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Example 1: Lowest available CGU
Company A is a manufacturing plant that produces construction specifically designed plywood. The company has significant fixed assets. At year end there was a significant decline in the construction market which indicated that an impairment was required on the property, plant and equipment. In assessing the level at which an impairment review could be carried out, it would be very hard to determine it for the fixed assets themselves as they do not have largely independent cash flows, therefore in this case the cash flows of the manufacturing plant as a whole would be used in the value in use calculation.
Example 2: Lowest available CGU
A group operates a chain of supermarkets, management review the activity of each supermarket individually and all cash flows for each supermarket are independent of each other. In this case the cash flows from each supermarket would be seen as one cash generating unit and an impairment review carried out on this basis. It would not be appropriate to include all supermarkets in the one CGU as it would be carried out at too high a level and therefore mask any impairment write offs in some supermarket which were not as profitable.
a) Example 3: A decline in the asset’s market value
Company A purchased a specialised piece of property, plant of equipment for CU300,000 during the year. At the end of year 1, the supplier dropped its price for that type of equipment to CU200,000. In this case, this would indicate a possible impairment. As a result an impairment may be required. This drop in price does not automatically mean an impairment loss as it is likely the value in use of the asset when taken together with a CGU for the Company will be higher so therefore no impairment may be required. If a residual value is estimated for the plant, then this would have to be updated as stated in Section 17.
If we assume that the piece of property is now abandoned and no longer in use within the CGU, then the fair value of that asset itself would be used to determine the amount of the impairment loss. The value in use for the CGU cannot be used as the asset is no longer providing any economic benefit, therefore its recoverable amount is the fair value less cost to sell.
Similarly assume Company A has an office block which it uses. Due to a significant reduction in property prices, there are indications that this asset is stated above its carrying amount. In this case, this would be an indicator of an impairment, however, this does not necessarily mean a write down is required as it is part of a CGU (that being the overall factory etc.) which when taken as one CGU shows significant headroom between the carrying value and the value in use. Therefore the slump in the property price is irrelevant.
b) Example 4: Significant adverse changes that have taken/will take place in the market
Company A is a pharmaceutical company that had an exclusive patent in which it sold its products. This patent expires and will not be renewed at the end of the year which will result in new entrants coming in and charging lower prices. At the end of that year the completion of the patent is an indicator of impairment as the future cash flows of the entity will be significantly reduced due to the entrant of new competitors and the impact of reduced selling prices.
c) Example 5: Change in assets use
Company A, produced a product; Product B. Due to changes in technology and the market, Product B sales are expected to decrease significantly. However, product B can be used in another product produced by Company A and this product will continue to make a profit using this product. The change in use of Product B, is an indicator of impairment and an impairment review will need to be carried out to review cash flows on the product as a result of the change in use.
d) Example 6: Introduction of new competitor
Company A has been the market leader for a product for a number of years. During the year a new competitor entered the market and has produced a similar product but is superior to Company A’s product. Even with the competitors introduction, sales have continued to increase.
In this case the introduction of the superior product is an indicator of impairment so management should carry out an impairment review. The existence of sales continuing to increase is not enough to negate the need to carry out an impairment review.
e) Example 7: Impairment indicators – decision to close
Company A made a decision at the year end to close its factory with immediate effect. In this case this is an indicator of impairment and an impairment review will be required. Given that the Company will no longer trade after the year end, there is no value in use, therefore the fair value less cost to sell should be used in order to determine the impairment to be booked on any property, plant and equipment, inventory etc.
If we assume that a decision was announced that it would cease in one years time from that date. Then in assessing whether an impairment existed, the value in use calculations could be used. If these value in use calculations showed no impairment requirement no write down is necessary. However, the depreciation to be charged of the assets in the following year would need to be updated so as to write them off in that year.
f) Example 8: Performance of an asset is worse than expected
Company A has performed detailed budgets and cash flows for a factory which is determined to be one CGU. During the year the actual performance significantly deviated from the budgeted numbers. This significant deviation is an indicator of impairment. Note the opposite is also true i.e. where the Company made significant profits in the past and now they are forecasting losses.
g) Example 9: Investment in subsidiary
Company A holds a 100% investment in Company B (cost CU500,000). At the year end Company B’s performance was far less than expected and a significant loss was incurred. As a result Company B’s net assets was CU400,000. The significant loss made by Company B is an impairment indicator. As it is likely that it would be difficult to determine the fair value less cost to see in an active market, the value in use model should be utilised to determine with an impairment is required. In this particular case, it may be appropriate to impair the investment down to the net asset amount of CU400,000 assuming Company B itself has completed an impairment review on its end.
Example 10: Value in use differs from fair value less costs to sell
Company A operates a factory and manufacturers products. The value in use calculation indicates an impairment of the fixed assets. The fair value of the fixed assets alone are well above the carrying amount. The company has no intention of disposing of the asset. In this particular case no impairment should be booked as the fair value is higher than the carrying amount. The intentions of management should be ignored as the company could if it wishes sell these valuable assets at any time.
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 |
Example 12: Determining cash flow to include
Company A is a manufacturing company providing special plywood to the construction industry. During the year there was a large slump in the construction market which was an indicator of impairment. The company has prepared the estimated cash flow and has included the below in the cash flow. Determine which ones will be allowed to be included as part of the value in use calculation.
- The company intends to restructure the company and lay 20 employees off which will result in cost savings of CU200,000 per annum.
Solution: Neither the costs of the reconstruction or the cost savings can be incorporated into estimated future cash flows as the entity was not demonstrately committed to it i.e. it was not provided for in the year end financial statements.
- Next year the company has planned to purchase and install a whole new production line which will allow the company to diversify the type of products it produces such that it can supply material to a separate industry.
Solution: Section 27.19 does not allow planned future capital expenditure which enhances the cash flow potential to be incorporated into the cash flow. Neither does it allow the future additional cash inflows from the proposed expenditure.
- The cost of replacing a component of the main production line which is depreciated at a different rate to the main line has been included in the cash flows.
Solution: Given that this is a component that is separately depreciated from the main production line and it does not enhance the performance of the line above the performance at the date of the value in use calculation, this should be included in the estimated cash outflows. Note the cash flows should incorporate these based on the life of that component so if these parts had to be changed every five years, it would have to be included in the cash flow every five year.
- Assumed a growth rate of 10% per annum for 10 years. The terminal value amount is increased by a further 10%
Solution: When determining whether this cash flow is appropriate, one would have to look at the industry in which the company operates. Given that the market has slumped it would be very unusual for a 10% growth rate to be assumed. On this basis it is likely that these growth rates would need to actually show a reduction for at least the first few years as opposed to an increase. The 10% growth rate for 10 years also seems to be for too long a period. IAS 36 would state that a growth rate should not be incorporated for more than 5 years and as stated in Section 27 from then on a steady rate or declining growth rate should be used. Therefore these growth rates would have to be reduced and usually after 5 years decreasing or no further growth should be assumed. However each circumstance would need to be assessed individually based on the industry in which the entity operates.
- The repairs and maintenance costs is very large when compared to the depreciation charged on the assets during the prior year.
Solution: Although this is an allowable cash flow usually the repairs and maintenance cost included in the cash flow should some way equate to the yearly depreciation charge.
- In calculating the cash flows, the company incorporated the working capital requirements/movements but they compared the present value of the cash flows to the carrying amount they have not included the debtors/creditors/inventory and other working capital items within the carrying amount.
Solution: This is incorrect as the company should compare like with like. In this instance the company should take the net assets relating to the CGU so that they are comparing like with like.
- The company has used a post-tax discount rate
Solution: This is incorrect as a pre-tax discount rate should be used.
- The company has not incorporated any inflation into its workings
Solution: The entity must incorporate the effects of inflation into its cash flows under the standard. Therefore, the expected future inflation needs to be incorporated.
- The company has included tax payments into the cash flow
Solution: The inclusion of tax cash flows is not allowed under Section 27.
- The company has included exceptional income with regard to a return on investment within the terminal value amount as this was included in the last forecasted period.
Solution: The terminal value amount must exclude all abnormal or exceptional items included in the last forecasted periods cash flows as this incorrectly inflates the terminal value amount.
- The company in its cash flow used the profit before tax, amortisation and depreciation.
Solution: This is incorrect as the cash flows should incorporate the earnings before interest, tax, amortisation and depreciation as financing activities should be excluded together with any non-cash costs.
The interest income and expense should therefore have also been excluded in the above example.
Example13: WACC
Company A has calculated a WACC of 5% based on market assumptions. This is the post-tax rate and they require the pre-tax rate for the value in use calculation as it is probable that an impairment exists. The tax rate is 10%. Therefore assuming there is no timing difference the pre-tax WACC is 5.555% (5%/(1-.1)). However as it is likely that there will be large timing differences, then a more detailed method will be required to determine the pre-tax WACC.
The most appropriate WACC model to use is the CAPM model (capital asset pricing model). The formula for to calculate the CAPM is:
Rs= Rf +B(Rm-Rf)
Where:
Rs= return on security we are interested in (expected return on capital assets or return required)
Rm= the expected return from the market as a whole (LSE/ISEQ shows return for all quoted companies in the country
Rf – return available on risk free securities (government bonds etc)
B= beta factor. Market as a whole produces a given return, the beta factor for an individual share measures the volatility of the return on that share to the market as a whole. Market as a whole has a beta factor of 1. Risk free securities have a beta of 0. This factor is the ratio of the return on that share to the markets overall return e.g. return on share is 29% & return on market as a whole was 15%, then beta factor for shares is 29/15=1.93. Beta factor is a measure of the systematic risk of the capital asset. If shares in ABC plc tend to vary twice as much as returns from the market as a whole, so that if market returns (i.e. LSE/ISEQ) increase by 3% returns on ABC plc would be expected to increase by 6% and vice versa. Hence beta factor for ABC is 2
Rm-Rf is the risk premium looked for in return for investing in securities other than risk free securities. From above we can see that the minimum return must at least be the risk free rate.
Example 14: Impairment loss for a CGU with goodwill
In year 1 Parent A acquired company X for CU100,000. On acquisition 3 CGU’s were identified called CGU 1, CGU 2 and CGU 3. The fair value of the assets acquired was CU60,000 and goodwill of CU40,000 was recognised on acquisition and set against each CGU. The goodwill was allocated to each CGU based on the synergies expected to be achieved which ultimately was allocated 1/3rd to each CGU.
In year 2, due to a change in the market trends the demand for the product produced by CGU 1 reduced significantly. The value in use calculations indicate a recoverable amount of CU9,000. At that date the carrying amount of the goodwill and identifiable assets were CU10,000 and CU20,000 (split between asset A&B of CU12,000 and CU8,000) respectively. Therefore, the total impairment to be booked is CU21,000 (CU10,000+CU20,000-CU9,000 recoverable amount).
The calculation of the allocation of the impairment loss of CGU 1 is carried out as follows:
|
|
Carrying value |
Impairment |
Carrying amount after impairment |
|
Goodwill |
CU10,000 |
(CU10,000)* |
CUnil |
|
Asset A |
CU12,000 |
(CU6,600)** |
CU5,400 |
|
Asset B |
CU8,000 |
(CU4,400)*** |
CU3,600 |
|
Total |
|
|
|
*impairment set against goodwill first and remaining amount set against all other assets on a pro-rata basis.
**impairment allocated pro-rata to identifiable assets e.g. asset A= (CU21,000-CU10,000 allocated to goodwill) * (CU12,000/(CU12,000+CU8,000)) = CU6,600.
***impairment allocated pro-rata to identifiable assets e.g. asset A= (CU21,000-CU10,000 allocated to goodwill) * (CU8,000/(CU12,000+CU8,000)) = CU4,400.
Example 15: Restriction of reduction of assets as a result of an impairment
In year 1 Parent A acquired company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU60,000 split between three machines (Machine A: CU10,000, Machine B: CU30,000 and Machine C: CU20,000) and goodwill of CU40,000 was recognised. In year 2, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU25,000. The carrying value of Machine A, B & C was CU7,000, CU25,000 and CU16,000 respectively. The carrying value of goodwill at that time is CU20,000. The fair value less cost to sell of machine C was CU6,000. The fair value of the other machines cannot be determined. See below how the impairment loss of CU43,000 (CU7,000+CU25,000+CU16,000+CU20,000-CU25,000 recoverable amount) should be allocated.
|
|
Carrying value |
Impairment |
Carrying amount after impairment |
|
Goodwill |
CU20,000 |
(CU20,000)* |
CUnil |
|
Machine A |
CU7,000 |
(CU1,000)** |
CU6,000 |
|
Machine B |
CU25,000 |
(CU13,414)*** |
CU11,586 |
|
Machine C |
CU16,000 |
(CU8,586)**** |
CU7,414 |
|
Total |
|
CU43,000 |
|
*impairment set against goodwill first and remaining amount set against all other assets on a pro-rata basis.
**Note 1: impairment allocated pro-rata to identifiable assets e.g. asset A= (CU43,000-CU20,000 allocated to goodwill) * (CU7,000/(CU7,000+CU25,000+CU16,000)) = CU3,354. However as the fair less cost to sell is CU6,000 it cannot be written down below CU6,000. Therefore the adjustment is limited to CU1,000 (CU7,000-CU6,000). The remaining CU2,354 (CU3,354-CU1,000 booked) has to be allocated between the remaining assets.
***Note 2: impairment allocated pro-rata to identifiable assets e.g. asset A= (CU43,000-CU20,000 allocated to goodwill) * (CU25,000/(CU7,000+CU25,000+CU16,000)) = CU11,979. However the CU2,354 in note 1 above has to be allocated to machine B as follows: = CU2,354 * (CU25,000/(CU25,000+ CU16,000))= CU1,435. Therefore total impairment to be booked against Machine B is CU1,435+CU11,979= CU13,414.
***Note 3: impairment allocated pro-rata to identifiable assets e.g. asset A= (CU43,000-CU20,000 allocated to goodwill) * (CU16,000/(CU7,000+CU25,000+CU16,000)) = CU7,667. However the CU2,354 in note 1 above has to be allocated to machine B as follows: = CU2,354 * (CU16,000/(CU25,000+ CU16,000))= CU919. Therefore total impairment to be booked against Machine B is CU919+CU7,667 = CU8,586.
Note we have called the assets machine A, B & C here but any of these could easily have been other intangible asset e.g. customer lists. The treatment would not change.
Example 16: Impairment loss on a CGU with goodwill and non-controlling interests (illustration of section 27.26 above)
At the start of year 1 Parent A acquired 70% of company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU80,000. Therefore goodwill of CU44,000 (CU100,000-CU80,000) being the fair value of net asset * 70% being the proportion of the net assets acquired) was recognised. The goodwill and identifiable assets are amortised over 10 years. At the date of acquisition; goodwill of CU44,000, CU80,000 of assets was recognised and CU24,000 (CU80,000*30%) was recognised in non-controlling interest.
At the end of year 2, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU50,000. The carrying value of goodwill at that date was CU35,200 (CU44,000/10yrs*8yrs) and the carrying amount of the identifiable assets was CU64,000 (CU80,000/10yrs*8yrs).
In accordance with Section 27.16 when assessing the amount of impairment the notional non-controlling interest needs to be incorporated as per below.
|
|
CU |
|
Carrying Amount of Goodwill at the End of Year 2 |
35,200 |
|
Unrecognised Non-Controlling Interest in Goodwill * |
15,086 |
|
Carrying Amount of Identifiable Assets |
64,000 |
|
Notionally Adjusted Carrying Amount |
114,286 |
|
Recoverable Amount |
(50,000) |
|
Impairment |
64,286 |
The impairment loss of CU64,286 is first allocated against goodwill and the remaining to the identifiable assets assuming they have a nil fair value less costs to sell. The amount to be allocated to goodwill is the total carrying amount of goodwill including the non-controlling notional interest i.e. CU35,200+CU15,086= CU50,286. However only 70% of this CU50,286 relates to Parent A’s interest so the amount to be taken off Parent A’s goodwill is CU35,200.
The remaining CU29,086 (CU64,286-CU35,200) is set against the carrying amount of the identifiable assets. In the consolidated accounts the 30% of the impairment of CU8,726 would be attributed to non-controlling interest. Therefore the carrying amount at the end of year 2 after the impairment would be:
|
|
Goodwill |
Identifiable assets |
Total |
|
Carrying Amount Before Impairment |
CU35,200 |
CU64,000 |
CU99,200 |
|
Impairment loss |
(CU35,200) |
(CU29,086) |
(CU64,286) |
|
Carrying Amount After Impairment |
– |
CU34,914 |
CU34,914 |
*carrying amount notionally adjusted to include goodwill attributable to the non-controlling party which is then compared to the recoverable amount. Non-controlling interest in goodwill = CU44,000/0.7*0.3 = CU18,857 at the date of acquisition. There has been two years since acquisition and this would notionally have been amortised for two years which would mean the NBV would be CU15,086 (CU18,857/10yrs*8yrs).
Example 17: Reversal of impairment on an individual asset
Company A purchased a specialist machine in year 1 for CU100,000. It is depreciated over 10 years and has a nil residual value. At the end of year 3 an impairment of CU20,000 was identified due to a slump in the market for the products the machine produced (i.e. the NBV at that time was CU70,000 (CU100,000/10yrs*7yrs) and the recoverable amount 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 CU70,000.
|
Carrying Value at the End of Year 6 Prior to Reversal (CU50,000/7yrs*4yrs remaining) |
CU28,571 |
|
Recoverable Amount |
CU70,000 |
|
Possible Impairment Reversal |
CU41,429 |
However as per Section 27.29 the carrying amount cannot be increased above that what it would have been had no impairment been recognised.
Carrying value at the end of year 6 if no impairment was booked CU40,000 (CU100,000/10yrs*4yrs remaining)
Therefore the maximum amount that the carrying amount can be increased to is CU40,000
The amount of the impairment to be reversed is:
|
Notional Carrying Amount if No Impairment was Booked |
CU40,000 |
|
Carrying Amount Prior to Reversal |
CU28,571 |
|
Amount of the Impairment to be Reversed |
CU11,429 |
The journal to be posted would be to:
|
|
CU |
CU |
|
Dr Fixed Assets |
11,429 |
|
|
Cr Impairment in the P&L |
|
11,429 |
Depreciation of CU10,000 (CU40,000/4yrs remaining life) will be charged per annum going forward. Depending on materiality this may be classed as an exceptional item.
If the above arose as a result of a revaluation downward when the impairment was booked and this amount exceeded the amount in the revaluation reserve such that the balance hit the profit and loss, some of the reversal will be reversed through the profit and loss account. See section 17 of this website for further details.
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 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.
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 is 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.
Treatment for UK companies who have eary adopted the September 2015 amendment made to FRS 102 earlier (these cannot reverse previous impairments of goodwill)
|
Total Impairment Reversal Allowable |
CU11,429 |
|
Allocated First to Goodwill Notionally as Goodwill impairment Cannot be Reversed |
(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 CU32,000 being the amount it would have been stated at had an impairment not occurred.
Treatment for Republic of Ireland companies (As EU directive 2013/34 has not been enacted in Ireland at the time of the creation of this guide Irish companies can currently reverse previous impairments of goodwill booked). This is also applicable for UK companies that have not early adopted the September 2015 FRS 102 amendments not mandatory required to adopt until periods beginning after 1 January 2016
| Total impairment reversal allowable | CU11,429 |
| Allocated first to goodwill notionally | (CU8,000) |
| Remaining amount to reversed to identifiable assets | CU3,429 |
Therefore the actual journal to be posted for the impairment reversal is:
|
|
CU |
CU |
|
Dr Goodwill |
8,000 |
|
|
Dr Fixed Assets/Identifiable Assets |
3,429 |
|
|
Cr Impairment – Profit and Loss (CU8,000+CU3,429) |
|
11,429 |
Being journal to increase carrying amount of goodwill and fixed assets to CU8,000 and CU32,000 respectively being the amount it would have been stated at had an impairment not occurred.
Example 19: Reversal of prior year goodwill impairments reversal since the date of transition
Company A, a UK company (who has early adopted the September 2015 amendments to FRS 102) reversed a previous impairment booked on goodwill on 2 January 2014 as allowed under old GAAP. The date of transition is 1 January 2014. The amount of the goodwill impairment reversed was CU100,000. This reinstated goodwill was amortised over its remaining useful life of 5 years under old GAAP. Under FRS 102 this reversal is not permitted. The adjustments required on transition are:
Year ended 31 December 2014
|
|
CU |
CU |
|
Dr Reversal of Goodwill Impairment in P&L |
100,000 |
|
|
Cr Goodwill |
|
100,000 |
Being journal to reverse the previous reversal of the goodwill impairment
|
|
CU |
CU |
|
Dr Goodwill |
20,000 |
|
|
Cr Amortisation of Goodwill (CU100,000/5yrs) |
|
20,000 |
Being journal to reverse amortisation charged under old GAAP on reinstated goodwill.
Journals required for the year ended 31 December 2015 assuming the above journals are carried forward:
|
|
CU |
CU |
|
Dr Goodwill |
20,000 |
|
|
Cr Amortisation of Goodwill (CU100,000/5yrs) |
|
20,000 |
Being journal to reverse amortisation charged under old GAAP on reinstated goodwill.
Example 20: Impairment loss on revalued asset posted directly to profit and loss under old GAAP and not set against revaluation reserve
The transition date is 1 January 2014. Company A charged an impairment of CU200,000 in the year ended 31 December 2014 under old GAAP. This impairment was on a factory which had previously been revalued and an amount of CU100,000 was included in the revaluation reserve at the date the impairment was booked. As the impairment was due to the consumption of economic activities the CU200,000 was charged directly to the profit and loss account. Under FRS 102, CU100,000 of this amount should have been set against the CU100,000 revaluation reserve and the remaining amount posted to the profit and loss account. Assume the impairment charge would not be allowable for tax purposes, there is no tax effect. The journals required to correct this are:
Year ended 31 December 2014
|
|
CU |
CU |
|
Dr Revaluation Reserve |
100,000 |
|
|
Cr Impairment in P&L |
|
100,000 |
Being journal to recognise the net CU100,000 in the profit and loss and reduce the revaluation reserve to nil.
For the year ended 31 December 2015, no adjustment is required
Note if the impairment was for anything other than the general consumption of economic benefits then under old GAAP the revaluation reserve would have been decreased first and therefore no transition adjustment would be required.
Example 21: Impairment loss on a CGU with goodwill and non-controlling interests
At 1 January 2013, Parent A acquired 70% of company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU80,000. Therefore goodwill of CU44,000 (CU100,000-CU80,000) being the fair value of net asset * 70% being the proportion of the net assets acquired) was recognised. The goodwill and identifiable assets are amortised over 10 years. At the date of acquisition; goodwill of CU44,000, CU80,000 of assets was recognised and CU24,000 (CU80,000*30%) was recognised in non-controlling interest.
At the 31 December 2014, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU50,000. The carrying value of goodwill at that date was CU35,200 (CU44,000/10yrs*8yrs) and the carrying amount of the identifiable assets was CU64,000 (CU80,000/10yrs*8yrs). Under old GAAP an impairment of CU49,200 was booked (the non-controlling interest was not incorporated)-CU35,200 against goodwill and CU14,000. However under old GAAP the non-controlling interest is required to be incorporated into the calculation. Assume a deferred tax rate of 10%.
Calculations required to determine the impairment under FRS 102.
In accordance with Section 27.16 when assessing the amount of impairment the notional non-controlling interest needs to be incorporated as per below.
|
|
CU |
|
Carrying Amount of Goodwill at the End of Year 2 |
35,200 |
|
Unrecognised Non-Controlling Interest in Goodwill * |
15,086 |
|
Carrying Amount of Identifiable Assets |
64,000 |
|
Notionally Adjusted Carrying Amount |
114,286 |
|
Recoverable Amount |
(50,000) |
|
Impairment |
64,286 |
The impairment loss of CU64,286 is first allocated against goodwill and the remaining to the identifiable assets assuming they have a nil fair value less costs to sell. The amount to be allocated to goodwill is the total carrying amount of goodwill including the non-controlling notional interest i.e. CU35,200+CU15,086= CU50,286. However only 70% of this CU50,286 relates to Parent A’s interest so the amount to be taken off Parent A’s goodwill is CU35,200.
The remaining CU29,086 (CU64,286-CU35,200) is set against the carrying amount of the identifiable assets. In the consolidated accounts the 30% of the impairment of CU8,726 would be attributed to non-controlling interest. Therefore the carrying amount at the end of year 2 after the impairment would be:
|
|
Goodwill |
Identifiable assets |
Total |
|
Carrying Amount Before Impairment |
CU35,200 |
CU64,000 |
CU99,200 |
|
Impairment Loss |
(CU35,200) |
(CU29,086) |
(CU64,286) |
|
Carrying Amount after Impairment |
– |
CU34,914 |
CU34,914 |
*carrying amount notionally adjusted to include goodwill attributable to the non-controlling party which is then compared to the recoverable amount. Non-controlling interest in goodwill = CU44,000/0.7*0.3 = CU18,857 at the date of acquisition. There has been two years since acquisition and this would notionally have been amortised for two years which would mean the NBV would be CU15,086 (CU18,857/10yrs*8yrs).
Transition adjustments required:
At 1 January 2014
No journals required
At 31 December 2014
|
|
CU |
CU |
|
Dr Impairment in P&L |
15,086 |
|
|
Cr Property, plant and equipment (CU29,086 that should have been booked-CU14,000 actually booked) |
|
15,086 |
Being journal to reflect additional impairment required under FRS 102
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU15,086*10%) |
1,509 |
|
|
Cr Deferred Tax P&L |
|
1,509 |
Being journal to reflect deferred tax movement on the additional impairment assuming capital allowances are claimed.
Journals required in 31 December 2015 year end assuming the above journals are posted to profit and loss reserves etc
|
|
CU |
CU |
|
Dr PPE |
1,885 |
|
|
Cr Depreciation on Fixed Assets (CU15,086/8 years remaining life at time of impairment) |
|
1,885 |
Being journal to reflect depreciation booked under old GAAP which was impaired in 2014 under FRS 102.
|
|
CU |
CU |
|
Dr Deferred Tax Asset in P&L (CU1,885*10%) |
189 |
|
|
Cr Deferred Tax Asset |
|
189 |
Being journal to reflect deferred tax on the above journal.
Example 21: Impairment loss on a CGU with goodwill and non-controlling interests
At 1 January 2013, Parent A acquired 70% of company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU80,000. Therefore goodwill of CU44,000 (CU100,000-CU80,000) being the fair value of net asset * 70% being the proportion of the net assets acquired) was recognised. The goodwill and identifiable assets are amortised over 10 years. At the date of acquisition; goodwill of CU44,000, CU80,000 of assets was recognised and CU24,000 (CU80,000*30%) was recognised in non-controlling interest.
At the 31 December 2014, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU50,000. The carrying value of goodwill at that date was CU35,200 (CU44,000/10yrs*8yrs) and the carrying amount of the identifiable assets was CU64,000 (CU80,000/10yrs*8yrs). Under old GAAP an impairment of CU49,200 was booked (the non-controlling interest was not incorporated)-CU35,200 against goodwill and CU14,000. However under old GAAP the non-controlling interest is required to be incorporated into the calculation. Assume a deferred tax rate of 10%.
Calculations required to determine the impairment under FRS 102.
In accordance with Section 27.16 when assessing the amount of impairment the notional non-controlling interest needs to be incorporated as per below.
|
|
CU |
|
Carrying Amount of Goodwill at the End of Year 2 |
35,200 |
|
Unrecognised Non-Controlling Interest in Goodwill * |
15,086 |
|
Carrying Amount of Identifiable Assets |
64,000 |
|
Notionally Adjusted Carrying Amount |
114,286 |
|
Recoverable Amount |
(50,000) |
|
Impairment |
64,286 |
The impairment loss of CU64,286 is first allocated against goodwill and the remaining to the identifiable assets assuming they have a nil fair value less costs to sell. The amount to be allocated to goodwill is the total carrying amount of goodwill including the non-controlling notional interest i.e. CU35,200+CU15,086= CU50,286. However only 70% of this CU50,286 relates to Parent A’s interest so the amount to be taken off Parent A’s goodwill is CU35,200.
The remaining CU29,086 (CU64,286-CU35,200) is set against the carrying amount of the identifiable assets. In the consolidated accounts the 30% of the impairment of CU8,726 would be attributed to non-controlling interest. Therefore the carrying amount at the end of year 2 after the impairment would be:
|
|
Goodwill |
Identifiable assets |
Total |
|
Carrying Amount Before Impairment |
CU35,200 |
CU64,000 |
CU99,200 |
|
Impairment Loss |
(CU35,200) |
(CU29,086) |
(CU64,286) |
|
Carrying Amount after Impairment |
– |
CU34,914 |
CU34,914 |
*carrying amount notionally adjusted to include goodwill attributable to the non-controlling party which is then compared to the recoverable amount. Non-controlling interest in goodwill = CU44,000/0.7*0.3 = CU18,857 at the date of acquisition. There has been two years since acquisition and this would notionally have been amortised for two years which would mean the NBV would be CU15,086 (CU18,857/10yrs*8yrs).
Transition adjustments required:
At 1 January 2014
No journals required
At 31 December 2014
|
|
CU |
CU |
|
Dr Impairment in P&L |
15,086 |
|
|
Cr Property, plant and equipment (CU29,086 that should have been booked-CU14,000 actually booked) |
|
15,086 |
Being journal to reflect additional impairment required under FRS 102
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU15,086*10%) |
1,509 |
|
|
Cr Deferred Tax P&L |
|
1,509 |
Being journal to reflect deferred tax movement on the additional impairment assuming capital allowances are claimed.
Journals required in 31 December 2015 year end assuming the above journals are posted to profit and loss reserves etc
|
|
CU |
CU |
|
Dr PPE |
1,885 |
|
|
Cr Depreciation on Fixed Assets (CU15,086/8 years remaining life at time of impairment) |
|
1,885 |
Being journal to reflect depreciation booked under old GAAP which was impaired in 2014 under FRS 102.
|
|
CU |
CU |
|
Dr Deferred Tax Asset in P&L (CU1,885*10%) |
189 |
|
|
Cr Deferred Tax Asset |
|
189 |
Being journal to reflect deferred tax on the above journal.
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