Accounting Alert

This Accounting Alert is issued to provide an overview of Philippine Accounting Standard (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

When the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset needs to be reduced to its recoverable amount and that reduction is recognized as an impairment loss.

In addition to assessing evidence of possible impairment, entities must also assess whether there is any indication a previously recognized impairment loss for an asset (other than goodwill) no longer exists or the assessed impairment amount may have decreased. If an indication of possible reversal is identified, the entity must estimate the recoverable amount of that asset.

Reversing an impairment loss for an individual asset

When recoverable amount is recalculated and exceeds the asset’s carrying value, the carrying amount is increased to the recoverable amount subject to a ‘ceiling’ (i.e., an upper limit). The increased carrying amount cannot exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

For assets accounted for using the revaluation model in PAS 16, Property, Plant and Equipment, or PAS 38, the reversal of the impairment loss is accounted for in the same way as a revaluation increase in accordance with those standards.

Reversing an impairment loss for a cash-generating unit (CGU)

Any reversal of an impairment loss for a cash-generating unit (CGU) must be allocated to the individual assets that make up the CGU (excluding goodwill). The entity is required to allocate the reversal of an impairment loss to the CGU’s assets pro rata to their carrying amounts. This is again however subject to a ‘ceiling’ whereby no individual asset’s carrying amount is increased above the lower of:

• its recoverable amount (if determinable), and,
• its carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior periods.

If this ‘ceiling’ takes effect for one or more of the CGU’s assets, the reversal of the impairment loss that would otherwise have been allocated to those assets is allocated on a pro rata basis to the other assets, subject to the same ceiling.

See attached Accounting Alert for further details and illustrative examples.