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IAS 36

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  IAS 36 —  Impairment of Assets Overview IAS 36 Impairment of Assets  seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impair-ment tests where there is an indication of impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely independent of those from other assets. IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in business combi-nations for which the agreement date is on or after 31 March 2004, and for all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004. Amendments under consideration by the IASB o   IFRS 13 —  Unit of account o   Research project —  Discount rates Summary of IAS 36 Objective of IAS 36 To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined. Scope IAS 36 applies to all assets except: [IAS 36.2] o   inventories (see IAS 2)  o   assets arising from construction contracts (see IAS 11)  o   deferred tax assets (see IAS 12)  o   assets arising from employee benefits (see IAS 19)  o   financial assets (see IAS 39)  o   investment property carried at fair value (see IAS 40)  o   agricultural assets carried at fair value (see IAS 41)  o   insurance contract assets (see IFRS 4)  o   non-current assets held for sale (see IFRS 5) Therefore, IAS 36 applies to (among other assets): o   land o   buildings  o   machinery and equipment o   investment property carried at cost o   intangible assets o   goodwill o   investments in subsidiaries, associates, and joint ventures carried at cost o   assets carried at revalued amounts under IAS 16 and IAS 38 Key definitions [IAS 36.6] Impairment loss:  the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount Carrying amount:  the amount at which an asset is recognised in the balance sheet after deducting accumulated deprecia-tion and accumulated impairment losses Recoverable amount:  the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use * Prior to consequential amendments made by IFRS 13 Fair Value Measurement  , this was referred to as 'fair value less costs to sell'. 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 (see IFRS 13 Fair Value Measurement  ) Value in use:  the present value of the future cash flows expected to be derived from an asset or cash-generating unit Identifying an asset that may be impaired  At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount). IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated. [IAS 36.9] The recoverable amounts of the following types of intangible assets are measured annually whether or not there is any indication that it may be impaired. In some cases, the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period: [IAS 36.10]  o   an intangible asset with an indefinite useful life o   an intangible asset not yet available for use o   goodwill acquired in a business combination Indications of impairment [IAS 36.12] External sources:   o   market value declines o   negative changes in technology, markets, economy, or laws o   increases in market interest rates o   net assets of the company higher than market capitalisation Internal sources:   o   obsolescence or physical damage o   asset is idle, part of a restructuring or held for disposal o   worse economic performance than expected o   for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee's assets, or a dividend exceeds the total comprehensive income of the investee These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset may be impaired may indicate that the asset's useful life, depreciation method, or residual value may need to be reviewed and adjusted. [IAS 36.17] Determining recoverable amount o   If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to calculate the other amount. The asset is not impaired. [IAS 36.19] o   If fair value less costs of disposal cannot be determined, then recoverable amount is value in use. [IAS 36.20] o   For assets to be disposed of, recoverable amount is fair value less costs of disposal. [IAS 36.21] Fair value less costs of disposal o   Fair value is determined in accordance with IFRS 13 Fair Value Measurement    o   Costs of disposal are the direct added costs only (not existing costs or overhead). [IAS 36.28] Value in use The calculation of value in use should reflect the following elements: [IAS 36.30]  o   an estimate of the future cash flows the entity expects to derive from the asset o   expectations about possible variations in the amount or timing of those future cash flows o   the time value of money, represented by the current market risk-free rate of interest o   the price for bearing the uncertainty inherent in the asset o   other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and extrapolation for periods beyond budgeted projections. [IAS 36.33] IAS 36 presumes that budgets and forecasts should not go beyond five years; for periods after five years, extrapolate from the earlier budgets. [IAS 36.35] Management should assess the reasonableness of its assumptions by examining the causes of differences between past cash flow projections and actual cash flows. [IAS 36.34] Cash flow projections should relate to the asset in its current condition  –  future restructurings to which the entity is not committed and expenditures to improve or enhance the asset's performance should not be anticipated. [IAS 36.44] Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or payments. [IAS 36.50] Discount rate In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assess-ments of the time value of money and the risks specific to the asset. [IAS 36.55] The discount rate should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that investors would require if they were to choose an investment that would generate cash flows equivalent to those expected from the asset. [IAS 36.56] For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity would pay in a current market transaction to borrow money to buy that specific asset or portfolio. If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow risk. The following would normally be considered: [IAS 36.57] o   the entity's own weighted average cost of capital o   the entity's incremental borrowing rate
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