TMI BlogImpairment of AssetsX X X X Extracts X X X X X X X X Extracts X X X X ..... nting for the impairment of all assets, other than: ( a ) inventories (see AS 2, Valuation of Inventories); ( b ) assets arising from construction contracts (see AS 7, Accounting for Construction Contracts ) ; ( c ) financial assets [1] , including investments that are included in the scope of AS 13, Accounting for Investments; and ( d ) deferred tax assets (see AS 22, Accounting for Taxes on Income). 2. This Standard does not apply to inventories, assets arising from construction contracts, deferred tax assets or investments because existing Accounting Standards applicable to these assets already contain specific requirements for recognising and measuring the impairment related to these assets. 3. This Standard applies to assets that are carried at cost. It also applies to assets that are carried at revalued amounts in accordance with other applicable Accounting Standards. However, identifying whether a revalued asset may be impaired depends on the basis used to determine the fair value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnique, a reasonable estimate of the 'value in use' can be made. Consequently, if an SMC chooses to measure the 'value in use' by not using the present value technique, the relevant provisions of AS 28, such as discount rate, etc., would not be applicable to such an SMC. 4.3 Net selling price is the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal. 4.4 Costs of disposal are incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense. 4.5 An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. 4.6 Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. 4.7 Depreciation (Amortisation) is a systematic allocation of the depreciable amount of an asset over its useful life. [2] 4.8 Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be expected as a result of the passage of time or normal use; ( b ) significant changes with an adverse effect on the enterprise have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the enterprise operates or in the market to which an asset is dedicated; ( c ) market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset's value in use and decrease the asset's recoverable amount materially; ( d ) the carrying amount of the net assets of the reporting enterprise is more than its market capitalisation; Internal sources of information ( e ) evidence is available of obsolescence or physical damage of an asset; ( f ) significant changes with an adverse effect on the enterprise have taken place during the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( a ) if the discount rate used in calculating the asset's value in use is unlikely to be affected by the increase in these market rates. For example, increases in short-term interest rates may not have a material effect on the discount rate used for an asset that has a long remaining useful life; or ( b ) if the discount rate used in calculating the asset's value in use is likely to be affected by the increase in these market rates but previous sensitivity analysis of recoverable amount shows that: ( a ) it is unlikely that there will be a material decrease in recoverable amount because future cash flows are also likely to increase. For example, in some cases, an enterprise may be able to demonstrate that it adjusts its revenues to compensate for any increase in market rates; or ( b ) the decrease in recoverable amount is unlikely to result in a material impairment loss. 13. If there is an indication that an asset may be impaired, this may indicate that the remaining useful life, the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stimated to be close to its net selling price and net selling price can be determined. 19. In some cases, estimates, averages and simplified computations may provide a reasonable approximation of the detailed computations illustrated in this Standard for determining net selling price or value in use. Net Selling Price 20. The best evidence of an asset's net selling price is a price in a binding sale agreement in an arm's length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset. 21. If there is no binding sale agreement but an asset is traded in an active market, net selling price is the asset's market price less the costs of disposal. The appropriate market price is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction may provide a basis from which to estimate net selling price, provided that there has not been a significant change in economic circumstances between the transaction date and the date at which the estimate is made. 22. If there is no binding sale agreement or active market for an asset, net selling price is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t recent budgets/forecasts should be estimated by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate should not exceed the long-term average growth rate for the products, industries, or country or countries in which the enterprise operates, or for the market in which the asset is used, unless a higher rate can be justified. 27. Detailed, explicit and reliable financial budgets/forecasts of future cash flows for periods longer than five years are generally not available. For this reason, management's estimates of future cash flows are based on the most recent budgets/forecasts for a maximum of five years. Management may use cash flow projections based on financial budgets/forecasts over a period longer than five years if management is confident that these projections are reliable and it can demonstrate its ability, based on past experience, to forecast cash flows accurately over that longer period. 28. Cash flow projections until the end of an asset's useful life are estimated by extrapolating the cash flow projections bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outflows to be incurred before it is ready for use or sale, the estimate of future cash outflows includes an estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale. For example, this is the case for a building under construction or for a development project that is not yet completed. 35. To avoid double counting, estimates of future cash flows do not include: ( a ) cash inflows from assets that generate cash inflows from continuing use that are largely independent of the cash inflows from the asset under review (for example, financial assets such as receivables); and ( b ) cash outflows that relate to obligations that have already been recognised as liabilities (for example, payables, pensions or provisions). 36. Future cash flows should be estimated for the asset in its current condition. Estimates of future cash flows should not include estimated future cash inflows or outflows that are expected to arise from: ( a ) a future restructuring to which an enterprise is not yet committed; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws reflect assumptions that are consistent with the way the discount rate is determined. Otherwise, the effect of some assumptions will be counted twice or ignored. Because the time value of money is considered by discounting the estimated future cash flows, these cash flows exclude cash inflows or outflows from financing activities. Similarly, since the discount rate is determined on a pre-tax basis, future cash flows are also estimated on a pre-tax basis. 44. The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life should be the amount that an enterprise expects to obtain from the disposal of the asset in an arm's length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal. 45. The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life is determined in a similar way to an asset's net selling price, except that, in estimating those net cash flows: ( a ) an enterprise uses prices prevailing at the date of the estimate for similar assets that have reached the end of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e into account the following rates: ( a ) the enterprise's weighted average cost of capital determined using techniques such as the Capital Asset Pricing Model; ( b ) the enterprise's incremental borrowing rate; and ( c ) other market borrowing rates. 51. These rates are adjusted: ( a ) to reflect the way that the market would assess the specific risks associated with the projected cash flows; and ( b ) to exclude risks that are not relevant to the projected cash flows. Consideration is given to risks such as country risk, currency risk, price risk and cash flow risk. 52. To avoid double counting, the discount rate does not reflect risks for which future cash flow estimates have been adjusted. 53. The discount rate is independent of the enterprise's capital structure and the way the enterprise financed the purchase of the asset because the future cash flows expected to arise from an asset do not depend on the way in which the enterprise financed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Illustrations attached to the Standard). Cash-Generating Units 63. Paragraphs 64 to 92 set out the requirements for identifying the cash-generating unit to which an asset belongs and determining the carrying amount of, and recognising impairment losses for, cash-generating units. Identification of the Cash-Generating Unit to Which an Asset Belongs 64. If there is any indication that an asset may be impaired, the recoverable amount should be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an enterprise should determine the recoverable amount of the cash-generating unit to which the asset belongs (the asset's cash-generating unit). 65. The recoverable amount of an individual asset cannot be determined if: ( a ) the asset's value in use cannot be estimated to be close to its net selling price (for example, when the future cash flows from continuing use of the asset cannot be estimated to be negligible); and ( b ) the asset does not generate cash inflows from continuing use that are largely independent of tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations (such as by product lines, businesses, individual locations, districts or regional areas or in some other way) or how management makes decisions about continuing or disposing of the enterprise's assets and operations. Illustration 1 in the Illustrations attached to the Standard illustrates identification of a cash-generating unit. 68. If an active market exists for the output produced by an asset or a group of assets, this asset or group of assets should be identified as a separate cash-generating unit, even if some or all of the output is used internally. If this is the case, management's best estimate of future market prices for the output should be used: ( a ) in determining the value in use of this cash-generating unit, when estimating the future cash inflows that relate to the internal use of the output; and ( b ) in determining the value in use of other cash-generating units of the reporting enterprise, when estimating the future cash outflows that relate to the internal use of the output. 69. Even if part or all of the output produced by an asset or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnised liability, unless the recoverable amount of the cash-generating unit cannot be determined without consideration of this liability. This is because net selling price and value in use of a cash-generating unit are determined excluding cash flows that relate to assets that are not part of the cash-generating unit and liabilities that have already been recognised in the financial statements, as set out in paragraphs 23 and 35. 75. Where assets are grouped for recoverability assessments, it is important to include in the cash-generating unit all assets that generate the relevant stream of cash inflows from continuing use. Otherwise, the cash-generating unit may appear to be fully recoverable when in fact an impairment loss has occurred. In some cases, although certain assets contribute to the estimated future cash flows of a cash-generating unit, they cannot be allocated to the cash-generating unit on a reasonable and consistent basis. This might be the case for goodwill or corporate assets such as head office assets. Paragraphs 78 to 86 explain how to deal with these assets in testing a cash-generating unit for impairment. 76. It may be necessary to consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying amount of the provision for restoration costs (Rs. 50,00,000). 77. For practical reasons, the recoverable amount of a cash-generating unit is sometimes determined after consideration of assets that are not part of the cash-generating unit (for example, receivables or other financial assets) or liabilities that have already been recognised in the financial statements (for example, payables, pensions and other provisions). In such cases, the carrying amount of the cash-generating unit is increased by the carrying amount of those assets and decreased by the carrying amount of those liabilities. Goodwill 78. In testing a cash-generating unit for impairment, an enterprise should identify whether goodwill that relates to this cash-generating unit is recognised in the financial statements. If this is the case, an enterprise should: ( a ) perform a 'bottom-up' test, that is, the enterprise should: ( i ) identify whether the carrying amount of goodwill can be allocated on a reasonable and consistent basis to the cash-generating unit under review; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the future cash flows to be generated by the cash-generating unit. If goodwill can be allocated on a reasonable and consistent basis, an enterprise applies the 'bottom-up' test only. If it is not possible to allocate goodwill on a reasonable and consistent basis, an enterprise applies both the 'bottom-up' test and 'top-down' test (see Illustration 7 given in the Illustrations attached to the Standard). 81. The 'bottom-up' test ensures that an enterprise recognises any impairment loss that exists for a cash-generating unit, including for goodwill that can be allocated on a reasonable and consistent basis. Whenever it is impracticable to allocate goodwill on a reasonable and consistent basis in the 'bottom-up' test, the combination of the 'bottom-up' and the 'top-down' test ensures that an enterprise recognises: ( a ) first, any impairment loss that exists for the cash-generating unit excluding any consideration of goodwill; and ( b ) then, any impairment loss that exists for goodwill. Because an enterprise applies the 'bottom-up' test firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate assets is given as Illustration 8 in the Illustrations attached to the Standard. Impairment Loss for a Cash-Generating Unit 87. An impairment loss should be recognised for a cash-generating unit if, and only if, its recoverable amount is less than its carrying amount. The impairment loss should be allocated to reduce the carrying amount of the assets of the unit in the following order: ( a ) first, to goodwill allocated to the cash-generating unit (if any); and ( b ) then, to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset in the unit. These reductions in carrying amounts should be treated as impairment losses on individual assets and recognised in accordance with paragraph 58. 88. In allocating an impairment loss under paragraph 87, the carrying amount of an asset should not be reduced below the highest of: ( a ) its net selling price (if determinable); ( b ) its value in use (if determinable); and ( c ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, no impairment loss is recognised for the machine. Nevertheless, the enterprise may need to reassess the depreciation period or the depreciation method for the machine. Perhaps, a shorter depreciation period or a faster depreciation method is required to reflect the expected remaining useful life of the machine or the pattern in which economic benefits are consumed by the enterprise. Assumption 2: Budgets/forecasts approved by management reflect a commitment of management to replace the machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal are estimated to be negligible. The machine's value in use can be estimated to be close to its net selling price. Therefore, the recoverable amount of the machine can be determined and no consideration is given to the cash-generating unit to which the machine belongs (the production line). Since the machine's net selling price is less than its carrying amount, an impairment loss is recognised for the machine. 92. After the requirements in paragraphs 87 and 88 have been applied, a liability should be recognised for any remaining amount of an impairment loss for a cash-gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nhance an asset in excess of its originally assessed standard of performance or a commitment to discontinue or restructure the operation to which the asset belongs; and ( e ) evidence is available from internal reporting that indicates that the economic performance of the asset is, or will be, better than expected. 96. Indications of a potential decrease in an impairment loss in paragraph 95 mainly mirror the indications of a potential impairment loss in paragraph 8. The concept of materiality applies in identifying whether an impairment loss recognised for an asset in prior accounting periods may need to be reversed and the recoverable amount of the asset determined. 97. If there is an indication that an impairment loss recognised for an asset may no longer exist or may have decreased, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value may need to be reviewed and adjusted in accordance with the Accounting Standard applicable to the asset, even if no impairment loss is reversed for the asset. 98. An impairment loss recognised for an asset in prior account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applies the Accounting Standard applicable to the asset. 103 A reversal of an impairment loss for an asset should be recognised as income immediately in the statement of profit and loss, unless the asset is carried at revalued amount in accordance with another Accounting Standard (see Accounting Standard (AS) 10, Accounting for Fixed Assets) in which case any reversal of an impairment loss on a revalued asset should be treated as a revaluation increase under that Accounting Standard. 104. A reversal of an impairment loss on a revalued asset is credited directly to equity under the heading revaluation surplus. However, to the extent that an impairment loss on the same revalued asset was previously recognised as an expense in the statement of profit and loss, a reversal of that impairment loss is recognised as income in the statement of profit and loss. 105. After a reversal of an impairment loss is recognised, the depreciation (amortisation) charge for the asset should be adjusted in future periods to allocate the asset's revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. Reversal of an Impairme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (for example, a change in the discount rate or in the amount and timing of future cash flows of the cash-generating unit to which goodwill relates). 111. A specific external event is an event that is outside of the control of the enterprise. Examples of external events of an exceptional nature include new regulations that significantly curtail the operating activities, or decrease the profitability, of the business to which the goodwill relates. Impairment in case of Discontinuing Operations 112. The approval and announcement of a plan for discontinuance [5] is an indication that the assets attributable to the discontinuing operation may be impaired or that an impairment loss previously recognised for those assets should be increased or reversed. Therefore, in accordance with this Standard, an enterprise estimates the recoverable amount of each asset of the discontinuing operation and recognises an impairment loss or reversal of a prior impairment loss, if any. 113. In applying this Standard to a discontinuing operation, an enterprise determines whether the recoverable amount of an asset of a discontinuing operation is assessed for the individual asset or for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b ) the amount of reversals of impairment losses recognised in the statement of profit and loss during the period and the line item(s) of the statement of profit and loss in which those impairment losses are reversed; ( c ) the amount of impairment losses recognised directly against revaluation surplus during the period; and ( d ) the amount of reversals of impairment losses recognised directly in revaluation surplus during the period. 118. A class of assets is a grouping of assets of similar nature and use in an enterprise's operations. 119. The information required in paragraph 117 may be presented with other information disclosed for the class of assets. For example, this information may be included in a reconciliation of the carrying amount of fixed assets, at the beginning and end of the period, as required under AS 10, Accounting for Fixed Assets. 120. An enterprise that applies AS 17, Segment Reporting, should disclose the following for each reportable segment based on an enterprise's primary format (as defined in AS 17): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if recoverable amount is net selling price, the basis used to determine net selling price (such as whether selling price was determined by reference to an active market or in some other way); and ( g ) if recoverable amount is value in use, the discount rate(s) used in the current estimate and previous estimate (if any) of value in use: Provided that if a Small and Medium Sized Company, as defined in the Notification, chooses to measure the 'value in use' as per the proviso to paragraph 4.2 of the Standard, such an SMC need not disclose the information required by paragraph 121 ( g ) of the Standard. 122. If impairment losses recognised (reversed) during the period are material in aggregate to the financial statements of the reporting enterprise as a whole, an enterprise should disclose a brief description of the following: ( a ) the main classes of assets affected by impairment losses (reversals of impairment losses) for which no information is disclosed under paragraph 121; and ( b ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A - Retail Store Chain Background Al. Store X belongs to a retail store chain M. X makes all its retail purchases through M's purchasing centre. Pricing, marketing, advertising and human resources policies (except for hiring X's cashiers and salesmen) are decided by M. M also owns 5 other stores in the same city as X (although in different neighbourhoods) and 20 other stores in other cities. All stores are managed in the same way as X. X and 4 other stores were purchased 4 years ago and goodwill was recognised. What is the cash-generating unit for X (X's cash-generating unit)? Analysis A2. In identifying X's cash-generating unit, an enterprise considers whether, for example: ( a ) internal management reporting is organised to measure performance on a store-by-store basis; and ( b ) the business is run on a store-by-store profit basis or on region/city basis. A3. All M's stores are in different neighbourhoods and probably have different customer bases. So, although X is managed at a corporate level, X generates cash inflows that are largely indep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( a ) the majority of X's production is used internally and could not be sold in an active market. So, cash inflows of X depend on demand for Y's products. Therefore, X cannot be considered to generate cash inflows that are largely independent from those of Y; and ( b ) the two plants are managed together. A10. As a consequence, it is likely that X and Y together is the smallest group of assets that generates cash inflows from continuing use that are largely independent. C - Single Product Enterprise Background A11. Enterprise M produces a single product and owns plants A, B and C. Each plant is located in a different continent. A produces a component that is assembled in either B or C. The combined capacity of B and C is not fully utilised. M's products are sold world-wide from either B or C. For example, B's production can be sold in C's continent if the products can be delivered faster from B than from C. Utilisation levels of B and C depend on the allocation of sales between the two sites. For each of the following cases, what are the cash-generating units for A, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement has a policy to abandon old titles before the end of their economic lives and replace them immediately with new titles for the same customer segment. What is the cash-generating unit for an individual magazine title? Analysis A18. It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level of advertising income for a title is influenced, to a certain extent, by the other titles in the customer segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, although titles are managed by customer segments, decisions to abandon titles are made on an individual title basis. A19. Therefore, it is likely that individual magazine titles generate cash inflows that are largely independent one from another and that each magazine title is a separate cash-generating unit. E - Building: Half-Rented to Others and Half-Occupied for Own Use Background A20. M is a manufacturing company. It owns a headquarter building that used to be fully occupied for internal use. After down-sizing, half of the building is now used internally and half rented to third parties. The lease agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the Country A operations is the Country A operations, since no independent cash inflows can be identified for individual assets. A27. The net selling price of the Country A cash-generating unit is not determinable, as it is unlikely that a ready buyer exists for all the assets of that unit. A28. To determine the value in use for the Country A cash-generating unit (see Schedule 2), T: ( a ) prepares cash flow forecasts derived from the most recent financial budgets/forecasts for the next five years (years 20X5- 20X9) approved by management; ( b ) estimates subsequent cash flows (years 20X10-20X15) based on declining growth rates. The growth rate for 20X10 is estimated to be 3%. This rate is lower than the average long-term growth rate for the market in Country A; and ( c ) selects a 15% discount rate, which represents a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the Country A cash-generating unit. Recognition and Measurement of Impairment Loss A29. The recoverable amount of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Based on management's best estimate of net cash flow projections (after the 40% cut). (2) Based on an extrapolation from preceding year cash flow using declining growth rates. (3) The present value factor is calculated as k = 1/(1+a)n, where a = discount rate and n = period of discount. Schedule 3. Calculation and allocation of the impairment loss for the Country A cash-generating unit at the end of 20X4 (Amount in Rs. lakhs) End of 20X4 Goodwill Identifiable assets Total Historical cost 1,000 2,000 3,000 Accumulated depreciation/amortisation (20X1-20X4) (800) (533) (1,333) Carrying amount 200 1,467 1,667 Impairment Loss (200) (107) (307) Carrying amount after impairment loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the Country A cash-generating unit. Schedule 1. Calculation of the carrying amount of the Country A cash-generating unit at the end of 20X6 (Amount in Rs. lakhs) Goodwill Identifiable assets Total End of 20X4 (Example 2) Historical cost 1,000 2,000 3,000 Accumulated depreciation/amortisation (4 years) (800) (533) (1,333) Impairment loss (200) (107) (307) Carrying amount after impairment loss 0 1,360 1,360 End of 20X6 Additional depreciation (2 years)(1) - (247) (247) Carrying amount 0 1,113 x 1,113 1,113 Recoverable amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,113 1,113 Reversal of impairment loss 0 87 87 Carrying amount after reversal of impairment loss 0 1,200 1,200 Illustration 5 - Treatment of a Future Restructuring In this Illustration, tax effects are ignored. Background A40. At the end of 20X0, enterprise K tests a plant for impairment. The plant is a cash-generating unit. The plant's assets are carried at depreciated historical cost. The plant has a carrying amount of ₹ 3,000 lakhs and a remaining useful life of 10 years. A41. The plant is so specialised that it is not possible to determine its net selling price. Therefore, the plant's recoverable amount is its value in use. Value in use is calculated using a pre-tax discount rate of 14%. A42. Management approved budgets reflect that: ( a ) at the end of 20X3, the plant will be restructured at an estimated cost of ₹ 100 lakhs. Since K is not yet committed to the restructuring, a provision has not been recognised for the future re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying amount before impairment loss 3,000 Recoverable amount (Schedule 1) 2,051 Impairment loss (949) Carrying amount after impairment loss 2,051 At the End of 20X1 A46. No event occurs that requires the plant's recoverable amount to be re-estimated. Therefore, no calculation of the recoverable amount is required to be performed. At the End of 20X2 A47. The enterprise is now committed to the restructuring. Therefore, in determining the plant's value in use, the benefits expected from the restructuring are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. In accordance with paragraphs 94-95 of this Standard, the recoverable amount of the plant is re-determined at the end of 20X2. Schedule 3. Calculation of the plant's value in use at the end of 20X2 (Amount in Rs. lakhs) Year Future cash flows Discounted at 14% 20X3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount is not calculated at the end of 20X3. Schedule 5. Summary of the carrying amount of the plant (Amount in Rs. lakhs) End of year Depreciated historical cost Recoverable amount Adjusted depreciation charge Impairment loss Carrying amount after impairment 20X0 3,000 2,051 0 (949) 2,051 20X1 2,700 n.c. (205) 0 1,846 20X2 2,400 2,162 (205) 521 2,162 20X3 2,100 n.c. (270) 0 1,892 n.c. = not calculated as there is no indication that the impairment loss may have increased/decreased. Illustration 6 - Treatment of Future Capital Expenditure In this example, tax effects are ignored. Background A50. At the end of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A54. The plane's carrying amount is less than its recoverable amount (value in use). Therefore, F recognises an impairment loss for the plane. Schedule 2. Calculation of the impairment loss at the end of 20X0 (Amount in Rs. lakhs) Plane Carrying amount before impairment loss 1,500.00 Recoverable amount (Schedule 1) 1,211.28 Impairment loss (288.72) Carrying amount after impairment loss 1,211.28 Years 20X1-20X3 A55. No event occurs that requires the plane's recoverable amount to be re-estimated. Therefore, no calculation of recoverable amount is required to be performed. At the End of 20X4 A56. The capital expenditure is incurred. Therefore, in determining the plane's value in use, the future benefits expected from the renewal of the engine are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. As a consequence, in accordance with para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he carrying amount of the plane exceeding depreciated historical cost. Schedule 5. Summary of the carrying amount of the plane (Amount in Rs. lakhs) Year Depreciated historical cost Recoverable amount Adjusted depreciation charge Impairment loss Carrying amount after impairment 20X0 1,500.00 1,211.28 0 (288.72) 1,211.28 20X1 1,350.00 n.c. (121.13) 0 1,090.15 20X2 1,200.00 n.c. (121.13) 0 969.02 20X3 1,050.00 n.c. (121.13) 0 847.89 20X4 900.00 (121.13) renewal 250.00 - 1,150.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 120 Net carrying amount (after allocation of goodwill) 1,360 1,240 820 3,420 A61. In accordance with the 'bottom-up' test in paragraph 78( a ) of this Standard, M compares A's recoverable amount to its carrying amount after the allocation of the carrying amount of goodwill. Schedule 3. Application of 'bottom-up' test (Amount in Rs. lakhs) End of 20X4 A Carrying amount after allocation of goodwill (Schedule 2) 1,360 Recoverable amount 1,350 Impairment loss 10 A62. M recognises an impairment loss of ₹ 10 lakhs for A. The impairment loss is fully allocated to the goodwill in accordance with paragraph 87 of this Standard. B - Goodwill Cannot Be Allocated on a Reasonable and Consistent Basis A63. There is no reasonable way to allocate the goodwill that arose on the acquisition of Z to A, B and C. At the end of 20X4, Z's recoverable amount is estimated to be ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the technological environment in which M operates. Therefore, M conducts impairment tests of each of its cash-generating units. At the end of 20X0, the carrying amounts of A, B and C are ₹ 100 lakhs, ₹ 150 lakhs and ₹ 200 lakhs respectively. A69. The operations are conducted from a headquarter. The carrying amount of the headquarter assets is ₹ 200 lakhs: a headquarter building of ₹ 150 lakhs and a research centre of ₹ 50 lakhs. The relative carrying amounts of the cash-generating units are a reasonable indication of the proportion of the head-quarter building devoted to each cash-generating unit. The carrying amount of the research centre cannot be allocated on a reasonable basis to the individual cash-generating units. A70. The remaining estimated useful life of cash-generating unit A is 10 years. The remaining useful lives of B, C and the headquarter assets are 20 years. The headquarter assets are depreciated on a straight-line basis. A71. There is no basis on which to calculate a net selling price for each cash-generating unit. Therefore, the recoverable amount of each cashgenerating unit is based on its value in use. Value in us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75 150 Carrying amount (after allocation of the building) 119 206 275 600 Determination of Recoverable Amount 75. The 'bottom-up' test requires calculation of the recoverable amount of each individual cash-generating unit. The 'top-down' test requires calculation of the recoverable amount of M as a whole (the smallest cash-generating unit that includes the research centre). Schedule 2. Calculation of A, B, C and M's value in use at the end of 20X0 (Amount in Rs. lakhs) A B C M Year Future cash flows Discount at 15% Future cash flows Discount at 15% Future cash flows Discount at 15% Future cash flows Discount at 15% 1 18 16 9 8 10 9 39 34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 17 22 2 57 5 108 10 18 18 1 51 4 97 8 19 14 1 43 3 85 6 20 10 1 35 2 71 4 Value 199 in use 164 271 720 (1) (1) It is assumed that the research centre generates additional future cash flows for the enterprise as a whole. Therefore, the sum of the value in use of each individual cash-generating unit is less than the value in use of the business as a whole. The additional cash flows are not attributable to the headquarter building. Calculation of Impairment Losses A76. In accordance with the 'bott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 100 120 197 137 50 604 Recoverable amount (Schedule 2) 720 Impairment loss arising from 'top-down' test 0 A79. Therefore, no additional impairment loss results from the application of the 'top-down' test. Only an impairment loss of ₹ 46 lakhs is recognised as a result of the application of the 'bottom-up' test. ---------------------------------- Notes:- [1] A financial asset is any asset that is: (a) cash; (b) a contractual right to receive cash or another financial asset from another enterprise; (c) a contractual right to exchange financial instruments with another enterprise under conditions that are potentially favourable; or (d) an ownership interest in another enterprise. [2] In the case of an intangible asset or goodwill, the term 'amortisation' is generally used instead of 'depreciation'. Both terms have th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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