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TMI BlogImpairment of AssetsX X X X Extracts X X X X X X X X Extracts X X X X ..... ounting 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, Construction Contracts); (c) financial assets1, 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 the asset: (a) if the fair value of the asset is its market value, the only difference between the fair value of the asset and its net selling price is the direct incremental co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sposal. 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, less its residual value. 4.9 Useful life is either: (a) the period of time over which an asset is expected to be used by the enterprise; or (b) the number of production or similar units expected to be obtained from the asset by the enterprise. 4.10 A cash generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include plans to discontinue or restructure the operation to which an asset belongs or to dispose of an asset before the previously expected date; and (g) evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected. 9. The list of paragraph 8 is not exhaustive. An enterprise may identify other indications that an asset may be impaired and these would also require the enterprise to determine the asset s recoverable amount. 10. Evidence from internal reporting that indicates that an asset may be impaired includes the existence of: (a) cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are significantly higher than those originally budgeted; (b) actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those budgeted; (c) a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraphs 15 to 55 set out the requirements for measuring recoverable amount. These requirements use the term an asset but apply equally to an individual asset or a cash-generating unit. 15. It is not always necessary to determine both an asset s net selling price and its value in use. For example, if either of these amounts exceeds the asset s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. 16. It may be possible to determine net selling price, even if an asset is not traded in an active market. However, sometimes it will not be possible to determine net selling price because there is no basis for making a reliable estimate of the amount obtainable from the sale of the asset in an arm s length transaction between knowledgeable and willing parties. In this case, the recoverable amount of the asset may be taken to be its value in use. 17. If there is no reason to believe that an asset s value in use materially exceeds its net selling price, the asset s recoverable amount may be taken to be its net selling price. This will often be the case for an asset that is held for disposal. This is because the value in use of an asset h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as liabilities, are deducted in determining net selling price. Examples of such costs are legal costs, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits and costs associated with reducing or reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset. 24. Sometimes, the disposal of an asset would require the buyer to take over a liability and only a single net selling price is available for both the asset and the liability. Paragraph 76 explains how to deal with such cases. Value in Use 25. Estimating the value in use of an asset involves the following steps: (a) estimating the future cash inflows and outflows arising from continuing use of the asset and from its ultimate disposal; and (b) applying the appropriate discount rate to these future cash flows. Basis for Estimates of Future Cash Flows 26. In measuring value in use: (a) cash flow projections should be based on reasonable and supportable assumptions that represent management s best estimate of the set of economic conditions that will exist over th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Composition of Estimates of Future Cash Flows 31. Estimates of future cash flows should include: (a) projections of cash inflows from the continuing use of the asset; (b) projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and that can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and (c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life. 32. Estimates of future cash flows and the discount rate reflect consistent assumptions about price increases due to general inflation. Therefore, if the discount rate includes the effect of price increases due to general inflation, future cash flows are estimated in nominal terms. If the discount rate excludes the effect of price increases due to general inflation, future cash flows are estimated in real terms but include future specific price increases or decreases. 33. Projections of cash outflows include future overheads that can be attributed directly, or allocated on a reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the restructuring (based on the most recent financial budgets/forecasts that have been approved by management). Illustration 5 given in the Illustrations attached to the Standard illustrates the effect of a future restructuring on a value in use calculation. 40. Until an enterprise incurs capital expenditure that improves or enhances an asset in excess of its originally assessed standard of performance, estimates of future cash flows do not include the estimated future cash inflows that are expected to arise from this expenditure (see Illustration 6 given in the Illustrations attached to the Standard). 41. Estimates of future cash flows include future capital expenditure necessary to maintain or sustain an asset at its originally assessed standard of performance. 42. Estimates of future cash flows should not include: (a) cash inflows or outflows from financing activities; or (b) income tax receipts or payments. 43. Estimated future cash flows 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 consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile equivalent to those that the enterprise expects to derive from the asset. This rate is estimated from the rate implicit in current market transactions for similar assets or from the weighted average cost of capital of a listed enterprise that has a single asset (or a portfolio of assets) similar in terms of service potential and risks to the asset under review. 49. When an asset-specific rate is not directly available from the market, an enterprise uses other bases to estimate the discount rate. The purpose is to estimate, as far as possible, a market assessment of: (a) the time value of money for the periods until the end of the asset s useful life; and (b) the risks that the future cash flows will differ in amount or timing from estimates. 50. As a starting point, the enterprise may take into account the following rates: (a) al 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only if, that is required by another Accounting Standard. 61. After the recognition of an impairment loss, 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. 62. If an impairment loss is recognised, any related deferred tax assets or liabilities are determined under Accounting Standard (AS) 22, Accounting for Taxes on Income (see Illustration 3 given in 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from continuing use are inflows of cash and cash equivalents received from parties outside the reporting enterprise. In identifying whether cash inflows from an asset (or group of assets) are largely independent of the cash inflows from other assets (or groups of assets), an enterprise considers various factors including how management monitors the enterprise s 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. Illustation 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 ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 consider certain recognised liabilities in order to determine the recoverable amount of a cash-generating unit. This may occur if the disposal of a cash-generating unit would require the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 -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 (ii) then, compare the recoverable amount of the cash- generating unit under review to its carrying amount (including the carrying amount of allocated goodwill, if any) and recognise any impairment loss in accordance with paragraph 87. The enterprise should perform the step at (ii) above even if none o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 -up test first to all assets that may be impaired, any impairment loss identified for the larger cash-generating unit in the -down test relates only to goodwill allocated to the larger unit. 82. If the top-down test is applied, an enterprise formally determines the recoverable amount of the larger cash-generating unit, unless there is persuasive evidence that there is no risk that the larger cash-generating unit is impaired. Corporate Assets 83. Corporate assets include group or divisional assets such as the building of a headquarters or a division of the enterprise, EDP equipment or a research centre. The structure of an enterprise determines whether an asset meets the definition of corporate assets (see paragraph 4) fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low the highest of: (a) its net selling price (if determinable); (b) its value in use (if determinable); and (c) zero. The amount of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro-rata basis. 89. The goodwill allocated to a cash-generating unit is reduced before reducing the carrying amount of the other assets of the unit because of its nature. 90. If there is no practical way to estimate the recoverable amount of each individual asset of a cash-generating unit, this Standard requires the allocation of the impairment loss between the assets of that unit other than goodwill on a pro-rata basis, because all assets of a cash-generating unit work together. 91. If the recoverable amount of an individual asset cannot be determined (see paragraph 65): (a) an impairment loss is recognised for the asset if its carrying amount is greater than the higher of its net selling price and the results of the allocation procedures described in paragraphs 87 and 88; and (b) no impairment loss is recognised for the asset if the related cash- generating unit is not im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required by another Accounting Standard. Reversal of an Impairment Loss 93. Paragraphs 94 to 100 set out the requirements for reversing an impairment loss recognised for an asset or a cashgene individual asset or a cash-generating unit. Additional requirements are set out for an individual asset in paragraphs 101 to 105, for a cash-generating unit in paragraphs 106 to 107 and for goodwill in paragraphs 108 to 111. 94. An enterprise should assess at each balance sheet date whether there is any indication that an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased. If any such indication exists, the enterprise should estimate the recoverable amount of that asset. 95. In assessing whether there is any indication that an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased, an enterprise should consider, as a minimum, the following indications: External sources of information (a) the asset s market value has increased significantly during the period; (b) significant changes with a favourable effect on the enterprise have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r from use or sale, since the date when an enterprise last recognised an impairment loss for that asset. An enterprise is required to identify the change in estimates that causes the increase in estimated service potential. Examples of changes in estimates include: (a) a change in the basis for recoverable amount (i.e., whether recoverable amount is based on net selling price or value in use); (b) if recoverable amount was based on value in use: a change in the amount or timing of estimated future cash flows or in the discount rate; or (c) if recoverable amount was based on net selling price: a change in estimate of the components of net selling price. 100. An asset s value in use may become greater than the asset s carrying amount simply because the present value of future cash inflows increases as they become closer. However, the service potential of the asset has not increased. Therefore, an impairment loss is not reversed just because of the passage of time (sometimes called the unwinding of the discount), even if the recoverable amount of the asset becomes higher than its carrying amount. Reversal of an Impairment Loss for an Individual Asset 101. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 107. In allocating a reversal of an impairment loss for a cash-generating unit under paragraph 106, the carrying amount of an asset should not be increased above the lower of: (a) its recoverable amount (if determinable); and (b) the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods. The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro-rata basis. Reversal of an Impairment Loss for Goodwill 108. As an exception to the requirement in paragraph 98, an impairment loss recognised for goodwill should not be reversed in a subsequent period unless: (a) the impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur; and (b) subsequent external events have occurred that reverse the effect of that event. 109. Accounting Standard (AS) 26, Intangible Assets, prohibits the recognition of internally generated goodwill. Any subsequent increase in the reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plan, negotiations with potential purchasers of the discontinuing operation or actual binding sale agreements may indicate that the assets of the discontinuing operation may be further impaired or that impairment losses recognised for these assets in prior periods may have decreased. As a consequence, when such events occur, an enterprise re- estimates the recoverable amount of the assets of the discontinuing operation and recognises resulting impairment losses or reversals of impairment losses in accordance with this Standard. 115. A price in a binding sale agreement is the best evidence of an asset s (cash-generating unit s) net selling price or of the estimated cash inflow from ultimate disposal in determining the asset s (cash-generating unit s) value in use. 116. The carrying amount (recoverable amount) of a discontinuing operation includes the carrying amount (recoverable amount) of any goodwill that can be allocated on a reasonable and consistent basis to that discontinuing operation. Disclosure 117. For each class of assets, the financial statements should disclose: (a) the amount of impairment losses recognised in the statement of profit and loss d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) the amount of the impairment loss recognised or reversed by class of assets and by reportable segment based on the enterprise s primary format (as defined in AS 17); and (iii) if the aggregation of assets for identifying the cash-generating unit has changed since the previous estimate of the cashthe current and former way of aggregating assets and the reasons for changing the way the cashgenerating unit is identified; (e) whether the recoverable amount of the asset (cash-generating unit) is its net selling price or its value in use; (f) 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Cash-Generating Units The purpose of this Illustration is: (a) to give an indication of how cash-generating units are identified in various situations; and (b) to highlight certain factors that an enterprise may consider in identifying the cash-generating unit to which an asset belongs. A - Retail Store Chain Background Al. Store ashiers 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. 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, B and C? Case 1: There is an active market for A s products. Case 2: There is no active market for A s products. Analysis Case 1 A12. It is likely that A is a separate cash-generating unit because there is an active market for its products (see Example B-Plant for an Intermediate Step in a Production Process, Case 1). A13. Although there is an active market for the products assemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition, 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 with the tenant is for five years. What is the cash-generating unit of the building? Analysis A21. The primary purpose of the building is to serve as a corporate asset, supporting M s manufacturing activities. Therefore, the building as a whole cannot be considered to generate cash inflows that are largely independent of the cash inflows from the enterprise as a whole. So, it is likely that the cash-generating unit for the building is M as a whole. A22. The building is not held as an investment. Therefore, it would not be appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Country A cash-generating unit is 1,360 lakhs: the higher of the net selling price of the Country A cash- generating unit (not determinable) and its value in use (Rs. 1,360 lakhs). A30. T compares the recoverable amount of the Country A cash-generating unit to its carrying amount (see Schedule 3). A31. T recognises an impairment loss of Rs. 307 lakhs immediately in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 0 1,360 1,360 Illustration 3 - Deferred Tax Effects A33. An enterprise has an asset with a carrying amount of Rs. 1,000 lakhs. Its recoverable amount is Rs. 650 lakhs. The tax rate is 30% and the carrying amount of the asset for tax purposes is Rs. 800 lakhs. Impairment losses are not allowable as deduction for tax purposes. The effect of the impairment loss is as follows: Amount in Rs. lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1,113 Recoverable amount 1,710 Excess of recoverable amount over carrying amount 597 (1) After recognition of the impairment loss at the end of 20X4, T revised the depreciation charge for the Country A identifiable assets (from Rs. 133.3 lakhs per year to Rs. 123.7 lakhs per year), based on the revised carrying amount and remaining useful life (11 years). A38. There has been a favourable change in the estimates used to determine the recoverable amount of the Country A net assets since the last impairment loss was recognised. Therefore, in accordance with paragraph 98 of this Standard, T recognises a reversal of the impairment loss recognised in 20X4. A39. In accordance with paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 Rs. 100 lakhs. Since K is not yet committed to the restructuring, a provision has not been recognised for the future restructuring costs; and (b) there will be future benefits from this restructuring in the form of reduced future cash outflows. A43. At the end of 20X2, K becomes committed to the restructuring. The costs are still estimated to be Rs. 100 lakhs and a provision is recognised accordingly. The plant s estimated future cash flows reflected in the most recent management approved budgets are given in paragraph A47 and a current discount rate is the same as at the end of 20X0. A44. At the end of 20X3, restructuring costs of Rs. 100 lakhs are paid. Again, the plant s estimated future cash flows reflected in the most recent management approved budgets and a current discount rate are the same as those estimated at the end of 20X2. At the End of 20X0 Schedule 1. Calculation of the plant s value in use at the end of 20X0 (Amount in Rs. lakhs) Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Future cash flows Discounted at 14% 20X3 420 (1) 368 20X4 570 (2) 439 20X5 380 (2) 256 20X6 450 (2) 266 20X7 510 (2) 265 20X8 510 (2) 232 20X9 480 (2) 192 20X10 410 (2) 144 Value in use 2,162 (1) Excludes estimated restructuring costs because a liability has already been recognised. (2) Includes estimated benefits expected from the restructuring reflected in management budgets. A48. The plant s recoverable amount (value in use) is higher than its carrying amount (see Schedule 4). Therefore, K reverses the impairment loss recognised for the plant at the end of 20X0. Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X2 (Amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprise F tests a plane for impairment. The plane is a cash-generating unit. It is carried at depreciated historical cost and its carrying amount is Rs. 1,500 lakhs. It has an estimated remaining useful life of 10 years. A51. For the purpose of this illustration, it is assumed that the plane s net selling price is not determinable. Therefore, the plane s recoverable amount is its value in use. Value in use is calculated using a pre-tax discount rate of 14%. A52. Management approved budgets reflect that: (a) in 20X4, capital expenditure of Rs. 250 lakhs will be incurred to renew the engine of the plane; and (b) this capital expenditure will improve the performance of the plane by decreasing fuel consumption. A53. At the end of 20X4, renewal costs are incurred. The plane s estimated future cash flows reflected in the most recent management approved budgets are given in paragraph A56 and a current discount rate is the same as at the end of 20X0. At the End of 20X0 Schedule 1. Calculation of the plane s value in use at the end of 20X0 (Amount in Rs. lakhs) Year Future cash flows Discounted at 14% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Future cash flows (1) Discounted at 14% 20X5 303.21 265.97 20X6 327.50 252.00 20X7 317.21 214.11 20X8 319.50 189.17 20X9 331.00 171.91 20X10 279.99 127.56 Value in use 1,220.72 (1) Includes estimated benefits expected from the renewal of the engine reflected in management budgets. A57. The plane s recoverable amount (value in use) is higher than the plane s carrying amount and depreciated historical cost (see Schedule 4). Therefore, K reverses the impairment loss recognised for the plane at the end of 20X0 so that the plane is carried at depreciated historical cost. Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X4 (Amount in Rs. lakhs) Plane Carrying amount at the end of 20X0 (Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Illustration 7 - Application of the -Up and Top-Down Tests to Goodwill In this illustration, tax effects are ignored. A58. At the end of 20X0, enterprise M acquired 100% of enterprise Z for Rs. 3,000 lakhs. Z has 3 cash-generating units A, B and C with net fair values of Rs. 1,200 lakhs, Rs. 800 lakhs and Rs. 400 lakhs respectively. M recognises goodwill of Rs. 600 lakhs (Rs. 3,000 lakhs less Rs. 2,400 lakhs) that relates to Z. A59. At the end of 20X4, A makes significant losses. Its recoverable amount is estimated to be Rs. 1,350 lakhs. Carrying amounts are detailed below. Schedule 1. Carrying amounts at the end of 20X4 (Amount in Rs. lakhs) End of 20X4 A B C Goodwill Total Net carrying amount 1,300 1,200 800 120 3,420 A - Goodwill Can be Allocated on a Reasonable and Consistent Basis A60. At the date of acquisition of Z, the net fair values of A, B and C are considered a reasonable basis for a pro-rata allocation of the goodwill to A, B and C. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A66. Since the goodwill could not be allocated on a reasonable and consistent basis to A, M also performs a top-down test in accordance with paragraph 78(b) of this Standard. It compares the carrying amount of Z as a whole to its recoverable amount (Z as a whole is the smallest cash-generating unit that includes A and to which goodwill can be allocated on a reasonable and consistent basis). Schedule 5. Application of the -down test (Amount in Rs. lakhs) End of 20X4 A B C Goodwill Z Carrying amount 1,300 1,200 800 120 3,420 Impairment loss arising from the bottom-up test 0 - - - 0 Carrying amount after the bottom-up test 1,300 1,200 800 120 3,420 Recoverable amount 3,400 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d consistent basis to the individual cash- generating units under review. Therefore, a top-down test will be applied in addition to the bottom-up test. Allocation of Corporate Assets A74. The carrying amount of the headquarter building is allocated to the carrying amount of each individual cash-generating unit. A weighted allocation basis is used because the estimated remaining useful life of A s cashgenerating unit is 10 years, whereas the estimated remaining useful lives of B and C s cash-generating units are 20 years. Schedule 1. Calculation of a weighted allocation of the carrying amount of the headquarter building (Amount in Rs. lakhs) End of 20X0 A B C Total Carrying amount 100 150 200 450 Useful life 10 years 20 years 20 years Weighting based on useful life 1 2 2 Carrying amount after weighting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56 24 155 67 7 55 21 34 13 60 22 162 61 8 55 18 35 11 63 21 166 54 9 53 15 35 10 65 18 167 48 10 48 12 35 9 66 16 169 42 11 36 8 66 14 132 28 12 35 7 66 12 131 25 13 35 6 66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t loss 0 (42) (4) A77. The next step is to allocate the impairment losses between the assets of the cash-generating units and the headquarter building. Schedule 4. Allocation of the impairment losses for cash-generating units B and C (Amount in Rs. lakhs) Cash-generating unit B C To headquarter building (12) (42*56/206) (1) (4*75/275) To assets in cash-generating unit (30) (42*150/206) (3) (4*200/275) (42) (4) A78. In accordance with the -down test, since the research centre could not be allocated on a reasonable and consistent basis to A, B and C s cash-generating units, M compares the carrying amount of the smallest cash- generating unit to which the carrying amount of the research centre can be allocated (i.e., M as a whole) to its recoverable amount. Schedule 5. Application of the -down test (Amount in Rs. lakhs) End of 20X0 A B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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