The judgements and estimates involved in impairment calculations are often significant, and so they should be disclosed.

The disclosure requirements for impairment are extensive. Regulators across the world raise comments on the inadequacy of entities’ impairment disclosures. The disclosure requirements under value in use and fair value less costs of disposal are similar, but some differences do exist. Example disclosures are contained in the standard and in the PwC illustrative financial statements.

Disclosure of key assumptions: focus for regulators Disclosure of key assumptions is a focus for regulators, who have emphasized that more granular disclosures are needed, instead of aggregated disclosures showing wide ranges for CGUs. Also, the view of a number of regulators around the world is that, whilst the growth rate used to extrapolate cash flow projections and the pre-tax discount rate are important, they are not ‘key assumptions’ on the basis of which the cash flow projections for the period covered by the most recent budgets or forecasts are based. Rather, they are applied to those cash flow projections after the projections have been prepared. IAS 36 includes disclosure requirements for the growth and discounts separately from (and in addition to) each key assumption on which the cash flow projections are based. In this context, the regulators’ view is that a reference to ‘growth’ is meaningless unless the item is identified – for example, as sales, margins or costs. This is likely to remain an area that is subject to scrutiny for groups with large amounts of goodwill or indefinite-lived intangible assets on the balance sheet.

Disclosures are split between CGUs where an impairment has been recognized and CGUs with goodwill or indefinite-lived assets allocated to them. The amount of impairment recorded or reversed must be disclosed, including the circumstances leading to that impairment or reversal. The recoverable amount methodology must also be disclosed.

For each CGU that contains goodwill or intangible assets with indefinite useful lives, extensive disclosures are required – for example, each key assumption used in the forecasts and how management determined the value; the period of the cash flows; and the growth rate used. If the CGU’s recoverable amount is based on fair value less costs of disposal, the disclosures are not covered by IFRS 13, but they are similar.

If there is any reasonably possible change to a key assumption used in determining recoverable amount that would cause the CGU’s carrying amount to exceed its recoverable amount, a sensitivity analysis must be disclosed.

The disclosures for CGUs with goodwill or intangible assets with indefinite useful lives are given in Illustrative Example of IAS 36. The example is very long and detailed, and it indicates that the disclosures are intended to be full and comprehensive. Boilerplate disclosure, of a generalized nature, will not be adequate.

Entities reporting segment information

Entities that report segment information under IFRS 8 are required to disclose the following for each reportable segment:

(a) the amount of impairment losses recognized in profit or loss and other comprehensive income during the period; and

(b) the amount of reversals of impairment losses recognized in profit or loss and other comprehensive income during the period.

Impairment losses recognized or reversed in the period

The following disclosures are required in respect of an individual asset (including goodwill) or a CGU for which an impairment loss has been recognized or reversed during the period:

(a) the events and circumstances that led to the recognition (reversal) of the loss;

(b) the amount of the loss recognized (reversed);

(c) for an individual asset:

(i) the nature of the asset; and

(ii) for entities that apply IFRS 8, the reportable segment to which the asset belongs;

(d) for a CGU:

(i) a description of the CGU (such as whether it is a product line, a plant, a business operation, a geographical area, a reportable segment or other);

(ii) the amount of the loss recognized or reversed by class of assets and, for entities that apply IFRS 8, by reportable segment; and

(iii) if the aggregation of assets for identifying the CGU has changed since the previous estimate of the CGU’s recoverable amount (if any), the entity should describe the current and former ways of aggregating assets and the reasons for changing the way the CGU is identified;

(e) the recoverable amount of the asset or CGU, and whether the recoverable amount of the asset or CGU is its fair value less costs of disposal or its value in use;

(f) if the recoverable amount is fair value less costs of disposal:

(i) the level of the fair value hierarchy (see IFRS 13) within which the fair value measurement of the asset or CGU is categorized in its entirety (without taking into account whether the ‘costs of     disposal’ are observable);

(ii) for fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) used to measure fair value less costs of disposal. If there has been a change in valuation technique, the entity should disclose that change and the reason(s) for making it; and

(iii) for fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, each key assumption on which management has based its determination of fair value less costs of disposal. Key assumptions are those to which the asset’s or CGU’s recoverable amount is most sensitive. The entity should also disclose the discount rate(s) used in the current measurement and previous measurement if fair value less costs of disposal is measured using a present value technique; and

(g) if the recoverable amount is value in use, the discount rate(s) used in the current estimate and previous estimate (if any) of value in use.

Other impairment losses/reversals material in aggregate to the financial statements

If impairment losses recognized (reversed) during the period, other than those disclosed, are material in aggregate to the financial statements taken as a whole, the entity should disclose a brief description of the following:

(a) the main classes of assets affected by those impairment losses (reversals); and

(b) the main events and circumstances that led to the recognition (or reversal) of those impairment losses.

Unallocated goodwill

If any portion of the goodwill acquired in a business combination during the period has not been allocated to a CGU (group of CGUs) at the end of the reporting period, the amount of the unallocated goodwill should be disclosed, together with the reasons why that amount remains unallocated.

Cash-generating units containing goodwill or intangible assets with indefinite useful lives

Information to be disclosed for cash-generating units to which significant goodwill or indefinite-life intangible assets have been allocated

The following information should be disclosed for each CGU (or group of CGUs) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (or group of units) is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives:

(a) the carrying amount of goodwill allocated to the unit (or group of units);

(b) the carrying amount of intangible assets with indefinite useful lives allocated to the unit (or group of units);

(c) the basis on which the unit’s (or group of units’) recoverable amount has been determined (i.e., value in use or fair value less costs of disposal);

(d) if the unit’s (or group of units’) recoverable amount is based on the value in use:

(i) each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets/forecasts. Key assumptions are those to which the unit’s (or group of units’) recoverable amount is most sensitive;

(ii) a description of management’s approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from experience or external sources of information;

(iii) the period over which management has projected cash flows based on financial budgets/forecasts approved by management and when a period greater than five years is used for a CGU (or group of CGUs), an explanation as to why that longer period is justified;

(iv) the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts, and the justification for using any growth rate that exceeds the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit (or group of units) is dedicated; and

(v) the discount rate(s) applied to the cash flow projections;

(e) if the unit’s (or group of units’) recoverable amount is based on fair value less costs of disposal, the valuation technique(s) used to measure fair value less costs of disposal. An entity is not required to provide the disclosures required by IFRS 13. If fair value less costs of disposal is not measured using a quoted price for an identical unit (or group of units), the following information should also be disclosed:

(i) each key assumption on which management has based its determination of fair value less costs of disposal. Key assumptions are those to which the unit’s (or group of units’) recoverable amount is most sensitive;

(ii) a description of management’s approach to determining the value (or values) assigned to each key assumption, whether those values reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information;

(iii) the level of the IFRS 13 fair value hierarchy within which the fair value measurement is categorized in its entirety (without giving regard to the observability of ‘costs of disposal’); and

(iv) if there has been a change in valuation technique, the change and the reason(s) for making it.

In addition, if fair value less costs of disposal is measured using discounted cash flow projections, the following information should also be disclosed:

(v) the period over which management has projected cash flows;

(vi) the growth rate used to extrapolate cash flow projections; and

(vii) the discount rate(s) applied to the cash flow projections; and

(f) if a reasonably possible change in a key assumption on which management has based its determination of the unit’s (or group of units’) recoverable amount would cause the unit’s (or group of units’) carrying amount to exceed its recoverable amount:

(i) the amount by which the unit’s (or group of units’) recoverable amount exceeds its carrying amount;

(ii) the value assigned to the key assumption; and

(iii) the amount by which the value assigned to the key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure the recoverable amount, for the unit’s (or group of units’) recoverable amount to be equal to its carrying amount.

Impairment loss not included within depreciation expense – example An entity recognizes an impairment loss in respect of certain intangible assets with indefinite useful lives in the fourth quarter of 20X1 in accordance with IAS 36. The entity has certain debt covenants that state that it must maintain a specified multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Impairment losses recognized in accordance with IAS 36 should not be included within depreciation expense. IAS 16 defines depreciation as the systematic allocation of the depreciable amount of an asset over its useful life. The recognition of an impairment loss is as a result of a valuation exercise, rather than an allocation exercise, and should not be presented in a manner that might encourage the belief that it is part of the regular allocation (i.e., the depreciation expense).

Disclosure of climate as a key assumption As discussed, consideration of climate-related factors may be a necessary part of a value in use calculation. When this (or any other longer-term risk) is a significant factor in a value in use calculation for cash-generating units containing significant goodwill or intangible assets with indefinite useful lives, the key assumptions applied together with a description of management’s approach to determining the value assigned to each key assumption should be disclosed in accordance with IAS 36. When relevant, this disclosure should provide an explanation of not only the key assumption, but also of its forecast effects on the entity’s future cash flows. Although IAS 36 does not require disclosure of the key assumptions used in determining the value in use of individual assets or cash-generating units that do not contain goodwill or indefinite life intangible assets, such disclosure may be required by IAS 1 if the estimation of value in use is a significant source of estimation uncertainty.

Information to be disclosed for cash-generating units to which insignificant goodwill or indefinite-life intangible assets have been allocated

If some or all of the carrying amount of goodwill or intangible assets with indefinite useful lives is allocated across multiple CGUs (or groups of CGUs), and the amount so allocated to each unit (or group of units) is not significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives, that fact should be disclosed, together with the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to those units (or groups of units).

In addition to the requirements set out in the previous paragraph, if the recoverable amounts of any such units (or groups of units) are based on the same key assumption(s) and the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to them is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives, the entity should disclose that fact, together with:

(a) the aggregate carrying amount of goodwill allocated to those units (or groups of units);

(b) the aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units (or groups of units);

(c) a description of each key assumption;

(d) a description of management’s approach to determining the value assigned to each key assumption, whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information; and

(e) if a reasonably possible change in the key assumptions would cause the aggregate of the units’ (or groups of units’) carrying amounts to exceed the aggregate of their recoverable amounts:

(i) the amount by which the aggregate of the units’ (or groups of units’) recoverable amounts exceeds the aggregate of their carrying amounts;

(ii) the value(s) assigned to the key assumption(s); and

(iii) the amount by which the value(s) assigned to the key assumption(s) must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the aggregate of the unit’s (or groups of units’) recoverable amounts to be equal to the aggregate of their carrying amounts.

As discussed, provided that specified criteria are met, the most recent detailed calculation made in a preceding period of the recoverable amount of a CGU (or group of CGUs) may be carried forward and used in the impairment test for that unit (or group of units) in the current period. When this is the case, the information for that unit (or group of units) that is incorporated into the disclosures required by IAS 36 (set out above) relates to the carried forward calculation of recoverable amount.

The comprehensive disclosures required by this section are illustrated in illustrative example accompanying IAS 36.