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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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27.7 Fair value less costs to sell
27.7.1 Extract from FRS102: Section 27.14 – 27.14A
27.14 Fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. The best evidence of the fair value less costs to sell of an asset is a price in a binding sale agreement in an arm’s length transaction or a market price in an active market. If there is no binding sale agreement or active market for an asset, fair value less costs to sell is based on the best information available to reflect the amount that an entity could obtain, at the reporting date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. In determining this amount, an entity considers the outcome of recent transactions for similar assets within the same industry.
27.14A When determining an asset’s fair value less costs to sell, consideration shall be given to any restrictions imposed on that asset. Costs to sell shall also include the cost of obtaining relaxation of a restriction where necessary in order to enable the asset to be sold. If a restriction would also apply to any potential purchaser of an asset, the fair value of the asset may be lower than that of an asset whose use is not restricted.
27.7.2 OmniPro comment
27.7.2.1 Fair value less cost to sell – active market
Section 27.14 and 27.14A of FRS 102 provides guidance on determining fair value less costs to sell. It states that it shall be based on an active market/binding sale agreement where available.
An active market is defined in Appendix I of FRS 102 as ‘a market in which all the following conditions exist:
(a) The items traded in the market are homogenous;
(b) Willing buyers and sellers can normally be found at any time; and
(c) Prices are available to the public’.
It is clear from the above that if there is a binding sales agreement in an arm’s length transaction or an active market then the price must be used. However, there are very few active markets for tangible and intangible fixed assets or trade CGU’s.
Example 11: Fair value less costs to sell
Company A owns a packaging machine. It’s NBV at year end was CU20,000. Its remaining useful life at that time was 10 years. The price that would be obtained in an active market for the machine is CU16,000 and would incur costs on disposal of CU1,000. At the year end due to a decrease in demand for the Company’s product, the machine is rarely used. The Company estimates that the value in use is well below the fair value less cost to sell. In this example, as the fair value less cost to sell is highest, an amount of CU5,000 would be posted at year end. The journal to post is:
| CU | CU | |
| Dr Impairment of Fixed Asset in P&L
(NBV of CU20,000 – (CU16,000-CU1,000)) |
5,000 | |
| Cr Accumulated Depreciation | 5,000 |
27.7.2.2 Fair value less cost to sell – no active market – valuation model
Where an active market does not exist, then the fair value can be based on recent transactions of identical nature. Where this is not possible valuation techniques should be used. One such example is a discounted cash flow model. Such a model should incorporate assumptions that market participants would use in estimating the asset’s fair value. The model should utilise the maximum use of market inputs, and rely as little as possible on entity determined inputs. A valuation technique would be expected to arrive at a reliable estimate of fair value:
- It reasonably reflects how the market could be expected to price the asset; and
- The inputs to the valuation technique reasonably represent market expectations and measures of the risk of return factors inherent in the asset (Section 11.29 of FRS 102).
Therefore the model should utilise the models that are used by investors in assessing the fair value e.g. hotel generally sell on a multiple of EBITA however discounted cash flows are usually used for manufacturing companies. The assumptions in whatever model should be based on the assumptions other market participants would use and should not be based on managements uncorroborated views or information not known by the market.
Where an active market does not exist but a valuation model is used, the advantage of using this model above the value in use model is that that model can incorporate any future capital expenditures any third party investor would incur to enhance the cash flows or restructuring that would be carried out. Under the value in use model any future capital which enhances the level of performance above current performance cannot be included in the cash flows.
In reality it is not always easy to determine fair value so it is likely that entities will default to the value in use model.
When using market data, careful selection is required and bias should not come into play, it should look at multiples on a number of transactions and not just the one which gives the right answer for the entity particularly where multiples are used.
27.7.2.3 Discount rate for fair value less cost to sell
The discount rate to use is the post tax discount rate and the cash flow should be post-tax. The post tax rate should be easier to obtain than a pre-tax rate.
When comparing the fair value of cash flows with the carrying amount it is important to compare like with like i.e. if cash flows include working capital then the carrying amount should include this also. Likewise, the cash flows should incorporate current tax but exclude deferred tax assets.
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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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