Impairment of asset

• Impairment loss


  The amount by which the carrying amount of an asset or a cash generating unit exceeds its recoverable amount
• Cash generating unit


  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
• Carrying amount


  The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon
• Recoverable amount


  The higher of an asset's or cash generating unit fair value less costs of disposal and its value in use
• Value in use


  The present value of the future cash flows expected to be derived from an asset or cash generating unit
• Fair value


  The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
• Useful life


  (a) the period of time over which an asset is expected to be used by an entity; or

  (b) the number of production or similar units expected to be obtained from the asset by an entity
• Identifying when an asset may be impaired

  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.

  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

  (b) test goodwill acquired in a business combination for impairment annually.
• Indicators that an asset may be impaired

  • Internal sources:
  • Obsolescence or physical damage of an asset
  • Current or future adverse changes in the extent to which, or manner in which, an asset is used
  • Economic performance of an asset is, or will be, worse than expected
• Measuring recoverable amount


  The recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs of disposal and its value in use.

  It is not always necessary to determine both an asset's fair value less costs of disposal and its value in use. If either of these amounts exceeds the asset's carrying amount, the asset is not impaired and it is not necessary to estimate the other amount.
• Fair value less costs of disposal


  The amount obtainable from the sale of an asset or cash generating unit (CGU) in an arm's length transaction between knowledgeable, willing parties, less the cost of disposal.
• Determining value in use

  Estimate the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal and apply the appropriate discount rate to those future cash flows.

  The discount rate(s) shall be a pre-tax rate(s) that reflect(s) current market assessments of:

  (a) the time value of money; and

  (b) the risks specific to the asset for which the future cash flow estimates have not been adjusted.
• Composition of estimates of future cash flows

  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.
• Indicators that assets may be impaired

  External sources:

  • Significant decline in asset's market value
  • Changes in technological, market, economic or legal environment
  • Changes in market interest rates
  • Low market capitalisation (the carrying amount of the net assets exceed the entity's market capitalisation)
• Indicators thats assets may be impaired

  Dividend from a subsidiary, joint venture or associate:

  • The carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee's net assets, including associated goodwill
  • The dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared