Presentation Transcript

1. ACCG224 – Semester 1, 2013Week 6

   Accounting for Impairment
2. Learning objectives Understand the purpose of the impairment test for assets; understand when to undertake an impairment test; explain how to undertake an impairment test for an individual asset; identify a cash-generating unit, and account for an impairment loss for a cash-generating unit – not including goodwill; account for the impairment of goodwill; account for reversals of impairment losses; apply the disclosure requirements of AASB 136.
3. Overview Impairment of Assets (AASB 136) Individual assets Cash generating units (CGU) without/with goodwill Reversal of impairment losses Disclosure requirements of AASB136
4. Relation to previous weeks Week 2 – Conceptual framework used to define, recognise and measure assets and liabilities; Week 3 & 4 – Property, Plant and Equipment (PPE): tangible assets (AASB 116); including tax implications (AASB 112); Week 5 – Intangibles: assets of a special nature; individual accounting standard and rules (AASB 138); Nowwe look at specific accounting standards in relation to asset impairment (AASB136) including again tax implications (AASB 112).
5. Introduction to AASB 136 Entities are required to conduct impairment tests to ensure their assets are not overstated. Impairment results when an asset’s carrying amount (CA) is greater than its recoverable amount (RA). Not all assets require this test. Notable exclusions include: Inventories (AASB 102) Deferred tax assets (AASB 112) Non-current assets held for sale (AASB 5) The specific requirements in relation to these assets are covered in the AASBs that deal with these balances
6. What is impairment? An unexpected or sudden decline in the service utility of an asset (PPE in particular). An example is the damage from the Qld floods. Also includes obsolescence due to technical innovation or changes to legislation. It is different from depreciation which is the planned reduction in the CA of an asset.
7. When to undertake an impairment test For most assets it is not necessary to conduct impairment tests every year. Assets must be tested for impairment when there is an indication (or evidence) of impairment. The following assets must be tested annually for impairment: intangibles with indefinite useful lives; intangibles not yet available for use; goodwill acquired in a business combination. Reason annual testing required → the CA of these assets is more uncertain than that of other assets
8. Collecting evidence of impairment Minimum indicators contained within AASB 136 are classified into two groups – internal and external. External sources of information include: decline in market value of the asset: e.g., due to technological advancements; adverse changes in entity’s environment/markets: e.g., a competitor may have patented a new product, resulting in a permanent fall in market share of the entity; increases in interest rates: affects the present value of future cash flows; market capitalisation: CA of net assets is greater than market capitalisation of the entity.
9. Collecting evidence of impairment (cont’d) Internal sources of information include: obsolescence or physical damage of an individual asset; change in asset use: e.g., has the asset become idle? an asset’s economic performance being worse than expected: e.g., cash inflows may be lower/cash outflows may be higher than expected.
10. Impairment test for an individual asset
11. Impairment test for an individual asset (cont’d) From the previous slide it can be seen that there are two possible amounts against which the carrying amount can be tested for impairment: fair value less costs to sell (FVLCTS); value in use (VIU). Not always necessary to measure both amounts when testing for impairment: If either one of these two amounts is higher than the carrying amount, the asset is not impaired. Therefore if the FVLCTS > CA there is no need to calculate the VIU of the asset. VIU more difficult to calculate than FVLCTS
12. Fair value less costs to sell Defined as: “ … the amount obtainable from the sale of an asset in an arm’s length transaction… less the costs of disposal” Two parts to the definition: fair value; costs of disposal.
13. Fair value less costs to sell (cont’d) Fair value is determined using the following ‘value hierarchy’: price in a binding sale agreement; market price (current bid price); appropriate estimation (e.g. using net present value (NPV) calculations). Costs of disposal include: legal fees; stamp duty; costs of removing the asset etc.; Finance costs and income tax are not considered to be costs of disposal.
14. Value in use Defined as “ … the present value of future cash flows expected to be derived from an asset or cash-generating unit”. Five elements when calculating value in use: estimate of future cash flows; expectations about possible variations in amount or timing of future cash flows; time value of money; price for bearing uncertainty inherent in asset; other factors such as illiquidity. Object overall is to estimate future cash flows; and apply a discount rate.
15. Value in use – estimating future cash flows Projections should be based on management’s best estimates. External evidence should be given greater weight than reliance on management’s expectations. Projections should be based on most recent budgets/forecasts. Such projections should cover a maximum period of 5 years. For years subsequent to 5 years, reliance should be placed on steady or declining growth rates. Cash inflows should include those from the continuing use of the asset as well as those expected on the disposal of the asset. Cash outflows must also be taken into account → net cash flow!
16. Value in use – estimating future cash flows (cont’d) Projected cash flows must be estimated for the asset in its current condition. Financing and tax related cash flows are excluded from the calculation. Disposal price should take into account any expected future price increase/decrease. Appendix A of AASB 136 contains two approaches to compute the present value: ‘traditional’ approach: uses a single set of estimated cash flows (the most probable at any each point in time); ‘expected cash flow' approach: uses all expectations about possible cash flows and weighs them based on their probabilities.
17. Value in use – determining the discount rate The discount rate should reflect: the time value of money; the risks specific to the asset for which future cash flows have not been adjusted. Discount rates are commonly based on: the entity’s weighted average cost of capital (WACC) determined using techniques such as the Capital Asset Pricing Model; the entity’s incremental borrowing rate; or other market borrowing rates. The rate must reflect specific risks relating to: country risk; currency risk; price risk.
18. Recording an impairment loss for an individual asset An impairment loss is recognised where CA > RA. Where the asset is accounted for under the cost model the impairment loss is recognised immediately in profit or loss. Where the asset is accounted for under the revaluation model the impairment loss is treated as a revaluation decrement. Any subsequent depreciation/amortisation is based on the new recoverable amount.
19. Recording an impairment loss for an individual asset – examples Cost model An asset has a CA of $100 (cost of $160 – accum. dep’n of $60) and a RA of $90. The journal entry to record the impairment loss would be: Dr Impairment loss 10 Cr Accum. dep’n & impairment losses 10
20. Recording an impairment loss for an individual asset – examples (cont’d) Revaluation model An asset has a CA of $100 (FV of $120 – accum. dep’n of $20) and a RA of $70. This asset was previously revalued upwards by $20 (ARS balance = $14; DTL balance = $6)
21. Recording an impairment loss for an individual asset – examples (cont’d) Revaluation model (cont’d) The journal entries to record the impairment loss would be: Dr Accum. dep’n 20 Cr Asset 20 Dr Loss on revaluation - impairment (OCI) 20 Dr Deferred tax liability 6 Dr Loss on revaluation - impairment (P&L) 10 Cr Income tax expense (OCI) 6 Cr Asset 30 Dr Asset Revaluation Surplus (ARS) 14 Dr Income tax expense (OCI) 6 Cr Loss on revaluation - impairment (OCI) 20 (120 – 100) 30% tax effect (100 – 70)
22. Cash-generating units (CGUs) Where the FVLCTS < CA it is necessary to calculate the VIU of an asset to determine whether or not it has been impaired. It may not be possible to identify an individual assets VIU when the asset only has a value due to its relationship with other assets: e.g., a machine in a factory works in conjunction with the rest of the assets in the factory. In such cases the VIU of the asset must be determined in the context of the asset’s cash-generating unit (CGU). Defined as the smallest identifiable group of assets (generating cash flows from continuing use) that are independent of the cash inflows from other assets or groups of assets.
23. Identifying CGUs Identification of CGUs requires consideration of: how management monitors the entity’s operations; how management makes decisions about continuing or disposing of the entity’s assets and operations. If an active market exists for the output of a group of assets (even if some of the output of the group of assets is used internally), this group of assets is classified as a CGU. CGUs must be identified consistently from period to period. AASB 136 allows a segment (determined in accordance with AASB 8 Operating Segments) to be used as a CGU where the segment equates to the smallest group of assets generating independent cash flows.
24. Impairment losses and CGUs – no goodwill Where an impairment loss arises in a CGU with no goodwill the loss is allocated across all of the assets in the CGU on a pro-rata basis based on the CA of each asset relative to the total CA amount of the CGU. Losses are accounted for in the same way as for individual assets discussed earlier. The CA of an individual asset cannot be reduced below the highest of: FVLCTS (if determinable); VIU (if determinable); or zero. Corporate assets – if possible to be allocated across CGUs on a reasonable and consistent basis.
25. Impairment losses and CGUs – no goodwill: example A Ltd has identified an impairment loss of $12,000 on one of its CGUs. The CGU consists of the following assets (stated at current carrying amounts): Buildings 500,000 Equipment 300,000 Land 250,000 Fittings 150,000 The FVLCTS of the building is $497,000. Required: Calculate the allocation of impairment loss against all assets in the CGU.
26. Impairment losses and CGUs – no goodwill: example (cont’d) 5,000 495,000 5/12 3,000 297,000 3/12 2.5/12 2,500 247,500 1,500 148,500 1.5/12 1,200,000 12,000
27. Impairment losses and CGUs – no goodwill: example (cont’d) As the FVLCTS of the building is $497,000, the maximum impairment loss that can be allocated to the building is $3,000. The remaining $2,000 must be allocated across the other assets in the CGU.
28. Impairment losses and CGUs – no goodwill: example (cont’d) 3,000 497,000 (2,000) 297/693 3,857 296,143 857 247.5/693 3,214 246,786 714 148.5/693 1,929 148,071 429 693,000 2,000
29. Impairment losses and CGUs – with goodwill Where a CGU includes goodwill, AASB 136 contains specific requirements for accounting for the allocation of impairment losses arising in relation to the CGU. Goodwill is a residual balance, consisting of assets that cannot be individually identified or separately recognised. Therefore it is not possible to determine a FVLCTS for goodwill, or to identify cash flows relating specifically to goodwill. Rather, goodwill can only be tested for impairment at the CGU level.
30. Impairment losses and CGUs – with goodwill (cont’d) AASB 136 requires that goodwill be allocated to the lowest level at which management monitors the goodwill. Recall that goodwill is required to be tested for impairment annually (or more frequently if there is an indication that the CGU may be impaired). Where an impairment loss arises in a CGU with goodwill the following allocation rules apply: to reduce the carrying amount of the CGU’s goodwill to zero; to the other assets of the CGU on a pro rata basis (on the same basis as discussed earlier).
31. Impairment losses and CGUs – with goodwill: example A Ltd has identified an impairment loss of $300,000 on one of its CGUs The CGU consists of the following assets (stated at current carrying amounts): Buildings 500,000 Equipment 300,000 Land 250,000 Goodwill 150,000 Required: Calculate the allocation of impairment loss against all assets in the CGU.
32. Impairment losses and CGUs – with goodwill: example (cont’d) - 150,000* 71,429** 428,571 500/1,050 42,857 257,143 300/1,050 35,714 214,286 250/1,050 1,050,000 300,000 * Remaining impairment loss still to be allocated = $150,000 ** 500/1,050 x $150,000 = 71,429
33. Reversal of an impairment loss Recognised losses are reassessed annually. Indicators for reversals of impairment losses are the same as those used for initially recognising a loss. Ability to recognise a reversal of an impairment loss and the accounting for that reversal is dependent on whether the reversal relates to an individual asset, a CGU, or goodwill. Previously recognised impairment losses in relation to individual assets are able to be reversed. The new CA cannot be higher than the CA that would have been determined had no impairment loss been previously recognised (i.e. for depreciable assets, the impact of depreciation needs to be considered).
34. Reversal of an impairment loss – individual assets Cost model The journal entry to record the reversal of the impairment loss would be: Dr Accum. dep’n & impairment losses xx Cr Income - impairment loss reversal xx
35. Reversal of an impairment loss – individual assets (cont’d) Revaluation model Where the impairment loss was taken through P&L the journal entry would be: Dr Asset xx Cr Gain on revaluation – impairment reversal (P&L) xx
36. Reversal of an impairment loss – individual assets (cont’d) Revaluation model (cont’d) Where the impairment loss was taken through OCI (decreasing an existing ARS) the journal entry to record the reversal of the impairment loss would be: Dr Asset xx Dr Income tax expense (OCI) xx Cr Gain on revaluation – impairment reversal (OCI) xx Cr Deferred tax liability xx Dr Gain on revaluation – impairment reversal (OCI) xx Cr Income tax expense (OCI) xx Cr Asset revaluation surplus xx
37. Reversal of an impairment loss – CGUs Impairment losses relating to goodwill cannot be reversed. The reversal of any impairment loss relating to a CGU is allocated across the assets of the CGU (excluding goodwill) on a pro-rata basis. The reversals for specific assets will be accounted for in the same way as outlined above for individual assets.
38. Reversal of an impairment loss – CGUs (cont’d) The CA of an asset cannot be increased above the lower of: its RA (if determinable); the CA that would have been determined had no impairment loss been recognised in prior periods. Any excess from the above situation is allocated across the remaining assets in the CGU on a pro-rata basis (consistent with the example on slides 25-28).
39. Reversal of an impairment loss – CGUs – Example At 30 June 2012, Entity A incurred an impairment loss of $5,000, of which $3,000 was used to write off the goodwill and $2,000 to write down the assets. The allocation of the impairment loss to the assets was as follows: The plant had previously cost $100,000 and was being depreciated at 10% per annum, requiring a depreciation charge of $10,000 per annum. Subsequent to the impairment, the asset was depreciated on a straight-line basis over three years, at $12,800 per annum.
40. Reversal of an impairment loss – CGUs – Example (cont’d) At 30 June 2013, the business situation had improved and the entity believed that it should reverse past impairment losses. A comparison of the carrying amounts of the assets at 30 June 2013 and their recoverable amounts revealed: Land 9,600 Plant [$38 400 – $12 800] 25,600 Furniture 800 36,000 Recoverable amount 38,800 Excess of recoverable amount over carrying amount 2,800 The excess cannot be allocated to the goodwill as impairment losses on goodwill can never be reversed.
41. Reversal of an impairment loss – CGUs – Example (cont’d) If the excess were allocated to the assets it can only be allocated to the assets existing at the previous impairment write-down as assets cannot be written up above their original cost. The excess of recoverable amount is then allocated to the relevant assets on a pro rata basis:
42. Reversal of an impairment loss – CGUs – Example (cont’d) These assets cannot be written up above the amounts that they would have been recorded at if there had been no previous impairment. These amounts would be: Land 10,000 Plant 30,000 [$40 000 less $10 000 depreciation for the 2012–13 fin. year] As the land cannot be written up above $10,000, $364 of the $764 that was allocated to it must be reallocated to the plant. This would increase the carrying amount of the plant to $28,000 (being $27 636 + $364). This is still less than the maximum of $30 000. The journal entry to record the reversal of the impairment loss is: Land Dr 400 Accumulated Depreciation and Impairment Loss – Plant Dr 2,400 Income – Reversal of Impairment Loss Cr 2,800 (Reversal of impairment loss)
43. Key disclosures requirements for impairment The amount of impairment losses recognised in profit or loss during the period and the respective line items on the statement of comprehensive income. The amount of reversals of impairment losses recognised in profit or loss during the period and the respective line items on the statement of comprehensive income. The amount of impairment losses on revalued assets recognised in other comprehensive income during the period. The amount of reversals of impairment losses on revalued assets recognised in other comprehensive income during the period.