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Section 27 – Impairment of Assets
27.1.1 Extract from FRS102: Section 27.1 – 27.1A.
27.1.2 OmniPro comment – Objective and scope.
27.2 Impairment of inventories.
27.2.1 Extract from FRS102: Section 27.2 – 27.4.
27.2.2 OmniPro comment – Impairment of Inventories.
27.3 Impairment of assets other than inventories.
27.3.1 Extract from FRS102: Section 27.5 – 27.6.
27.4 Impairment – assessing if an impairment is required.
27.4.1 Extract from FRS102: Section 27.7 – 27.8.
27.4.2.1 Assessing if an impairment is required.
27.5.1 Extract from FRS102: Section 27.9 – 27.10.
27.5.2 OmniPro comment – Indicators of Impairment
27.6 Measuring recoverable amount
27.6.1 Extract from FRS102: Section 27.11 – 27.13.
27.6.2 OmniPro comment – Measuring recoverable amount
27.7 Fair value less costs to sell
27.7.1 Extract from FRS102: Section 27.14 – 27.14A.
27.7.2.1 Fair value less cost to sell – active market
27.7.2.2 Fair value less cost to sell – no active market – valuation model
27.7.2.3 Discount rate for fair value less cost to sell
27.8.1 Extract from FRS102: Section 27.15 – 27.20.
27.8.2.2 Estimating the future pre-tax cash flows.
27.8.2.4 Steps in calculating Value in Use.
27.8.2.5 Value in use – discount rate.
27.8.2.6 Value in use – terminal value.
27.9 Assets held for service potential
27.9.1 Extract from FRS102: Section 27.20A.
27.9.2 OmniPro comment – Asset held for service potential
27.10 Recognising and measuring an impairment loss for a cash-generating unit
27.10.1 Extract from FRS102: Section 27.21 – 27.23.
27.10.2.1 Allocation of the improvement loss in a CGU.
27.10.2.2 Restoration on reduction of assets as a result of impairment
27.11 Additional requirements for impairment of goodwill
27.11.2.1 – Impairment of Goodwill
27.12 Reversal of an impairment loss.
27.12.1 Extract from FRS102: Section 27.28 – 27.30.
27.12.2.1 Impairment reversals generally.
27.13 Reversal when recoverable amount was estimated for a cash-generating unit
27.13.1 Extract from FRS102: Section 27.31.
27.13.2 OmniPro comment – Reversal of impairment when recoverable amount based on CGU
27.14.1 Extract from FRS102: Section 27.32 – 27.33A.
27.14.2 OmniPro comment – Disclosures.
27.14.2.1 Tangible fixed assets accounting policy disclosure.
27.14.2.2 Extract from notes to the financial statements.
27.14.2.2.1 Exceptional item – impairment charge.
27.14.2.2.2Tangible fixed assets.
27.14.2.2.3 Extract from profit and loss where impairment is shown as an exceptional item.
27.14.2.2.4 Extract from notes to the financial statements
27.14.2.2.5 Extract from notes where impairment is not deemed exceptional
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27.13 Reversal when recoverable amount was estimated for a cash-generating unit
27.13.1 Extract from FRS102: Section 27.31
27.31 When the original impairment loss was based on the recoverable amount of the cash-generating unit to which the asset, including goodwill belongs, the following requirements apply:
(a) The entity shall estimate the recoverable amount of that cash-generating unit at the current reporting date.
(b) If the estimated recoverable amount of the cash-generating unit exceeds its carrying amount, that excess is a reversal of an impairment loss. The entity shall allocate the amount of that reversal to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets, subject to the limitation described in (c) below. Those increases in carrying amounts shall be treated as reversals of impairment losses and recognised immediately in profit or loss unless an asset is carried at revalued amount in accordance with another section of this FRS (for example, the revaluation model in Section 17 Property, plant and equipment). Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with the relevant section of this FRS.
(c) In allocating a reversal of an impairment loss for a cash-generating unit, the reversal shall not increase the carrying amount of any asset above the lower of:
(i) its recoverable amount; and
(ii) the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognised for the asset in prior periods.
(d) Any excess amount of the reversal of the impairment loss that cannot be allocated to an asset because of the restriction in (c) above shall be allocated pro rata to the other assets of the cash-generating unit, except for goodwill.
(e) After a reversal of an impairment loss is recognised, if applicable, the entity shall adjust the depreciation (amortisation) charge for each asset in the cash-generating unit in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.
27.13.2 OmniPro comment – Reversal of impairment when recoverable amount based on CGU
See example below which illustrates the requirements of Section 27.31 of FRS 102
Example 18: Reversal of cash generating unit
Parent A acquired 100% of Company B for CU100,000. One CGU was identified. The fair value of the assets acquired was CU80,000 and the goodwill recognised on acquisition was CU20,000. The goodwill and identifiable assets are depreciated over 10 years and have a nil residual value. At the end of year 3 an impairment of CU20,000 was identified due to a slump in the market in which the CGU operates (i.e. the NBV of the goodwill at that time was CU14,000 (CU20,000/10yrs*7yrs) and of the identifiable assets was CU56,000 (CU80,000/10yrs*7yrs) and the recoverable amount was CU50,000). Post the impairment the carrying amount of goodwill was Nil (because as per Section 27.21 of FRS 102 the impairment was first set against goodwill) and the carrying amount of the identifiable assets was CU50,000.
Following a review at the end of year 6, there was evidence to show that the impairment had reversed and the value in use at that time was now CU50,000 (section 27.31 (a) of FRS 102).
The carrying value at the end of year 6 was as follows:
| CU | |
| Identifiable assets = CU50,000/7yrs remaining life at date of impairment*4yrs remaining at the end of year 6) | 28,871 |
| Goodwill (nil as was fully written off at end of year 3) | Nil |
| Total carrying amount at end of year 6 | 28,571 |
| Value in use at that date | 50,000 |
| Difference to be considered for reversal | 21,429 |
So the total amount considered for reversal is CU21,429
The carrying value at the end of year 6 if no impairment was booked is:
| CU | |
| Identifiable assets = CU80,000/10yrs*4yrs remaining life at date of reversal of impairment) = | 32,000 |
| Goodwill (CU20,000/10yrs*4yrs) | 8,000 |
| Total carrying amount at end of year 6 | 40,000 |
Therefore the max of the impairment reversal of CU21,429 noted above that can be utilised are CU11,429 (CU40,000-CU28,571) as the carrying amount cannot be stated above what it would have been stated if no impairment had been booked (as detailed in Section 27.31 (c) of FRS 102).
Section 27.31 (d) of FRS 102 is not applicable in this example. If the fixed assets are fair value was greater than the amount by which the impairment was to be reversed then the balance would be allocated to the remaining assets in the CGU (other than goodwill) on a pro rata basis. If you had this situation then you should refer to Example 15 in 27.10.2.2 for guidance.
| Total Impairment Reversal Allowable | CU11,429 |
| Allocated First to Goodwill Notionally as Goodwill impairment Cannot be Reversed (as required by Section 27.32 (b) of FRS 102) |
(CU8,000) |
| Remaining Amount to be reversed to Identifiable Assets | CU3,429 |
Therefore the actual journal to be posted for the impairment reversal is:
| CU | CU | |
| Dr Fixed Assets/Identifiable Assets | 3,429 | |
| Cr Impairment – Profit and Loss | 3,429 |
Being journal to increase carrying amount of fixed assets to EU32,000 being the amount it would have been stated at had an impairment not occurred.
The restated fixed asset figure of CU32,000 is depreciated over the remaining useful economic life (incorporating residual values) of 4 years as required by Section 27.31(e) of FRS 102
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Examples:
Example 1: Lowest available CGU.
Example 2: Lowest available CGU.
Example 3: A decline in the asset’s market value.
Example 4: Significant adverse changes that have taken/will take place in the market
Example 5: Change in assets use.
Example 6: Introduction of new competitor
Example 7: Impairment indicators – decision to close.
Example 8: Performance of an asset is worse than expected.
Example 9: Investment in subsidiary.
Example 10: Value in use differs from fair value less costs to sell
Example 11: Fair value less costs to sell
Example 12: Determining cash flow to include.
Example 14: Impairment loss for a CGU with goodwill
Example 15: Restriction of reduction of assets as a result of an impairment
Example 16: Impairment loss on a CGU with goodwill and non-controlling interests
Example 17: Reversal of impairment on an individual asset
Example 18: Reversal of cash generating unit
Example 19: extract from an accounting policy note and disclosure requirements.
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