PAS 36

• PAS 36 prescribes procedures to ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined.
• PAS 36 applies in accounting for the impairment of the following assets: (PIIIG)

  1. Property, plant and equipment
  2. Investment property measured under the cost model
  3. Investments in associates, joint ventures, and subsidiaries
  4. Intangible assets
  5. Goodwill
• The objective of this standard is to establish principles for determining when an asset has been impaired or when its carrying amount cannot be recovered through use and disposal.
• • Recoverable amount is the amount to be recovered through use or sale of an asset. It is the higher of an asset’s:

  1. Fair value less costs of disposal; and
  2. Value in use
• Value in use

  is the present value of the future cash flows expected to be derived from an asset or cash-generating unit
• An entity shall assess at the end of each reporting period 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.

  If there is no indication that an asset may be impaired, an entity is not required to estimate the recoverable amount of the asset.
• External sources of information:

  1. Significant decline in the asset's value
  2. Significant changes in environment
  3. Increase in market interest rates
  4. Carrying amount of the net assets is more than its market capitalization
• Internal sources of information:

  1. Obsolescence or physical damage
  2. Significant change with adverse effect
  3. Economic performance worse than expected
• The following are required to be tested for impairment at least annually, whether or not there are indications for impairment:

  1. Intangible asset with indefinite useful life
  2. Intangible asset not yet available for use
  3. Goodwill acquired in a business combination
• However, if there is no reason to believe that an asset’s value in use materially exceeds its fair value less costs of disposal, the asset’s fair value less costs of disposal may be used as its recoverable amount. This will often be the case for an asset that is held for disposal.
• Cost of disposal, except those that have been recognized as liabilities.

  1. Legal costs, stamp duty and similar transaction taxes
  2. Costs removing the asset
  3. Direct incremental costs to bring an asset into condition for its sale.
• Value in use

  Is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
• Any residual value of the asset and disposal costs should be included in estimating future cash inflows and outflows.
• • Cash flow projections shall cover a maximum period of 5 years.
• Projections beyond 5 years are extrapolated.
• The discount rate to be used shall be a pre-tax rate.
• Exclude cash flows arising from:

  1. Future restructurings not yet committed
  2. Improving or enhancing the asset’s performance
  3. Income taxes
  4. Financing activities
• Include cash flows arising from:

  1. Revenues to be derived from the continuing use of the asset

  2. Day-to-day costs of using the asset

  3. Any residual value of the asset and disposal costs
• Impairment loss is recognized in profit or loss, unless the asset is carried at revalued amount, in which case revaluation surplus is decreased first and any excess is recognized in profit or loss. The decrease in the revaluation surplus is recognized in other comprehensive income.
• After the recognition of an impairment loss, the depreciation (amortization) charge for the asset shall be adjusted in future periods to allocate for the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.
• Cash-generating Unit (CGU)


  Is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.
• Assets whose recoverable amount can be determined reliably are tested for impairment individually.
• Assets whose recoverable amount cannot be determined reliably (e.g., assets that do not generate their own cash flows) are included in a CGU. The CGU is the one tested for impairment.
• For purposes of impairment testing, goodwill acquired in a business combination shall be allocated to each of the acquirer’s CGU in the year of business combination.
• The impairment loss on a CGU shall be allocated

  1. First, to any goodwill allocated to the CGU
  2. Then, to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.
• Corporate Assets

  Are assets that contribute to the future cash flows of several departments or divisions within an entity.
• To test corporate assets for impairment, it needs to be allocated to the various CGUs using the asset.
• (d) - (c) = Reversal of impairment loss recognized in other comprehensive income
• (c) - (b) = Reversal of impairment loss recognized in profit or loss