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 the governance of reporting entities understand the requirements set out in PAS 36 and revisit some areas where confusion has been seen in practice.

Overview

PAS 36’s step by step impairment approach is explained and set out in full in our article ‘Insights into PAS 36 – Overview of the Standard’.  This article is issued to discuss when there are exceptions to the rule of comparing recoverable amount with carrying amount, which is step 5 in the impairment review process.

Like-for-like comparison of recoverable amount and carrying amount of a cash generating unit (CGU)

When assets are grouped for recoverability assessments, it is important to include in the CGU all assets that generate or are used to generate the relevant cash inflows. ​The recoverable amount of a CGU is determined excluding cash flows that relate to:

• assets whose cash flows are largely independent of the cash inflows from the asset under review (for example, financial assets such as receivables); and,
• liabilities that have already been recognized

Certain exceptions to this general rule apply as discussed below.

A. Liabilities that are inseparable from the CGU

It may be necessary to consider some recognized liabilities to determine the recoverable amount of a CGU. This may be the case when the disposal of the CGU would require the buyer to assume the liability. To perform a meaningful comparison between the carrying amount of the CGU and its recoverable amount, the liability is also deducted from the CGU’s carrying amount and the cash flows from settling the liability are included in the value in use (VIU) calculation.

B. Other assets/liabilities

Sometimes, for practical reasons, the recoverable amount of a CGU is determined after consideration of assets that are not part of the CGU (for example, receivables or other financial assets) or liabilities that have been recognized (for example, payables, pensions and other provisions). In such cases the carrying amount of the CGU is increased by the carrying amount of those assets and decreased by the carrying amount of those liabilities.

The order of impairment testing for corporate assets and goodwill

PAS 36 specifies the order of impairment testing in the following circumstances:

A. Order of impairment testing for corporate assets that cannot be allocated

Where a portion of the carrying amount of a corporate asset cannot be allocated on a reasonable and consistent basis to an individual CGU being tested, the entity should:

• compare the carrying amount of the unit, excluding the corporate asset, with its recoverable amount and recognize any impairment loss,

• compare the carrying amount of the smallest group of CGUs under review to which a portion of the carrying amount of the corporate asset can be allocated on a reasonable and consistent basis and compare that amount with the recoverable amount of the group of units and recognize any impairment loss. Any additional impairment loss calculated in this step should be recognized as follows:

• • first, to reduce the carrying amount of any goodwill allocated to the CGU (or groups of CGUs), and
  • next, to the other assets of the CGU (or groups of CGUs) pro rata based on the carrying amount of each asset in the CGU (or groups of CGUs), and

• when all or part of the corporate asset remains untested, the entity should test for impairment on an entity-wide basis and follow the same allocation process as outlined in bullet 2 above for any additional impairment calculated at this level.

B. Order of impairment testing for assets and cash generating units to which goodwill has been allocated 

If certain assets forming part of a CGU to which goodwill has been allocated are tested for impairment at the same time as the CGU, these assets are tested before the CGU as a whole is tested. Similarly, if a group of CGUs to which goodwill has been allocated is tested for impairment at the same time as the individual CGUs, the individual CGUs are tested for impairment before the group of CGUs.

See attached Accounting Alert for further details and illustrative examples.