IFRS for SMEs - World Banksiteresources.worldbank.org/.../5751608...IFRS_for_SMEs_English.pdfThe IFRS for SMEs 2 Topic 2.3 Section 13 Inventories Section 16 Investment Property Sec

1

International Financial Reporting Standards

IFRS for SMEsIFRS Foundation-World Bank

26–27 May 2011

Kiev, Ukraine

Copyright © 2010 IFRS Foundation.

All rights reserved.

2The IFRS for SMEs

Topic 2.3

Section 13 Inventories

Section 16 Investment Property

Sec 17 Property, Plant & Equipment

Section 18 Intangible Assets

Section 27 Impairment of Assets

Andrei Busuioc

3The IFRS for SMEs

Scope of

Sections 13 and 16–18

4Section 13 – Scope

Inventories are assets:

– held for sale in the ordinary course of business (finished goods);

– in the process of production for such sale (work in process); or

– in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials & consumables).

• Section 13 specifies accounting + reporting for inventories

Section 13 – Scope exclusions

• Section 13 applies to all inventories,

except

– work in progress arising under construction

contracts

– financial instruments

– biological assets related to agricultural

activity and agricultural produce at the

point of harvest

5

6Section 17 – Definition of PP&E

Property, plant and equipment (PP&E) are

tangible assets:

• held for

– use in the production or supply of goods

or services,

– for rental to others, or

– for administrative purposes;

• & are expected to be used in +1 period.


• Section 17 specifies accounting &

reporting for:

– property, plant and equipment; and

– investment property whose fair value

cannot be measured reliably without

undue cost or effort on an ongoing basis.


Investment property is land or a building

(or part of a building, or both) held by the

owner or by the lessee under a finance

lease to earn rentals or for capital

appreciation or both.


reporting for:

– investment property whose fair value can

be determined reliably without undue cost

or effort on an ongoing basis

9Section 18 – Definition intangible asset

Intangible = identifiable non-monetary

asset without physical substance

Identifiable when:

– separable, ie can be separated from the

entity & sold, transferred, licensed, rented

or exchanged, either individually or

together with a related contract, asset or

liability, or

– arises from contractual or legal rights



reporting for intangible assets, excluding

– goodwill

– financial assets

– mineral rights & mineral reserves, such as

oil, natural gas and similar

non-regenerative resources

Sections 13 & 16–18 – Scope examples

In scope of S13, S16, S17 or S18?

• Ex 1*: A trades in property (ie it buys

property to sell it at a profit near-term)

• Ex 2*: B trades in transferable taxi

licences

• Ex 3*: C produces wine from grapes

harvested from its vineyards in a 3-year

production cycle

* see example with the same number in Module 13 of the IFRS Foundation training material

11

Sections 13 & 16–18 –examples continued


• Ex 4*: D holds lubricants that are

consumed by its machine in producing

goods

• Ex 6*: E maintains its plant using:

– a bespoke long-life cleaning machine; &

– a set of low-value common tools acquired

from a local hardware store.


12



• Ex 9*: F operate a hotel from a building it

owns

– it rents out hotel rooms for short-stays

– guest services included in the room rate =

breakfast and television

– services charged for separately = other

meals, room bar, gymnasium facilities &

guided tours

* see example 9 in Module 16 of the IFRS Foundation training material

13



• Ex 3*: G buys a building to earn rentals under an operating lease from its subsidiary. The sub sells its products from the building

• Ex 7*: H owns– a herd of cattle—breeding stock of its

agricultural activities – a tractor used to transport feed to the

herd


14



• Ex 1: I owns digital films and audio

recordings which it licenses to its customers

• Ex 12: In accounting for the acquisition of

the net assets and operations of a

competitor J recognised future economic

benefits arising from assets that are not

individually identified as an asset (goodwill)

15

Examples of classification judgements

– when unclear what purpose of acquiring

property is (inventories, IP or PP&E?)

– when property owner provide ancillary

services to the occupants of a property (IP

or PP&E?)

– mixed use property (IP or PP&E?)

– when is undue cost or effort necessary to

measure the fair value of an IP on an

ongoing basis (IP or PP&E?)

16

17The IFRS for SMEs

Section 13 Inventories

and

Paragraphs 27.2–27.4 (impairment of

inventories)

18Section 13 – Measurement

• Inventories in the scope of Section 13 are

measured at the lower of:

– cost; and

– estimated selling price less costs to

complete and sell (SP-CTC&S).

Section 13 – Measurement exemptions

• Section 13 does not apply to the

measurement of inventories of

– producers of agricultural and forest

products, agricultural produce after

harvest, and minerals and mineral

products, or

– commodity brokers and dealers

when measured at fair value less costs to

sell through profit or loss

19

Section 13 – Measurement examples

Are these inventories measured in accordance with Section 13?

• Ex 7*: A commodity broker-trader acquires wheat in anticipation of selling it in the short-term. The broker-trader measures such inventories at fair value less costs to sell

• Ex 8*: Same as Ex 7 except the broker-trader measures inventories at cost


20

21Section 13 – Cost

• Cost = costs of purchase + costs of

conversion + other costs incurred in

bringing the inventories to their present

location and condition

22Section 13 – Cost of purchase

• Cost of purchase = purchase price + import duties + other taxes (non-refundable in nature) + other direct costs

– costs of purchase is after deducting trade discounts, rebates etc

– if purchase arrangement effectively contains an unstated financing element, eg a difference between the purchase price for normal credit terms and the deferred settlement amount, the difference is recognised as interest expense over the period of the financing (ie it is not added to the cost of the inventories)

23Section 13 – Examples cost of purchase

• Ex 13*: A buys a good priced at CU500 per unit from Z. Z awards A a 20% discount on orders of +100 units and 10% discount when A buys +999 units in 1 year. The discounts apply to all units acquired in a year.

A buys as follows: 800 units on 1/1/20X1 and 200 units on 24/12/20X1.

On 31/12/20X1, 150 units were unsold (ie inventories of A).


24Section 13 – Examples cost of purchase• Ex 13 continued:

A measures the cost of the inventories in 20X1 at CU350,000 [ie 1,000 units × (CU500 list price less 30%(CU500) volume discount)], because all units purchased in the year get the full 30% discount.

• A recognises:

– expense (cost of sales) of CU297,500 [ie 850

units sold × (CU500 list price less 30%(CU500)

volume discount)] in profit or loss in 20X1

– asset (inventories) of CU52,500 [ie 150 units

unsold × (CU500 less 30%(CU500) discount)]

at 31/12/20X1.

25Section 13 – Examples cost of purchase

• Ex 17*: A buys inventory for CU2,000,000 on 2-year interest-free credit. Appropriate discount rate = 10% per year.

The cost of the inventory is CU1,652,893 (ie the present value of the future payment).

Calculation: CU2,000,000 future payment ÷(1.1)2.


26Section 13 – Cost of conversion

• Cost of conversion = direct costs +

indirect costs (allocated production

overheads)

– allocated production overheads = fixed

production overheads + variable

production overheads

27Section 13 – Examples conversion costs

• Ex 18*: A makes concrete blocks in reusable moulds. Blocks dry in a drying room for 2 weeks. Dried blocks & raw mat’s stored in separate rooms.

A front-end loader (man 1) adds materials to the mixing machine operated by man 2. Casual labourers remove blocks from moulds. Man 3 supervises the factory. Man 4 does admin, finance and sales.

A operates from rented premises (fixed payments).


28Section 13 – Examples conversion cost

• Ex 18 continued:

Costs of conversion include

– direct costs: casual labour.

– production overheads: factory rent (incl.

raw mat’s area & drying room but excl.

finished goods room); staff cost of man

1,2 & 3; depreciation of equipment (front

end loader, mixing machine and moulds).

29Section 13 – Allocate production overheads

• Allocate fixed production overheads on

– normal capacity if low or normal

production

– actual production (units) if abnormally

high production (so that inventory is not

measured above cost)

– note: unallocated overheads are

expensed when incurred

• Allocate variable production overheads

on actual production

30Section 13 – Example FP overheads• Ex 20*: Fixed production (FP) overheads

= CU900,000. 200,000 units produced.

Normal capacity = 250,000 units.

Allocation rate: CU900,000 ÷ 250,000 units normal capacity = CU3.6 per unit produced.

Allocate to inventories: CU3.6 × 200,000 units = CU720,000.

Unallocated overheads of CU180,000 are expense (ie CU900,000 less CU720,000 in inventory).


31Section 13 – Example FP overheads

• Ex 21*: Same as Ex 20 except 300,000

units produced. Normal capacity =

250,000 units.

Allocation rate: CU900,000 ÷ 300,000 units

actual production = CU3 per unit produced.

Allocate to inventories: CU3 × 300,000

units = CU900,000


32Section 13 – Example wastage

• Ex 27*: Total costs of a production run = CU100,000 (including a cost of normal wastage of CU2,000). The weakening of operating controls while the owner-manager was in hospital caused the wastage of raw materials to increased to CU7,000 per production run.

The abnormal wastage cost of CU5,000 (CU7,000 – CU2,000) is not included in the cost of inventory but recognised as an expense.


33Section 13 – Joint and by-products

• Production process results in more than one product being produced simultaneously– joint product, or– main product and by-product.

• Allocate joint costs on a rational and consistent basis

• If by-product is immaterial– measure by-product at selling price less

costs to complete and sell (SP-CTC&S) – deduct this amount from the cost of the

main product.

34Section 13 – Example by-product

• Ex 22*: A production process costs CU100,000 (including allocated overheads). It mixes base chemicals to produce:– 5,000 litres of product A (sales value =

CU250,000); and– 1,000 litres of by-product C (sales value =

CU2,000).

Cost per litre of A = CU19.60 (ie CU100,000 less CU2,000 SP of C) ÷ 5,000 litres = CU19.60.


35Section 13 – Example joint product

• Ex 23*: Same as in Ex 22 except, instead of by-product ‘C’ there is a joint product ‘B’. Total costs = CU300,000 to produce: – 5,000 litres of A (sales value =

CU250,000); and– 4,000 litres of B (sales value =

CU400,000).

Allocate joint process costs on relative sales values.


36Section 13 – Example joint product continued

• Ex 23 continued:

Cost per litre of A = CU23.08 & B = CU46.15.

Calculation A: CU250,000 SP of A ÷CU650,000 combined SP of A & B ×CU300,000 costs = CU115,385 cost of 5,000 litres of A. CU115,385 ÷ 5,000 litres = CU23.08.

Calculation B: CU400,000 SP of B ÷CU650,000 combined SP of A & B ×CU300,000 costs = CU184,615 cost of 4,000 litres of B. CU184,615 ÷ 4,000 litres = CU46.15.

37Section 13 – Other costs

• Include other costs in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition.

• Ex 25*: A manufactures individually packaged pens.

The cost of the inventory includes the cost of manufacturing the pens and the individual packaging in which they are presented for sale.


38Section 13 – Cost formulas

• Specific identification of costs if

– goods not ordinarily interchangeable or

– segregated for specific projects

• Other inventories

– FIFO or

– weighted average (WA)

• Can use other ways if approximates cost

– standard cost

– retail method

– most recent purchase price

39Section 27 – Impairment of inventories

• Assess at each reporting date whether

any inventories are impaired, by

– comparing the carrying amount (CA) of

each item of inventory with its selling price

less costs to complete and sell (SP-

CTC&S)

– if CA > SP-CTC&S reduce CA to SP-

CTC&S

– that reduction = impairment loss

– impairment loss = expense in profit or loss

40Section 27 – Examples impairment

• Ex 1: At reporting date

– CA (cost) of raw materials = 100

– replacement cost = 80

– est. selling price of finished good = 200

– est. costs to convert the raw material into

finished good = 60

– est. costs to sell the finished good = 30

• Ex 2: Same as Ex 1 except est. SP = 180

41Section 27 – Impairment exception

• Inventory is assessed for impairment item by item

– only if it is impracticable to determine SP-

CTC&S item-by-item may items of inventory:

–relating to the same product line that have

similar purposes or end uses; and

– that are produced and marketed in the same

geographical area

be grouped for the purpose of assessing

impairment.

42Section 27 – Examples impairment

• Ex 3: A has 3 items of inventory

(finished goods) that qualify for

impairment testing as a group

– CA (cost) 90 + 100 + 130 = 320

– est. SP-CTC&S for the 3 items = 330

• Ex 4: Same as Ex 3 except

– items do not qualify for impairment testing

as a group; and

– est. SP-CTC&S = 110 each.

Section 27 – Reversal of impairment

• Reverse the impairment when:

–circumstances that caused inventories to

be impaired no longer exist; or

– there is clear evidence of an increase in

SP-CTC&S because of changed economic

circumstances

• Amount of reversal is limited to the

amount of the original impairment loss

– ie CA cannot be > cost

43

44Section 27 – Example reverse impairment

• Ex 5: At 31/12/20X1

– because of a decline in economic

circumstances recognised an impairment loss

on an item of inventory of 30 (ie cost = 100 &

SP-CTC&S = 70)

At 31/12/20X2

– because of an improvement in economic

circumstance the SP-CTC&S of that item is

120

45Section 13 – Measurement judgements

• For cost, examples include

– determining normal capacity

– separating normal & abnormal wastage

– allocating joint cost to joint products

–if no market for joint products at

separation

–if multiple joint products and exit joint

production at different stages

• For the impairment

– estimating SP-CTC&S

46Section 13 – Derecognition

• Expense inventory when

– impaired

– derecognised (ie when sold)

• Allocate inventory to another asset

– eg inventory used as a component of self-

constructed PP&E.

47Section 13 – Disclosure

• Disclose

– accounting policies for measuring

inventories

– carrying amount of inventories analysed by

class

– amount expensed in the period

– impairment losses recognised or reversed

– amount pledged as security for liabilities

48The IFRS for SMEs

Section 17

Property, Plant and Equipment

(including investment property whose fair

value cannot be measured reliably on an

ongoing basis)

49Section 17 – Recognition

Recognise the cost of an item of PP&E

as an asset if:

– probable future benefits inflows; and

– cost can be measured reliably.

50Section 17 – Measurement

• Initial measurement of PP&E = cost

– cost = purchase price + direct cost for PP&E

become capable of operating as intended +

initial estimate of obligation to dismantle/remove

– cash price equivalent at the recognition date

– if payment deferred beyond normal credit

terms, cost = present value of future payments

• Subsequent measurement = cost less

depreciation and impairment losses

51Section 17 – Replacing parts

• Parts that require replacement at regular

intervals (eg roof and furnace’s lining)

– add cost of replacement to the carrying

amount of the item if the replacement adds

benefits

– if consumption pattern different, depreciate

component separately over its useful life

– derecognise the parts replaced.

• Day-to-day servicing costs = expense

52Section 17 – Exchange of assets

• Cost of PP&E acquired in exchange for a

non-monetary asset = fair value unless

the transaction lacks commercial

substance

– if fair value cannot be measured reliably,

cost = carrying amount of the asset given

up

53Section 17 – Cost

• Cost of PP&E comprises:– purchase price (incl. fees, duties &

purchase taxes after deducting trade discounts & rebates)

– costs directly attributable to bring the PP&E to location & condition necessary for it to be capable of operating as intended by management: – site prep. costs, delivery & handling,

installation & assembly, & testing functions).

– initial estimate of dismantling & removing costs and site restoration.

54Section 17 – Example cost• Ex 15*: Costs before ready for use as

intended: – purchase price = 600 (incl 50 refundable

purch tax)– costs 120 to get equip to site and to install– in 10 yrs must restore land (PV to restore

= 100)– costs 135 to modify equip to operate as

intended– costs 10 to train staff to operate equip. – costs 37 for testing and final modifications

23 = operating loss after ready for use.

* Adapted from example 15 in Module 17 of the IFRS Foundation training material

55Section 17 – Depreciation• To allocate depreciable amount over

items useful life use judgement to

estimate

– useful life

– residual value

– depreciation method (eg straight-line,

diminishing balance, units of production)

• Re-evaluate estimates if change indicator

– change is a change in accounting

estimate

56Section 17 – Depreciation continued

• Depreciation begins when the PP&E is

available for use

– ie when it is in the location and condition

necessary for it to be capable of operating

in the manner intended by management

• Depreciation stops when the PP&E is

derecognised

57Section 17 – Example depreciation

• Ex 20*: On 1/1/20X1 buy machine for

CU100,000. Initial estimates &

judgements:

– useful life = 10 yrs & residual value = 0

– straight-line depreciation is appropriate

At 31/12/20X5 year-end reassess:

– useful life = 24 yrs (from the date of acq)

and residual value = CU20,000

– straight-line depreciation is appropriate

* adapted from example 20 in Module 17 of the IFRS Foundation training material


• Derecognise PP&E on disposal or when

no further benefits are expected from its

use or disposal

• Gain or loss = net disposal proceeds (if

any) less carrying amount

– show gain or loss in profit or loss (except

for some sale & leasebacks)

– gain is not revenue

59Section 17 – Example derecognition

• Ex 35*: On 1/11/20X5 sold building for

3,500. Carrying amount = 2,000. Selling

costs = 350 commission & 10 legal fees.

On 1/11/20X5 recognise gain of CU1,140

in profit or loss

[calculation: 3,500 less (2,000 + 350 + 10)]


60Section 17 – Disclosures

• Disclose for each class of PP&E– measurement bases– depreciation methods– useful lives or depreciation rates– gross carrying amount & accumulated

depreciation (incl. impairment losses) at beginning & end of period

– reconciliation of carrying amount at beginning & end of the reporting period showing specified items (comparatives not required)

61Section 17 – Other disclosures

• Also disclose

– existence and carrying amounts of PP&E

when entity has restricted title or PP&E is

pledged as security for liabilities

– amount of contractual commitments for

the acquisition of PP&E

62The IFRS for SMEs

Section 18

Intangible Assets other than Goodwill

63Section 18 – Recognition

Recognise the cost of intangible as asset if:– probable future benefits inflows, and– cost can be measured reliably– the asset does not result from

expenditure incurred internally on an intangible item– cannot recognise R&D costs; internally

generated brands, logos, publishing titles, customer lists; expenditure to open new facilities or launch new products; training activities; advertising; relocating or reorganising costs.

64Section 18 – Recognise this brand?

• Ex 1: A developed a brand that allows it

to charge a premium for its products.

A maintains & enhances its brand by

sponsoring local events & advertising.

• Ex 2: Same as Ex 1 except A bought

brand from a competitor in a separate

acquisition.

65

Section 18 – Intangibles in business

com

• Intangible asset acquired in a bus com– is normally recognised as a separate

asset –fair value can be measured reliably

– however, not recognised when arises from legal/contractual rights & fair value cannot be measured reliably because the asset either:–is not separable from goodwill; or –is separable but no history or evidence

of exchange transactions for similar assets, and otherwise estimating fair value would be dependent on immeasurable variables.

66Section 18 – Initial measurement

• Initial measurement of intangible = cost– if separately acquired, cost = purchase

price + directly attrib. cost of preparing for intended use

– if acquired in a business combination, cost = at acquisition fair value

– if acquired in government grant, cost = fair value at the date the grant is received or receivable

Internally generated intangibles are not recognised & therefore are not measured

67Section 18 – Example business com

Ex 3: A buys B when B’s intangibles were:

A incurred 200 to complete in-process

R&D project & decides to develop the

related product commercially.

CA FV

Customer list 0 50

In process R&D project 0 80

Licence to operate 100 150

Brand (trademark & brand name) 0 300

68Section 18 – Judgements about cost

• Judgements in measuring cost include:– deferred payment—determining the

discount rate– exchange transaction—estimating fair

value if no active market for asset received or asset given up

– acquired in a business combination—estimating fair value if no active markets & judging if fair value can be measured reliably (for recognition)

– acquired by government grant—estimating fair value of if no active market

69Section 18 – Subsequent measurement

• After initial recognition measure intangibles at cost less amortisation & impairment losses

• Similar to PP&E but– all intangibles considered to have finite useful

life– useful life not > the contractual/legal right– useful life includes renewal periods only if

evidence to support likely renewal without significant cost

– useful life = 10 yrs if cannot estimate reliably– residual value is 0, except in specified

circumstances

70Section 18 – Estimating useful life

• Ex 4: A acquires a customer list. Expects to benefit from list for 1–3 yrs.

• Ex 5: B acquires a 5-yr airline route authority (ARA) that is renewable every 5 yrs at no cost– renewal is routine if specified rules &

regulations are complied with– B is compliant & expects to fly the route

indefinitely– an analysis of demand and cash flows

supports those assumptions


• Derecognise intangibles on disposal or

when no further benefits are expected

from its use or disposal

• Gain or loss = net disposal proceeds (if

any) less carrying amount

– show gain or loss in profit or loss (except

for some sale & leasebacks)

– gain is not revenue

72Section 18 – Disclosures

• Disclose for each class of intangible– line item in income statement (or SOCI or

SOI&RE) in which amortisation is included

– amortisation methods– useful lives or amortisation rates– gross carrying amount & accumulated

amortisation (incl. impairment losses) at beginning & end of period

– reconciliation of carrying amount at beginning & end of the reporting period showing specified items (comparatives not required)

73Section 18 – Other disclosures

– R&D expenditure expensed in the period– existence & carrying amounts of intangible

with restricted title or pledged as security for liability

– amount of contractual commitments for the acquisition of intangibles

– (i) description, (ii) carrying amount and (iii) remaining amortisation period of individual intangible asset that is material to the entity’s financial statements

– if acquired as government grant & initially recognised at fair value―the fair value initially recognised & the carrying amount

74The IFRS for SMEs

Section 27

Impairment of Assets


• Section 27 specifies accounting and

reporting of impairment losses of all assets

except:

– deferred tax assets

– assets arising from employee benefits

– financial assets in scope of Sections 11 & 12

– assets measured at fair value

76Section 27 – General principles

• Assets except inventories:– at reporting date assess whether there is

any indication that an asset may be impaired

– if any such indication exists, estimate the recoverable amount (RA) of the asset

– impair if carrying amount (CA) > RA– recognise impairment loss in profit or loss

• Note: if impairment indicated– review the remaining useful life, the

depreciation (amortisation) method or the residual value for the asset even if no impairment loss found

77Section 27 – Impairment testing level

• Impairment test at level of

– individual asset (if possible)

– otherwise cash-generating unit (CGU)

– eg when need to calculate value in use

and the individual assets do not

generate cash flows by themselves

A CGU is 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.

78Section 27 – Impairment indicators

• Consider, as a minimum:

• External sources of information in a period

– asset’s market value declined significantly

> expected

– significant changes in the technological,

market, economic or legal environment

– market rates increased (eg effect on

discount rate)

– CA of the net assets > estimated fair

value of the entity

79C Section 27 – Impairment indicators continued

• Internal sources of information– obsolete or physical damaged asset– significant changes in the extent or

manner in which, an asset is (or is expected to be) used– eg idle assets, plans to discontinue or

restructure operation, plans to dispose before expected, and reassessing the useful life of an asset as finite rather than indefinite.

– internal reporting indicates that the economic performance of an asset is, or will be, worse than expected (eg operating results & cash flows)

80Section 27 – Recoverable amount

• Recoverable amount = higher of value in

use (VIU) & fair value less costs to sell

(FV-CTS)

– if either VIU or FV-CTS > CA then no

need to determine the other

– if no reason to believe VIU > FV-CTS,

then FV-CTS may be used as RA

81Section 27 – Estimating FV-CTS

• FV-CTS = amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal– best evidence is a price in a binding sale

agreement in an arm’s length transaction or a market price in an active market

– if not available, estimate using best information available considering the outcome of recent transactions for similar assets within the same industry

82Section 27 – Estimating VIU

• VIU = present value of the future net cash

flows expected to be derived from an asset.

• Steps to calculate VIU:

– estimate future cash flows (in & out) from

continuing use of the asset & its ultimate

disposal, and

– apply appropriate discount rate to future

cash flows

83Section 27 – Estimating VIU

• Reflect in calculation of VIU:– est. future cash flows (FCFs) entity

expects– expectations about possible variations in

the amount or timing of those FCFs– time value of money (current market risk-

free rate of interest)– price for uncertainty inherent in the asset– other factors (eg illiquidity) that market

participants would adjust forAvoid double-counting in FCFs & discount

rate

84Section 27 – Est. VIU cash flows

• Estimates of FCFs include:– cash inflows from the continuing use– cash outflows necessary to generate cash

inflows (directly attributed or allocated on reasonable & consistent basis)

– net cash flows, if any, expected from disposal at end of useful life

• May:– use recent budgets/forecasts to est. cash

flows– extrapolate beyond forecast period using

steady or declining growth rate, unless another is justified

85Section 27 – Est. VIU cash flows continued

• Est. FCFs for asset in current condition

• Est. FCFs don’t include in/outflows from:

– a future restructuring to which an entity is

not yet committed, or

– improving or enhancing the asset’s

performance.

• Est. FCFs also don’t include:

– cash in/outflows from financing activities,

and

– income tax receipts/payments.

86Section 27 – Est. VIU discount rate

• Discount rate/s is a pre-tax rate/s that

reflect/s current market assessments of:

– the time value of money (ie current

market risk-free rate of interest); and

– the risks specific to the asset for which

the future cash flow estimates have not

been adjusted (ie avoid double-counting).

87Section 27 – Cash generating unit (CGU)

• Allocate impairment loss:

– 1st to any goodwill allocated to the CGU

– 2nd to other assets pro rata on the basis

CA of each asset in CGU

– however, cannot reduce the CA of any

asset below the highest of 0, FV-CTS &

VIU (if determinable)

–reallocate to other assets of CGU

88Section 27 – Example CGU impairment

• Ex 1: At 31/12/20X1 CA of a CGU’s assets = 210 (ie 150 taxis, 50 taxi licence & 10 goodwill)

Impairment indicated & RA = 170.

Fair value of taxis = 140.

Impairment loss = 40 (ie 210 CA less 170 RA)

1st allocate 10 loss to goodwill

2nd allocate remaining 30 loss, ie 22.5 to taxis & 7.5 to licence (pro rata on CA)

3rd reallocate 12.5 loss from taxis to licence

89Section 27 – Goodwill

• On acquisition date goodwill is allocated to

each cash-generating unit that is expected

to benefit from the synergies of the business

combination

• CA of partly-owned CGU is notionally

adjusted for the NCI’s share of goodwill

before being compared with its RA

90Section 27 – Example goodwill

• Ex 2: Goodwill of CU40 on A’s

acquisition of 75% of B’s shares on

1/1/20X1.

To reflect synergies the group allocated

the goodwill 10 to A’s CGU and 30 to B’s

CGU.

• For impairment testing purposes only B’s

goodwill is notionally grossed up to 40 (ie

additional goodwill for NCI = 10).

91Section 27 – Goodwill continued

• If goodwill cannot be allocated to CGU/s on a non-arbitrary basis, then for the purposes of testing goodwill for impairment, the entity determines the recoverable amount of either:– the acquired entity in its entirety (if

goodwill relates to an acquired entity that has not been integrated).

– the entire group of entities, excluding any entities that have not been integrated (if the goodwill relates to an acquired entity that has been integrated).

92Section 27 – Reversing impairment loss

• General principles:– at reporting date assess whether there is

any indication that impairment has reversed

– if any such indication exists, estimate RA– reverse impairment in profit or loss if CA <

RA, but–reversal cannot increase the CA above

the CA that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior years.

–goodwill impairment cannot be reversed

93Section 27 – Example reverse impairm’t

• Ex 3: Facts from Ex 1. At 31/12/20X2 CA of CGU = 120 (ie 100 taxis & 20 licence)

Impairment reversal indicated & RA estimated = 150

Potential impairment reversal = 30 (ie 150 RA less 120 CA) but limited to 20 (as follows)

1st allocate to assets pro rata on CAs, ie 5 to licence & 25 to taxis

2nd limit amt allocated to taxis to 7 (if no impairment in 20X1, CA at 20X2 = 107)

94Section 27 – Example reversal continued

• Ex 3 continued:

3rd reallocate 18 reversal from taxis to licence

Total reversal provisionally allocated to licence = 23 (ie 5 + 18)

4th limit amt allocated to licences to 13 (if no impairment in 20X1, CA at 20X2 = 33)

5th as there are no other assets to reallocate the unallocated 10 (ie 23 less 13) reversal to, limit the total impairment reversal to 20 (ie 7 for taxis and 13 for licence)

95Section 27 – After reversal

• After reversing impairment loss

– adjust the depreciation/amortisation

charge for the asset in future periods to

allocate the asset’s revised CA, less its

residual value (if any), on a systematic

basis over its remaining useful life.

96Section 27 – Impairment disclosures

• Disclose separately for each of―(a)

inventories; (b) PP&E; (c) goodwill; (d)

intangibles other than goodwill; (e)

investments in associates; (f) investments in

joint ventures:

– amount of impairment losses recognised

in profit or loss & line item(s) in the

income statement (or SOCI or SOI&RE)

in which included.

– same for reversals of impairment losses

© 2010 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

97Questions or comments?

Expressions of individual views by

members of the IASB and its staff

are encouraged.

The views expressed in this

presentation are those of the

presenter.

Official positions of the IASB on

accounting matters are determined

only after extensive due process

and deliberation.

98

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The accounting requirements applicable to small and medium-sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009.

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