MHM Executive Education Series: IFRS-Impairment of Assets

Presented by: Marco Pulido, Shareholder

September 18, 2013

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Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has over 14 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards both in the U.S. and in Latin America with Big 4 accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution & Manufacturing - Transportation - Utilities - Consumer Services - Construction/Real Estate - Health Sciences – Financial Services – Agriculture.

Today’s Presenters

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The information in this Executive Education Series

course is a brief summary and may not include all the details relevant to your situation.

Please contact your MHM service provider to further

discuss the impact on your financial statements.

Disclaimer

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Today’s Agenda

Application of IAS 36

Identifying when an asset may be impaired

The process for determining an impairment loss

Calculating the new book value of an impaired asset

Identifying the Cash Generating Unit (CGU)

Procedures required for reversing a previously recognized impairment loss

Comparison of IFRS vs. U.S. GAAP

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IAS 36 Scope

Applies to all assets other than: Financial assets within the scope of IAS 39 (Financial

Instruments) Assets arising from employee benefits Investment property measured at fair value Inventories Non-current assets classified as held for sale Deferred tax assets and deferred acquisition costs Biological assets related to agricultural activity measured at

fair value less sale costs Assets arising from construction contracts

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An asset is impaired when its carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s or cash-

generating unit’s: FV less costs to sell Value in use

When is an asset impaired?

Recoverable Amount

Carrying Amount

Impairment loss

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At each reporting date, impairment indicators should be evaluated to determine likelihood of impairment.

Independent of the existence of impairment indicators, an annual impairment test must be performed for the following items: Intangible with indefinite useful lives and intangibles that are not yet available for

use: The impairment test must be performed at any date during the period, as long as it is

on the same date each year. The impairment test for different intangible assets can be performed on different

dates, prior to the end of the year. Goodwill acquired in a business combination:

The test must be performed on an annual basis. <IAS 36.9,10>

Identifying an Asset That may be Impaired

Calculate recoverable amount Impairment indicators exist

Do not calculate recoverable amount, except in certain cases (see below). Impairment indicators do not exist

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True or false: Goodwill impairment testing

Statement (Yes or No) May a qualitative test be performed for purposes of testing

impairment of goodwill and indefinite-lived intangibles under IAS 36?

Identifying an Asset That may be Impaired

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True or false: Goodwill impairment testing

Statement (Yes or No) May a qualitative test be performed for purposes of testing

impairment of goodwill and indefinite-lived intangibles under IAS 36?

Identifying an Asset That may be Impaired

Response: • A qualitative test is not allowed under IAS 36. • Impairment testing must be performed annually at the same

date each year <IAS 36.10(b)>. • Impairment must be performed at the reporting date if there are

indicators of impairment <IAS 36.9>.

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What are some impairment indications?

Note: This is not an exhaustive list, other factors may be detected which would require calculating the recoverable amount of an asset.

External Internal • Decline in market value • Obsolescence or physical damage

• Changes in environment (technological, market, economical, legal)

• Change in use ‒ Restructuring plans and plans to

discontinue a business for which an asset pertains, etc.

• Increase in interest rates and rates of return

• Lower economic performance than expected

• Market capitalization less than book value

<IAS 36.12>

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Identifying an Asset That may be Impaired

If there are asset impariment indicators, this may indicate that the following may have to be reviewed

and adjusted(*):

Amortization/ depreciation

method

Remaining useful life of

the asset

Residual value

(*) This may be the case even if determined that no impairment should be recorded.

<IAS 36.17>

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Calculating Recoverable Amount

It is not always necessary to calculate both amounts, if any of the two is greater than the book value:

<IAS 36.18, 19, 20>

The asset is not impaired and it is not

necessary to determine the other.

Recoverable amount is the > of the following:

Fair value (FV) less selling costs (SC), and

Value in use of the asset.

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Fair Value Less Selling Costs

The best method to determine FV less SC is the price indicated in a formal sales agreement between two independent parties, adjusted with incremental selling costs.

<IAS 36.25, 26, 27>

Formal sales

contract exists?

Active market exists?

No The best estimate (*) of the asset selling

price, less SC.

Yes

Use price indicated in contract, less SC.

Market price (**), less SC.

(*) The entity should consider recent similar transactions, in the same industry.

(**) When this price is not available, the price of the most recent transaction.

Yes

No

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Fair Value Less Selling Costs Example – Requirement to determine FV less SC

Background The entity reviews its assets for impairment due to a decrease in its product market

values. Its plant is 10 years old, with a book value of $80 million and a value in use of $75

million. A similar plant (competitor of the entity), was sold for $82 million. Selling costs were $1 million. There is an active market for the assets of the plant. Question Can the entity record an impairment loss for $5 million, based on the value in use?

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Fair Value Less Selling Costs Example – Requirement to determine FV less SC

Background The entity reviews its assets for impairment due to a decrease in its product market values. Its plant is 10 years old, with a book value of $80 million and a value in use of $75 million. A similar plant (competitor of the entity), was sold for $82 million. Selling costs were $1 million. There is an active market for the assets of the plant. Question Can the entity record an impairment loss for $5 million, based on the value in use? Response No. The entity should not record an impairment loss, considering that the FV less SC is greater than the

value in use, and therefore should be identified as the recoverable amount. The book value is less than the recoverable amount, therefore, no impairment loss should be

recorded.

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Value in use

Definition: The discounted present value of estimated future cash flows expected to arise from: the continuing use of an asset its disposal at the end of its useful life

Elements that should be considered in the calculation of the value in use:

‒ Estimate of future cash flows that will be obtained. For an asset, based on its remaining estimated useful life

‒ Expectation in possible variations in the amount or timing of the cash flows

‒ Time value of money represented by the actual risk-free market interest rate of return

‒ Inherent uncertainty in the price of the asset

‒ Other factors, such as liquidity, that participants would use to price the asset

<IAS 36.30, 31>

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Recognition of Impairment Loss

The loss will be recognized in the income statement, unless the asset was previously revalued per another standard, e.g. IAS 16 allows fair value method for valuation of PPE. In such case, the loss will be recognized against the revaluation surplus account in equity to

the extent that the loss does not exceed the balance in the revaluation surplus account.

An impairment loss will be recorded only if the book value is less than the recoverable amount. In such case, the book value will be reduced to recoverable amount. Such reduction will be designated as a loss due to impairment.

Determine effects on deferred taxes

Adjust subsequent recognition for

amortization/depreciation of asset

If an impairment

loss is recognized

If the impairment loss is greater than the book value of the asset, a liability will be recognized to the extent that it is required by another standard.

<IAS 36.59 - 64>

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Cash-generating Unit

A CGU is the smallest identifiable group of assets that generates cash flows independent of other assets or group of assets.

<IAS 36, 66 and 67>

• The recoverable amount should be determined for each asset

Recoverable amount shall be determined at the CGU level for the related group of assets.

If calculating recoverable amount is not possible

• If there is an impairment indicator

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Cash-generating Unit What should be considered in determining the CGU:

Watch for how management monitors the entity’s operations (such as by product lines, businesses, individual locations, districts or regional areas) or

How management makes decisions about continuing or disposing of the entity’s assets and operations.

If an entity can sell its product in an active market, the asset or group

of assets shall be identified as the CGU. This shall even be the case when the product is utilized internally.

The CGUs shall be consistent from one period to another, and shall be composed of the same assets or group of assets, unless there is a justified change in the CGUs.

<IAS 36.70 and 72>

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• The CGUs who are assigned goodwill: ‒ Should represent the lowest level at which goodwill is monitored internally. ‒ Should not be assigned to a unit that is greater than a reportable segment

of the entity (IFRS 8 p. 5).

Impairment of Goodwill – Allocate Goodwill to CGU or groups of CGUs

• Goodwill must be allocated to each CGU or group of CGUs at the date of a business combination, i.e., when a business is acquired.

• applicable if acquisition involved more than one CGU (e.g., group of entities or one entity with various operations)

• Goodwill should be assigned to each CGU prior to the end of the first annual reporting period during the year in which the entity was acquired.

<IAS 36.80, 86 and 87>

• Goodwill will have to be redistributed among existing CGUs if a CGU is sold or disposed of.

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CGU Impairment Testing

Example – Assets that do not provide an expected future benefit Question Can an asset be included within a CGU that individually does not provide any future

economic benefits and does not contribute to the economic benefits of the group of assets, but in the past has been distributed to a group of assets which have positive cash flows?

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CGU Impairment Testing

Example – Assets that do not provide an expected future benefit Question Can an asset be included within a CGU that individually does not provide any future

economic benefits and does not contribute to the economic benefits of the group of assets, but in the past has been distributed to a group of assets which have positive cash flows?

Response No. IAS 36 does not permit an entity to recognize an asset which does not meet

the basic definition of an asset (see conceptual framework). When there is an impairment indicator, the entity must first test individual assets for

impairment (prior to testing recoverable amount of CGUs) and recognize a loss if book value is greater than the recoverable amount for such assets.

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CGU Impairment Testing Summary The mandatory impairment test for CGUs with goodwill shall be performed annually at any

date during the year (must be consistent from year-to-year), or when an impairment indicator exists.

For CGUs with goodwill, the first impairment test must be performed prior to the end of the

first reporting period in the year of acquisition. If individual assets are tested for impairment which also form part of a CGU with goodwill

assigned: The assets must first be tested for impairment prior to determining the recoverable

amount of the CGU.

When determining the recoverable amount of a CGU, with goodwill assigned, the prior recoverable amount that was calculated may be utilized only in cases where ALL of the following criteria are met: The assets and liabilities that compose the CGU have not changed significantly since the

last calculation of the recoverable amount. The prior recoverable amount calculation that was calculated was significantly greater

than the book value of the CGU. Considering changes in circumstances and events since the prior calculation, the

probability that the recoverable amount being less than the book value of the CGU is remote.

<IAS 36.96, 97 and 99>

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Impairment of Goodwill A CGU loss from impairment is recorded if the recoverable amount is less than the book

value. The impairment loss is equal to the difference between the recoverable amount and book

value.

Book values will not be less than the greater of: Fair value less selling costs Value in use (if determinable) Zero

Excess loss not designated will be prorated among remaining assets. A liability will be recorded for the excess if required by another standard.

<IAS 36.104, 105 and 108>

The impairment loss will result in a decrease in book value of the assets that compose the CGU, in the following order:

FIRST: Goodwill assigned to the CGU

SECOND: The other assets of the CGU, in proportion to their book values

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Noncontrolling Interest

Under IFRS 3 Business Combinations, goodwill attributable to the noncontrolling interest (NCI) is not recognized in the consolidated financial statements of the controlling entity.

If there is a NCI in the CGU, the book value of the CGU will only include:

The participation of the controlling entity and the NCI in the net assets of the entity.

The participation of the controlling entity in the goodwill.

Any impairment of goodwill will divided between the goodwill attributed to the controlling entity and the NCI. Only the first is recognized as a goodwill impairment loss.

<IAS 36.91, 92, 93>

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Impairment of Corporate Assets

Distinctive characteristics: Do not generate cash inflows independently of other assets (for example, corporate office assets).

Allocate to a CGU it belongs to if can be allocated on a reasonable and consistent basis. If it can not be allocated to a CGU, the CGU book value will

exclude the value of the corporate assets. <IAS 36.100 - 102>

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Reversal of Impairment for Assets (reversal of goodwill is not allowed)

Steps to follow when reversing previously recognized impairment: At each reporting date assess if there could be external and internal indications

that previously recognized impairment may no longer be valid. If any indication exists, estimate the recoverable amount of that asset. If recoverable amount is now higher than the carrying amount, impairment no

longer exists. Reverse the loss by increasing the carrying amount (for assets in CGU on pro-

rata basis) only up to the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

Reverse if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized Not just due to passage of time

Reversal of impairment for goodwill is prohibited <IAS 36.110, 111 and 114>

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Reversal of Impairment for Assets Example– Reversing a previously recognized asset impairment

Background An intangible asset with a cost of $10 million is amortized over 20 years. Two years after being acquired, an impairment is recorded from book value of $9 million to

its recoverable amount of $5 million. Two years after recognizing the impairment, the recoverable amount for the intangible

asset is determined to be $10 million (due to changes in estimated future cash flows to be generated from the intangible asset).

Question Can the previously recognized impairment be reversed?

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Reversal of Impairment for Assets Example– Reversing a previously recognized asset impairment

Background An intangible asset with a cost of $10 million is amortized over 20 years. Two years after being acquired, an impairment is recorded from book value of $9 million to its

recoverable amount of $5 million. Two years after recognizing the impairment, the recoverable amount for the intangible asset is

determined to be $10 million (due to changes in estimated future cash flows to be generated from the intangible asset).

Question Can the previously recognized impairment be reversed? Response Yes. Given that the recoverable amount has changed due to a change in the estimates used to calculate

the recoverable amount, the impairment loss must be reversed. Reversal limits - The impairment loss amount that is reversed must consider that the asset shall

maintain a value no greater than the book value that would have been present had the asset never been impaired.

Book value, had no impairment been recorded, would be $8 million ($9 million less two year of depreciation at $0.5 million per year). Hence, only $3 million of the original $4 million impairment loss may be reversed.

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Disclosures Certain disclosures on judgments used and assumptions made are required

when an impairment is recorded by: Class of assets Segment

If an individual impairment loss (reversal) is material, disclose: events and circumstances resulting in the impairment loss amount of the loss individual asset: nature and segment to which it relates Cash generating unit: description, amount of impairment loss (reversal) by class of

assets and segment if recoverable amount is fair value less costs to sell, disclose the basis for determining

fair value. if recoverable amount is value in use, disclose the discount rate.

Other disclosures <IAS 36.126 – 135>

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IFRS vs. U.S. GAAP- Impairment Approaches

IFRS U.S. GAAP

1) IAS 36: Long-Lived Asset Impairment Test when Impairment Indicators Exist (One-Step Approach): -Determine recoverable amount and record impairment loss, if necessary

2) IAS 36: Goodwill Impairment Test - Tested annually - Determine recoverable amount of CGU and record impairment loss, if necessary.

1) ASC 360 (FAS 144) Long-Lived Asset Impairment Test when Impairment Indicators Exist (Two-Step Approach): i) Estimate: If Book Value (BV) > Undiscounted future cash flows, ii) Determine FV to calculate Loss

2) ASC 350 (FAS 142) Goodwill Impairment Test - Tested annually with optional qualitative

testing approach - Quantitative approach (Two-Step approach):

i) If BV > FV of Reporting Unit (CGU), ii) Determine FV of assets & liabilities to

calculate implied goodwill

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IFRS vs. U.S. GAAP- Other differences

IFRS U.S. GAAP

3) Cash generating units

4) Reverse previously recognized impairment loss if amount is recovered (except goodwill)

3) Reportable units

4) Reversal of previously recognized impairment is prohibited

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Questions?

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Join us for this EES course: Nov. 21: IFRS – Liabilities & Contingencies

Read these related publications: MHM Messenger 1-13a: AICPA Conference Recap – IFRS Messenger 14-12: The SEC’s Report on IFRS - Steps Companies

Can Take Now

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Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has over 14 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards both in the U.S. and in Latin America with Big 4 accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution & Manufacturing - Transportation - Utilities - Consumer Services - Construction/Real Estate - Health Sciences – Financial Services – Agriculture.

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