Pandemics, growing inflation, war, market instability, shortages on everything from labor to baby formula…it feels like all this year is missing is a plague of locusts! Oh wait, didn’t that happen last year? With all of this market disruption, it begs the question: What is the impact to impairment of non-financial assets under IAS 36? (That is the question you were thinking of too, right?) Let’s take a look at the requirements of IAS 36 Impairment of Assets and some additional considerations you may want to think about during times of market disruption.

Overview of IAS 36

The objective of IAS 36 is to ensure an entity’s assets are carried at no more than their recoverable amount. According to IAS 36, an asset is carried at more than its recoverable amount if the carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is impaired and an impairment loss must be recognized. IAS 36 provides specific guidance relating to:

1. When a quantitative impairment test is required
2. At what level the impairment test should be performed
3. How to perform the quantitative impairment test
4. How to recognize (and/or reverse) an impairment loss

And, like any good standard, it also provides detailed disclosure requirements for both impaired assets and nonimpaired assets. As far as IFRS Standards go, it is actually a fairly detailed and prescriptive standard, whereas most IFRS standards are more principles-based.

When a quantitative impairment test is required

IAS 36 requires that a quantitative impairment test be performed at least annually for the following assets:

• Goodwill
• Indefinite lived intangible assets
• Intangible assets not yet available for use

In addition, ALL in-scope assets (including those listed above) should be tested for impairment when there is ANY indication that the asset may be impaired. (Note: there are some limited exceptions to this guidance). These indicators of impairment could be macroeconomic events, like market disruption, a pandemic, etc. or microeconomic events, such as changes in the production capabilities or other events directly related to the entity. This is quite similar to what we would term a “triggering event” under U.S. GAAP.

At what level the impairment test should be performed

Wherever possible, IAS 36 requires that an entity perform the impairment test (more on that test momentarily) at the individual asset level, wherever possible. Where this is not possible, and often it is not, the entity should determine the recoverable amount of the Cash Generating Unit (CGU) to which the asset belons.

A CGU is defined in IAS 36 as 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. Cash inflows are inflows of cash and cash equivalents received from parties external to the entity. Determining the CGU is a judgmental process and crucial to performing a proper impairment test. A warning for the auditors reading this post: management bias would likely be to group the CGU at a higher level of aggregation to hide potential impairment!

As it relates to goodwill, IAS 36 requires that, for purposes of impairment testing, goodwill be allocated at the acquisition date to each of the acquirer’s CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. This means that goodwill is always tested at the CGU level.

How to perform the quantitative impairment test

Once management has identified the correct level for testing, its time to perform the impairment test. This is done by comparing the recoverable amount to the carrying amount of the asset or CGU.

The recoverable amount is defined in IAS 36 as the higher of:

1. The fair value less costs of disposal (FVLCOD); or
2. The value in use (VIU)

When determining FVLCOD, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Determining fair value is covered by IFRS 13 Fair Value Measurements. Costs of disposal are defined as incremental costs directly attributable to the disposal of an asset or cash‑generating unit, excluding finance costs and income tax expense. IAS 36 provides examples of “costs of disposal” and items that would not meet that definition.

When determining VIU, IAS 36 defines value in use as the present value of the future cash flows expected to be derived from an asset or cash‑generating unit. IAS 36 also requires certain elements be considered in the cash flows, including:

1. Expectations about possible variations in the amount or timing of future cash flows
2. The time value of money
3. The price for bearing the uncertainty inherent in the asset
4. Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows

How to recognize (and/or reverse) and impairment loss

If the recoverable amount (higher of FVLCOD and VIU) is less than the carrying amount of an asset, IAS 36 requires that an entity recognize an impairment loss, either directly against the asset or by allocating it to the assets within the CGU.

IAS 36 also allows for an impairment lost to be reversed if conditions improve in prior periods. IAS 36 sets out the timing for this assessment, indicators when a previously recognized impairment loss may no longer exist, and the accounting for the reversal, including any limitations on the amount that can be reversed.

Impact of Market Disruption

Now that we understand the accounting requirements of IAS 36, let’s look at some of the ways that the recent market disruption could impact an entity’s ability to comply with the requirements outlined in the Standard.

Indicators of Impairment

As we saw earlier, impairment tests must be performed when there are indicators of impairment. Indicators of impairment could relate to the global economy or could be entity-specific. During the COVID-19 pandemic, we recognized that COVID could certainly be an indicator of impairment and market disruption is no different. Increasing inflation, supply shortages or supply chain disruption, labor shortages, and even war can all be seen as indicators of impairment. It is likely that and indicator of impairment has occurred for companies that:

• Are adversely affected by increases in prices of commodities
• are significantly affected by supply chain disruption
• have operations in or near countries impacted by war or conflict

Remember, IAS 36 requires companies to determine whether there have been any indicators of impairment at each reporting date.

Forecasts of future cash flows

If there has been an indicator of impairment, the guidance requires an entity to determine the recoverable amount and compare it with the asset or CG use carrying amount. Remember, the recoverable amount is the higher of the value in use or fair value less costs of disposal. Making this determination usually requires management to forecast future cash flows, and in times of market disruption, significant assumptions may need to be reassessed. Significant assumptions could include:

• Forecast sales
• Growth rates inflation rates
• Profit margin
• Discount rates

Remember, as rates rise the present value of the estimated future cashflows will decline. This could result in more impairment charges being taken during these times of market disruption.

Want to learn more?

Do you want to learn more about impairment of assets under IAS 36? If so, GAAP Dynamics has developed 2 CRE eligible self-study courses covering IAS 36.

Impairment of Assets (Part One): IAS 36 (1.0 CPE)

This course explores the requirements under IAS 36 Impairment of Assets, including understanding when to test for impairment, at what level the test must be performed, and the correct order for testing various assets for impairment.

Impairment of Assets (Part Two): IAS 36 (1.0 CPE)

This CPE-eligible eLearning will explore the IFRS accounting requirements under IAS 36, specifically how to measure the recoverable amount and how to recognize an impairment loss. 

Looking to train a group? Contact us today for group discounts!

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