Accounting Alert

This Accounting Alert is issued to provide an overview of Philippine Accounting Standards (PAS) 36, Impairment of Assets, to assist preparers of financial statements and those charged with governance of reporting entities in understanding the requirements of PAS 36, and to revisit some areas where confusion has been seen in practice.

Overview

The accounting requirements regarding impairment of tangible and intangible assets are governed by PAS 36, Impairment of Assets.  The requirements are not new, however, remain challenging as the guidance is detailed and complex in some areas.

Identifying cash-generating units (CGUs) is a critical step in the impairment review and can have a significant impact on its results. That said, the identification of CGUs requires judgement. The identified CGUs may also change due to changes in an entity’s operations and the way it conducts them.

This Accounting Alert discusses how to allocate assets to CGUs, which follows an article on how to identify CGUs and then finally discusses how to allocate goodwill to CGUs.

Operational Assets

Recoverable amount is determined (if required) at the level of individual assets when possible.  Where it is not possible to estimate the recoverable amount of the individual operational asset, it is allocated to the CGU to which it belongs.

Assets that contribute to the cash flows of a CGU also need to be allocated to that CGU even if it is possible to determine recoverable amount individually [because, for example, an asset’s value in use (VIU) can be estimated as similar to its fair value less costs of disposal (FVLCOD)]. This is to ensure a like-for-like comparison when the CGU is tested and its recoverable amount is compared to its carrying value.

Corporate Assets

In some cases, management may identify certain assets that contribute to the estimated future cash flows of more than one CGU.  It would be inappropriate to allocate these assets entirely to a single CGU. Such assets are referred to as ‘corporate assets’ or  ‘shared assets’ and may include (for example):

• a headquarters building;
• IT equipment;
• research center; or,
• corporate or global brands.

Corporate assets are assets other than goodwill that contribute to the future cash flows of both the CGU under review and other CGUs.

Distinctive characteristics of corporate assets are that they do not generate cash inflows independently of other assets or groups of assets and their carrying amount cannot be fully attributed to the CGU under review.

If there is an indication of impairment for the corporate asset itself, recoverable amount cannot be determined at the individual asset level, unless management has decided to dispose of it (because corporate assets do not generate separate cash inflows).

Corporate assets therefore need to be incorporated into the impairment review at the CGU level – not only to test the asset in question (when necessary), but also to test the CGUs that benefit from those assets. To do so, the entity should:

• identify corporate assets that relate to the CGU under review, and
• allocate the carrying amount of the corporate assets on a reasonable and consistent basis to the CGU under review (if a reasonable and consistent basis can be identified).

Where a portion of the carrying amount of a corporate asset cannot be allocated on a reasonable and consistent basis, the assets are incorporated into the impairment review at a higher level and the analysis becomes more complicated.

The Accounting Alert also provides a diagram that summarizes the different allocation bases for assets, example of identification and allocation of corporate assets to CGUs, practical insights on allocating corporate assets, and practical insights on corporate assets and shared corporate costs in the regulatory spotlight.

See attached Accounting Alert for further details.