This chapter deals both with IAS 36, Impairment of Assets, and IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations. IAS 36 identifies when the carrying amount of a certain asset needs to be reduced to its recoverable amount. IFRS 5 determines the treatment of non-current assets held for sale and discontinued operations. An impairment exists when the recoverable amount (the higher of fair value less cost to sell and value in use) is less than the carrying amount. This assessment is to be made on an asset-specific basis or on the smallest group of assets for which the entity has identifiable cash flows (the cash-generating unit).
IAS 36 is equally applicable to tangible and intangible assets.
Carrying amount. The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. Carrying amount is often different from market value because depreciation is a cost allocation rather than a means of valuation. For liabilities, the carrying amount is the amount of the liability minus offsets such as any sums already paid or bond discounts.
Cash-generating unit. The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Corporate assets. Assets other than goodwill that contribute to future cash flows of both the cash-generating unit under review and other cash-generating units.
Cost to sell. The incremental cost directly attributable to a disposal of an asset (or disposal group), excluding finance cost and income tax expenses.
Depreciable amount. The cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.
Depreciation (amortisation). The systematic allocation of the depreciable amount of an asset over its useful life.
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.
Impairment loss. The amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
Recoverable amount. The higher of an asset or a cash-generating unit's fair value less costs of disposal and its value in use.
Useful life. Either:
Value in use. The present value of the future cash flows expected to be derived from an asset or cash-generating unit.
IAS 36 is applicable to all assets except:
This standard applies to financial assets classified as:
In general, the standard provides the procedures that an entity is required to apply to ensure that its assets are not carried at amounts higher than their recoverable amount. If an asset's carrying amount is more than its recoverable amount (the amount to be recovered through use or sale of the asset), an impairment loss is recognised. IAS 36 requires an entity to assess at the end of each reporting period whether there is any indication that an asset may be impaired. Tests for impairment are only necessary when there is an indication that an asset might be impaired (but are assessed annually for intangible assets having an indefinite useful life, intangible assets not yet available for use and goodwill). When carried out, the test is applied to the smallest group of assets for which the entity has identifiable cash flows, called a “cash-generating unit.” The carrying amount of the asset or assets in the cash-generating unit is compared with the recoverable amount, which is the higher of the asset's (or cash-generating unit's) fair value less costs to sell and the present value of the cash flows expected to be generated by using the asset (“value in use”). If the higher of these values is lower than the carrying amount, an impairment loss is recognised for the difference.
According to IAS 36, at each financial reporting date the reporting entity should determine whether there are conditions that would indicate that impairments may have occurred. If such indicators are present, the recoverable amount should be estimated.
The standard provides a set of indicators of potential impairment and suggests that these represent a minimum array of factors to be considered. An entity may also identify other indicators. At a minimum, the following external and internal indicators of possible impairments are to be given consideration on an annual basis:
The mere fact that one or more of the foregoing indicators suggests that there might be cause for concern about possible asset impairment does not necessarily mean that formal impairment testing must proceed in every instance, although in the absence of a plausible explanation why the signals of possible impairment should not be further considered, the implication would be that some follow-up investigation is needed.
IAS 36 defines impairment as the excess of carrying amount over recoverable amount, and defines recoverable amount as the higher of fair value less costs to sell and value in use. If the one is higher than the carrying amount, the other need not to be calculated. The objective is to recognise an impairment loss when the recoverable amount of an asset (or cash-generating unit) is lower than the carrying value.
The determination of the fair value less costs to sell (i.e., net selling price) of the asset being evaluated might present difficulties when market values are not applicable. IFRS 13, Fair Value Measurement, deals specifically with these issues. Refer to Chapter 25 for more detail on how IFRS suggests the fair values are to be determined. Cost to sell represents the incremental cost directly attributable to a disposal of an asset (or disposal group) and specifically excludes finance cost and income tax expenses.
The computation of “value in use” involves a two-step process: first, future cash flows must be estimated; and second, the present value of these cash flows must be calculated by application of an appropriate discount rate.
Projection of future cash flows must be based on reasonable assumptions. Exaggerated revenue growth rates, significant anticipated cost reductions or unreasonable useful lives for plant assets must be avoided if meaningful results are to be obtained. In general, recent experience is a fair guide to the near-term future, but a recent sudden growth spurt should not be extrapolated to more than the very near-term future. For example, if growth over the past five years averaged 5%, but in the latest year equalled 15%, unless the recent rate of growth can be identified with factors that demonstrate it as being sustainable, a future growth rate of 5%, or slightly higher, would be more supportable.
IAS 36 stipulates that steady or declining growth rates must be utilised for periods beyond those covered by the most recent budgets and forecasts. It further states that, barring an ability to demonstrate why a higher rate is appropriate, the growth rate should not exceed the long-term growth rate of the industry in which the entity participates.
The guidance offered by IAS 36 suggests that only normal, recurring cash inflows and outflows from the continuing use of the asset being evaluated should be considered, to which any estimated residual value at the end of the asset's useful life would be added. In determining the cash flows from operations, the company should take into account the effect of the business developments on working capital requirements. These working capital requirements include both assets and liabilities and can be positive and negative. For example, if a growth of revenues is estimated for the coming five years, it can be expected that under normal business circumstances, the receivables increase in a similar direction. The same would be the case for any prepayment of services, for instance in the publishing industry, where many subscriptions are paid up-front.
Non-cash costs, such as depreciation of the asset, obviously must be excluded from this calculation, since, in the case of depreciation, this would in effect double count the very item being measured. Furthermore, projections should always exclude cash flows related to financing the asset—for example, interest and principal repayments on any debt incurred in acquiring the asset—since operating decisions (e.g., keeping or disposing of an asset) are to be evaluated separately from financing decisions (borrowing, leasing, buying with equity capital funds). Also, cash flow projections must relate to the asset in its existing state and in its current use, without regard to possible future enhancements. Income tax effects are also to be disregarded (i.e., the entire analysis should be on a pre-tax basis). An entity should translate the present value of future cash flows estimated in the foreign currency using the spot exchange rate at the date of the value-in-use calculation.
Under IAS 36, when cash flows cannot be identified with individual assets (as will frequently be the case), assets must be grouped in order to permit an assessment of future cash flows. The requirement is that this grouping be performed at the lowest level possible, which would be the smallest aggregation of assets for which independent cash flows can be identified. In practice, this unit may be a department, a product line or a factory, for which the output of product and the input of raw materials, labour and overhead can be identified.
Thus, while the precise contribution to overall cash flow made by, say, a given drill press or lathe may be impossible to surmise, the cash inflows and outflows of a department which produces and sells a discrete product line to an identified group of customers can be more readily determined. To comply with IFRS, the extent of aggregation must be the minimum necessary to develop cash flow information for impairment assessment and no greater.
A too-high level of aggregation is prohibited for a very basic reason: doing so could permit some impairments to be concealed by effectively offsetting impairment losses against productivity or profitability gains derived from the expected future use of other assets. IAS 36 requires that cash-generating units be defined consistently from period to period. In addition to being necessary for consistency in financial reporting from period to period, which is an important objective per se, it is also needed to preclude the opportunistic redefining of cash-generating groups affected in order to minimise or eliminate impairment recognition.
The other measurement issue in computing value in use comes from identifying the appropriate discount rate to apply to projected future cash flows. The discount rate is comprised of subcomponents. The base component of the discount rate is the current market rate, which should be identical for all impairment testing at any given date. This must be adjusted for the risks specific to the asset, which have not been adjusted in the projected cash flows. The interest rate to apply must reflect current market conditions as of the end of the reporting period.
In practice, this asset class risk adjustment can be built into the cash flows. Appendix A to the standard discusses what it describes as the traditional approach to using present value techniques to measure value in use, where forecast cash flows are discounted using a rate that is adjusted for uncertainties. It also describes the expected cash flow method, where the forecast cash flows are directly adjusted to reflect uncertainty and then discounted at the market rate. These are alternative approaches and care must be exercised to apply one or the other correctly. Most importantly, risk should not be adjusted for twice in computing the present value of future cash flows.
IAS 36 suggests that identifying the appropriate risk-adjusted cost of capital to employ as a discount rate can be accomplished by reference to the implicit rates in current market transactions (e.g., leasing transactions), or from the weighted-average cost of capital of publicly traded entities operating in the same industry grouping. Such statistics are available for certain industry segments in selected (but not all) markets. The entity's own recent transactions, typically involving leasing or borrowing to buy other non-current assets, will be highly salient information in estimating the appropriate discount rate to use.
When risk-adjusted rates are not available, however, it will become necessary to develop a discount rate from surrogate data. The two steps to this procedure are:
Regarding the first component, the life of the asset being tested for impairment will be critical; short-term obligations almost always carry a lower rate than intermediate- or long-term ones, although there have been periods when “yield curve inversions” have been dramatic. As to the second element, projected future cash flows having greater variability (which is the technical definition of risk) will be associated with higher risk premiums.
Of these two discount rate components, the latter is likely to prove the more difficult to determine or estimate in practice. IAS 36 provides discussion of the methodology to utilise, and this should be carefully considered before embarking on this procedure. It addresses such factors as country risk, currency risk and pricing risk but also the (il)liquidity of the (group of) asset(s). The latter is also referred to as the small-firm premium.
Corporate assets, such as headquarters buildings and shared equipment, which do not themselves generate identifiable cash flows, need to be tested for impairment together with other non-current assets. However, these present a particular problem in practice due to the inability to identify cash flows deriving from the future use of these assets. A failure to test corporate assets for impairment would permit such assets to be carried at amounts that could, under some circumstances, be at variance with requirements under IFRS. It would also permit a reporting entity to deliberately evade the impairment testing requirements by opportunistically defining certain otherwise productive assets as being corporate assets.
To avoid such results, IAS 36 requires that corporate assets be allocated among or assigned to the cash-generating unit or units with which they are most closely associated. For a large and diversified entity, this probably implies that corporate assets will be allocated among most or all of its cash-generating units, perhaps in proportion to annual turnover (revenue). Since ultimately an entity must generate sufficient cash flows to recover its investment in all non-current assets, whether assigned to operating divisions or to administrative groups, there are no circumstances in which corporate assets can be isolated and excluded from impairment testing.
If the recoverable amount of the cash-generating unit is lower than its carrying amount, an impairment must be recognised. The mechanism for recording an impairment loss depends upon whether the entity is accounting for non-current assets at historical cost subject to depreciation or on the revaluation basis. Impairments computed for assets carried at historical cost will be recognised as charges against current period profit or loss.
For assets grouped into cash-generating units, it will not be possible to determine which specific assets have suffered impairment losses when the unit as a whole has been found to be impaired, and so IAS 36 prescribes the allocation approach. If the cash-generating unit in question has been allocated any goodwill, any impairment should be allocated fully to goodwill, until its carrying amount has been reduced to zero. Any further impairment would be allocated proportionately to all the other assets in that cash-generating unit. In practice, the impairment loss is allocated against the non-monetary assets that are carried, as the carrying amount of monetary assets usually approximates actual values.
If the entity employs the revaluation method of accounting for non-current assets, the impairment adjustment will be treated as the partial reversal of a previous upward revaluation. However, if the entire revaluation account is eliminated due to the recognition of an impairment, any excess impairment should be charged to profit or loss. In other words, the revaluation account cannot contain a net debit balance.
When the calculated impairment is greater that the carrying amount of an asset a liability can only be created if it is required by another IFRS. After an impairment of an asset the depreciation needs to be adjusted to reflect the revised carrying amount and residual values. The deferred tax effect of impairment is recognised by comparing the revised carrying amount with the tax base of the asset by applying the guidance in IAS 12 (refer to Chapter 26).
IFRS provides for recognition of reversals of previously recognised impairments. In order to recognise a recovery of a previously recognised impairment, a process similar to that which led to the original loss recognition must be followed. This begins with consideration, at the end of each reporting period, of whether there are indicators of possible impairment recoveries, utilising external and internal sources of information. Data relied upon could include that pertaining to material market value increases; changes in the technological, market, economic or legal environment or the market in which the asset is employed; and the occurrence of a favourable change in interest rates or required rates of return on assets which would imply changes in the discount rate used to compute value in use. Also, to be given consideration are data about any changes in the manner in which the asset is employed, as well as evidence that the economic performance of the asset has exceeded expectations and/or is expected to do so in the future.
If one or more of these indicators is present, it will be necessary to compute the recoverable amount of the asset in question or, if appropriate, of the cash-generating unit containing that asset, in order to determine if the current recoverable amount exceeds the carrying amount of the asset, where it had been previously reduced for impairment.
If that is the case, a recovery can be recognised under IAS 36. The amount of recovery to be recognised is limited, however, to the difference between the current carrying amount and the amount which would have been the current carrying amount had the earlier impairment not been recognised. Note that this means that restoration of the full amount at which the asset was carried at the time of the earlier impairment cannot be made, since time has elapsed between these two events and further depreciation of the asset would have been incurred in the interim.
Where a cash-generating unit including goodwill has been impaired, and the impairment has been allocated first to the goodwill and then pro rata to the other assets, only the amount allocated to non-goodwill assets can be reversed. The standard specifically prohibits the reversal of impairments to goodwill, on the basis that the goodwill could have been replaced by internally generated goodwill, which cannot be recognised under IFRS.
Reversals of impairments are accounted for differently if the reporting entity employed the revaluation method of accounting for non-current assets. The basic principle is that the reversal will increase the revaluation reserve; however, any impairment previously recognised in profit or loss since the revaluation reserve was eliminated must first be reversed before a revaluation reserve is created again.
Impairments of tangible non-current assets resulting from natural or other damages, such as from floods or windstorms, may be insured. IAS 16 holds that when property is damaged or lost, impairments and claims for reimbursements should be accounted for separately (i.e., not netted for financial reporting purposes). Impairments are to be accounted for per IAS 36 as discussed above; disposals (of damaged or otherwise impaired assets) should be accounted for consistent with guidance in IAS 16. Compensation from third parties, which are gain contingencies, should be recognised as profit only when the funds become receivable. The cost of replacement items or of restored items is determined in accordance with IAS 16.
For each class of property, plant and equipment, the amount of impairment losses recognised in profit or loss for each period being reported upon must be stated, with an indication of where in the statement of comprehensive income it has been presented. For each class of asset, the amount of any reversals of previously recognised impairment must also be stipulated, again with an identification of where in the statement of comprehensive income that this has been presented. If any impairment losses were recognised in other comprehensive income and in revaluation surplus in equity (i.e., as a reversal of a previously recognised upward revaluation), this must be disclosed. Finally, any reversals of impairment losses that were recognised in other comprehensive income and in equity must be stated.
If the reporting entity is reporting financial information by segment (in accordance with IFRS 8 as discussed in more detail in Chapter 28), the amounts of impairments and of reversals of impairments, recognised in profit or loss and in other comprehensive income during the year for each reportable segment, must also be stated. Note that the segment disclosures pertaining to impairments need not be categorised by asset class, and the location of the charge or credit in the statement of profit or loss need not be stated (but will be understood from the disclosures relating to the primary financial statements themselves).
IAS 36 further provides that if an impairment loss for an individual asset or group of assets categorised as a cash-generating unit is either recognised or reversed during the period, in an amount that is material to the financial statements taken as a whole, disclosures should be made of the following:
Furthermore, when impairments recognised or reversed in the current period are material in the aggregate, the reporting entity should provide a description of the main classes of assets affected by impairment losses or reversals of losses, as well as the main events and circumstances that caused recognition of losses or reversals. This information is not required to the extent that the disclosures above are given for individual assets or cash-generating units.
Exemplum Reporting PLC
Financial Statements
For the Year Ended 31 December 20XX
Accounting policy: Impairment of non-financial assets
The group assesses annually whether there is any indication that any of its assets have been impaired. If such indication exists, the asset's recoverable amount is estimated and compared to its carrying value. Where it is impossible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the smallest cash-generating unit to which the asset is allocated.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount an impairment loss is recognised immediately in profit or loss, unless the asset is carried at a revalued amount, in which case the impairment loss is recognised as revaluation decrease.
For goodwill, intangible assets that have an indefinite life and intangible assets not yet available for use, the recoverable amount is estimated annually and at the end of each reporting period if there is an indication of impairment.
Note: Goodwill and impairment | IFRS3 B67 | |
Cost | ||
Opening cost at 1 January 20XX-1 | X | |
Recognised on acquisition of a subsidiary | X | |
Derecognised on disposal of a subsidiary | X | |
Opening cost at 1 January 20XX | X | |
Recognised on acquisition of a subsidiary | X | |
Derecognised on disposal of a subsidiary | X | |
Closing cost at 31 December 20XX | X | |
Goodwill and impairment | IFRS3 B67 | |
Cost | ||
Opening cost at 1 January 20XX-1 | X | |
Recognised on acquisition of a subsidiary | X | |
Derecognised on disposal of a subsidiary | X | |
Opening cost at 1 January 20XX | X | |
Recognised on acquisition of a subsidiary | X | |
Derecognised on disposal of a subsidiary | X | |
Closing cost at 31 December 20XX | X | |
Accumulated impairment | ||
Opening balance at 1 January 20XX-1 | X | |
Impairment loss | X | |
Opening balance at 1 January 20XX | X | |
Impairment loss | X | |
Closing balance at 31 December 20XX | X | |
Opening carrying value at 1 January 20XX-1 | X | |
Opening carrying value at 1 January 20XX | X | |
Closing carrying value at 31 December 20XX | X | |
The events and circumstances that led to the recognition of the impairment loss was the disposal of a chain of retail stores in the United Kingdom. No other class of assets was impaired other than goodwill. | IAS36 p130 (a), (d) | |
[Describe the cash generating units/individual intangible assets of the group and which operating segment they belong to (if any), and whether any impairment losses were recognised or reversed during the period.] | IAS36 p130 (a), (d) | |
The aggregation of assets for identifying the cash-generating unit has not changed since the prior year. | IAS36 p130(d) | |
The recoverable amount of a cash-generating unit is its value in use. In calculating the value in use of the impaired reportable segment the group used a discount rate of X% (20XX-1: X%). | IAS36 p130 (e).(g) |
The carrying amount of goodwill allocated to each reportable segment is as follows:
20XX | ||||
Manufacture | Retail | Distribution | Total | |
Home country | X | X | X | X |
Other countries | X | X | X | X |
20XX-1 | ||||
Manufacture | Retail | Distribution | Total | |
Home country | X | X | X | X |
Other countries | X | X | X | X |
Management has based its cash flow projections on cash flow forecasts covering a 5-year period. Cash flows after the 5-year period have been extrapolated based on the estimated growth rates disclosed below. These growth rates do not exceed the long-term average growth rate for the industry or market in which the group operates. Other key assumptions used in the cash flow projections are as follows: | IAS36 p134(d) |
Manufacture | Retail | Distribution | |
Growth rates | X | X | X |
Discount rates | X | X | X |
Gross profit margins | X | X | X |
Management has based their assumptions on past experience and external sources of information, such as industry sector reports and market expectations. | IAS36 p134(d) |
Cash-generating unit. The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Component of an entity. Operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.
Costs to sell. The incremental costs directly attributed to a disposal of an asset (or disposal group), excluding finance costs and income tax expense.
Current asset. An entity shall classify an asset as current when:
Discontinued operation. A component of an entity that either has been disposed of or is classified as held-for-sale and:
Disposal group. A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated in accordance with the requirements of IAS 36 or if it is an operation within such a cash-generating unit.
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.
Firm purchase commitment. An agreement with an unrelated party, binding on both parties and usually legally enforceable, that (1) specifies all significant terms, including the price and timing of the transactions, and (2) includes a disincentive for non-performance that is sufficiently large to make performance highly probable.
Highly probable. Significantly more likely than probable.
Non-current asset. An asset not meeting the definition of a current asset.
Probable. More likely than not.
Recoverable amount. The higher of an asset's fair value less costs to sell and its value in use.
Value in use. The present value of the future cash flows expected to be derived from an asset or cash-generating unit.
As part of its ongoing efforts to converge IFRS with US GAAP, the IASB issued IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. This introduced new and substantially revised guidance for accounting for non-current tangible (and other) assets that have been identified for disposal, as well as new requirements for the presentation and disclosure of discontinued operations.
IFRS 5 states that where management has decided to sell an asset, or disposal group, these should be classified in the statement of financial position as “held-for-sale” and should be measured at the lower of carrying amount or fair value less cost to sell. After reclassification, these assets will no longer be subject to systematic depreciation. The measurement basis for non-current assets classified as held-for-sale is to be applied to the group as a whole, and any resulting impairment loss will reduce the carrying amount of the noncurrent assets in the disposal group.
Assets and liabilities which are to be disposed of together in a single transaction are to be treated as a disposal group. In accordance with the standard, a disposal group is a group of assets (and liabilities directly associated with those assets) to be disposed of, by sale or otherwise, together as a group in a single transaction. Goodwill acquired in a business combination is included in the disposal group if this group is a cash-generating unit to which goodwill has been allocated in accordance with IAS 36 or if it is an operation within such a cash-generating unit.
IFRIC 17, Distributions of Non-cash Assets to Owners, provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends to its shareholders. As part of the issuance of IFRIC 17, IFRS 5 was amended to include non-cash assets held for distribution to owners as part of IFRS 5 and should be treated in accordance with IFRS 5's classification, presentation and measurement requirements. Whether or not a non-cash asset is classified as “held for distribution to owners” is determined using the principles in IFRS 5 detailed below.
The reporting entity would classify a non-current asset (or disposal group) as held-for-sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. The criteria are as follows:
Extension of the period beyond 12 months is allowable in the following situations:
Occasionally companies acquire non-current assets exclusively with a view to disposal. In these cases, the non-current asset will be classified as held-for-sale at the date of the acquisition only if it is anticipated that it will be sold within the one-year period and it is highly probably that the held-for-sale criteria will be met within a short period of the acquisition date. This period normally will be no more than three months. Exchanges of non-current assets between companies can be treated as held-for-sale when such an exchange has commercial substance in accordance with IAS 16.
If the criteria for classifying a non-current asset as held-for-sale occur after the reporting date, the non-current asset should not be presented as held-for-sale. Nonetheless, certain information should be disclosed about these non-current assets.
Operations that are expected to be wound down or abandoned do not meet the definition of held-for-sale. However, a disposal group that is to be abandoned may meet the definition of a discontinued activity. Abandonment means that the non-current asset (disposal group) will be used to the end of its economic life, or the non-current asset (disposal group) will be closed rather than sold. The reasoning behind this is that the carrying amount of the non-current asset will be recovered principally through continued usage. A non-current asset that has been temporarily taken out of use or service cannot be classified as being abandoned.
Assets that are classified as being held for disposal are measured differently and presented separately from other non-current assets. In accordance with IFRS 5, the following general principles would apply in measuring non-current assets that are held for sale:
Any interest or expenses of a disposal group should continue to be provided for.
The standard stipulates that, for assets not previously revalued (under IAS 16), any recorded decrease in carrying amount (to fair value less cost to sell or value in use) would be an impairment loss taken as charge against income; subsequent changes in fair value would also be recognised, but not increases in excess of impairment losses previously recognised.
For an asset that is carried at a revalued amount (as permitted under IAS 16), revaluation under that standard will have to be effected immediately before it is reclassified as held-for-sale under this proposed standard, with any impairment loss recognised in accordance with IAS 16 and IAS 36. Subsequent increases or decreases in estimated fair value less costs to sell the asset will be recognised in profit or loss.
A disposal group, as defined under IFRS 5, may include some assets which are accounted for by the revaluation model. For such disposal groups subsequent increases in fair value are to be recognised, but only to the extent that the carrying amounts of the non-current assets in the group, after the increase has been allocated, do not exceed their respective fair values less cost to sell. The increase recognised would continue to be treated as a revaluation increase under IAS 16.
Finally, IFRS 5 states that non-current assets classified as held-for-sale are not to be depreciated. The constraints on classifying an asset as held-for-sale are, in part, intended to prevent entities from employing such reclassification as a means of avoiding depreciation. Even after classification as held-for-sale, however, interest and other costs associated with the asset are still recognised as expenses as required under IFRS.
Measurement of non-current assets held for distribution to owners. Assets that are classified as being held for distribution to owners are measured differently and presented separately from other non-current assets. An entity shall measure a non-current asset (or disposal group) classified as held for distribution to owners at the lower of its carrying amount and fair value less costs to distribute.
If the asset held for sale or held for distribution to owners is not later disposed of or distributed, it is to be reclassified to the operating asset category it is properly assignable to. The amount to be initially recognised upon such reclassification would be the lower of:
If the asset is part of a cash-generating unit (as defined under IAS 36), its recoverable amount will be defined as the carrying amount that would have been recognised after the allocation of any impairment loss incurred from that same cash-generating unit.
Under the foregoing circumstance, the reporting entity would include, as part of income from continuing operations in the period in which the criteria for classification as held-for-sale or held for distribution to owners are no longer met, any required adjustment to the carrying amount of a non-current asset that ceases to be classified as held-for-sale or held for distribution to owners. That adjustment would be presented in income from continuing operations. It is not an adjustment to prior period results of operations under any circumstances.
If an individual asset or liability is removed from a disposal group classified as held-for-sale or held for distribution to owners, the remaining assets and liabilities of the disposal group still to be sold will continue to be measured as a group only if the group meets the criteria for categorisation as held-for-sale or held for distribution to owners. In other circumstances, the remaining non-current assets of the group that individually meet the criteria to be classified as held-for-sale or held for distribution to owners will need to be measured individually at the lower of their carrying amounts or fair values less costs to sell at that date.
If an entity reclassifies an asset (or disposal group) directly from being held for sale to being held for distribution to owners, or directly from being held for distribution to owners to being held for sale, then the change in classification is considered a continuation of the original plan of disposal. The guidance above for a change will not apply. The entity shall, however, apply the classification, presentation and measurement requirements in IFRS 5 that are applicable to the changed method of disposal. Any reduction or increase in the fair value less costs to sell/costs to distribute of the non-current asset (or disposal group) shall be recognised by following the normal measurement guidance for non-current assets held-for-sale or held for distribution to owners. The date of the original classification will not be changed. This does not preclude the application of the conditions for an extension of the period required to complete a sale or a distribution to owners.
IFRS 5 specifies that non-current assets classified as held-for-sale and the assets of a disposal group classified as held-for-sale must be presented separately from other assets in the statement of financial position. The liabilities of a disposal group classified as held-for-sale are also presented separately from other liabilities in the statement of financial position.
Several disclosures are required, including a description of the non-current assets of a disposal group, a description of the facts and circumstances of the sale, and the expected manner and timing of that disposal. Any gain or loss recognised for impairment or any subsequent increase in the fair value less costs to sell should also be shown in the applicable segment in which the non-current assets or disposal group is presented in accordance with IFRS 8 (Chapter 28).
The disclosure requirements in other IFRS do not apply to such assets (or disposal groups) unless those IFRS require:
IFRS 5 also provides that where additional disclosures about non-current assets (or disposal groups) classified as held-for-sale or discontinued operations are necessary in order to comply with the general requirements of IAS 1, then such disclosures must still be made.
IFRS 5 requires an entity to present and disclose information that enables users of the financial statements to evaluate the financial effects of discontinued operations. A discontinued operation is a part of an entity that has either been disposed of or is classified as held-for-sale and meets the following requirements:
An entity should present in the statement of comprehensive income a single amount comprising the total of:
IFRS 5 requires detailed disclosure of revenue, expenses, pre-tax profit or loss, and the related income tax expense, either in the notes or on the face of the statement of comprehensive income. If this information is presented on the face of the statement of comprehensive income (or separate statement of profit or loss if the two-statement alternative is used), the information should be separately disclosed from information relating to continuing operations. Regarding the presentation in the statement of cash flows, the net cash flows attributable to the operating, investing and financing activities of the discontinued operation should be shown separately on the face of the statement or disclosed in the notes.
Any disclosures should cover both the current and all prior periods that have been shown in the financial statements. Retrospective classification as a discontinued operation, where the criteria are met after the statement of financial position date, is prohibited by IFRS. In addition, adjustments made in the current accounting period to amounts that have previously been disclosed as discontinued operations from prior periods must be separately disclosed. If an entity ceases to classify a component as held-for-sale, the results of that element must be reclassified and included in the results from continuing operations.
Exemplum Reporting PLC Financial Statements For the Year Ended 31 December 20XX |
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Profit for the period from continuing operations | X | X | IAS1 p82 IFRS5 p33 | |
Profit for the year from discontinued operations | 12 | X | X | |
PROFIT FOR THE YEAR | X | X | ||
Earnings per share | ||||
From continuing operations | ||||
Basic (cents per share) | 13 | X | X | IAS33 p66 |
Diluted (cents per share) | 13 | X | X | |
From continuing and discontinued operations | ||||
Basic (cents per share) | 13 | X | X | IAS33 p68 |
Diluted (cents per share) | 13 | X | X | |
12. Discontinued operations | ||||
12.1 Analysis of the statement of comprehensive income result: | ||||
In May 20XX the management committed to dispose of the packaging division. The sale is expected to be concluded in February 20XX, and no further loss is expected on the disposal of the assets involved. The packaging division fell within the distribution reporting segment. |
20XX | 20XX-1 | |||
Analysis of cash flow movements | IFRS5 p33(c) | |||
Operating cash flows | X | - | ||
Investing cash flows | X | - | ||
Financing cash flows | X | - | ||
Total cash flows | X | X | ||
Analysis of statement of comprehensive income result | 20XX | 20XX-1 | IFRS5 p33(c) | |
Revenue | X | X | ||
Expenses | X | X | ||
Loss before tax of discontinued operations | X | X | ||
Income tax expense | X | X | ||
Loss after tax of discontinued operations | X | X | ||
Pre-tax loss recognised on the measurement to fair value | X | - | ||
Income tax expenses | X | - | ||
After-tax loss recognised on the measurement to fair value | X | - | ||
Loss for the year from discontinued operations | X | X | ||
12.2 Analysis of assets and liabilities: | ||||
Cumulative income or expense recognised directly in other comprehensive income: | 20XX | 20XX-1 | IFRS5 p38 | |
Foreign exchange translation adjustments | X | - | ||
X | - | |||
Analysis of assets and liabilities | 20XX | 20XX-1 | IFRS5 p38 | |
Property, plant and equipment | X | - | ||
Goodwill | X | - | ||
Inventory | X | - | ||
Other current assets | X | - | ||
Other current liabilities | X | - | ||
Current provisions | X | - | ||
X | - |
Impairment under US GAAP is a three-step process. The first step, sometimes referred to as step zero, is an optional qualitative assessment as to the likelihood of an impairment. An entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. If it is determined that it is likely that the long-lived asset is impaired, then the entity must proceed to the quantitative step. An entity may skip the qualitative assessment and proceed with the quantitative steps.
The first quantitative step is to compare the undiscounted future cash flows, termed the recoverable amount, of the assets being tested to the carrying value. If the recoverable amount is less than the carrying value, the second step is taken, resulting in a write-down of the excess of the fair value of the asset over the carrying value. Impairments cannot be reversed.
The previous differences between IFRS and US GAAP in the definition, and hence the accounting, of discontinued operations were largely removed by ASC 205-20-45-1B.
ASU 2017-04 eliminates Step 2 from the goodwill impairment test under US GAAP, resulting in guidance that more closely aligns with the requirements in IFRSs regarding goodwill impairment.