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Chapter
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Impairment ofAssets (lAS 36)
307
7.3 An y future cash flows should not include inflows or outflows fro m fin an cing ac tivities or
income tax receipts and payments. However, they should include the es timated disposal proceeds
from the ass et. If any future cash flows are in a for eign curre ncy, they are es tima ted in that
currency and discounted usin g a rate appropri ate for that currency. Th e resultant figure will be then
translated usin g the exchange rate at the date of the value- in-use computation.
Case Study 3
Facts
An entity is reviewing one of its business segments for impairment. The carrying value of its net assets is
$20
million. Management has produced two computations for the value-in-use of the business segment.
The first value
($ 18
million) excludes the benefit to be derived from a future reorganization, but the sec–
ond value
($22
million) includes the benefits to be derived from the future reorganization. There is not
an active market for the sale of the business segments.
Required
Explain whether the business segment is impaired.
Solution
The benefit of the future reorganization should not be taken into account in calculating value-in-use.
Therefore, the net assets of the business segment will be impaired by
$2
million because the value-in-use
($18
million) is lower than the carrying value
($20
million). The value-in-use can be used as the recov–
erable amount as there is no active market for the sale of the business segment.
Practical Insight
Noki a (2003) discloses that it plan s to recon struct its business. In co nnec tio n with this recon –
struction, it has rev iewed the carrying va lues of ca pitalized devel opment costs . An impairment
loss of €275 mill ion was recogn ized . No kia had discounted the cash flows ex pected to arise
from the continuing use of the assets and from di sposal at the end of their useful lives at dis–
co unt rates of 15% and 12%.
8. DISCOUNT RATE
Th e discount rate to be used in mea suring value-in-use should be a pretax rat e that refl ects current
market ass es sments of the time valu e of money and the risks that relate to the asset for which the
future cash flows have not yet been adj usted.
Case Study 4
Facts
Management of an entity is carrying out an impairment test on an asset. The posttax market rate of return
from the asset is 7% and profits are taxed at 30%. Management intends to use the posttax rate of return
in discounting the posttax cash flows from the asset of
$2
million, as management says it will make no
difference to the calculation of value-in-use.
Required
Explain whether the use of the posttax rate is acceptable in the above circumstances.
Solution
In theory, discounting posttax cash flows at a posttax discount rate should give the same result as dis–
counting pretax cash flows at a pretax discount rate. However, this depends upon future tax cash flows
and deferred tax considerations. Therefore, the posttax calculation will not always give the same results
as a pretax computation. Also, the pretax discount rate is not always the posttax discount rate grossed up
by a standard rate of tax. Management should gross up the posttax discount rate based on an assessmen t
of what the long-term effective tax rate might be.