ACCA Applied Skills · Financial Reporting

Impairment of assets: formula sheet

Full chapter guide

Key formulas

Carrying amount: Carrying amount = cost (or revalued amount) − accumulated depreciation − accumulated impairment losses; This is the figure compared with recoverable amount.
Impairment test: Impaired if carrying amount > recoverable amount; Loss = carrying amount − recoverable amount.
Recoverable amount: Recoverable amount = higher of (fair value less costs of disposal) and value in use; If either figure is above carrying amount, the asset is not impaired and you need not calculate the other.
When to test: Each reporting date: look for indicators. Annually regardless: goodwill, indefinite-life intangibles, intangibles not yet available for use; Other assets are tested only if an indicator exists.
Recoverable amount: Recoverable amount = higher of (FVLCD, VIU); Compare this with carrying amount. Impairment exists only if carrying amount is higher.
Fair value less costs of disposal: FVLCD = fair value − costs of disposal; Costs of disposal are direct incremental selling costs. Exclude finance costs and tax expense.
Value in use: VIU = Σ [cash flow in year t ÷ (1 + r)^t], including final disposal proceeds; r is a pre-tax discount rate. Use cash flows for the asset in its current condition.
Impairment loss: Impairment loss = carrying amount − recoverable amount (if positive); Recognise in profit or loss, unless the asset is revalued, when it first goes against any revaluation surplus on that asset.
Cash flow rules for VIU: Include: cash inflows from use, cash outflows needed to generate them, net disposal proceeds. Exclude: financing cash flows, tax payments, uncommitted restructuring, enhancement of performance.; Base cash flows on reasonable, supportable assumptions and the most recent approved budgets, normally covering a maximum of five years unless a longer period is justified.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount (if positive); If recoverable amount is higher than carrying amount, there is no impairment and no gain is recognised under IAS 36.
Recoverable amount: Recoverable amount = Higher of (Fair value less costs of disposal) and (Value in use); If one figure is above carrying amount, the asset is not impaired and you need not work out the other.
Fair value less costs of disposal: FVLCD = Fair value − Costs of disposal; Costs of disposal are incremental selling costs such as legal fees, not finance costs or tax.
Cost model treatment: Dr Impairment loss (profit or loss) Cr Asset (or accumulated impairment); The whole loss goes to profit or loss.
Revaluation model treatment: Dr Revaluation surplus (OCI) up to the surplus on that asset; Dr Profit or loss for any excess; Cr Asset; Only the surplus relating to the same asset can be used.
Depreciation after impairment: New annual depreciation = (Revised carrying amount − Residual value) ÷ Remaining useful life; Apply from the date of impairment.
Impairment loss of a CGU: Impairment loss = Carrying amount of CGU (including goodwill) − Recoverable amount of CGU; Recognise only if carrying amount is higher. Recoverable amount = higher of fair value less costs of disposal and value in use.
Allocation order: 1) Goodwill allocated to the CGU 2) Other assets pro rata to carrying amount; Goodwill is written down first, up to its full carrying amount.
Pro rata share: Share of loss = Remaining loss × (Asset carrying amount ÷ Total carrying amount of assets in scope); Only assets within the scope of the allocation share the loss. Assets with a floor are limited.
Floor for each asset: Asset cannot go below its individual floor: the highest of fair value less costs of disposal, value in use and zero; Use only the measures that can be determined. Excess loss is reallocated to other assets pro rata.
Recoverable amount: Recoverable amount = higher of (fair value less costs of disposal, value in use); If either figure is above carrying amount, there is no impairment, so you need not find the other.
Impairment loss: Impairment loss = carrying amount − recoverable amount (if positive); For a CGU, the carrying amount includes allocated goodwill.
Order of allocating a CGU loss: 1) Goodwill to zero; 2) other assets pro rata to carrying amounts; Do not reduce any asset below its own fair value less costs of disposal, value in use (if known) or zero.
Gross-up of goodwill (proportionate NCI method): Notional goodwill = recognised goodwill ÷ parent's percentage; Used only for the impairment test. Only the parent's share of any loss is recognised.
Reversal cap: Carrying amount after reversal ≤ depreciated historical cost (or depreciated revalued amount) had no loss occurred; Applies to assets other than goodwill.
Goodwill reversal rule: Reversal of goodwill impairment = not permitted; Applies even if the unit recovers fully.

Quick revision

Impairment: carrying amount is higher than recoverable amount.
Recoverable amount is the higher of fair value less costs of disposal and value in use.
Value in use is the present value of expected future cash flows from continuing use and final disposal.
You do not need both measures if one already exceeds carrying amount.
Review for indicators at each reporting date; test goodwill and intangibles with indefinite lives every year.
An impairment loss is normally charged to profit or loss.
For a revalued asset, the loss first reduces the revaluation surplus for that asset, then goes to profit or loss.
In a cash-generating unit, allocate the loss to goodwill first, then to other assets pro rata to carrying amounts.
Do not reduce an asset below the highest of its fair value less costs of disposal, value in use and zero, where these can be measured.
Impairment losses on goodwill are never reversed.
Other losses can be reversed if estimates change, but not above the carrying amount that would have existed without the impairment.
Depreciate the written-down amount over the remaining life after an impairment.

Common mistakes

Testing every asset every year. Fix: Only goodwill and certain intangibles need an annual test. Other assets need a test only when an indicator exists.
Using cost instead of carrying amount. Fix: Deduct accumulated depreciation up to the test date, and any earlier impairment, before comparing.
Using the lower of FVLCD and VIU as recoverable amount. Fix: Recoverable amount is always the higher. Say 'higher' out loud when you read the question.
Forgetting to deduct costs of disposal from fair value. Fix: Underline any selling costs in the scenario and subtract them. Label the result FVLCD.
Using the lower of fair value less costs of disposal and value in use. Fix: Recoverable amount is always the higher of the two. A sensible owner would take the better option.
Forgetting to depreciate the asset to the test date before comparing. Fix: Always compute the up-to-date carrying amount first. Impairment is measured against that figure.
Allocating the loss pro rata across all assets including goodwill. Fix: Write off goodwill first. Only the loss left over is shared pro rata among the other assets.
Leaving goodwill out of the CGU's carrying amount. Fix: Include the goodwill allocated to the CGU in the carrying amount before comparing with recoverable amount.
Reversing a goodwill impairment loss when the CGU recovers. Fix: Remember goodwill is the one exception. A reversal would create internally generated goodwill, which is not allowed.
Reversing an impairment up to the full recoverable amount or original cost. Fix: Compute the carrying amount the asset would have had with normal depreciation and no loss. The reversed amount cannot take the asset above that.

Exam tips

In Section A, check scope first. Many wrong options are assets that sit under another standard.
Remember the three annual-test assets. Examiners often hide goodwill in a scenario and ask whether a test is needed.
Always depreciate to the test date before finding carrying amount. Using cost is the most common lost mark.
In written answers, name the indicator, say whether it is internal or external, and then state the consequence.
Do not compute both fair value less costs of disposal and value in use if one already exceeds carrying amount.
In objective test questions, check first whether FVLCD already exceeds carrying amount. If so, you can answer without any discounting.
Read the cash flow list line by line and cross out interest, tax and uncommitted restructuring before you discount anything.
Show FVLCD, VIU, recoverable amount and loss as four labelled lines in a constructed response answer. Markers award method marks for each.