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Impairment of assets – Cash-Generating Assets

Client Substantiation File.

Current New Zealand Generally Accepted Accounting Practice (GAAP) for PBE’s

Current NZ Generally Accepted Accounting Practice is set out in NZ IPSAS 26 Impairment of cash-generating assets. The standard applies to tier 1 and 2 public benefit entities and would relate to:

  • property, plant and equipment;
  • intangibles;
  • goodwill; and
  • investments in entities measured at cost.

Overview

The standard requires an entity to recognise impairment when its assets are carried at more than their recoverable amount. The standard prescribes procedures that an entity has to apply to ensure assets are carried at no more than their recoverable amount as illustrated below.

Procedure for cash generating assets.

Key definitions

Impairment: A loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset’s future economic benefits or service potential through depreciation.

Impairment loss of a cash-generating asset: 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 statement of financial position, after deducting any accumulated depreciation and accumulated impairment losses thereon.

Recoverable amount (of an asset or cash-generating unit): the higher of an asset's fair value less costs of disposal and its value in use.

Fair value: The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

So how do you apply the requirements of NZ IPSAS 26 to your entity?

In terms of PBE IPSAS 26 at the end of each reporting period, an entity is required to assess whether there is an indication that an asset may be impaired. A list of external and internal indicators of impairment are described by the standard. If there’s an indication that the entity’s asset(s) may be impaired then the asset(s’) recoverable amount must be calculated.

The standard prescribes that goodwill acquired in a business combination is tested annually for impairment and recoverable amounts determined whether or not there are any internal or external indications of impairment. The same is true for intangible assets with an indefinite useful life and intangible assets not yet available for use.

External sources of information

  • market value information suggests that the assets’ value has declined significantly;
  • significant adverse changes expected in terms of technological advances, market, economic or legal environment; and
  • increases in market interest rates.

Internal sources of information

  • obsolescence and/or physical damage.
  • significant changes; expected and occurred, in the entity making assets idle assets, restructuring, discontinuing or restructuring of the operations to which an asset belongs;
  • a decision to halt the construction of the asset before it is complete or in a usable state; and
  • internal evidence that the performance of an asset will be worse than expected.

Dividend or similar distribution from a controlled entity, jointly controlled entity or associate

  • the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill; and
  • the dividend or similar distribution exceeds the total comprehensive revenue and expense of the controlled entity, jointly controlled entity or associate in the period the dividend or similar distribution is declared.

Fair value less costs of disposal

The best evidence of an asset’s fair value less costs to sell is the price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset.

If there is no binding sale agreement but an asset is traded in an active market, fair value less costs to sell is the asset’s market price less the costs of disposal.

If there is no binding sale agreement or active market for an asset, fair value less costs to sell is based on the best information available that reflects the amount that an entity could obtain, at the reporting date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal

Costs of disposal are the direct incremental costs to dispose of the asset.

Value in use

Estimating the value in use of an asset involves estimating the future cash inflows and outflows to be derived from the continuing use of the asset and its ultimate disposal and applying an appropriate discount rate to those future cash flows.

Recognition of an impairment

Recognising an impairment asset for an individual asset other than goodwill:

  • if, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss; and
  • an impairment loss shall be recognised immediately in surplus or deficit.

The recognition and measurement of impairment losses for cash-generating units and goodwill are dealt with in paragraphs 76–97.

Reversal of impairment

An entity shall assess at each reporting date whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset.

The same approach is followed for the identification of impaired assets i.e. assess at the end of each period end whether there is an indication that an impairment may have decreased using the indicators discussed above. If there’s evidence of a decrease in impairment calculate the recoverable amount.

An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed 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 recognised. If this is the case, the carrying amount of the asset shall be increased to its recoverable amount. That increase is a reversal of an impairment loss.

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.

A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in surplus or deficit. After a reversal of an impairment loss is recognised, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

A reversal of an impairment loss for a cash-generating unit shall be allocated to the cash-generating assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets. These increases in carrying amounts shall be treated as reversals of impairment losses for individual assets and recognised in accordance with paragraph 108. No part of the amount of such a reversal shall be allocated to a non-cash-generating asset contributing service potential to a cash-generating unit.

An impairment loss recognised for goodwill shall not be reversed in a subsequent period.

Re-designation of assets

The re-designation of an asset from a cash-generating asset to a non-cash- generating asset or from a non-cash-generating asset to a cash-generating asset shall only occur when there is clear evidence that such a re-designation is appropriate. A re-designation, by itself, does not necessarily trigger an impairment test or a reversal of an impairment loss.

What are the disclosure requirements required by PBE IPSAS 26?

An entity shall disclose the criteria developed by the entity to distinguish cash-generating assets from non-cash-generating assets.

Disclosure by class of assets:

  • impairment losses recognised in surplus or deficit;
  • impairment losses reversed in surplus or deficit; and
  • which line item(s) of the statement of comprehensive revenue and expense.

Other disclosures:

An entity shall disclose the following for each material impairment loss recognised or reversed during the period for a cash-generating asset, including goodwill, or a cash-generating unit:

  • events and circumstances resulting in the impairment loss;
  • amount of the impairment loss or reversal;
  • for a cash-generating asset, the nature of the asset;
  • cash generating unit: description, description of the way of aggregating assets and the reasons for any changes if there’s been a change in the aggregation;
  • whether the recoverable amount is its fair value less costs to sell or value in use;
  • if the recoverable amount is fair value less costs to sell, the basis used to determine fair value less costs to sell; and
  • if the recoverable amount is value in use, the discount rate(s) used in the current estimate and previous estimate (if any) of value in use.

Any portion of the goodwill acquired in a business combination during the period has not been allocated to a cash-generating unit (group of units) at the reporting date, the amount of the unallocated goodwill shall be disclosed together with the reasons why that amount remains unallocated

Recognition of impairment losses and reversals

Management is responsible for the identification and disclosure of impairment losses and reversals. This responsibility requires management to implement adequate accounting and internal control systems to ensure that impairment is appropriately identified and disclosed, where appropriate, in the financial reports.

Management would normally engage an expert firm to determine the Fair Value less costs to disposal, it is managements’ responsibility to ensure that the information provided to the expert is complete and accurate. Where management has performed a calculation of discounted cash flows there should be adequate evidence to support the assumptions made by management in determining the cash flows and discount rate.

Systems for identifying and monitoring impairment assessment

We expect entities to establish systems and internal controls to:

  • perform cyclical counts of assets and maintain an up-to-date fixed asset register of all assets;
  • identify, account for, monitor and disclose impairment in accordance with the applicable financial reporting framework (PBE IPSAS 26);
  • review the calculations prepared for the value in use and the expert reports for the fair value less disposal costs assessments; and
  • formally authorise and approve the assessments that have been prepared.