Impairment testing - Recoverability test

Invest for Excel®, Enterprise edition, includes functionality for impairment test in accordance with IFRS, US GAAP and some national Gaaps. With this software it is easy to make cash flow modeling for calculation of value in use. Goodwill as well as other assets can be tested. Invest for Excel® guides you during the analysis process. Protected and tested calculation logic ensures correct and comparable results in annual impairment tests. In addition, the software produces a verification of impairment test for annual reporting.

Functions supporting international accounting standards in Invest for Excel® Enterprise edition:

Calculation of value in use or recoverable value
Impairment testing of assets and goodwill
Verification of impairment test
Allocation of overvalue (IFRS3)
Deferred tax liability
Financial statements in IFRS form
Capitalization of project borrowing costs
Iteration of pre-tax discount rate
Split in continuing operations and discontinuing operations
Examples of IFRS regulations implemented:
IFRS3, IFRS5, IAS 16, IAS 23, IAS 36, IAS 38, IAS 40

Key definitions:

What is value in use?

Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

What is a cash-generating unit?

Under international financial reporting standards, a cash-generating unit is the smallest group of assets that independently generates cash flow and whose cash flow is largely independent of the cash flows generated by other assets.

What is a recoverability test?

A recoverability test screens for asset impairment. If the future cash flows from the use of an asset plus its disposition are less than the carrying value of the asset, the asset is considered to be impaired.

What is impairment loss?

Impairment loss is the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

What is carrying amount?

In accounting, carrying amount or carrying value or book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset.

What is Recoverable amount?

Recoverable amount the higher of an asset’s fair value less costs of disposal* (sometimes called net selling price) and its value in use

Why is Impairment testing required?

Impairment testing is required under the applicable accounting framework and standards. The regulations for conducting impairment tests have been summarized by the International Accounting Standards Board primarily in International Accounting Standard (IAS) 36 Impairment of Assets.

The main purpose of impairment testing is to bring the carrying value of a business in line with its recoverable value, which is the higher of the fair value less cost to sell and the value in use. In more practical terms, this means that the book value of a business should not exceed what the owners of the business expect to receive either from its open market sale or through its continuous use.

Impairment testing is an area in which significant judgment is required, and current market conditions only increase the complexity involved. Thus, in line with the relevant professional standards as set by the International Federation of Accountants, audit teams are encouraged to liaise with an accredited Valuation specialist upon need for performing impairment tests in line with the requirements of IAS 36.

When is impairment testing required?

Under the International Financial Reporting Standards (IFRS), impairment testing is required:

at each reporting date when there is an indication of a possible impairment (a • triggering event), and annually for the following assets, regardless of whether there is a triggering event:• – intangible assets with an indefinite useful life and intangible assets not yet available for use, and – assets to which goodwill acquired in a business combination has been allocated.

Indicators of possible impairment include an increase in the cost of borrowing and the carrying amount of the net assets of an entity exceeding its market capitalization. Significant adverse changes in the business climate may also be an indicator of impairment. As a result, under the current market conditions, it is likely that most entities will be carrying out detailed impairment testing of non-financial assets.

What is IAS 36 Impairment of Assets?

IAS 36 Impairment of Assets seeks to ensure that an entity’s assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a ‘cash-generating unit’ where an asset does not generate cash inflows that are largely independent of those from other assets.

IAS 36 applies to (among other assets):

land
buildings
machinery and equipment
investment property carried at cost
intangible assets
goodwill
investments in subsidiaries, associates, and joint ventures carried at cost
assets carried at revalued amounts under IAS 16 and IAS 38