Impairments are recorded similarly for both individual assets and Cash Generating Units (CGU). However, CGU impairment accounting includes an additional initial step, reducing any Goodwill associated with the CGU, first. Both IFRS (IAS 36) and ASPE (ASPE 3063) have similar guidelines for booking impairments.
Step 1: Cash Generating Unit Only
1. First, any goodwill which had been allocated to the CGU is written down.
2. The remainder of the loss is written down, pro-rata, based on each asset’s carrying amount. However, no individual asset can be written down below the highest of:
Fair Value less disposal costs,
Value in Use,
Zero
The remaining losses are accounted for, pro-rata, using the table in Step 2, below.
Step 2: Individual Assets and CGUs
Individual assets do not have Goodwill associated with them, so step 1, from above, is skipped, and we start with the table, below. For CGUs with Goodwill associated with them, this will be Step 2.
If no revaluation had previously occurred
The entity can choose between the two options below, where the impairment loss is taken to Accumulated Depreciation.
OR:
P/L = Profit Loss section of the Income Statement. The Impairment loss will be considered an Expense in the P/L section.
Some entities choose the second approach because they need to disclose impairment losses in their notes. Having a separate account helps to keep track of the individual impairment losses. However, despite it being in a separate account, impairment should always be netted from the Asset amount on the Balance Sheet, similarly to how Accumulated Depreciation is treated.
If revaluation had previously occurred
Step 1: The impairment is considered as a revaluation loss, and the Revaluation Surplus is reversed.
This action empties out the Revaluation Surplus balance that was created earlier.
Step 2: If the Impairment Loss is greater than the revaluation surplus or this is the second impairment, we create a loss directly in the Profit and Loss section of the Income Statement.
P/L = Profit Loss section of the Income Statement. The Impairment loss will be considered an Expense in the P/L section.
The combined effect would be:
OCI = Other Comprehensive Income in the Income Statement. If you recall from our article on PPE Revaluations, Revaluation Surpluses are recorded in the Other Comprehensive Income section of the Income Statement.
This process may seem complicated at first, but the idea is fairly straightforward. It is very similar to revaluations, where first the initial action is reversed (ie: the creation of a Revaluation Surplus is reversed and the Revaluation Surplus is removed). Then, if there is more impairment or if this is the second impairment, the remainder is treated as a Loss and immediately recorded as an expense in the Profit/Loss section of the Income Statement.
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