IAS 36: IMPAIRMENT OF ASSETS

Introduction
The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its
assets are carried at no more than their recoverable amount. An asset is carried at more than its
recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of
the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to
recognise an impairment loss. The Standard also specifies when an entity should reverse an
impairment loss and prescribes disclosures.
Identifying an asset that may be impaired
An entity shall assess at each reporting date whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
Irrespective of whether there is any indication of impairment, an entity shall also:
(a) Test an intangible asset with an indefinite useful life or an intangible asset not yet available for
use for impairment annually by comparing its carrying amount with its recoverable amount. This
impairment test may be performed at any time during an annual period, provided it is performed
at the same time every year. Different intangible assets may be tested for impairment at
different times. However, if such an intangible asset was initially recognised during the current
annual period, that intangible asset shall be tested for impairment before the end of the current
annual period.
(b) Test goodwill acquired in a business combination for impairment annually.
If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the
individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity
shall determine the recoverable amount of the cash-generating unit to which the asset belongs (the
assets cash-generating unit).
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 groups of assets.
Measuring recoverable amount
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to
sell and its value in use. It is not always necessary to determine both an assets fair value less costs to
sell and its value in use. If either of these amounts exceeds the assets carrying amount, the asset is
not impaired and it is not necessary to estimate the other amount.
Fair value less costs to sell is the amount obtainable from the sale of an asset or cash-generating unit
in an arms length transaction between knowledgeable, willing parties, less the costs of disposal.
Value in use is the present value of the future cash flows expected to be derived from an asset or cashgenerating unit.
The following elements shall be reflected in the calculation of an assets value in use:
(a) an estimate of the future cash flows the entity expects to derive from the asset;
(b) expectations about possible variations in the amount or timing of those future cash flows;
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(c) the time value of money, represented by the current market risk-free rate of interest;
(d) the price for bearing the uncertainty inherent in the asset; and
(e) other factors, such as illiquidity, that market participants would reflect in pricing the future
cash flows the entity expects to derive from the asset.
Estimates of future cash flows shall include:
(a) Projections of cash inflows from the continuing use of the asset;
(b) Projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset (including cash outflows to prepare the asset for use) and can be
directly attributed, or allocated on a reasonable and consistent basis, to the asset; and
(c) Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its
useful life.
Future cash flows shall be estimated for the asset in its current condition. Estimates of future cash flows
shall not include estimated future cash inflows or outflows that are expected to arise from:
(a) A future restructuring to which an entity is not yet committed; or
(b) Improving or enhancing the assets performance.
Estimates of future cash flows shall not include:
(a) Cash inflows or outflows from financing activities; or
(b) Income tax receipts or payments.
Recognising and measuring an impairment loss
If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount
of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.
An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at
revalued amount in accordance with another Standard (for example, in accordance with the revaluation
model in IAS 16 Property, Plant and Equipment). Any impairment loss of a revalued asset shall be
treated as a revaluation decrease in accordance with that other Standard.
An impairment loss shall be recognised for a cash-generating unit (the smallest group of cashgenerating units to which goodwill or a corporate asset has been allocated) if, and only if, the
recoverable amount of the unit (group of units) is less than the carrying amount of the unit (group of
units). The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit
(group of units) in the following order:
(a) First, to reduce the carrying amount of any goodwill allocated to the cash-generating unit
(group of units); and
(b) Then, to the other assets of the unit (group of units) pro rata on the basis of the carrying
amount of each asset in the unit (group of units).
However, an entity shall not reduce the carrying amount of an asset below the highest of:
(a) Its fair value less costs to sell (if determinable);
(b) Its value in use (if determinable); and
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(c) Zero.
The amount of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to the other assets of the unit (group of units).
Goodwill
For the purpose of impairment testing, goodwill acquired in a business combination shall, from the
acquisition date, be allocated to each of the acquirers cash-generating units, or groups of cashgenerating units, that is expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
The annual impairment test for a cash-generating unit to which goodwill has been allocated may be
performed at any time during an annual period, provided the test is performed at the same time every
year. Different cash-generating units may be tested for impairment at different times. However, if some
or all of the goodwill allocated to a cash-generating unit was acquired in a business combination during
the current annual period, that unit shall be tested for impairment before the end of the current annual
period.
The Standard permits the most recent detailed calculation made in a preceding period of the
recoverable amount of a cash-generating unit (group of units) to which goodwill has been allocated to
be used in the impairment test for that unit (group of units) in the current period, provided specified
criteria are met.
Reversing an impairment loss
An entity shall assess at each reporting date whether there is any indication that an impairment loss
recognised in prior periods for an asset other than goodwill may no longer exist or may have
decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset.
An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and
only if, there has been a change in the estimates used to determine the assets recoverable amount
since the last impairment loss was recognised.
A reversal of an impairment loss for a cash-generating unit shall be allocated to the assets of the unit,
except for goodwill, pro rata with the carrying amounts of those assets. The increased carrying amount
of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the
carrying amount that would have been determined (net of amortisation or depreciation) had no
impairment loss been recognised for the asset in prior years.
A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in
profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for
example, the revaluation model in IAS 16 Property, Plant and Equipment). Any reversal of an
impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with that
other Standard.

An impairment loss recognised for goodwill shall not be reversed in a subsequent period.
Application of IAS with reference to IFRS
IAS 36 apply to goodwill arising on consolidation, so the standard was slightly revised in march 2004 to
reflect the new rules in IFRS 3 covering the accounting for such goodwill (no routine amortisation but
annual impairment reviews).
Identifying impairments
Entities are only required to carry out impairment reviews if there is evidence that impairment may have
occurred. Indications that impairment might have happened can come from external or internal sources:
(a)
External sources of information:
(i)
Unexpected decreases in an assets market values
(ii)
Significant adverse changes have taken place or are about to take place in the
technological market, economic or legal environment
(iii)
Increase interest rates have decreased at more than its market capitalisation
(b)

Internal sources of information:

(i)
Evidence of obsolescence or damage
(ii)
There is, or is about to be, a material reduction in usage of an asset
(iii)
Evidence that the economic performance of an asset has been, or will be, worse than
expected.

Impaired assets should be reviewed at each balance sheet date to see whether there are indications
that the impairment has reversed in whole or part. Indications of a reversal are the opposite of the
indicators above.
(a)
External indicators
(i)
Increases in the assets market value
(ii)
Favourable changes in the technological, market, economic or legal environment
(iii)
Decreases in interest rates
(b)

Internal indicators
(i)
Favourable changes in the use of the asset
(ii)
Improvements in the assets economic performance

IAS 36 additionally requires impairment reviewed to be carried out a least annually whenever:
(a)
An intangible asset is not being amortised because it has an indefinite useful life; or
(b)
Goodwill has arisen on a business combination

Calculation
Impairment occurs if the carrying value of an asset is greater than its recoverable amount
The recoverable amount is the higher of fair value less costs to sell and value in use.
Fair value less costs to sell is the amount obtaining form the sale of assets in an arms length
transaction between knowledgeable, willing parties, less the costs of disposal.
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Value in use is the present value of future cash flows from using as asset, including its eventual
disposal. The discount rate to use is a pre-tax, risk adjusted market rate.

Charge
Any impairment loss will be charged immediately in the income statement to the same heading as the
related depreciation (e.g. cost of sales or administration). An impairment of a revalue item may be taken
to the revaluation reserve (to the limit of any related surplus)
Depreciation
Having written the assets down to its recoverable amount, future depreciation charges will write off the
impaired value its remaining life.
Reversals
If an impairment loss recognised in a previous period is reversed then the asset can be increased to its
recoverable amount provided that this does not exceed the net book value that it would have had by
that time if there had been no impairment loss. The related credit will be recognised in the income
statement (unless the loss had been taken to the revaluation reserve)

Illustration
Afe Limited hires out motorbikes to tourists. The draft accounts for the year ending 31 December 2008
included the following motorbike:
GHS
GHS
Cost
Depreciation:

12,000
Accumulated balance
Charge for 2008

4,800
2,400

Net book value

(7,200)
4,800

The motorbike is being written off over five years and it has two years life remaining. However, the
tourist has slumped, and as a result it will only be able to generate GHS 2,500 cash per annum in 2009
and 2010. It will then be scrapped in December 2010. Alternatively, the bike could be sold immediately
for GHS 3,000 (less GHS 200 selling costs). Market interest rates are 12% per annum.
Required:
(a)

Calculate the impairment loss at 31 December 2008

(b)
(c)
(d)

Redraft the plant and equipment note to reflect the impairment

Draft the plant and equipment note for 2009
In December 2009 the market for motorbike tours picked up, and the bike now has a
recoverable amount of GHS 3,900. You are required to redraft 2009s plant and equipment
note to reflect this.

Model answers
(a) Impairment loss
Draft carrying amount
Recoverable amount
Higher of:

GHS
Net selling price (3,000 200)
Value in use

Recoverable amount

2,800

(2,500 x 0.893) 2,233

(2,500 x 0.797) 1,993
(4,226)

Impairment has taken place, the loss is (4,800 4,226)

574

(b) Revised plant and equipment note for 2008

GHS
Cost
Depreciation

Accumulated balance
4,800
Charge for 2008
2,400
Impairment
(4,800 4,226) 574

GHS
12,000

(7,774)
4,226

(c) Draft plant and equipment note for 2009

GHS
Cost
Depreciation

Accumulated balance
7,774
Charge for 2009(4,226 2years) 2,113

Net book value

GHS
12,000
(9,887)
2,113

(d) Revised plant and equipment note for 2009

GHS
Cost
Depreciation

Net book value

Accumulated balance
Charge for 2009
Reversal of impairment

7,774
2,113
(287)

GHS
12,000

9,600
2,400

Note: Although the recoverable amount is now GHS 3,900, the asset can only be restated to
the depreciated historic cost that it would have had on 31 December 2009. That is GHS 12,000
less four years depreciation at GHS 2,000 per annum.

Exercise 1
Fatawu Limited operates a hotel at a tourists centre. The draft accounts for the year ending 31
December 2008 included the following for wooden structure buildings:
GHS
GHS
Cost
60,000
Depreciation: Accumulated balance
24,000
Charge for 2008
12,000
(36,000)
Net book value
24,000
The building is being written off over five years and it has two years life remaining. However, the tourist
has slumped, and as a result it will only be able to generate GHS 12,500 cash per annum in 2009 and
2010. It will then be scrapped in December 2010. Alternatively, the buildings could be sold immediately
for GHS 15,000 (less GHS 1,000 selling costs). Market interest rates are 15% per annum.
Required:
(a)
(b)
(c)
(d)

Calculate the impairment loss at 31 December 2008.

Redraft the building note to reflect the impairment.

Draft the building note for 2009.
In December 2009 the market for the hotel picked up, and the hotel now has a recoverable amount
of GHS 19,500. You are required to redraft 2009s buildings note to reflect this.
(e) Prepare the income surplus account for 2008 and 2009.
(f) Prepare the revaluation account for 2008 and 2009 financial year.

Exercise 2
Amina Limited operates a chop bar at former Achimota lorry station. The following information relates to the
wooden structure building:
(i)
(ii)
(iii)
(iv)
(v)

Cost of the wooden structure building at 1st January 2006 amounts to GHS 48,000

Useful life span of the wooden structure building will be 5 years

Depreciation is being provided on a straight line basis
Scrap value at the end of useful life will be nil
Wooden structure building has been revalued on 1st January 2007 by GHS 2,000

By 1st December 2008 the lorry station has been moved to the newly built Achimota lorry terminal causing
Aminas chop bar business to slump, and as a result will only be able to generate GHS 8,000 cash per annum in
2008, 2009 and 2010. It will then be scrapped in December 2010. Alternatively, the wooden structure building
could be sold immediately for GHS 19,700 gross, selling expenses amounts to GHS 1,200. Market interest rates
are 15% per annum.
Required:
(a) Draft the building note to reflect revaluation at 31 December 2007
(b) Calculate the impairment loss at 31 December 2008
(c) Redraft the building note to reflect the impairment for 31 December 2008
(d) Draft the building note for 2009

(e) In December 2009, the chop bar business has picked up as Amina Limited has re-established at

the new Achimota lorry terminal. The recoverable amount for the wooden structure building for
December 2009 amounts to GHS 13,500. You are to redraft 2009s buildings note.
(f) Prepare the income surplus account for 2008 and 2009.
(g) Prepare the revaluation account for 2007, 2008 and 2009 financial year.