IAS 36IE Allocation of corporate assets

Last Updated on 08/02/2020 by 75385885

IAS 36 Impairment of assetsIAS 36IE Allocation of corporate assets

IAS 36IE Allocation of corporate assets

Example 8

In this example, tax effects are ignored.

Background

IE69 Entity M has three cash-generating units: A, B and C. The carrying amounts of those units do not include goodwill. There are adverse changes in the technological environment in which M operates. Therefore, M conducts impairment tests of each of its cash-generating units. At the end of 20X0, the carrying amounts of A, B and C are CU100, CU150 and CU200 respectively.

IE70 The operations are conducted from a headquarters. The carrying amount of the headquarters is CU200: a headquarters building of CU150 and a research centre of CU50. The relative carrying amounts of the cash-generating units are a reasonable indication of the proportion of the headquarters building devoted to each cash-generating unit. The carrying amount of the research centre cannot be allocated on a reasonable basis to the individual cash-generating units.

IE71 The remaining estimated useful life of cash-generating unit A is 10 years. The remaining useful lives of B, C and the headquarters are 20 years. The headquarters is depreciated on a straight-line basis.

IE72 The recoverable amount (ie higher of value in use and fair value less costs of disposal) of each cash-generating unit is based on its value in use. Value in use is calculated using a pre-tax discount rate of 15 per cent.

Identification of corporate assets

IE73 In accordance with paragraph 102 of IAS 36, M first identifies all the corporate assets that relate to the individual cash-generating units under review. The corporate assets are the headquarters building and the research centre.

IE74 M then decides how to deal with each of the corporate assets:

  1. the carrying amount of the headquarters building can be allocated on a reasonable and consistent basis to the cash-generating units under review; and
  2. the carrying amount of the research centre cannot be allocated on a reasonable and consistent basis to the individual cash-generating units under review.

Allocation of corporate assets

IE75 The carrying amount of the headquarters 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 cash-generating 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 headquarters building

IAS 36IE Allocation of corporate assets

Determination of recoverable amount and calculation of impairment losses

IE76 Paragraph 102 of IAS 36 requires first that the recoverable amount of each individual cash-generating unit be compared with its carrying amount, including the portion of the carrying amount of the headquarters building allocated to the unit, and any resulting impairment loss recognised. Paragraph 102 of IAS 36 then requires the recoverable amount of M as a whole (ie the smallest group of cash-generating units that includes the research centre) to be compared with its carrying amount, including both the headquarters building and the research centre.

Schedule 2. Calculation of A, B, C and M’s value in use at the end of 20X0

IAS 36IE Allocation of corporate assets

(a) It is assumed that the research centre generates additional future cash flows for the entity as a whole. Therefore, the sum of the value in use of each individual cash-generating unit is less than the value in use of the business as a whole. The additional cash flows are not attributable to the headquarters building.

Schedule 3. Impairment testing A, B and C

Impairment loss 0 (42) (4)
End of 20X0 A B C
CU CU CU
Carrying amount (after allocation of the building) (Schedule 1) 119 206 275
Recoverable amount (Schedule 2) 199 164 271

IE77 The next step is to allocate the impairment losses between the assets of the cash-generating units and the headquarters building.

Schedule 4. Allocation of the impairment losses for cash-generating units B and C

Cash-generating unit A C
CU CU
To headquarters building (12) (42 x 56/206) (1) (4 x 75/275)
To assets in cash-generating unit (30) (42 x 150/206) (3) (4 x 200/275)
(42) (4)  

Cash-generating unit B C

IE78 Because 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 group of cash-generating units to which the carrying amount of the research centre can be allocated (ie M as a whole) to its recoverable amount.

Schedule 5. Impairment testing the smallest group of cash-generating units to which the carrying amount of the research centre can be allocated (ie M as a whole)

IAS 36IE Allocation of corporate assets

IE79 Therefore, no additional impairment loss results from the application of the impairment test to M as a whole. Only an impairment loss of CU46 is recognised as a result of the application of the first step of the test to A, B and C.

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Source EU rules on financial information disclosed by companies

 

Last Updated on 08/02/2020 by 75385885

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