Section 22 – Impairment of Assets

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Section 22 – Overview

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Section 22 – Analysis

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Section 22: Impairment of Assets
Summary

Section 22 deals with the measuring, recognising and disclosing impairments for the following types of assets:

Note impairment of investments in associates, joint ventures, subsidiaries is dealt with under Section 9 of FRS 105.

What is new when compared to FRSSE/old GAAP?

Reversal of an impairment for goodwill is not be permitted under Section 22 however, under old GAAP/FRSSE the reversal of a previous impairment was allowed under certain circumstances. Therefore, where a reversal of an impairment on goodwill was recognised under old GAAP/FRSSE since the date of transition to FRS 105, a transition adjustment will be required. Where the exemption in Section 28 is taken not to restate goodwill on prior business combinations, no adjustments will be required for reversals of impairments recognised prior to the date of transition.

Section 22 states that an impairment review must be carried out when there are indicators of impairment. This contrasts with old GAAP/FRSSE where mandatory annual testing for goodwill and intangible assets with an estimated useful life of more than 20 years, tangible fixed assets of more than 50 years and on which no depreciation is charged on the grounds of immateriality.

Section 22 does not require an entity to carry out post impairment monitoring whereas under old GAAP (FRS 11) subsequent monitoring of cash flows explicitly required for 5 years after the impairment was booked where the recoverable amount was based on value in use, with re-performance of original impairment calculation if actual cash flows are significantly less than forecast.

If goodwill cannot be allocated to an individual cash generating unit (CGU) or group of CGUs on a non-arbitrary basis the test for impairment of goodwill should be carried out by determining the recoverable amount of either the acquired entity in its entirety; or the entire group of trade assets/liabilities that have not been integrated. This concept was not in old GAAP/FRSSE.

What is different when compared to FRS 102?

Section 22 gives no guidance on how to assess impairment for assets held for service potential. FRS 102 makes it clear where assets are held for service potential then it is possible to use the depreciated replacement cost as a measurement model. As FRS 105 does not permit charities to utilise the framework the likelihood of an asset held for service potential is slim, however, where it arises the guidance in FRS 102 would likely be followed.

Under FRS 102, deferred tax must be taken into account when determining the recoverable amount. This is not required under FRS 105 as deferred tax is not required to be recognised (FRSSE/old GAAP has the same treatment as FRS 105 in this regard).

Impairment of investment in shares (i.e. associates, joint ventures and subsidiaries) to be determined in line with the rules of Section 9 – Financial Instruments of FRS 105. The indicators of impairment stated in Section 9 differ to those stated in Section 27 of FRS 102 however it is unlikely that it will result in a difference in treatment as all circumstances are usually considered.

FRS 102 gives guidance on impairments where non-controlling interest is held. This is not replicated in Section 22 as it is not applicable as consolidated financial statements cannot be prepared under FRS 105.

What is different when compared to previous GAAPs – General?

ROI entities require disclosure of any impairments and reversal of impairment on fixed and financial assets. UK entities require no disclosure. This is in contrast to the previous GAAP’s which required detailed disclosures.

What is different when compared to FRSSE/old GAAP?

 The wording in FRS 11 (old GAAP/FRSSE) has changed from an income generating unit (IGU) to a cash generating unit (CGU). An IGU may sometimes be identified at a higher level than CGUs, however it should not create major differences in practice. This wording in FRS 102 is the same as FRS 105.

Section 22 provides very little guidance on the identification of IGUs, treatment of central assets, basis for cash flow estimates and discount rates. All of the aforementioned were dealt with under FRS 11. It is likely the guidance in FRS 11 (old GAAP/FRSSE) will be utilised in relation to these. 

Under Section 22, if a CGU is impaired the impairment will be first set against goodwill and then set against other assets on a pro-rata basis.  In contrast under FRS 11 (old GAAP/FRSSE) the impairment loss was set against intangibles first and then finally against other assets on a pro-rata basis.

Other standards affecting Section 22 where differences arise:

Section 28.10 provides an exemption not to restate goodwill recognised on business combinations prior to the date of transition. Where this is availed of, any impairments previously reversed cannot be undone.

What are the key points?

Impairment review only required to be performed if indicators of an impairment exists.

Indicators of impairment as defined in Section 22.7 are:

A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.

An impairment exists if the recoverable amount is less than the carrying amount.

The recoverable amount of an asset or cash generating unit is the higher of its fair value less costs to sell and its value in use.

Fair value less costs to sell is based on the sale of the asset in an arm’s length transaction between knowledgeable and willing parties.

Value in use is the present value of the future cash flows expected to be derived from the asset.

If an impairment loss arises on a cash generating unit, it is allocated first against goodwill and then against other assets of the unit, pro rata based on their carrying values.

For individual assets, reversals are recognised in profit or loss. The asset carrying value is never restored to more than what it would have been had the impairment never occurred.

For cash generating units, the reversal is allocated pro-rata to the assets in the unit, excluding goodwill.

Goodwill impairments cannot be reversed.

Future of cash flows included in the value in use calculation cannot include future cash flows from future restructuring or improvements to the asset’s performance. The pre-tax discount rate should be used.

What do accountants need to do?

Be aware of the differences between old GAAP and FRS 102 in relation to impairments so that they can advise clients of these. Get to know the new standard in detail.

Advise clients who have previously had to carry out impairment reviews on an annual basis (applicable for entities transitioning from FRSSE/old GAAP), that this may no longer be required if there are no indicators of impairment. Similarly, advise clients of the non-necessity for a look back test under Section 22 (applicable for entities transitioning from FRSSE/old GAAP).

Review whether there has been a reversal of an impairment and if so determine if it must be reversed (i.e. goodwill impairments reserved). Consider the impact on distributable reserves as a result.

Be aware of the fact that impairment of investments in shares of all types is covered by Section 9 and not this section.

Be aware of the reduced disclosure requirements.

What do companies need to do?

Be aware of the differences between old GAAP and FRS 105 in relation to impairments and the non-necessity of performing impairment reviews on an annual basis or performing a look back test in future years following an impairment (applicable to entities transitioning from FRSSE/old GAAP.

Be aware of the method in which an impairment should be set off so that companies correctly account for these under FRS 105.

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