An impairment should be recognized if the recoverable amount of an asset or CGU is less than it carrying amount. An impairment reduces the asset’s carrying amount to the recoverable amount.

The impairment loss should be recognized in profit or loss immediately for assets carried on the depreciated historical cost basis. The loss is charged in arriving at profit or loss before tax.

The impairment loss is treated as a revaluation decrease for assets that are carried at revalued amounts. The loss is first set against any revaluation surplus relating to the asset in other comprehensive income to the extent of the surplus, and the remaining balance of the loss (if any) is then treated as an expense in profit or loss.

The remaining carrying value after impairment should be amortized over the remaining useful economic life. Asset lives and residual values should be reviewed at least annually, to ensure that they are realistic, and they should be revised if this is not the case in the light of experience or changed circumstances. An impairment might indicate that previously estimated asset lives are unrealistically long and need to be shortened.

Where an impairment loss is recognized, any related deferred tax assets or liabilities are determined in accordance with IAS 12, by comparing the asset’s carrying amount to its tax base.

Allocation of impairment losses to assets of cash-generating units

An impairment loss attributable to a CGU should be allocated to write down the assets in the following order:

• Recorded goodwill.
• The other assets in the CGU on a pro rata basis, based on the carrying amount of each asset in the CGU.

Allocation of impairment to goodwill and then to a brand Entity A is testing its CGU, which contains goodwill and two brands, X and Y. The CGU needs to be impaired, since the recoverable amount is lower than the carrying amount. Entity A believes that this is mainly due to brand Y’s poor performance, and it wants to allocate the impairment charge to this brand. If a CGU is considered to be impaired, the goodwill allocated to that CGU is written off first. Entity A should first impair the goodwill before any charge is allocated to the CGU’s other assets.

However, within this allocation framework, each asset should be reduced only to the highest of:

• Its fair value less costs of disposal, if measurable.
• Its value in use, if this can be determined.

The amount of impairment loss that would otherwise have been allocated to the asset should be allocated pro rata to the CGU’s other assets.

Should an impaired asset be tested as part of a CGU? A machine that is part of a production line has been damaged, but it still operates, and there is no intention of scrapping or selling it. The machine’s recoverable amount cannot be determined, because it does not generate cash flows independently of the production line. The machine could only be sold for scrap value, which is below it carrying amount. If the recoverable amount of the CGU to which the machine belongs (the production line) is above the CGU’s carrying amount, no impairment should be recognized in respect of the damaged machine. The depreciation rates or the machine’s useful life might need to be reviewed.

Allocation of impairment loss within a cash-generating unit – example Entity C has a soft drinks CGU which contains both goodwill and intangible assets in the form of brands with indefinite lives. Entity C tests the CGU for impairment and determines that an impairment loss has occurred. The directors attribute the impairment loss to the poor performance of a particular brand, B. Notwithstanding the directors’ belief that the impairment is attributable to brand B, it is not acceptable for Entity C to allocate the impairment loss to the carrying amount of that brand, rather than following the allocation specified in IAS 36. Because it is not practicable to estimate the recoverable amount of each individual asset, the rules set out in IAS 36 (see above) result in an arbitrary allocation of any impairment loss between the assets of the unit (including brand B) other than goodwill. These reductions in carrying amounts should be dealt with in the same manner as impairment losses on individual assets as discussed. Therefore, in the circumstances described, the impairment loss identified must first be allocated to goodwill. Following this, any excess is then available for allocation against the carrying amount of Entity C’s other assets (including brand B).

Recognition of an impairment loss creates a deferred tax asset An entity has an identifiable asset with a carrying amount of CU1,000. Its recoverable amount is CU650. The tax rate is 30 per cent and the tax base of the asset is CU800. Impairment losses are not deductible for tax purposes. The effect of the impairment loss is as follows: Before impairment Effect of impairment  After impairment  CU CU  CU  Carrying amount 1,000 (350) 650 Tax base 800   – 800 Taxable (deductible) temporary difference 200 (350) (150) Deferred tax liability (asset) at 30%  60 (105)  (45) In accordance with IAS 12, the entity recognizes the deferred tax asset to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

Allocation of impairment losses based on depreciated replacement cost It is not easy to determine the fair value less costs of disposal for some individual assets (for example, machinery, equipment or specialized buildings) when allocating an impairment loss. In order to allocate the impairment loss as appropriate, entities might consider using a depreciated replacement cost approach to determine a proxy for fair value less costs of disposal. Although depreciated replacement cost is not used when determining recoverable amount, we would consider it acceptable to use this measure when allocating an impairment loss if this is the only possible way to calculate a proxy for fair value less costs of disposal. This method should not be used if an income approach could be performed on a single-asset basis. In practice, this issue might arise after a business combination if the fair value of an asset at initial recognition was measured using a depreciated replacement cost approach, as is allowed under IFRS 3.

Two-step approach for goodwill allocated to a group of CGUs – example In 20X0, Entity X acquires a business comprising three CGUs, A, B and C. The entire goodwill arising in the business combination is allocated to the three CGUs as a group (this allocation complies with the requirements of IAS 36). At the end of 20X5, the carrying amount of the net assets in each CGU and the associated goodwill and the value in use of each CGU is as set out below. Entity X has determined that the fair value less costs of disposal of each of the CGUs and of the business as a whole is less than the value in use of each CGU and of the business, respectively. Cash-generating unit A B C Goodwill Total CU CU CU CU CU Carrying amount 80 120 140 50 390 Value in use 100 140 120 360 Step 1 Firstly, Entity X assesses each individual CGU for impairment. This first assessment results in an impairment loss of CU20 being recognized in respect of CGU C, thereby reducing its carrying amount from CU140 to CU120, and the total carrying amount of the group of CGUs (including goodwill) from CU390 to CU370. Cash-generating unit A B C  Goodwill Total  CU CU CU  CU CU  Original carrying amount 80 120 140 50 390 Impairment recognized in Step 1   –   –  (20)  –  (20) Carrying amount following Step 1 80 120 120 50 370 Value in use 100 140 120 360 Step 2 Secondly, the group of CGUs including the associated goodwill is tested for impairment. This second assessment gives rise to an impairment loss of CU10 in respect of the goodwill, reducing its carrying amount from CU50 to CU40. The total carrying amount of the group of CGUs including goodwill is reduced to CU360. Cash-generating unit A B C  Goodwill  Total  CU CU CU  CU  CU  Carrying amount 80 120 140 50 390 Impairment recognized in Step 1 – – (20) – (20) Impairment recognized in Step 2   –   –   –  (10)  (10) Carrying amount following Step 2 80 120 120 40 360 Value in use 100 140 120 360

Allocation of corporate assets to CGUs – example An entity produces different types of packaging based on paper. The three main types of packaging materials produced for its customers are the following: tubes; corrugated board; and solid board. Each of the three main types of packaging associated with the business is identified as an operating segment under IFRS 8, and as a CGU under IAS 36. Asset M is partly used for the production of tubes (CGU T) and corrugated board (CGU C). The following information relates to CGU T. Goodwill = zero Carrying amount of machinery used exclusively in manufacturing tubes (excluding Asset M) = CU4,500 Carrying amount of Asset M = CU1,000 Capacity of Asset M used for the tubes production = 60 per cent Recoverable amount of CGU T (including Asset M) = CU4,000 For CGU C, the excess of value in use over the carrying amount is CU2,000. In accordance with IAS 36, Asset M should be allocated on a reasonable and consistent basis to CGUs T and C. The entity should compare the carrying amount of each CGU, including the portion of the carrying amount of the corporate asset allocated to the CGU, with its recoverable amount. In this case, 60 per cent of Asset M’s capacity is used for the production of the tubes; accordingly, it seems reasonable to allocate 60 per cent of the carrying amount of Asset M to CGU T. Therefore, the carrying amount of CGU T is CU5,100 (CU1,000 × 60% + CU4,500) which exceeds its recoverable amount (CU4,000) by CU1,100. An impairment loss should be recognized and should be allocated to all assets of CGU T (including Asset M) pro rata based on the carrying amount of each asset in the unit: • to Asset M: CU1,100 × CU600 / CU5,100 = CU129 • to other assets: CU1,100 × CU4,500 / CU5,100 = CU971 However, if the entity were able to determine the fair value less costs of disposal of Asset M, and that number was CU1,000 or more, the impairment loss in respect of CGU T would be allocated on a pro rata basis to the other assets of CGU T in accordance with the requirements of IAS 36. No impairment loss is recognized in respect of CGU C because the amount of Asset M to be allocated (CU400) is less than the excess of CGU C’s value in use over CGU C’s carrying amount (CU2,000). Even though the difference between the carrying amount and the recoverable amount (CU2,000) of CGU C is higher than the impairment loss of CGU T, an impairment loss should be recognized in CGU T. The entity cannot test for impairment at a higher level to avoid the impairment loss.

Allocation of impairment losses The following example illustrates how an impairment loss is allocated under IAS 36. There is an indication that a group of assets (A, B and C) within a CGU might be impaired. Management has carried out an impairment test, and it has estimated that the CGU’s recoverable amount is C700. Further details of the group of assets are as follows: Assets Carrying amount Fair value less costs of disposal Value in use C C C 300 – – – Asset A 500 550 500 – Asset B 90 50 50 – Asset C 250 50 150 Total for CGU 1,140 650 700 Total recoverable amount for CGU 700 Impairment to allocate 440 An impairment of C440 has been identified, and this needs to be allocated. The impairment loss arising will be allocated first to goodwill and then to each of the assets within the CGU. The carrying amount of each asset is reduced to the highest of fair value less costs of disposal, value in use and zero, in accordance with IAS 36. Assets Carrying amount Fair Value less costs of disposal Value in use Allocation of impairment Revised carrying amount (i) carrying amount based on allocation Goodwill 300 − − (300) − − Asset A 500 550 500 (ii) 500 − Asset B 90 50 50 (40) 50 − Asset C 250 50 150 (100) 250 50 150 (100) 150 1,140 (400) 700 Notes: (i) An impairment loss is allocated first to goodwill allocated to the CGU and then to the individual assets within the CGU on a pro rata basis, based on the carrying amount of each asset. (ii) No impairment is allocated, because fair value less costs of disposal or value in use is greater than original carrying value. Because no impairment loss is allocated to asset A, the balance of the impairment after the goodwill write-down is C140, which should be allocated pro rata to the carrying amount of assets B (C90) and C (C250). This would lead to C103 being allocated to asset C, but this would bring the carrying amount below the recoverable amount of C150. Therefore, the amount of impairment loss allocated to asset C is capped at C100. The remaining C3 should be allocated to asset B. This means that the total allocated to asset B is C40 (being (140 × (90 ÷ (250 + 90))) + 3).

An impairment charge is not fully allocated if the assets do not have sufficient value to absorb the charge in its entirety. In these circumstances, no liability for the unallocated impairment charge will be recognized, unless the liability meets the definition of a liability under another standard.

Assets or CGUs held for disposal

An asset or CGU qualifies as ‘held for sale’ under IFRS 5 if it carrying amount will be recovered principally through a sale transaction, rather than through continued use. This applies only to assets or CGUs that are to be sold, and not to assets or CGUs that are to be abandoned or liquidated. This is because, in the latter situation, the carrying amount will be recovered through continued use by the entity up to the date of abandonment or closure.

An impairment test, under IAS 36, is required for non-current assets and disposal groups before classification as ‘held for sale’. A plan to dispose of an asset or CGU is an internal indicator of impairment. The value in use and fair value less costs of disposal of an asset or CGU that is expected to be sold converge to the same number, because the value will be realized from sale and the cash flows up to the point of sale will be much less significant. The convergence of value in use and fair value less costs of disposal of an asset or CGU is progressive. The values gradually move closer, until IFRS 5’s criteria are met.

Impairment presentation of a discontinued operation An entity reports quarterly. In the third quarter, the entity decides to sell an operation, and an impairment is recognized. In the fourth quarter, the operation meets the definition of a discontinued operation. Question: Could the impairment charge in the third quarter be shown in the full year’s financial statements below the tax line, as part of the results of the discontinued operation? Answer: 1. The operation does not qualify as ‘held for sale’ or as a discontinued operation in the third quarter. The impairment loss (if any) is recognized in arriving at profit before tax, under one of the format headings set out in IAS 1. 2. At the end of the year, the operation is classified in the closing balance sheet as a disposal group held for sale. The disposal group is measured at the lower of carrying amount and fair value less costs of disposal. A further impairment loss might or might not arise at this stage. 3. The impairment losses incurred in the third and fourth quarters are presented in the income statement for the full year, as part of the results of discontinued operations.

Once an asset or CGU qualifies as a non-current asset (or disposal group), held for sale in accordance with IFRS 5, it is excluded from IAS 36’s scope.