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Chapter
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Impairment ofAssets (lAS 36)
305
• Extern al so urces, such as a decline in mark et value, inc reases in market interes t rates, the
ca rry ing amo unt of net assets bein g valued at more than the stoc k market va lue of the entity,
and economic, legal , or techn olog ical changes that have had an adverse affect on the entity
• Intern al sources of informa tion, such as physical damage to an asset, or its ob solescence, or
an asset becoming idle, or if the ass et is part of a restructuring, or if the entity' s performance
has suffe red during the peri od , or if there has been a significant decline or reduction in the
cash flow s ge nerated or to be generated from the asset
3.4 If there is an indication that an asset is impaired, the asset 's useful life, depreciation, or resid–
ual value may need adju sting.
Case Study 1
Facts
An entity has purchased the whole of the share capital of another entity for a purchase consideration of
$20 million. The goodwill arising on the transaction was $5 million.
It
was planned at the outset that the
information systems would be merged in order
to
create significant savings. Additionally the entity was
purchased because of its market share in a particular jurisdiction and because of its research projects.
Subsequently the cost savings on the information systems were made. The government of the jurisdic–
tion introduced a law that restricted the market share to below that anticipated by the entity, and some
research projects were abandoned because of lack of funding.
Required
Explain any potential indicators of the impairment of goodwill.
Solution
The entity would have paid for the goodwill in anticipation of future benefits arising therefrom. The
benefit in terms of the cost savings on the information systems has arisen, but the market share increase
and the successful outcome of the research projects has not occurred. Therefore, these events may indi–
cate the impairment of goodwill.
Goodwill has to be impairment tested at lea st annually und er IFRS 3.
4. DETERMINAnON OF A RECOVERABLE AMOUNT
4.1 Th e recoverable amount of an asse t is the higher of the asset ' s fair value less costs to sell and
its value in use. (The term "cas h-ge nerating unit " could be used as a substitute for the term "as–
set." )
4.2 If it is not possible to determine the fair value less co sts to sell bec ause there is no active
market for the asset, the entity can use the asset's va lue in use as its recoverable amount. Similarly,
if there is no reason for the asset' s value in use to exceed its fair va lue less costs to sell, the latt er
amo unt may be used as its recoverable amount. An example of this is where an asset is being held
for dispos al, as the value of thi s asset is likely to be the net d isposal proceeds. The future cash
flows from thi s asse t from its co ntinuing use are likely to be negli gibl e.
4.3 In the case of an intangible asset with an indefinite use ful life, it is possible to use a calcula–
tion of the asset's recoverabl e amount that has been made in the preceding peri od as long as certain
conditions are met. These co nd itions are that the int angible asset is part of a cash- generating unit
whose value has not changed signific antly since the most recent recoverable amount calculation.
Al so, the recent calculation mu st have resulted in an amount that wa s substantially in excess of the
asset's carrying amount, and it would be unlikel y that a current calculation of the recoverable
amount would show a value less than the asset' s carrying amount.
Case Study 2
Facts
An entity is preparing its financial statements for the year ending November 30, 20X5. Certain items of
plant and equipment were scrapped on January I, 20X6. At November 30, 20X5, these assets were being
used in production by the entity and had a carrying value of $5 million. The value-in-use of the asset at