Impairment test example ifrs

Key requirements are those of IAS Note that those disclosures are required for CGU s with goodwill or intangible assets with indefinite useful lives only. In practice, disclosures made by entities are often too general to enable a user of financial statements to assess how an entity calculated the recoverable amount e. Entities often mistakenly believe that disclosing the value of WACC and PGR along with generic discussion relating to evolution of business activities is sufficient.

PwC IFRS Talks Episode 98: Business Combinations - Disclosures, Goodwill and Impairment DP

In such cases, entities are required to disclose the value of so-called safety margin, the value assigned to key assumptions note that WACC and PGR are not the only key assumptions and sensitivity analysis.

The criterion from IAS When an impairment loss was recognised or reversed during the period, additional disclosure from IAS National regulatory and supervisory bodies often focus on disclosures relating to IAS 36 and some even issue their own requirements applicable to companies reporting within their jurisdiction.

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Value in Use as the Recoverable Amount (IAS 36)

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Suggested guidance. PwC Employees. Your email address. Forgot password? Sign in.Value in use IAS In practice, a single estimate of cash flows derived from budgets is used most often, but IAS 36 allows also the use of the expected value approach. A1-A14 for more discussion on this topic.

Under IAS 36, the carrying amount of assets in the statement of financial position should not be higher than the economic benefits expected to be derived from them. The amount of economic benefits is the recoverable amount as per IAS 36 terminology. If the carrying amount is higher than the recoverable amount, the asset is impaired, i.

Example: Simple impairment test of a CGU based on value in use. Below is a simple impairment test of a CGU that is based on value in use. Notional, i.

How to Test Goodwill for Impairment

It may be different from the depreciation charge e. Temporary differences should be ignored as they are already included in deferred tax. Interest in impairment tests is ignored in cash flow projections, as cost of capital is reflected in the discount rate.

Based on the cash flow projections above, the value in use in calculated as follows see the formulas in the spreadsheet :. The discount rate WACC used in this calculation amounts to 5.

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Discount rate used for the value in use calculation should reflect current market assessments of: IAS Appendix AA21 :. The discount rate used for testing assets for impairment should not be specific to the capital structure of the entity IAS As a rule, IAS 36 requires discounting pre-tax cash flows with pre-tax discount rate.

In practice, a different approach is commonly adopted. The discussion below and calculations in the excel file lead to a post-tax WACC. WACC weighted average cost of capital is the discount rate most often used for value in use calculations. One could easily write a page book on calculating WACC, but a simple approach is presented below.

Note that different WACC will be applicable to cash flows in different countries, currencies or even for different products, even if within the same CGU tested. Below is a calculation of WACC simplified for illustrative purposes. Each element of the calculation is discussed in the following sections. There are many different approaches to estimating cost of equity.

IAS A17 sees CAPM as a good starting point. You can also check this excel file mentioned above for an example showing calculation of WACC for retail chain operating in UK. Risk free rate is usually based on the yield of government bonds denominated in the same currency as estimated cash flows with time horizon close to the timing of cash flows.

For testing CGUs with cash flows discounted into perpetuity, very long-term bonds e. If the government bond yield has a significant default risk built in the yield, entities need to adjust the government bond yield for default risk by using credit spreads.

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Beta is a measure of volatility risk relative to the market. Beta is calculated using regression analysis. Betas for specific entities or industries can be obtained from sources such as Bloomberg or Reuters paid subscription.

When obtaining betas, entities must understand the difference between unlevered and levered betas. Unlevered beta is beta of a company without debt, i.

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For the purpose of WACC used in impairment testing, entities need a levered beta, but this should not result from the gearing ratio or beta specific to the reporting entity.

Instead, a benchmark gearing should be used, e.In my last article, I tried to outline the main things to consider and to avoid when preparing the c ash flow projections for the impairment tests under IAS Please be warned that there are many variations of the cash flow projections and value in use calculations, and you should always apply your judgment while following the rules. The impairment testing aims at proving that the carrying amount of an asset or cash-generating unit is LOWER than its recoverable amount.

Recoverable amount is the higher of fair value less costs of disposal and value in use. We always know the carrying amount — please look to your financial statements or accounting records. However, in order to determine the recoverable amount, we need to find out either fair value less costs of disposal or value in use. Based my own experience, vast majority of companies perform impairment tests on cash-generating units, because it is hard to determine fair value of used assets and the assets generate independent cash inflows rarely on its own.

The carrying amount of a subsidiary, including allocated goodwill and working capital current assets and current liabilitiesis CU For the purpose of value in use calculation, the parent made the following assumptions:.

When you are testing a whole company or even its part as CGU, it is necessary to draft net pre-tax cash flows generated by that CGU for a maximum of 5 years. Now, you might ask: Why did we stop at profit before tax, depreciation, interest and amortization? Once you have your EBIDTA forecasts, you need to realize that they do not represent the cash flow projections for value in use calculation. With regard to changes in working capital, you need to forecast the net balance of your working capital at the end of each period and then adjust EBIDTA.

For example, if opening net balance of your working capital in 20X2 is CU 1 net asset and closing balance of your working capital in 20X2 is CU 1then the cash flow change in net working capital is CU The logic is simple: you have more money tied in a working capital at the end of 20X2 than in the beginning of 20X2, thus the net cash flow change is negative as you have less cash available CU 1 CU 1 However, be careful, because WACC will give you post-tax rate and you are required to use pre-tax rate here.

You can make an attempt to calculate value in use based on post-tax rate, but in such a case your cash flows need to incorporate tax effects — and that is not a very nice, neat and reliable exercise. I strongly recommend calculating pre-tax rate from your post-tax rate e.

impairment test example ifrs

However, let me add here, that this formula not always works well. In other words, pre-tax rate is not always the post-tax rate grossed up by the appropriate tax rate. Thus you will use the number 1. It indicates, that the cash flows happen in the middle of the year 2. In the following table, I used the year-end convention.

For example, in the year 2, I used number 2 as number of years in the discount factor formula:. As I explained in the previous articleterminal value is a very important number because it estimates the net cash flows beyond forecasted period of maximum 5 years. In some cases the terminal value represents the net cash flows to receive from the sale of an asset at the end of its useful life. However, in this particular case we can reasonably assume that a subsidiary — our CGU in testing — will operate its business for indefinite number of years.

Therefore the terminal value estimates the net cash flows beyond forecasted period. In this example, we projected the net cash inflow of 17 CU at the end of year 5. Then we can apply the growing perpetuity formula which is the cash flow after the first period divided by the difference between the discount rate and the growth rate.

In fact you are calculating growing perpetuity as a series of periodic payments that grow at a proportionate rate for an infinite amount of time. So, your terminal value would be:. This is quite normal, because perpetuity method assumes to carry on with business and accept business risks beyond 5 years, and exit multiple method assumes selling the business and getting rid of all associated business risks. When the plan is to sell a subsidiary after 5 years, then exit multiple is probably more suitable method.

However, when the plan is to continue the business indefinitely, then perpetuity method is more acceptable.

impairment test example ifrs

To arrive at value in use, we must sum up the net present value of cash flows in the next 5 years and the present value of terminal value:. Please — if you calculate your value in use very close to the carrying amount, then expect that your auditor will ask a lot of questions and examine your calculations thoroughly.

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IFRS 9 Financial Instruments - 2017 update

Please check your inbox to confirm your subscription.Jan 23 AM Solution. Questions Courses. A loss on impairment of an intangible asset under IFRS is the asset's: a.

Jan 23 AM. Expert's Answer Solution. Feedback :. Next Previous. Related Questions. Is it clear? Is it comprehensive? Could Vivendi have reported a goodwill impairment charge for ? Under IFRS, if a firm recovers an impairment loss on a long- term operating asset, does it report Under IFRS, if a firm recovers an impairment loss on a long- term operating asset, does it report the asset at its current fair value?

Which of the following is not true regarding expenditures for improvements? Improvements are. Improvements are sometimes called betterments B. Entity A"s first IFRS financial statements are for a period that ends on 31 December and include comparative information for only. Restatement of intangible assets, deferred tax and non-controlling interests Entity A"s first IFRS financial statements are for a period that ends on 31 December and include comparative information for only.

impairment test example ifrs

On 1 JulyEntity A Merchandise sales. Ignoring all other costs incurred by Darvin and assuming a Sharon Salome and Mr. Rock Laughton begin separate businesses on April 1, Goodwill Impairment it is a deduction from the earnings that companies record on their income statement after identifying that the acquired asset associated with the goodwill has not performed financially as expected at the time of its acquisition.

US GAAP requires a goodwill Impairment Test wherein the balance sheet goodwill should be valued at-least-once annually to check if the balance sheet value is greater than the market value and if there is any resulting impairment. It should be written off as impairment charges in the Income Statement. Goodwill can be affected by events like the deterioration of the economic condition, change in government policies or regulatory norms, competition in the market, etc. These events have a direct impact on the business and hence can affect the goodwill.

The need for the goodwill impairment test is when any such events have an effect on the goodwill. Goodwill impairment testing is a multi-step process; it requires an assessment of the current situation, identification of the impairment, and calculation of the impairment.

It is further explained below:. The current condition of the acquired business needs to be assessed to understand whether impairment testing is needed. As mentioned above, events like a change in government policies, change in management, or fall in the share price, possible bankruptcy would trigger deterioration of the financial condition. A company is required to assess the fair value of the company or the reporting unit in the first half of a fiscal year as to whether or not an adjustment for impairment needs to be recorded.

The current fair market value of the reporting unit should be compared to the carrying amount. The carrying amount of the reporting unit should include goodwill and any unrecognized intangible assets. There is no goodwill impairment if the current fair market value of the reporting unit is greater than the carrying amount, and there is no need to conduct the next step. If the carrying value is greater than the current fair market value of the reporting unit, then the impairment needs to be calculated.

By comparing the current fair market value of the reporting unit to the carrying amount, if the carrying amount is greater, this would be the impairment that needs to be calculated. The maximum impairment value will be the carrying amount, as it cannot exceed this value. A simple example would be of you buying a vintage bike.

You buy it reading all the reviews on the internet regarding the brand and the model, and you are convinced in buying it at a rate that is higher than its actual value owing to its popularity among the masses.

After a year or so, you realize the cost involved in maintaining the bike is far more than that what you spend on the fuel.When a company acquires control over another company, then often a goodwill arises, too. You should present it as an intangible assetbut when you think about it carefully, a goodwill is not a typical asset, because unlike other assets, you cannot sell it to somebody, you cannot use it in your production process or to provide your services.

IAS 36 Impairment of Assets: Disclosure

Therefore, IFRS standards are quite strict about goodwill — for example, you need to test goodwill for impairment every single year you do not need to test other assets, only when there are some indicators. Before we explain how to test goodwill for impairment, you need to understand what a goodwill is all about. At the date of acquisition, the net assets of this company or its fair value amount to CU Instead, the investor accounts for it as for a goodwill — a separate intangible asset.

Instead, you need to test it for impairment annuallyas the standard IAS 36 Impairment of Assets requires. Well, if an investor is willing to pay more than he gets, then he probably believes that the new business will generate enough profits to provide satisfactory returns even after the investor paid the premium or goodwill.

Is your new investment really generating sufficient returns? Is it worth it? Your annual impairment test of goodwill will give you the answers. When the carrying amount is greater that the recoverable amount, then you need to recognize the impairment loss. Often, it is not possible to test an individual asset for the impairment, e.

In this case, you need to test cash generating unit CGU — the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets IAS In other words, a goodwill is a specific asset that does not generate any cash flows on its own, independently of other assets. Instead, you need to look at its impairment testing as at some business valuation test, not as at goodwill impairment test.

Simply said, you are required to compare the book value of your company or division with its revenue-generating ability whether it is market value or projection of profits. Translating this to IFRS language: you need to compare the carrying amount of your cash-generating unit including goodwill with its recoverable amount higher of its fair value less cost of disposal and value in use.

Typically, a cash-generating unit would be a company as a whole, but if there are some separate divisions generating independent cash flows, then your CGU would be a division. So if you buy a company with a few divisions and a goodwill arose, then you need to allocate that goodwill to each of the cash-generating units that are expected to benefit from the synergies of the business combination.

However, each CGU to which goodwill is allocated should represent the lowest level at which the goodwill is monitored and it cannot be larger than an operating segment as defined by IFRS 8.

Unfortunately, IAS 36 does not say anything about the allocation method, or how you should allocate the goodwill. In practice, there are more methods used, for example, you can allocate goodwill based on the fair value of CGU before and after acquisition and the difference represents the allocated goodwill.


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