocation and Reversal of Impairment Losses
IAS 36 Impairment of Assets: Disclosure

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