IAS 36 Determine if and when to test for impairment – When looking at the step-by-step IAS 36 impairment approach it comes down to the following broadly organised steps:

• What?? – Determining the scope and structure of the impairment review (see the step-by-step IAS 36 impairment approach),
• If and when? – Determining if and when a quantitative impairment test is necessary (discussed on this page),
• How? – Understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary (see IAS 36 Impairment test – How?).

Step 3: IAS 36 Determine if and when to test for impairment

IAS 36 requires an entity to a perform a quantified impairment test (ie to estimate the recoverable amount): IAS 36 Determine if and when to test for impairment

• if at the end of each reporting period, there is any indication of impairment for the individual asset or CGU (IAS 36.9) (indicator-based impairment) and
• annually for the following types of assets, irrespective of whether there is an indication of impairment:
  • intangible assets with an indefinite useful life  IAS 36 Determine if and when to test for impairment
  • intangible assets not yet available for use  IAS 36 Determine if and when to test for impairment
  • goodwill acquired in a business combination (IAS 36.10). IAS 36 Determine if and when to test for impairment

These requirements are summarised below.   IAS 36 Determine if and when to test for impairment

1. (Internal and external) indicator-based impairment testing

IAS 36 requires an entity to assess at the end of each reporting period whether there is any indication that an asset or CGU may be impaired. This requirement also applies to goodwill, indefinite life intangible assets, and intangible assets not yet ready for use (although, in practice, an indicator review is necessary only at period ends that do not coincide with the annual test). If any such indication exists, the entity should estimate the recoverable amount of the asset or CGU (IAS 36.9). The process to estimate the recoverable amount is discussed in IAS 36’s Impairment review – How? – Step 4.

Indicators   IAS 36 Determine if and when to test for impairment

IAS 36.12 provides a non-exhaustive list of external, internal and other indicators that an entity should consider, summarised below:

External sources of information (IAS 36.12 (a) – (d))   IAS 36 Determine if and when to test for impairment

• Observable indications of a significant and unexpected decline in market value
• Significant negative changes (have occurred or are expected) in the technological, market, economic or legal environment
• Market interest rates or other market rates of return on investments have increased (which will increase the discount rate used in calculating an asset’s VIU)
• Carrying amount of the net assets of the entity is more than its market capitalisation

Internal sources of information (IAS 36.12 (e) – (g))   IAS 36 Determine if and when to test for impairment

• Evidence is available of obsolescence or physical damage of an asset
• Significant negative changes (have occurred or are expected) in the extent to which an asset is (or is expected to be used) (eg such as the asset becoming idle, plans to discontinue or dispose of the asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite)
• Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected

Other indicators (IAS 36.12(h), IAS 38.83)  IAS 36 Determine if and when to test for impairment

• For an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from the investment and evidence is available that:
• the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill; or
• the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared
• The fact that an active market no longer exists for a revalued intangible asset

Generally, internal indicators would provide reasonably direct evidence that a specific asset or CGU may be impaired. For example, internal reports might show:

• cash flows for acquiring the asset or CGU, or subsequent cash needs for operating or maintaining it, are significantly higher than those originally budgeted;
• actual net cash flows or operating profit or loss flowing from the asset or CGU are significantly worse than those budgeted;
• a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing from the asset or CGU; or
• operating losses or net cash outflows for the asset or CGU, when current period amounts are aggregated with budgeted amounts for the future (IAS 36.14).

However, external sources of information will more typically be broader and less clearly linked to a specific asset or CGU (for example, a decline in market capitalisation to less than the carrying value of the entity’s net assets). This then may require the use of judgement to determine which assets or CGUs should be tested in response to an external source of information. The example below illustrates this point. IAS 36 Determine if and when to test for impairment

Bridging the gap from external indicators of impairment to testing specific assets

Background BioTech Research Company (BTRC) develops and sells a range of diagnostic products. It operates from three manufacturing and distribution centres. Each centre is considered to be a separate CGU. BTRC is preparing its financial statements for its year-ended 31 December 20X1. Summary financial information for each CGU is as follows: CU ‘000 CGU 1 CGU 2 CGU 3 Total             Goodwill 1,900 – – 1,900 Other intangible assets (amortised) 1,100 500 1,000 2,600 PPE 500 1,500 700 3,700 Subtotal 3,500 2,000 1,700 7,200 Corporate HQ 1,800 Net debt -3,500 Other assets and liabilities (net) -500 Net book value 5,000 The market capitalisation of BTRC as at 31 December 20X1 is CU3,000. Analysis As part of its indicator assessment, management should compare market capitalisation (CU3,000) with net book value (CU5,000). Given the seemingly material ‘market to book’ shortfall of CU2,000, a detailed impairment test is probably required. However, BTRC should consider all facts and circumstances, including: whether some or all of the shortfall is attributable to assets and liabilities outside IAS 36’s scope (eg if the fair value of the entity’s net debt is significantly different to its carrying value of CU3,500) whether any implied control premium included in the market capitalisation is reasonable in all the circumstances (eg is it ‘standard’ for this industry?) whether the market capitalisation reflects a discount for lack of liquidity share price volatility length of time over which a shortfall is observed other possible impairment indicators. If, after considering these factors management concludes that detailed impairment testing is required, the question arises as to which CGUs and assets should be tested. CGU 1 needs to be tested for impairment in any event because goodwill has been allocated to it; however determining the relevance of the market to book shortfall for CGU 2 and 3 will require BTRC to make a judgement after considering all facts and circumstances including: whether there is a reasonable basis to conclude that the market capitalisation to book value shortfall relates to a specific CGU or CGUs the existence or otherwise of other impairment indicators for each CGU or the results of impairment testing for CGU 1 (if CGU 1 is impaired, the market capitalisation to book value shortfall may be reduced or eliminated). If BTRC is unable to link the shortfall to particular CGUs it may conclude that all CGUS should be tested.

Something else -   SPAC Merger under IFRS 3

Food for thought – Indicators that develop over time

Review useful life, depreciation/amortisation method, residual value

The existence of an impairment indicator may also suggest that the remaining useful life, depreciation (amortisation) method or the residual value for the asset needs to be adjusted. When an entity identifies an indicator of impairment, the remaining useful life, the depreciation (amortisation) method or the residual value of the asset should be reviewed (and adjusted if necessary) even if no impairment loss is recognised (IAS 36.17).   IAS 36 Determine if and when to test for impairment

2 Annual impairment testing

As depicted in Figure C.1, the Standard requires an intangible asset with an indefinite useful life, an intangible asset not yet available for use and goodwill to be tested for impairment both:

• when an indication of impairment exists (see Indicator-based impairment testing) (IAS 36.9) and  IAS 36 Determine if and when to test for impairment
• at least annually, irrespective of indicators (IAS 36.10(a-b)).  IAS 36 Determine if and when to test for impairment

Further, the intangible asset and/or goodwill should be tested for impairment before the end of the current annual period if:

• the asset was initially recognised during the current annual period (IAS 36.10(a)) or
• some or all of the goodwill allocated to the CGU under review was acquired in a business combination during the current annual period (IAS 36.96).

See provision allocation of goodwill for related discussion on the provisional allocation of goodwill.

Annual impairment test required

See also – Allocation of impairment loss

Timing of the annual impairment test

The annual impairment test for an asset may be performed anytime during the annual period provided the test is performed at the same time every year (IAS 36.10(a), IAS 36.96). Assets that are subject to annual testing may be tested at different dates provided the date is consistent for each. This provides some flexibility to spread the workload while providing a safeguard against manipulation.

Food for thought – Changing the annual impairment testing date

An entity may wish to change its annual impairment testing date, perhaps to align with the budget cycle or to reduce the testing burden in another period. IAS 36 is silent on this. In our view, a change of date is acceptable in reasonable circumstances subject to the entity demonstrating that this has not resulted in avoiding an impairment loss.

For example, an entity with a 31 December year-end might wish to change its testing date from 30 June to 31 December. In the current annual period it could conduct tests at both dates, then test only at 31 December in the following annual period (assuming no indicators are identified at other period ends).

In general, IAS 36.96 serves as an anti-abuse provision which will not be breached if this approach is taken and the entity consistently tests at the new date on a go-forward basis. A new testing date is not considered to be a change in accounting policy. However, entities should consider disclosing the change and the reasons for it.

IAS 36 Determine if and when to test for impairment

Next –  IAS 36 Impairment test – How?

IAS 36 Determine if and when to test for impairment IAS 36 Determine if and when to test for impairment IAS 36 Determine if and when to test for impairment

IAS 36 Determine if and when to test for impairment IAS 36 Determine if and when to test for impairment IAS 36 Determine if and when to test for impairment

IAS 36 Determine if and when to test for impairment IAS 36 Determine if and when to test for impairment IAS 36 Determine if and when to test for impairment

IAS 36 Determine if and when to test for impairment IAS 36 Determine if and when to test for impairment IAS 36 Determine if and when to test for impairment