Separately acquired intangible assets

Chapter 13 – Impairment Page 159

Chapter 13 IMPAIRMENT

1 Business Context Asset availability and usage in the business is one of the key drivers to business success. Any assessment of assets should therefore consistently reflect their worth to the business. At the very least, an asset recognised in the statement of financial position should not be reported at a value above the amount that could be recovered from using or selling the asset. During periods where general prices are increasing there is an assumption that recoverability of the reported value of such assets will not be an issue. It is important that all assets utilised within the business are considered. For example, some intangible assets which are highly technical in nature may attract premium valuations which may not be recoverable as technology continues to be developed or competitors enter the market. It is therefore important that an entity considers the values its assets are measured at in the context of not only the individual entity but also the wider industry in which it operates. Whenever an asset’s recoverable amount falls to an amount less than its carrying amount, it is said to be impaired. Its value in the statement of financial position is therefore reduced to this recoverable amount and, in most instances, an expense is recognised in profit or loss. 2 Chapter Objectives This chapter deals with ‘impairment’, which is a loss in the value of an asset i.e. its carrying amount recognised in the statement of financial position is greater than its recoverable amount. The recoverable amount of an asset is that which can be recovered through continuing to use the asset or by selling it. Impairment usually arises where a substantial change has come about which adversely affects the way in which an asset is being used in the business. A simple example is where there have been technological advances that limit the planned use of an asset. Judgement is required by management to establish when an asset’s value is impaired, and how to measure the impairment. IAS 36 Impairment of assets provides guidance on identifying indicators that suggest impairment may have occurred and how to measure the extent of that impairment. It also considers the circumstances in which impairments may be reversed. On completion of this chapter you should be able to:  demonstrate a knowledge of the objectives and scope of IAS 36;  demonstrate a knowledge of the terminology and definitions relating to impairment of assets; Illustration 1 Businesses in the European telecoms sector invested over 100bn in third generation 3G mobile phone operating licences but had to reduce the reported value of the licences very quickly when they realised that the market for the related services was significantly lower than expected. The reduction in the reported value had a major impact on their operating performance, their overall value and, in some cases, their ability to continue in business. Chapter 13 – Impairment Page 160  understand the key principles relating to the identification and measurement of impairment;  understand in which circumstances and to what extent impairments can subsequently be reversed; and  apply IAS 36 knowledge and understanding in particular circumstances through basic calculations. 3 Objectives, Scope and Definitions of IAS 36 IAS 36 applies to all assets apart from those specifically excluded from the standard. It most commonly applies to assets such as property, plant and equipment accounted for in accordance with IAS 16 Property, plant and equipment and intangible assets accounted for in accordance with IAS 38 Intangible assets. The standard also applies to some financial assets, namely investments in subsidiaries, associates and joint ventures. Impairments of all other financial assets are accounted for in accordance with IAS 39 Financial instruments: measurement and recognition. [IAS 36.2] An entity is required to assess at each reporting date whether there is an indication that an asset is impaired. If such an indication is identified, the asset’s recoverable amount should be calculated and compared to its carrying amount. In addition, regardless of whether there have been any indicators of an impairment during the period, there are three specific situations where the recoverable amount of the asset should be assessed for impairment annually. The three scenarios are: [IAS 36.10]  where the entity has intangible assets that have been identified as having indefinite lives;  where the entity has an intangible asset that is not yet ready for use; and  where goodwill has been recorded as a result of a business combination. The impairment test in these circumstances may be carried out at any time during the period, provided that it is carried out at the same time each period. 4 Key Stages in the Impairment Process The stages in the process of identifying and accounting for an impairment loss are as follows: i assess whether there is an indication that an asset may be impaired. Note that if there is no such indication, then, subject to the exceptions listed above, no further action is required; ii if there is an indication of impairment, then measure the asset’s recoverable amount; and iii reduce the asset’s carrying amount to its recoverable amount, usually by treating the loss as a separately disclosed expense.