http://facebook.com/roniverse Objective and scope of PAS 36 1. Indication of possible impairment 2. Measurement of recoverable amount 3. Recognition of impairment loss 4. Reversal of impairment loss 5. Impairment of cash generating units 6. Disclosures 7. ISSUES IN ACCOUNTING FOR AN IMPAIRMENT : OBJECTIVE & SCOPE OF PAS 36: The objective of PAS 36 is to ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined. Inventories (PAS 2); 1. Assets arising from construction contracts (PAS 11); 2. Deferred tax assets (PAS 12); 3. Assets arising from employee benefits (PAS 19); 4. Financial assets (PAS 39); 5. Investment property carried at fair value (PAS 40); 6. Biological assets carried at fair value (PAS 41); 7. Insurance contract assets (PFRS 4); and 8. Non-current assets held for sale (PFRS 5). 9. PAS 36 applies to all assets except for , Property, plant and equipment; 1. Investment property carried at cost; 2. Intangible assets; and 3. Investments in subsidiaries, associates, and joint ventures carried at cost. 4. Therefore, PAS 36 applies to (among other assets): INDICATION OF POSSIBLE IMPAIRMENT: Market value of the asset declines; 1. Negative changes in technology, markets, economy, or laws; 2. Increases in market interest rates; and 3. Company stock price is below its book value. 4. External sources (among others): Obsolescence or physical damage of an asset; 1. Asset is part of a restructuring or held for disposal; 2. Worse economic performance than expected. 3. Internal sources (among others): MEASUREMENT OF RECOVERABLE AMOUNT : Under PAS 36, the recoverable amount of an asset is the higher of its fair value less cost to sell and value in use. Fair Value Less Cost to sell (or Net Selling Price) If there's a binding sale agreement , use the agreed price. a. If there's no binding sale agreement but there is an active market for that type of asset, use the market price. Market price means current bid price, if available, or the price in the most recent transaction. b. If there's no binding sale agreement and the asset is not traded in an active market, the fair value is the best estimate of price that willing parties might agreed. c. Rules in determining Fair Value: Composition of Cost to Sell: legal cost a. attributable stamp and transfer taxes b. cost of removing the asset, and c. any other cost to bring the asset into a "for-sale" condition. d. Includes: finance cost a. Attributable income taxes b. termination benefits, and c. costs incurred following the sale. d. Excludes: Value in Use (or the discounted future cash flows) Cash flow projections shall be based on reasonable and supportable assumptions. a. Projections shall be based on the most latest budgets on financial forecast, usually up to maximum period of 5 years, unless a longer period can be justified. b. Projections beyond 5 years shall be estimated by extrapolating the 5-year projections using a steady or declining growth rate each subsequent year, unless an increasing rate can be justified. c. Rules in calculating projected cash flows: Composition of estimates of future cash flows: Cash inflows of continuing use of the asset a. Cash outflows necessary to generate the inflows of cash from continuing use of the asset b. Net cash flows on the disposal of the asset at the end of its useful life. c. Includes: Cash flows relating to restructuring to which the entity is not yet committed a. Cash flows that arises from enhancing the performance of an asset b. Cash flows from financing activities, and c. Related income tax d. Excludes: The current market rate the entity would pay in financing that specific asset or portfolio; 1. The entity's own weighted average cost of capital; 2. The entity's incremental borrowing rate; or 3. Other market borrowing rates. 4. In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. It is (based on priority): RECOGNITION OF IMPAIRMENT LOSS WHEN? If the recoverable value of an asset is lesser than its carrying value, then the asset is said to be impaired. Needless to say, if the recoverable value is greater than its carrying amount, there's no, therefore, impairment loss to be recognized. HOW? If the entity elected to use cost model, impairment loss shall be recognized immediately in profit or loss by reducing the asset's carrying value to its recoverable amount. If the entity, however, uses revaluation model, excess over recoverable amount must be directly charged against any revaluation surplus related to the asset before recognizing the impairment loss in profit and loss statement. PAS 36 doesn't specify whether the impairment shall be directly credited to the asset or its accumulated depreciation. In accordance with European and US GAAP, impairment loss is adjusted through crediting accumulated depreciation account. COST MODEL: *Recoverable Value XX Less: Carrying Value of Asset (XX) Impairment Loss (XX) # Accumulated Depreciation XX Impairment Loss XX REVALUATION MODEL: *Recoverable Value XX Less: Carrying Value of Asset (XX) Excess over recoverable cost (XX) Less: Revaluation Surplus, if any XX Impairment loss (XX) Revaluation Surplus Impairment Loss XX Accumulated Depreciation XX # *Recoverable Value = Fair value less cost to sell or Value in use, whichever is higher. REVERSAL OF IMPAIRMENT LOSS WHEN? If the recoverable value of previously-impaired asset turns out to be higher than its current carrying value, then the asset shall be increased to its new recoverable amount. However, PAS 36 further provides that the increase in carrying amount of an asset due to a reversal of an impairment loss shall not exceed the carrying amount as if the asset does not suffered from impairment. HOW? If the entity elected to use cost model, a gain on reversal of impairment shall be recognized immediately in profit or loss by increasing the value of the asset to the threshold indicated above. If the entity, however, uses revaluation model, the same procedure is observed but the excess of the new recoverable amount over the carrying value as if there's no previous impairment occurred, if any, must be directly credited to revaluation surplus and should be amortize in the same basis in PAS 16. COST & REVALUATION MODEL: *Threshold Value XX Less: Carrying Value of Asset (XX) Gain on reversal of impairment XX *Threshold Value = New recoverable amount or Carrying value of asset as if there's no impairment loss previously recognized, whichever is lower. # Gain on Reversal of impairment XX Accumulated Depreciation XX IMPAIRMENT OF ASSETS (PAS 36) Impairment Of Assets (PAS 36) Page 1