General rules

An entity should assess, at each reporting date, whether there is any indication that an impairment loss for an asset other than goodwill either no longer exists or has decreased. If there is any such indication, the entity should estimate the recoverable amount. This applies both to individual assets, other than goodwill, and to CGUs.

Indicators that impairment losses might have reversed are generally the opposite of those that gave rise to the impairment loss in the first place. Entities should consider whether there have been favorable events or changes in circumstances, since the impairment loss was recognized, that would indicate that the impairment loss no longer exists or might have decreased.

If there are indicators, the recoverable amount of the relevant assets or CGUs should be estimated again.

The reversal of an impairment loss should be recognized if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment test was carried out. A reversal of an impairment loss recognizes an increase in the estimated service potential of an asset, either from use or sale, since the last impairment test. Entities are required to identify the change in the estimates that causes the increase in estimated service potential. Changes might result from:

• A change in the basis for recoverable amount (that is, whether it is based on fair value less costs of disposal or value in use).
• If recoverable amount was based on value in use, a change in the amount or timing of estimated future cash flows or in the discount rate.
• If recoverable amount was based on fair value less costs of disposal, a change in the estimate of the fair value less costs of disposal.

Impairment losses relating to goodwill are not permitted to be reversed.

Reverse indicators Entity O is a South American entity, producing orange juice, most of which is sold to overseas customers. Three years ago, entity O recognized an impairment loss on fixed assets, based on value in use. At that time, management estimated that prices of its products would fall over the following four years. During the current year, the orange crop in the northern hemisphere was mostly destroyed by a very severe winter. Orange juice prices rose significantly as a result. The entity is also entering into long-term agreements with overseas customers, under which higher volumes will be exported during the subsequent years. The combinations of prices and volumes, used as references for the cash flow estimates in the value in use calculation, have changed. This is an indicator that the previously recognized impairment might have reversed. Management should update its estimates and determine the assets’ revised recoverable amounts. Reversals of previously recognized impairment losses are limited to the carrying amount which would have been determined at the current date if the impairment had not been recognized.

Reversals of impairment losses that arise simply from the passage of time should not be recognized. They result from the unwinding of the discount rate that was applied to arrive at the present value of expected future cash flows. The underlying reasons for the original impairment have not been removed, and the service potential of the asset has not increased. An increase in value resulting from the passage of time does not need to be identified as a separate component if there is a reversal resulting from another indicator.

Determining whether the reversal of an impairment loss is appropriate – examples An acquired business produces bottled mineral water. Just before the year end, a consumer group tests the water and publicizes the fact that it contains high levels of a harmful chemical. Sales of the mineral water plummet. Situation 1 Assume that there is great uncertainty about the validity of the consumer group’s claim, but it is assumed to be valid and that sales of the product will recover only after the problem has been sorted out, and the product has been re-tested and re-marketed. The future cash flows indicate that the recoverable amount of the CGU (which consists mainly of an intangible asset, being the brand of mineral water) is less than its carrying amount, so the CGU/intangible asset is written down by the entity. However, in the next period, further tests demonstrate that the consumer group had been wrong in its claims and it retracts them publicly. Sales of the mineral water recover very quickly and soon are back to the previous level. In this specific case, it is clear that an unforeseen change in the estimates of future cash flows used in determining the recoverable amount has resulted in the recognition of the impairment loss, and later in the reversal of that impairment loss. The CGU/intangible asset can be written back up to the value that would have been recognized had the impairment never occurred. This write-up is recognized immediately in profit or loss. Situation 2 Assume that, by year end, the mineral water company has conducted its own tests and satisfied both itself and independent experts that the consumer group was wrong in its claims. So, the entity forecasts that, although there has been a temporary reduction in sales, sales will soon recover when the consumer group retracts the claims. The temporary reduction in sales has caused a small temporary impairment in the value of the CGU/intangible asset as measured at the end of the reporting period. The CGU/intangible asset is written down by this small amount to its recoverable amount. In the next period, sales increase back to their previous levels in line with expectations and the value of the CGU/intangible asset recovers to its original level. But, the (small) impairment loss cannot be reversed in the financial statements. Its reversal was foreseen in the original impairment calculations and has occurred simply because of the passing of time; therefore, the reversal does not arise from a change in the estimates used in the original recoverable amount calculation. A reversal of an impairment loss must reflect an increase in the estimated service potential of an asset (or CGU), either from use or sale. Examples of such changes in estimate include: a change in the basis for recoverable amount (i.e., whether recoverable amount is based on fair value less costs of disposal or value in use); if recoverable amount was based on value in use, a change in the amount or timing of estimated future cash flows or in the discount rate; or if recoverable amount was based on fair value less costs of disposal, a change in estimate of the components of fair value less costs of disposal. An increase in the recoverable amount of the asset due to the passage of time does not, however, represent an increase in the estimated service potential of an asset and, therefore, it is not acceptable to recognize a reversal of an impairment loss on this basis. In other words, the value in use of an asset may increase and even become greater than the carrying amount of the asset simply because the present value of future cash inflows increases as they become closer (i.e., ‘the discount unwinds’). This does not, however, represent an economic change in the value of the asset. Therefore, a reversal of an impairment loss should not be recognized on this basis.

Unwinding of discounted cash flows does not reverse an impairment loss – example At the beginning of 20X0, Entity X acquires a machine with an expected useful life of four years for CU1,000. Depreciation is charged on a straight-line basis. At the end of 20X0, there is an indication that the machine may be impaired and consequently its recoverable amount is assessed by Entity X. Entity X determines that the fair value less costs of disposal is lower than the value in use of the machine. The value in use of the machine is determined using estimated future cash flows and a discount rate of 10 per cent as follows. 20X1 20X2 20X3 Total CU CU CU CU Estimated future cash flows 250 250 300 800 Present value at 20X0 227 207 225 659 The carrying amount of the machine of CU750 is higher than its value in use of CU659. Therefore, Entity X should recognize an impairment loss of CU91 to reduce the machine’s carrying amount to its value in use. The revised carrying amount is then depreciated over the remaining useful life of three years. The cash flows and discount rate used in estimating the value in use of the machine do not change in subsequent years. The value in use based on the original estimated future cash flows and discount rate in each of the subsequent years is as follows. 20X1 20X2 20X3 CU CU CU Carrying amount at year end 439 220 – Estimated future cash flows 550 300 – Value in use at year end 475 273 – Although the machine’s value in use exceeds its carrying amount in 20X1 and 20X2, this increase simply arises from the unwinding of the discount relating to the future cash flows. Consequently, the impairment loss of CU91 should not be reversed.

Reversal of impairment loss for an individual asset – example Entity A holds an intangible asset and accounts for it under the cost model of IAS 38. The intangible asset cost CU10 million and it is amortized over 10 years. Two years after it is purchased, the intangible asset becomes impaired and it is written down from its carrying amount of CU8 million to its estimated recoverable amount of CU4 million. Its estimated useful life is unchanged (eight years remaining). Two years after the recognition of the impairment loss, with the carrying amount at CU3 million, the recoverable amount of the intangible asset is estimated to be CU7 million, following a change in estimates of the future cash flows arising from this asset. Because the reversal of the impairment loss arises from a change in the estimates used to determine the recoverable amount, the impairment loss should be reversed. However, the impairment loss can only be reversed to the extent that it does not increase the carrying amount above what it would have been had the impairment loss never been recognized. Had the impairment loss never been recognized, the carrying amount would be CU6 million (CU8 million less two further years depreciation at CU1 million per annum); therefore, only CU3 million of the original CU4 million impairment loss can be reversed.

Limited reversal of impairment loss for an individual asset – example Entity A holds a property and accounts for it under IAS 16’s cost model. The cost of the property is CU10 million and its useful life is 20 years. Depreciation each year is, therefore, CU0.5 million. At the end of Year 5, the property has a carrying amount of CU7.5 million. Due to changes in the economic environment, the directors perform a detailed impairment review and determine that the property’s recoverable amount is its value in use, which is CU5 million. Their estimate of the remaining useful life of the asset is 10 years. Therefore, an impairment loss of CU2.5 million is recognized in Year 5. In Years 6 and 7, the property is depreciated by CU0.5 million per year so that its carrying amount at the end of Year 7 is CU4 million. Due to shortages in the supply of properties, the directors determine that the fair value less costs of disposal of the property at the end of Year 7 is CU8 million. The recoverable amount of the asset has therefore increased to CU8 million. The reversal of the impairment loss is limited, however, to the amount that would restore the carrying amount to what it would have been had no impairment loss been recognized (i.e., CU7.5 million – (CU7.5 million × 2/10) = CU6 million). Therefore, only CU2 million of the impairment loss is reversed. If the entity wishes to recognize the market value of the property in its statement of financial position, the remainder of the uplift would be treated as a revaluation movement. (This will only be possible, however, if the entity decides to adopt the revaluation model for all assets in that class.) A reversal of an impairment loss for an asset other than goodwill is recognized immediately in profit or loss unless the asset is carried at a revalued amount in accordance with another Standard. When an asset is carried at a revalued amount, the reversal is considered a revaluation increase and treated accordingly. Normally, a revaluation increase is recognized in other comprehensive income and increases the revaluation surplus within equity. But to the extent that an impairment loss on the same revalued asset was previously recognized in profit or loss, a reversal of that impairment loss is recognized in profit or loss.

Subsequent depreciation is not an indication that an impairment has reversed An asset cost C100 on 1 January 20X0. Its expected useful life is five years; depreciation is on a straight-line basis. An impairment review is carried out as at 31 December 20X0, when the carrying value is C80. The projected cash flows are as follows: 20X1 20X2 20X3 20X4 C C C C Cash flows (nominal total C82; present value C64) 13 22 23 24 Using a discount rate of 10%, the present value of the cash flows (value in use) at 31 December 20X0 is C64. Thus, an impairment loss of C16 is recognized. The impaired carrying value of C64 is then depreciated, on a straight-line basis, over the remaining four years of its expected useful life. Assuming that the cash flows materialize as projected in the impairment calculation, the carrying value and value in use (present value of remaining cash flows discounted at 10%) at each year-end are as follows: 20X0 20X1 20X2 20X3 20X4 C C C C C Carrying value 64 48 32 16 – Value in use 64 57 41 22 – It can be seen that the value in use at 31 December 20X1, 20X2 and 20X3 exceeds the carrying amount. The reason is the unwinding of the discount (as the future cash flows get nearer, their present value increases). But there is no reversal of the original impairment loss.

The amount of any reversal that can be recognized is restricted to increasing the relevant asset’s carrying value to the carrying value that would have been recognized if the original impairment had not occurred (that is, after taking account of normal depreciation that would have been charged if no impairment had occurred).

The reversal of an impairment loss on a depreciable asset will not be as large as the original impairment loss. Any increase above the carrying amount (if no impairment charge had been recognized originally net of depreciation) is treated as a revaluation.

An asset’s useful life, depreciation method and the residual value should be reviewed if there is an indicator of a reversal. This might be necessary, even if no impairment loss is reversed for the asset.

Accounting for the reversal of an impairment loss should be consistent with the treatment adopted when the impairment was recognized. The reversal should be recognized in the current year’s profit or loss where the asset is held at historical cost.

The reversal of an impairment loss for a revalued asset should be recognized in profit or loss to the extent that the original impairment loss (adjusted for subsequent depreciation) was recognized in profit or loss. Any remaining balance of the reversal should be recognized in other comprehensive income. The increased carrying amount of the asset cannot exceed the carrying amount as it would have been without the original impairment (as adjusted for the depreciation that would have applied).

Reversal of impairment loss on revalued asset At 31 December 20X1, an asset was purchased for C100,000. Its expected useful economic life is 20 years. Three years later, it was revalued to C136,000. At 31 December 20X6, the asset was reviewed for impairment and written down to its recoverable amount of C65,000. The following table shows the movements in the asset’s book value, on a depreciated historical cost basis and as actually recognized in the financial statements: Depreciated historical cost Revalued carrying value C’000 C’000 31 December 20X1 – cost 100 100 Depreciation (3 years) (15) (15) Revaluation – 51 31 December 20X4 85 136 Depreciation (2 years) (10) (16) 31 December 20X6 75 120 Impairment loss (10) (55) 31 December 20X6 after impairment loss 65 65 The impairment loss of C55,000 at 31 December 20X6 is charged to other comprehensive income, until the carrying amount reaches depreciated historical cost, and thereafter in the income statement, as follows: C’000 Other comprehensive income 45 Income statement 10 Impairment loss 55 The impairment loss is charged to other comprehensive income to the extent of the revaluation surplus held in other comprehensive income that relates to the asset. In the above example, there was a credit balance of C51,000 in 20X4. It has been assumed that, as permitted by IAS 16, a transfer has been made each year of the depreciation relating to the revalued amount from the revaluation surplus to retained earnings. This amount would be C6,000 and would reduce the available surplus in other comprehensive income from C51,000 to C45,000. At 31 December 20X8, economic conditions have improved and the asset’s recoverable amount is estimated to be C90,000. If no impairment loss had been recognized, the carrying value at 31 December 20X8 would have been C104,000 (C120,000 at 31 December 20X6, less two years of further depreciation of C16,000), which is greater than the recoverable amount of C90,000. Therefore, the whole of the increase in the carrying value can be treated as a reversal of the previous impairment loss. If the carrying value had been increased to more than C104,000, the excess would be treated as a revaluation, and not a reversal of the impairment. The impairment loss should be reversed, as indicated in the following table: Depreciated historical cost Carrying value Before impairment After impairment C’000 C’000 C’000 31 December 20X6 75 65 65 Depreciation (2 years) (10) (9) (9) 31 December 20X8 65 56 56 Reversal of impairment loss – 9 34 31 December 20X8 after reversal 65 65 90 The reversal of the impairment loss of C34,000 is recognized as follows: C’000 Income statement 9 Other comprehensive income 25 34 The standard does not specifically say that the reversal credited to profit or loss should not exceed the original impairment loss charged there as adjusted by depreciation. However, the increased carrying amount of the asset cannot exceed the carrying amount as it would have been without the original impairment (as adjusted for the depreciation that would have applied). The profit and loss figure of C9,000 represents the amount of the original impairment loss that was charged in the income statement of C10,000, less an adjustment for the additional depreciation that would have been charged if the asset had been carried at depreciated historical cost of C1,000. This is calculated as the difference between the depreciation that would have been charged for the two years of C10,000 if the asset had been stated at depreciated historical cost and the depreciation actually charged of C9,000. The balance of the reversal of C25,000 is credited to other comprehensive income.

After a reversal of an impairment loss has been recognized, the future depreciation charge for the asset should be adjusted to allocate the revised carrying amount less residual value over its remaining useful life on a systematic basis.

Special rules for goodwill

Impairments of goodwill are not permitted to be reversed in any circumstances. Subsequent increases in recoverable amount of goodwill are likely to be from internally generated goodwill. The recognition of internally generated goodwill is prohibited, and so the reversal cannot be recorded.

Reversal of impairment for a CGU with goodwill The carrying amount (net assets) at 31 December 20X1 is C6,500,000. This included C100,000 of goodwill. There is an impairment loss of C227,000. C100,000 of the total impairment loss would be allocated against goodwill and reduce this balance to nil. The remaining impairment loss (C127,000) should then be offset against the other assets of C6,400,000. The other net assets’ carrying amount, as at 31 December 20X1, will now equal C6,273,000 (C6,400,000 – C127,000). At 31 December 20X2, the carrying amount would be C5,489,000, rounded to the nearest thousand (C6,273,000 × 7/8 years remaining useful life). The recoverable amount is C6,254,000. The amount of the original reversal loss that could be recognized is calculated as follows: C C Original impairment 227,000 Goodwill impairment that cannot be reversed (100,000) Balance 127,000 Net carrying amount of assets other than goodwill, assuming no impairment ((C6,500,000 – C100,000) × 7/8) 5,600,000 Less carrying amount of assets other than goodwill after impairment 5,489,000 Potential reversal 111,000 Only C111,000 of the reversal can be recognized. This is because, if C127,000 of the impairment loss is reversed, this would result in the original net carrying amount of assets being carried at a value of C5,616,000 (C5,489,000 + C127,000), which is greater than the assets’ original unimpaired depreciated historical cost of C5,600,000. Any impairment recognized in relation to the goodwill could not subsequently be reversed.

Allocation of reversal of impairment losses to assets of a CGU

The reversal is allocated to assets other than goodwill on a pro rata basis, based on the carrying amount of each asset in the CGU.

In allocating the reversal of an impairment loss, an asset’s carrying amount should not be increased above the lower of: its recoverable amount (if determinable); and the carrying amount that would have been determined if no impairment loss had been recognized previously, adjusted for subsequent depreciation or amortization. Any surplus reversal arising from the application of this limitation to a particular asset should be allocated to the CGU’s remaining assets (except goodwill) on a pro rata basis.

Allocation of the reversal of an impairment loss for a CGU An impairment of C495 was charged, based on an original carrying amount of the CGU of C1,395, less recoverable amount of C900. Of the impairment loss, C295 was allocated to write off goodwill. Several years later, the CGU’s recoverable amount is estimated at C1,000. The carrying amount of the CGU’s net assets at that time is C800. There is thus a reversal of the impairment loss of C200. Details of the original impairment allocation and the present carrying amounts, and the amounts at which the assets would have been carried if the original impairment had not occurred, are as follows: Original carrying amount Impairment Original carrying amount after impairment Present carrying amount (after depreciation) Carrying amount without impairment (after depreciation) Asset C C C C C Goodwill 295 (295) Nil Nil 295 Property A 505 (5) 500 480 480 Machine A 90 (10) 80 60 70 Machine B 125 (46) 79 65 100 Machine C 130 (48) 82 65 110 Intangible A 250 (91) 159 130 230 Total 1,395 (495) 900 800 1,285 Note: The figures in the last two columns are not precise, and they assume (in some cases) changes in depreciation rates/useful lives following recognition of the original impairment. The details of the revised estimates of recoverable amount and allocation of the reversal of the impairment loss are shown below. The recoverable amount is presented as one figure, but it represents the higher of fair value less costs of disposal and value in use. Carrying amount Recoverable amount Reversal 1st allocation Revised carrying amount Reversal 2nd allocation Revised carrying amount Asset C C C C C C Goodwill Nil 30 Nil (1) Nil Nil Nil Property A 480 510 Nil (2) 480 Nil 480 Machine A 60 70 10 (3) 70 Nil 70 Machine B 65 80 15 (3) 80 Nil 80 Machine C 65 90 25 (3) 90 Nil 90 Intangible A 130 220 81 (4) 211 9 (4) 220 Total 800 1,000 131 931 9 940 Notes: 1. No allocation of the reversal is made to goodwill, because reversals of impairments of goodwill are not permitted by IAS 36. 2. No allocation is made to property A, because its carrying amount equals its depreciated historical cost excluding the original impairment. 3. The amount of the reversal allocated to each machine is limited to the lower of its recoverable amount and its carrying amount calculated as if the original impairment had not taken place, but after depreciation on that amount. In each case, the recoverable amount is equal to or below that latter figure, so the reversal is limited to the difference between present carrying value and recoverable amount. 4. The full pro rata allocation of the reversal is allocated to the intangible. Because the revised carrying amount (C211) is still less than the recoverable amount (C220) and what the carrying amount would have been without the original impairment (C230), there is a second allocation of C9, to increase the carrying amount to the lower of these two figures (C220). The first allocation of C81 is calculated as the proportion of the C200 impairment reversal that relates to the carrying amount of the intangible, when compared with the total assets which qualify for an increase in value from an impairment reversal, being machines A to C and the intangible (C130 × C200/C320). 5. After increasing all of the assets, except goodwill, to the lower of their recoverable amount and the carrying amount at which the assets would have been stated if the original impairment had not occurred, there remains C60 that cannot be further allocated due to the limits set out in IAS 36. This amount represents reversals that cannot be allocated to: C C Machine A 27 (60 × 200/320) − 10 Machine B 26 (65 × 200/320) − 15 Machine C 16 (65 × 200/320) − 25 69 Sub-total (9) Less: reallocated to intangible 60 The allocations were based on the asset’s carrying amount multiplied by the amount of the reversal (C200) divided by the carrying amount of the assets over which the reversal could be allocated (C320, being the sum of the carrying amounts of machines A, B and C and intangible A).

Separate financial statements

Investments in subsidiaries, associates and joint ventures that are carried at cost in separate financial statements are within IAS 36’s scope for impairment testing.

Value in use would be determined by the present value of expected dividend receipts. The present value of the estimated cash flows of the subsidiary, associate or joint venture might be a proxy for this, provided that appropriate assumptions are used.

What is the impact of an impairment of goodwill in consolidated financial statements on an investment in a subsidiary in separate financial statements? A goodwill impairment on consolidation indicates a decrease in value since acquisition. This will most likely trigger an impairment review of the parent entity’s investment in the relevant subsidiary in the parent’s separate financial statements. The subsidiary’s net assets in consolidated financial statements (including goodwill) might be lower than the amount of the parent’s investment recorded at cost. This does not necessarily mean that there is an impairment of the investment. The carrying amount of the investment in separate financial statements should be compared with its recoverable amount (that is, the higher of fair value less costs of disposal and value in use), rather than the carrying amount of the subsidiary’s net assets. Often, an acquisition is undertaken by one company within a group, but the goodwill acquired is attributable to various CGUs and subsidiaries across the group. This could lead to the subsidiary’s carrying value in the parent’s separate financial statements not being fully recoverable (because the synergistic benefits associated with the acquisition do not all flow to the subsidiary), even if the goodwill is not impaired at a group level.

How is value in use calculated for an investment in a subsidiary? The investor’s share of the present value of the subsidiary’s estimated cash flows might be a proxy for the present value of expected dividend receipts (which will determine ViU) where the parent is able to control the extraction of dividends from the subsidiary. This is true if the subsidiary has no debt. Otherwise, the present value of expected cash flows from the subsidiaries’ underlying assets should be reduced by the fair value of outstanding debt, in order to determine the net amount available to equity holders. The investor’s share of this net amount is the amount to use in the impairment test. When performing an impairment review of an investment in a subsidiary, it is necessary to consider non-interest-bearing inter-company balances, such as trade receivables and payables, between the parent and subsidiary. Any cash outflows payable to the parent for settlement of inter-company trading balances are included in determining the subsidiary’s cash flows for use in the impairment calculation. This is because, from an entity perspective, it is expected that there will be a cash outflow from the subsidiary. Similarly, any cash inflows from the parent to the subsidiary are also taken into account. Any inter-company receivable in the parent’s separate financial statements is separately evaluated, based on the guidance in IFRS 9.

What assumptions should be used to align an investment’s cash flows to those of the investee when calculating value in use for an investment in an associate or a joint venture? The appropriate assumptions to align the investment’s cash flows to those of the investee will principally include reflecting the fact that the investment is a minority holding. This is typically addressed through the application of a higher discount rate to the total company cash flows, reflecting the fact that the investor does not control them or the amount which might be paid as a dividend. Other issues to address include the impact of any restrictions on dividends and the rights of other equity holders.