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IMPAIREMENT OF ASSETS-IAS 36 - Home - ICPAK

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11/6/2014
CPA OPANGA
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IMPAIRMENT OF ASSETS–IAS36BY CPA OPANGA5THNOVEMBER,2014bopanga@yahoo.com
June-1996- IASC decided to prepare an IAS on impairment of assets on the need to;Combine the requirements to identify, measure, recognize and reverse an impairment consistentlyDevelop a common baselineProvide detailed information for depreciation and amortization for assets exceeding 20yrs
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HISTORICAL DEVELOPMENT OF IAS 36
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April 1997, tests in more than 20 entities from more than 10 countries found no uniform reporting for impairment of assets.In October 1997, IASC with IASs Boards in Australia,Canada,New Zealand, UK and US published a paper entitledInternational Review of Accounting Standards Specifying a Recoverable Amount Test for Long-Lived AssetsDiscussions from this paper gave rise to IAS 36 in April 1998.
Changes to IAS 36 focused on impairment tests for intangible assets with indefinite life and goodwill to reflect measurement of non-controlling interest in an acquiree.Need to measure inventories at net realizable value IAS 2IAS 36 is applicable to all assets .Impaired asset should be kept or disposed depending on its future cash flows and the recoverable amount will be based on time value of money as follows;
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IMPAIREMENT OF ASSETS-IAS 36
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Thesum of undiscounted cashflowTheasset’s fair value and not market values especially for assets without observable market likegoodwill, plant, equipment and machinery. Not appropriate too where a certain asset is acash generating unitAsset’svalue in use-the present value of the future cash flows expected to be derived from an asset.Thehigher of the asset’s net selling price and value in use.
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An estimate of recoverable amount should be done any time there is an indication of impairment or it may no longer exist or have decreased.Other refinements include;replacement cost as a ceilingappraisal values-verification that the appraisal follows IAS 36net selling price which is the amount obtainable from the sale of an asset in an arm’s length.Cash flow projections should reflect reasonable and supportable assumptions.
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Value in use of an asset that generates future cash flows in a foreign currency should be translated into the reporting currency using the spot rate at the balance sheet dateDiscounting future cash flows reflects the time value of money.The uncertainties attached to cash flows (opportunity cost) and is based on owns assessment of time value of money and the associated risks.
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Cash flow projections should be based on the most recent financial budgets /forecasts that have been approved by management.When a cash generating unit contains assets with different useful lives;- the replacement of assets with shorter lives is considered to be part of the day-to-day servicing of the unit when estimating the future cash flows associated with the unit(asset).
Test goodwill impairment-end of every financial accounting period.Goodwill impairment recognition enables;To make a distinction between acquired goodwill and internally generated one.Device away of allocating it –amortizationThe useful life of acquired goodwill cannot be predicted nor it’s diminishing
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IMPAIRMENT OF GOODWILL
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Goodwill;Is a payment made by an acquirer in the anticipation of future economic benefits from assets that are not capable of individually identified and separately recognized.It represents the excess of the cost of a business combination over acquirer’s interest in the net fair value of theacquiree’sidentifiable- Asset- Liabilities-Contingent liabilities.
Each unit to which goodwill is allocated should represent the lowest level within which the goodwill is monitored.Acquired goodwill should be allocated to each of the acquirer’s cash-generating units.Testing goodwill at a level appropriate for internal reporting that reflects how they manage their operationsis preferred.
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ALLOCATING GOODWILL TO CASH GENERATING UNITS
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Allocation canbecompletedbefore the end of the first annual period beginning after acquisition date.Goodwill of a cash generating unit disposed of should be measured on the basis of the relative values of the operation and the portion of the cash-generating unit retained.Reorganization of the business structure requires re-allocation of the goodwill to units affected using a relative value approach.
Screening mechanism – fair valuevscarrying amount.Allocation to a ‘larger’ unit is an indication of a possible impairment or ‘smaller’ cash-generating, an entity should first test a smaller unit.Any excess of carrying mount of a cash-generating unit over its recoverable amount represents a loss for goodwill allocated to other assets of the unit pro rata with their carrying amounts.
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MEASUREMENT OF IMPAIREMENT LOSSES
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An impairment loss for a cash-generating unit should be allocated;To goodwillIntangible assets with no active marketsTo assets whose net selling price is less than their carrying amountLastly to other assets of the unit in a pro rata basis based on the carrying amount of each asset in the unit.
An impairment loss should be reversed if and only if there has been a change in the estimates used to determine the asset’s recoverable amount since previous impairment loss was recognized.Captures future economic benefits from the asset previously not expectedIt is not revaluation as long as reversal amount does not exceed the cost of the asset
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REVERSAL OF IMPAIRMENT LOSS OTHER THAN GOODWILL
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Provideusers with a more useful indication of the potential for future benefits of an assetResultsfrom operations will be more fairly stated in the current and future periods since depreciation or amortization will not reflect a previous impairment loss that is no longer relevant.Impairmentlosses are recognized and measured based on estimates. (IAS 8)
Recognition of reversals of impairment losses for goodwill is prohibited under basis of;IAS 38 intangible assets prohibits the recognition of internally generated goodwill to avoid back door capitalization of internally generated goodwill.
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REVERSING GOODWILL IMPAIRMENT LOSSES
CASH-GENERATING UNITS CONTAINING GOODWILL /INDEFINITE-LIVED INTANGIBLESUK FRS 11; impairment for fixed assets and goodwill-by performing subsequent cash flow tests to confirm, ex post, the cash flow projections used to measure a unit’s value in use when testing goodwill for impairment to enhance reliability and provide useful information to different users though it ignores other elements and the need to have as many computations as possible.
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OTHER DISCLSURES
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Including disclosure requirements in the revised standard. IAS 37 provisions, contingent liabilities and contingent assets -disclosinginformation about uncertainties surrounding the amount and timing of expectedoutflowsCurrent impairment method- comparability between entities applying IFRs and US GAAP.If an entity decides to apply IFRS 3 from any date it should also apply IAS 36 from the same date.
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A transitional goodwill impairment test may not be regarded as the initial year’s annual test unless an entity designates the beginning of its fiscal year as at the date for its annual goodwill impairment test.Entities encouraged to apply requirements of IAS 36 before its effective date in conjunction with IFRS 3 and IAS 38.
Intangible assets to be tested for impairment annually by comparing its carrying amount with its recoverable one.Clear assumptions to be made on which current cash flow projections used consistentlyExistence of active markets for the output produced by an asset(s) should be identified as a cash-generating unit, even if some or all of the output is used internally.
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SUMMARY OF MAIN CHANGES
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Goodwill acquired in business combination should be allocated to each cash-generating unit.Goodwill associated with the operation disposed of should be measured on the basis of relative values of the operation disposed and the portion of the cash-generating unit retained.Any excess of the carrying of a cash-generating unit over its recoverable amount should be recognized as an impairment loss for the goodwillandallocated to other assets
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The standard;Does not require information for evaluating the reliability of the impairment tests for goodwill and indefinite-lived intangibles to be disclosed in aggregate for each segment and separately for cash-generating units within a segment when specified criteria are met.Does not require an entity to disclose the amounts by which recoverable amount of cash-generating unit exceeds its carrying amount.
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Doesnot require an entity to disclose the value assigned to each key assumption on which management has based its recoverable amount determination, and the amount by which that value mustchange.Requires information about key assumptions to be disclosed for any key assumption that is relevant to the recoverable amount determination of multiple cash-generating activities.
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THE ENDTHANK YOU

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IMPAIREMENT OF ASSETS-IAS 36 - Home - ICPAK