The cost of internally generated intangible assets

Chapter 13 – Impairment Page 162 The recoverable amount should be determined on an individual asset basis as far as possible. If, however, the individual asset does not generate cash flows largely independent from other assets, then the asset is grouped with other assets to form what is referred to in IAS 36 as a ‘cash-generating unit’. This is the smallest group of assets for which it is possible to identify separately independent cash flows. Illustration 2 A bus company has a contract with a local education authority to transport children to and from school. There are ten routes contracted to this particular bus company. One of the routes is making losses because it collects children from remote areas and, as a result, the number of children collected is much lower than on the highly populated routes. The bus company does not have the ability to withdraw from individual routes. The ten routes are contracted for as a group. The ten routes should therefore be grouped together as one cash-generating unit.

4.3 Stage 3 – Recognising an impairment loss

If the recoverable amount of an asset is less than its carrying amount, the asset should be reduced to its recoverable amount. The difference is an impairment loss. [IAS 36.59] An impairment loss is recognised immediately in profit or loss unless the impairment is in relation to a revalued asset. An impairment loss on a revalued asset is treated as a decrease in valuation in accordance with IAS 16. To the extent that the asset has previously been revalued upwards, and there remains a balance on the revaluation reserve for that upwards valuation, any impairment loss will be recognised in other comprehensive income and reduce the revaluation surplus. If the impairment is greater than a previous valuation surplus then the excess is recognised in profit or loss for the period. Illustration 3 An entity has a property that was originally acquired for CU500,000. The property was revalued to CU800,000, and the CU300,000 was recognised in other comprehensive income as a revaluation surplus in accordance with IAS 16. The current carrying amount for the property is CU750,000. Due to finding that the land on which the property stands is contaminated, the entity has undertaken an impairment review. The fair value of the property is now estimated to be only CU300,000 and the value in use of the property is calculated as being CU400,000. The recoverable amount of the property is therefore CU400,000. An impairment of CU350,000 has occurred, being the difference between the current carrying amount of CU750,000 and the recoverable amount of CU400,000. As the property was previously valued upwards, this part of the impairment loss should be recognised in other comprehensive income, reducing the surplus on the revaluation reserve. Consequently, CU300,000 is recognised in other comprehensive income, i.e. it reduces the revaluation reserve balance to zero. The remaining loss of CU50,000 is recognised in profit or loss. Following the recognition of an impairment loss, any depreciation charged in respect of the asset in future periods will be based on the revised carrying amount, less any residual value expected, over the remaining useful life of the asset as per IAS 16.