Impairment of assets (ias 36) and investment property (ias 4...

Learning Outcomes

After reading this article, you will be able to explain the objectives and process for impairment testing under IAS 36, including identifying impairment indicators, defining and applying the concept of a cash-generating unit (CGU), and calculating recoverable amounts. You will also be able to outline the measurement and disclosure requirements for investment property under IAS 40. This knowledge is essential for handling asset impairment scenarios in ACCA Strategic Business Reporting.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand the requirements and principles that underpin the impairment of assets and investment property. In particular, revision for the exam should focus on:

• Recognising and applying impairment indicators for non-current assets as per IAS 36
• Determining and defining cash-generating units (CGUs)
• Calculating recoverable amounts and impairment losses
• Allocating impairment losses, including within CGUs and to goodwill
• Understanding the reversal of impairment losses
• Applying IAS 40 for investment property: classification, measurement (cost and fair value), transfers, and required disclosures

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is NOT an external indicator of impairment under IAS 36?
   1. Market value declines due to technological change
   2. Serious physical damage to an asset
   3. A new competitor entering the market
   4. A change in the useful economic life estimate

2. Define “recoverable amount” in the context of an impairment review.

3. True or false? Impairment losses can always be reversed for goodwill if the recoverable amount increases in future periods.

4. How does IAS 40 require gains arising from fair value changes in investment property to be reported?

5. Briefly explain what is meant by a cash-generating unit (CGU) and why it is important in impairment testing.

Introduction

IAS 36 Impairment of Assets and IAS 40 Investment Property are central to determining the carrying values of non-current assets on the statement of financial position. For ACCA SBR, you must be competent in identifying when assets should be tested for impairment, applying the CGU model, measuring recoverable amounts, and understanding when impairments must be recognised or reversed. You also must know the principles for classifying, measuring, and transferring investment property under IAS 40.

Getting these principles right ensures financial statements provide relevant and faithful information to stakeholders, particularly in relation to asset values, performance, and returns.

Key Term: impairment loss
The amount by which an asset’s carrying amount exceeds its recoverable amount.

IMPAIRMENT INDICATORS

IAS 36 requires entities to consider at each reporting date whether there are indications an asset may be impaired. Certain assets, such as goodwill and intangible assets with indefinite useful lives, must be tested for impairment annually even if there is no indication of impairment.

Indicators can be external or internal. If any indication exists, an entity must estimate the recoverable amount.

External indicators

• Significant decline in market value
• Adverse changes in market, economy, or law
• Increases in market interest rates, which may decrease recoverable amounts
• Entity’s net assets exceeding its market capitalisation

Internal indicators

• Obsolescence or physical damage
• Plans to discontinue or restructure operations
• Evidence of worse-than-expected asset performance

Key Term: impairment indicator
A fact or circumstance suggesting an asset may be impaired, requiring further assessment.

CASH-GENERATING UNITS (CGUs)

If it is not possible to estimate recoverable amount for an individual asset, or that asset does not generate independent cash flows, impairment testing is performed at the group level—a cash-generating unit.

Key Term: cash-generating unit (CGU)
The smallest identifiable group of assets that generates cash inflows largely independent from other assets or asset groups.

CGUs are particularly important for assets such as goodwill and central assets. Impairment is allocated to CGU assets based on their carrying amounts, with certain restrictions.

Worked Example 1.1

A factory consists of a building, specialised equipment, and vehicles, none of which generate cash inflows independently. The group of assets as a whole supplies goods to customers, generating cash inflows from these sales.

Question: What is the CGU for impairment testing?

Answer:
The CGU is the combined group of the building, equipment, and vehicles, as this collection of assets together produces the cash inflows. Testing at the group level is required.

RECOVERABLE AMOUNT

Impairment losses are determined by comparing carrying amount to recoverable amount.

Key Term: recoverable amount
The higher of an asset’s fair value less costs of disposal and its value in use.

Key Term: fair value less costs of disposal
The price to sell an asset in an orderly transaction, minus incremental costs to sell.

Key Term: value in use
The present value of future cash flows expected from an asset or CGU.

Calculating these amounts requires significant judgement about market conditions, expected use, and discount rates.

Worked Example 1.2

An asset has the following attributes:

• Carrying amount: $900,000
• Fair value less costs of disposal: $800,000
• Value in use: $850,000

Question: Is the asset impaired and, if so, by how much?

Answer:
The recoverable amount is the higher of $800,000 and $850,000 = $850,000. The carrying amount exceeds recoverable amount by $50,000 ($900,000 – $850,000). An impairment loss of $50,000 is recognised.

ALLOCATION AND REVERSAL OF IMPAIRMENT LOSSES

If an impairment loss is identified at the CGU level, allocate:

1. First, to reduce goodwill (if allocated to the CGU)
2. Then to other assets of the unit pro rata based on their carrying amounts, subject to certain minimum values (cannot reduce assets below their fair value less costs to sell, value in use, or zero).

Impairment losses (except for goodwill) must be reversed if the recoverable amount increases in a future period. However, reversals are limited so that the asset is not carried at more than what its depreciated cost would have been if no impairment had been recognised.

Worked Example 1.3

A subsidiary’s CGU consists of goodwill ($20,000), equipment ($50,000), and inventory ($30,000). The total carrying amount is $100,000. The CGU’s recoverable amount is $70,000.

Question: How is the $30,000 impairment loss allocated?

Answer:

• Goodwill is reduced to zero ($20,000).
• Remaining impairment: $10,000 ($30,000 – $20,000).
• Allocate $10,000 pro rata to equipment and inventory:
  • Equipment: $50,000 / $80,000 × $10,000 = $6,250
  • Inventory: $30,000 / $80,000 × $10,000 = $3,750

Exam Warning

Impairment losses for goodwill cannot be reversed, even if the recoverable amount increases in the future.

INVESTMENT PROPERTY – IAS 40

IAS 40 applies to property (land or buildings) held to earn rentals, for capital appreciation, or both. The standard offers two accounting policies: cost model or fair value model.

• Cost model: Property is carried at cost less accumulated depreciation and impairment, similar to IAS 16.
• Fair value model: Property is remeasured to fair value at each reporting date, with changes recognised in profit or loss.

The chosen model must be applied consistently to all investment property. If fair value cannot be reliably measured, the cost model is used.

Key Term: investment property
Land or buildings held to earn rentals, for capital appreciation, or both, and not for use in production, administration, or sale in the ordinary course of business.

Transfers to or from investment property may only occur when there is a change in use, such as the start or end of owner-occupation or commencement of development for sale.

Worked Example 1.4

A building used for administration is vacated and then leased to a tenant. Management decides to use the fair value model. Prior to change, the carrying amount is $600,000. On the change of use date, the fair value is $650,000. At year end, the fair value is $680,000.

Question: How is the property accounted for during the year?

Answer:
At the date of change, a revaluation gain of $50,000 ($650,000 – $600,000) is recognised in other comprehensive income if previously held at revaluation under IAS 16, or in profit or loss if at cost. From that date, investment property is measured at fair value, recording a further $30,000 gain ($680,000 – $650,000) in profit or loss.

DISCLOSURE REQUIREMENTS

IAS 36 and IAS 40 require entities to disclose:

• The events leading to impairment or reversals
• The amounts recognised in profit or loss and other comprehensive income
• For each class of asset, the main assumptions used to estimate recoverable amount
• For investment property measured at fair value: the methods and significant assumptions used, and whether independent valuations were obtained

Summary

IAS 36 ensures assets are not carried above their recoverable amounts and mandates regular reviews for impairment, especially when indicators exist. The CGU model is critical for assets not generating independent cash flows. All impairment losses (except those on goodwill) must be reversed if the recoverable amount increases subsequently. IAS 40 allows a choice of cost or fair value for investment property, with strict rules for transfers and disclosure.

Key Point Checklist

This article has covered the following key knowledge points:

• Identify external and internal impairment indicators as per IAS 36
• Define and determine cash-generating units for impairment testing
• Calculate recoverable amounts and impairment losses, including fair value less costs of disposal and value in use
• Allocate impairment losses to CGU assets, including goodwill
• Apply measurement and disclosure rules for investment property under IAS 40
• Understand the reversal of impairment and restrictions on reversals for goodwill

Key Terms and Concepts

• impairment loss
• impairment indicator
• cash-generating unit (CGU)
• recoverable amount
• fair value less costs of disposal
• value in use
• investment property