Impairment of Assets (IAS 36): A Simple Explanation
Impairment of Assets (IAS 36): A Simple Explanation
What is Impairment of Assets?
Impairment occurs when an asset’s carrying amount (book value) exceeds its recoverable amount, requiring a write-down in the financial statements. Under IAS 36, this applies to tangible and intangible assets (e.g., machinery, goodwill). In the ACCA FR exam, you’ll calculate impairment losses and understand their impact on financial reporting.
Let’s look at an example involving a cash-generating unit (CGU).
Key Components of Impairment Calculation
To assess impairment:
- Carrying Amount: The asset’s book value (cost minus depreciation/amortisation).
- Recoverable Amount: Higher of fair value less costs to sell (FVLCS) and value in use (VIU) (discounted future cash flows).
- Impairment Loss:
Carrying Amount - Recoverable Amount(if positive).
Formulae
- Recoverable Amount =
The Higher of FVLCS and VIU - Impairment Loss =
Carrying Amount - Recoverable Amount(if Carrying Amount > Recoverable Amount) - Post-Impairment Carrying Amount =
Recoverable Amount
Numeric Example
A company tests a CGU (e.g., a factory) for impairment on March 02, 2025:
- Carrying Amount of CGU: $500,000 (includes $100,000 goodwill, $400,000 machinery)
- Fair Value Less Costs to Sell (FVLCS): $420,000 (market value minus disposal costs)
- Value in Use (VIU): $450,000 (discounted cash flows: $100,000/year for 5 years, 10% discount rate)
- Depreciation has been correctly applied to date.
Step 1: Determine Recoverable Amount
- FVLCS =
$420,000 - VIU =
$450,000 - Recoverable Amount =
Higher of 420,000 & 450,000 = $450,000
Step 2: Calculate Impairment Loss
- Carrying Amount =
$500,000 - Recoverable Amount =
$450,000 - Impairment Loss =
$500,000 - $450,000 = $50,000
Step 3: Allocate Impairment Loss
- Goodwill First: Reduce goodwill ($100,000) by $50,000 to $50,000.
- Remaining Assets: No further allocation here (loss fully absorbed by goodwill).
- New Carrying Amount of CGU =
$450,000($50,000 goodwill + $400,000 machinery).
What Does This Mean?
- Impairment Loss ($50,000): Recognised in profit or loss, reducing the CGU’s value.
- Goodwill Impact: Absorbs the loss first, per IAS 36, as it’s the least specific asset.
- Financial Statements: Assets drop from $500,000 to $450,000; profit decreases by $50,000.
Management might investigate: Did market conditions reduce VIU? Are cash flow forecasts too optimistic?
Why It Matters for ACCA FR
Impairment tests your ability to:
- Apply IAS 36 to compute recoverable amounts using discounted cash flows or market data.
- Allocate losses across CGU components (goodwill, then other assets pro-rata).
- Adjust financial statements under IFRS.
Practice with complex CGUs (e.g., multiple assets, reversal scenarios) to excel in FR!