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Impairment of assets

Client Substantiation File.

Current New Zealand Generally Accepted Accounting Practice (GAAP) for non-profit entities

Current NZ Generally Accepted Accounting Practice is set out in NZ IAS 36 Impairment of assets and this standard would apply 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.

Key definitions

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 depreciation and accumulated impairment losses.

Recoverable amount: the higher of an asset's fair value less costs of disposal and its value in use.

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.

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 IAS 36 to your entity?

In terms of NZ IAS 36 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 applies for intangible assets with an indefinite useful life and intangible assets not yet available for use (e.g. Software that is work in progress)

Examples of impairment indicators:

  • External sources of information
  • observable indicators that the assets’ value has declined significantly;
  • significant changes expected in terms of technological advances, market, economic or legal environment;
  • increases in market interest rates; and
  • net assets of the entity are more than its market capitalisation.

Internal sources of information

  • obsolescence and 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;
  • internal evidence that the performance of an asset will be worse than expected; and
  • for investments in subsidiaries, JVs, associates; the carrying amount of the investment in the separate financial statement exceeds the consolidated financial statements of the investee.

Dividend from a subsidiary, joint venture or associate and evidence is available that:

  • 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 exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared.

These examples provided above are not intended to be exhaustive.

Fair value less costs of disposal

Fair value is determined using the principles outlined in IFRS 13 Fair Value measurement and the costs to sell are the direct incremental costs attributable to the disposal 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. Refer to paragraphs 30 – 57 for further details on how value in use is calculated.

Recognition of an impairment

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

  • An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for example, in accordance with the revaluation model in NZ IAS 16). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard.
  • An impairment loss on a non-revalued asset is recognised in profit or loss. However, an impairment loss on a revalued asset is recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset.

The recognition of an impairment loss for cash-generating units and goodwill are dealt with separately. Refer to paragraphs 65 – 108 of NZ IAS 36.

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.

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 profit or loss unless the asset is carried at the revalued amount in accordance with another NZ IFRS (for example, the revaluation model in NZ IAS 16). Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with that other NZ IFRS.

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.

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

What are the disclosure requirements required by IAS 36?

Disclosure by class of assets:

  • impairment losses recognised in profit or loss;
  • impairment losses reversed in profit or loss;
  • which line item(s) of the statement of comprehensive income; and
  • impairment losses on revalued assets recognised in other comprehensive income impairment losses on revalued assets reversed in other comprehensive income.

Disclosure by reportable segment (for entities that present operating segment information):

  • impairment losses recognised; and
  • impairment losses reversed.

Other disclosures:

If an individual impairment loss (reversal) is material disclose:

  • events and circumstances resulting in the impairment loss;
  • amount of the impairment loss or reversal;
  • 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 the recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy (from IFRS 13 Fair Value Measurement) within which the fair value measurement is categorised, the valuation techniques used to measure fair value less costs of disposal and the key assumptions used in the measurement of fair value measurements categorised within 'Level 2' and 'Level 3' of the fair value hierarchy; and
  • if recoverable amount has been determined on the basis of value in use, or on the basis of fair value less costs of disposal using a present value technique*, disclose the discount rate.

If impairment losses recognised (reversed) are material in aggregate to the financial statements as a whole, disclose:

  • main classes of assets affected main events and circumstances; and
  • detailed information about the estimates used to measure recoverable amounts of cash generating units containing goodwill or intangible assets with indefinite useful lives.

Recognition of impairment losses and reversals

Management is responsible for the identification and disclosure of impairment. 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 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 (NZ IAS 36);
  • 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.