Impairment occurs when an asset devalues and is no longer worth its carrying amount. Both ASPE (ASPE 3063) and IFRS (IAS 36) have clear guidance on how impairment should be assessed. In this article, we review when impairment is considered to have occurred, how impairment differs from revaluation (discussed earlier), and how to measure the impairment amount. The following impairment standards apply to property, plant and equipment, intangible assets, and investments which are carried at amortized cost (addressed in a later article). This article does not pertain to inventories, investment properties, or non-current assets which are held for sale.
When does Impairment Occur?
Impairment occurs when:
Recoverable Amount of the asset < Carrying amount (Net Book Value)
How is Impairment different from a Revaluation?
Revaluations can increase the value of an asset, as well as decrease the value (gains or losses). However, impairment can only decrease the value of the asset. While IFRS (IAS 36) allows the reversal of impairments, ASPE (ASPE 3063) does not. The ASPE standard recognizes an impairment as a much more terminal event, and has a different accounting treatment.
How to Calculate the Impairment Amount
ASPE 3036 and IAS 36 account for impairment slightly differently. How to calculate the impairment loss, and the differences between ASPE and IFRS are highlighted in the table, below.
* For IFRS the Recoverable Amount is the higher of:
Fair Value (arm’s length party) less the Cost of disposal
Value in Use: Present Value of future net cash flows obtainable from the asset (before tax). This means the cash inflows less cash outflows. The discount rate used is often the company’s Working Average Cost of Capital (described in a later article). This discount rate should be before tax.
IMPORTANT: Notice that IFRS uses discounted cash flows, while ASPE uses undiscounted cash flows.
When to Test for Impairment:
TIP: For those taking the Canadian CPA Board Exams (CFEs) -> impairment is often on the exam. Look for key words and triggers (listed below) which signal that impairment has taken place.
ASPE (ASPE 3036) is more lenient about testing for impairment. For most assets, we do not need to test for impairment yearly. We only when there are triggers/indications of impairment.
IFRS (IAS 36) insists we need to test for impairments at each reporting period in addition to when there are triggers for impairment.
Triggers that indicate an impairment has taken place include:
Declines in market values
Interest rate changes
Changes in use
New competition, etc..
While ASPE only requires testing for impairments when there are triggers, both IFRS and ASPE require that the following assets be tested annually for impairment, regardless of whether or not triggers exist:
- Intangible assets:
with an indefinite useful life OR
not yet available for use
It's always best to check each asset individually, for impairment. However, most assets will not generate cash flows on their own, making it difficult or impossible to determine the asset's Value in Use (discounted / undiscounted cash flows). So in order to determine whether impairment has taken place, we group these assets. These groupings are called “Cash Generating Units” and are covered in the next article.
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