IAS 36 How Impairment test

IAS 36 How Impairment test is all about this – When looking at the step-by-step IAS 36 impairment approach it comes down to the following broadly organised steps: IAS 36 How Impairment test

  • What?? – Determining the scope and structure of the impairment review, explained here,
  • If and when? – Determining if and when a quantitative impairment test is necessary, explained here,
  • IAS 36 How Impairment test or understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary. Which is explained in this section…

The objective of IAS 36 Impairment of assets is to outline the procedures that an entity applies to ensure that its assets’ carrying values are not … Read more

IAS 36 Best brilliant impairment of telecom assets

IAS 36 Best brilliant impairment of telecom assets sets out the procedures that an entity should follow to ensure that it carries its assets at no more than th IAS 36 Best brilliant impairment of telecom assets eir recoverable amount. Recoverable amount is the higher of the amount to be realised through using or selling the asset.

Where the carrying amount exceeds the recoverable amount, the asset is impaired and an impairment loss must be recognised.

The standard details the circumstances when an impairment loss should be reversed, and also sets out required disclosures for impaired assets, impairment losses, reversals of impairment losses as well as key estimates and assumptions used in measuring the recoverable amounts of cash-generating units (CGUs) that contain goodwill or intangible assets with indefinite … Read more

Discount rate

Discount rate used in discounted cash flow models incorporates the time value of money (the risk-free rate) and a risk premium build from distinct components

Calculating the value of an acquisition

Calculating the value of an acquisition – This is a detailed example of calculating the fair value of an acquisition, using a logical step by step approach and realistic assumptions and determinations based on transaction and market data. Identifying and valuing intangible asset(s) is a broad endeavor and requires careful consideration of; factors specific to each business, the transaction structure, identifying the primary income generating asset, determining the discount rates, estimating the useful lives for identified intangibles. Examples of such intangibles include customer contracts, trademarks, brands, etc.


The Deal Fortune, Inc. acquired M&P Company on January 1, 2017. Consideration was $30 million cash plus additional contingent consideration, as follows:


  • Below 1 million: Nil Calculating the value of an
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Fair Value of Tangible Assets

Fair Value of Tangible Assets – In the event of Business Combinations tangible assets (current – non-current) are best valued with the market or income approaches. If adequate data are not available to derive an indication of value through these methods, an appraiser may use the replacement cost method, which adjusts the original cost for changes in the price level to determine its current replacement cost. The current replacement cost is then adjusted due to physical use or functional obsolescence. Cash-generating unit (CGU) Cash-generating unit (CGU)

Property, Plant and Equipment (PP&E) must be recognized at fair value for current capacity. Accumulated depreciation is not carried forward. An appraiser may use the cost approach, in which a market participant would pay no more for an asset … Read more

Intangible valuation approach

Intangible valuation approach Intangible valuation approach – Valuation assignments must estimate the value of intangibles, recognising the volatility, ongoing creation and problems with protection and enforcement. Business valuation analysts have been independently valuing intangible assets for many years, usually in the context of an exchange between owners (transaction), for estate and gift tax purposes or as part of a litigation assignment. Knowledge underlies the creation of value. Some of the questions that need to be answered include the following:

  • What would a willing buyer pay to employ the intangible asset?
  • What is the useful life of this asset?
  • What portion of the operating income does this asset generate?

Financial reporting concepts require measurement of these separable intangible assets from the overall goodwill in Read more

Discount rates for intangible assets

Discount rates for intangible assets – An important event in accounting for an acquisition in a Business Combination has become the recognition and measurement of intangible assets, other than goodwill.

In the past the difference between the consideration transferred (transaction, purchase or acquisition price) and the fair value of net assets acquired was simply goodwill in many countries.

With increasing transaction prices for acquiring – not so increased – values of net assets, goodwill as a percentage of the transaction price went sky high. Especially during the internet bubble in the late nineteen-nineties goodwill allocations went through the roof.

In the US long time accounting standards in respect of intangible assets (other than goodwill) exist from the early 1970-ies (see … Read more

Capitalisation of earnings valuation

Capitalisation of earnings – The Capitalisation of Earnings Method is an income-oriented approach to valuation modeling. This method is used to value a business based on the future estimated benefits, normally using some measure of earnings or cash flows to be generated by the company. These estimated future benefits are then capitalized using an appropriate capitalization rate. This method assumes all of the assets, both tangible and intangible, are indistinguishable parts of the business and does not attempt to separate their values. In other words, the critical component to the value of the business is its ability to generate future earnings/cash flows. This method expresses a relationship between the following: Capitalisation of earnings

  • Estimated future benefits (earnings or cash flows), Capitalisation of earnings
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Impairment test before and after IFRS 16 Leases

Impairment test before and after IFRS 16 Leases – Below is a simplified example of an impairment test that shows the situation pre-IFRS 16 and post-IFRS 16 and the effects of adjusting the (pre-tax) discount rate. The CGU has a finite life of five years, with no residual value. The lease term and useful life of the right-of-use asset are also five years.

Pre-IFRS 16 Impairment test before and after IFRS 16 Leases

Assumptions underlying the example: Impairment test before and after IFRS 16 Leases

  • Five-year operating lease of 30 per year commencing at the start of year 1; cost of operating lease is relatively significant compared to the overall free cash flow (FCF).
  • The carrying amount of the CGU
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