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Section 27 – Impairment of Assets
27.1.1 Extract from FRS102: Section 27.1 – 27.1A.
27.1.2 OmniPro comment – Objective and scope.
27.2 Impairment of inventories.
27.2.1 Extract from FRS102: Section 27.2 – 27.4.
27.2.2 OmniPro comment – Impairment of Inventories.
27.3 Impairment of assets other than inventories.
27.3.1 Extract from FRS102: Section 27.5 – 27.6.
27.4 Impairment – assessing if an impairment is required.
27.4.1 Extract from FRS102: Section 27.7 – 27.8.
27.4.2.1 Assessing if an impairment is required.
27.5.1 Extract from FRS102: Section 27.9 – 27.10.
27.5.2 OmniPro comment – Indicators of Impairment
27.6 Measuring recoverable amount
27.6.1 Extract from FRS102: Section 27.11 – 27.13.
27.6.2 OmniPro comment – Measuring recoverable amount
27.7 Fair value less costs to sell
27.7.1 Extract from FRS102: Section 27.14 – 27.14A.
27.7.2.1 Fair value less cost to sell – active market
27.7.2.2 Fair value less cost to sell – no active market – valuation model
27.7.2.3 Discount rate for fair value less cost to sell
27.8.1 Extract from FRS102: Section 27.15 – 27.20.
27.8.2.2 Estimating the future pre-tax cash flows.
27.8.2.4 Steps in calculating Value in Use.
27.8.2.5 Value in use – discount rate.
27.8.2.6 Value in use – terminal value.
27.9 Assets held for service potential
27.9.1 Extract from FRS102: Section 27.20A.
27.9.2 OmniPro comment – Asset held for service potential
27.10 Recognising and measuring an impairment loss for a cash-generating unit
27.10.1 Extract from FRS102: Section 27.21 – 27.23.
27.10.2.1 Allocation of the improvement loss in a CGU.
27.10.2.2 Restoration on reduction of assets as a result of impairment
27.11 Additional requirements for impairment of goodwill
27.11.2.1 – Impairment of Goodwill
27.12 Reversal of an impairment loss.
27.12.1 Extract from FRS102: Section 27.28 – 27.30.
27.12.2.1 Impairment reversals generally.
27.13 Reversal when recoverable amount was estimated for a cash-generating unit
27.13.1 Extract from FRS102: Section 27.31.
27.13.2 OmniPro comment – Reversal of impairment when recoverable amount based on CGU
27.14.1 Extract from FRS102: Section 27.32 – 27.33A.
27.14.2 OmniPro comment – Disclosures.
27.14.2.1 Tangible fixed assets accounting policy disclosure.
27.14.2.2 Extract from notes to the financial statements.
27.14.2.2.1 Exceptional item – impairment charge.
27.14.2.2.2Tangible fixed assets.
27.14.2.2.3 Extract from profit and loss where impairment is shown as an exceptional item.
27.14.2.2.4 Extract from notes to the financial statements
27.14.2.2.5 Extract from notes where impairment is not deemed exceptional
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27.11 Additional requirements for impairment of goodwill
27.11.1 Extract from FRS102: Section 27.24 – 27.27
27.24 Goodwill, by itself, cannot be sold. Nor does it generate cash flows to an entity that are independent of the cash flows of other assets. As a consequence, the fair value of goodwill cannot be measured directly. Therefore, the fair value of goodwill must be derived from measurement of the fair value of the cash-generating unit(s) of which the goodwill is a part.
27.25 For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s cash- generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
27.26 Part of the recoverable amount of a cash-generating unit is attributable to the non-controlling interest in goodwill. For the purpose of impairment testing of a non-wholly-owned cash-generating unit with goodwill, the carrying amount of that unit is notionally adjusted, before being compared with its recoverable amount, by grossing up the carrying amount of goodwill allocated to the unit to include the goodwill attributable to the non-controlling interest. This notionally adjusted carrying amount is then compared with the recoverable amount of the unit to determine whether the cash-generating unit is impaired.
27.27 If goodwill cannot be allocated to individual cash-generating units (or groups of cash-generating units) on a non-arbitrary basis, then for the purposes of testing goodwill the entity shall test the impairment of goodwill by determining the recoverable amount of either:
(a) the acquired entity in its entirety, if the goodwill relates to an acquired entity that has not been integrated. Integrated means the acquired business has been restructured or dissolved into the reporting entity or other subsidiaries; or
(b) the entire group of entities, excluding any entities that have not been integrated, if the goodwill relates to an entity that has been integrated.
In applying this paragraph, an entity will need to separate goodwill into goodwill relating to entities that have been integrated and goodwill relating to entities that have not been integrated. Also the entity shall follow the requirements for cash-generating units in this section when calculating the recoverable amount of, and allocating impairment losses and reversals to assets belonging to, the acquired entity or group of entities.
27.11.2 OmniPro comment
27.11.2.1 – Impairment of Goodwill
See below for illustration of the points mentioned above in Sections 27.24 to 27.27 of FRS 102.which deals with the impairment of goodwill. It is clear from Sections 27.24 and 27.25 of FRS 102 that when assessing the fair value of goodwill, the entity must look to the CGU to which it relates when assessing improvement and when allocating the impairment. Section 27.28 of FRS 102 does not permit an impairment on goodwill to be reversed.
Example 16: Impairment loss on a CGU with goodwill and non-controlling interests (illustration of section 27.26 of FRS 102)
At the start of year 1 Parent A acquired 70% of company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU80,000. Therefore goodwill of CU44,000 (CU80,000 being the fair value of net asset * 70% being the proportion of the net assets acquired less the cost of investment of CU100,000) was recognised. The goodwill and identifiable assets are amortised over 10 years. At the date of acquisition; goodwill of CU44,000, CU80,000 of assets was recognised and CU24,000 (CU80,000*30%) was recognised in non-controlling interest.
At the end of year 2, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU50,000. The carrying value of goodwill at that date was CU35,200 (CU44,000/10yrs*8yrs) and the carrying amount of the identifiable assets was CU64,000 (CU80,000/10yrs*8yrs).
In accordance with Section 27.16 of FRS 102 hen assessing the amount of impairment the notional non-controlling interest needs to be incorporated as per below.
| CU | |
| Carrying Amount of Goodwill at the End of Year 2 | 35,200 |
| Unrecognised Non-Controlling Interest in Goodwill * | 15,086 |
| Carrying Amount of Identifiable Assets | 64,000 |
| Notionally Adjusted Carrying Amount | 114,286 |
| Recoverable Amount | (50,000) |
| Impairment | 64,286 |
The impairment loss of CU64,286 is first allocated against goodwill and the remaining to the identifiable assets assuming they have a nil fair value less costs to sell. The amount to be allocated to goodwill is the total carrying amount of goodwill including the non-controlling notional interest i.e. CU35,200+CU15,086= CU50,286. However only 70% of this CU50,286 relates to Parent A’s interest so the amount to be taken off Parent A’s goodwill is CU35,200.
The remaining CU29,086 (CU64,286-CU35,200) is set against the carrying amount of the identifiable assets. In the consolidated accounts the 30% of the impairment of CU8,726 would be attributed to non-controlling interest. Therefore the carrying amount at the end of year 2 after the impairment would be:
| Goodwill | Identifiable assets | Total | |
| Carrying Amount Before Impairment | CU35,200 | CU64,000 | CU99,200 |
| Impairment loss | (CU35,200) | (CU29,086) | (CU64,286) |
| Carrying Amount After Impairment | – | CU34,914 | CU34,914 |
*carrying amount notionally adjusted to include goodwill attributable to the non-controlling party which is then compared to the recoverable amount. Non-controlling interest in goodwill = CU44,000/0.7*0.3 = CU18,857 at the date of acquisition. There has been two years since acquisition and this would notionally have been amortised for two years which would mean the NBV would be CU15,086 (CU18,857/10yrs*8yrs).
27.11.2.2 Integrated entity
Section 27.27 of FRS 102 makes it clear that where goodwill cannot be allocated on a non-arbitrary basis where it has been integrated with existing operations then the goodwill of the acquired entity should be added with the existing asset when comparing to the recoverable amount in order to assess if an impairment has occurred. For example Company A acquired Company B in the year. Company A already had a similar business to Company B and in year 2 Company B was subsumed into this business. For the purposes of impairment the goodwill recognised on the acquisition of Company B will be added to the carrying value when carrying out an impairment review for that part of the business.
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Examples
Example 1: Lowest available CGU.
Example 2: Lowest available CGU.
Example 3: A decline in the asset’s market value.
Example 4: Significant adverse changes that have taken/will take place in the market
Example 5: Change in assets use.
Example 6: Introduction of new competitor
Example 7: Impairment indicators – decision to close.
Example 8: Performance of an asset is worse than expected.
Example 9: Investment in subsidiary.
Example 10: Value in use differs from fair value less costs to sell
Example 11: Fair value less costs to sell
Example 12: Determining cash flow to include.
Example 14: Impairment loss for a CGU with goodwill
Example 15: Restriction of reduction of assets as a result of an impairment
Example 16: Impairment loss on a CGU with goodwill and non-controlling interests
Example 17: Reversal of impairment on an individual asset
Example 18: Reversal of cash generating unit
Example 19: extract from an accounting policy note and disclosure requirements.
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