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Reversal of an impairment loss
Extract from FRS102: Section 27.28 – 27.30
27.28 An impairment loss recognised for goodwill shall not be reversed in a subsequent period.
27.29 For all assets other than goodwill, if and only if the reasons for the impairment loss have ceased to apply, an impairment loss shall be reversed in a subsequent period. An entity shall assess at each reporting date whether there is any indication that an impairment loss recognised in prior periods may no longer exist or may have decreased. Indications that an impairment loss may have decreased or may no longer exist are generally the opposite of those set out in paragraph 27.9. If any such indication exists, the entity shall determine whether all or part of the prior impairment loss should be reversed. The procedure for making that determination will depend on whether the prior impairment loss on the asset was based on:
(a) the recoverable amount of that individual asset (see paragraph 27.30); or
(b) the recoverable amount of the cash-generating unit to which the asset belongs (see paragraph 27.31).
Reversal where recoverable amount was estimated for an individual impaired asset
27.30 When the prior impairment loss was based on the recoverable amount of the individual impaired asset, the following requirements apply:
(a) The entity shall estimate the recoverable amount of the asset at the current reporting date.
(b) If the estimated recoverable amount of the asset exceeds its carrying amount, the entity shall increase the carrying amount to recoverable amount, subject to the limitation described in (c) below. That increase is a reversal of an impairment loss. The entity shall recognise the reversal immediately in profit or loss unless the 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) The reversal of an impairment loss shall not increase the carrying amount of the asset above the carrying amount that would have been determined (net of amortisation or d epreciation) had no impairment loss been recognised for the asset in prior years.
(d) After a reversal of an impairment loss is recognised, the entity shall adjust the depreciation (amortisation) charge for the asset 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.
OmniPro comment
The section above makes it clear that an impairment loss should only be reversed when the circumstance that caused the reversal has reversed. All impairments can be reversed with the exception of impairments on goodwill. Until the EU Directive 2013/34 is implemented in Ireland goodwill reversal is still permitted however for the UK it is not permitted for periods beginning on or after 1 January 2016 unless the changes made to FrS 102 in September 2015 are early adopted as the directive has been enacted in the UK. Therefore where the changes made to FRS 102 in September 2015 is early adopted prior goodwill impairments cannot be reversed.
Depreciation is charged on the revised carrying amount over its useful life. Likewise when an impairment is first booked the impaired amount is depreciated over the remaining useful life.
See below for illustration of the above points.
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.
Reversal when recoverable amount was estimated for a cash-generating unit
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 thecash-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.
OmniPro comment
See example below which illustrates the above points
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.
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