HKAS 36 - Impairment of Assets (Condensed)

Objective & Scope

Core Objective

Ensure assets are carried at no more than their recoverable amount. If carrying amount exceeds recoverable amount, the asset is impaired and an impairment loss must be recognised.

Scope – Excluded Assets

This Standard does apply to subsidiaries, associates, and joint ventures (financial assets). It also applies to assets carried at revalued amount (e.g., under HKAS 16/38 revaluation model).

Definitions

Key Terms

Identifying an Asset That May Be Impaired

Core Principle

An asset is impaired when its carrying amount exceeds its recoverable amount.

When to Estimate Recoverable Amount

• Paragraph 9: Assess at each reporting date whether any indication of impairment exists. If yes, estimate recoverable amount.
• Paragraph 10: Irrespective of indicators, test annually for: (a) intangible assets with indefinite useful lives or not yet available for use; (b) goodwill acquired in a business combination.

Indications of Impairment

If impairment indicators exist, also review remaining useful life, depreciation method, and residual value – even if no impairment loss is recognised.

Measuring Recoverable Amount

Basic Principle

Recoverable amount = higher of FVLCD and VIU. It is not always necessary to determine both – if either exceeds carrying amount, the asset is not impaired.

Fair Value Less Costs of Disposal (FVLCD)

Costs of disposal include: legal costs, stamp duty, costs of removing the asset, direct incremental costs to bring asset into condition for sale. Exclude: termination benefits and costs of reducing/reorganising business after disposal.

Value in Use (VIU)

VIU = present value of future cash flows from continuing use and ultimate disposal. Elements to reflect:

• Estimate of future cash flows
• Expectations about variations in amount or timing
• Time value of money (risk-free rate)
• Price for bearing uncertainty
• Other factors (e.g., illiquidity)

Steps in Estimating VIU

1. Estimate future cash inflows/outflows from continuing use and disposal.
2. Apply appropriate discount rate.

Discount Rate

Pre-tax rate reflecting current market assessments of time value of money and asset-specific risks not already adjusted for in cash flows. Use surrogates (WACC, incremental borrowing rate) adjusted for asset-specific risks.

For foreign currency cash flows: estimate in currency of generation, discount using rate for that currency, translate at spot exchange rate.

Recognising and Measuring an Impairment Loss

For Individual Assets (Other than Goodwill)

Paragraph 59: If recoverable amount < carrying amount, reduce carrying amount to recoverable amount. That reduction is an impairment loss.

Paragraph 60: Recognise impairment loss immediately in profit or loss, unless asset is carried at revalued amount (e.g., HKAS 16 revaluation model). For revalued assets, treat as revaluation decrease in other comprehensive income (to extent of revaluation surplus).

Subsequent Depreciation

After impairment, adjust depreciation/amortisation charge to allocate revised carrying amount (less residual value) over remaining useful life.

Tax Implications

Determine deferred tax assets/liabilities under HKAS 12 by comparing revised carrying amount with tax base.

Cash-Generating Units and Goodwill

Identifying the CGU

If recoverable amount of an individual asset cannot be determined (e.g., asset does not generate independent cash inflows), determine recoverable amount of the CGU to which it belongs. CGU = smallest group of assets generating largely independent cash inflows.

Goodwill Allocation

Paragraph 80: Allocate goodwill to CGUs (or groups of CGUs) expected to benefit from synergies. Each unit/group must: (a) represent lowest level at which goodwill is monitored internally; (b) not be larger than an operating segment (HKFRS 8).

Impairment Testing for CGUs with Goodwill

• Annual test: Compare carrying amount (including goodwill) with recoverable amount.
• If recoverable amount > carrying amount: no impairment.
• If carrying amount > recoverable amount: recognise impairment loss (first to goodwill, then pro rata to other assets).

Corporate Assets

Corporate assets (e.g., headquarters, research centre) do not generate independent cash inflows. Test for impairment by allocating their carrying amount to CGUs on a reasonable and consistent basis.

Impairment Loss for a CGU & Reversal

Allocation of Impairment Loss

Paragraph 104: If recoverable amount of CGU < carrying amount, allocate impairment loss in this order:

1. First: Reduce goodwill allocated to the CGU.
2. Then: Reduce other assets pro rata based on carrying amounts.

Reversing an Impairment Loss

Paragraph 110: Assess at each reporting date whether indications exist that a prior impairment loss (other than goodwill) may have decreased. If yes, estimate recoverable amount.

Paragraph 114: Reverse impairment loss if, and only if, there has been a change in estimates used to determine recoverable amount since the last impairment loss was recognised.

Paragraph 119: Recognise reversal immediately in profit or loss (unless revalued asset – treat as revaluation increase).

Paragraph 124: Prohibition: Impairment loss recognised for goodwill shall not be reversed in a subsequent period.

Disclosure

General Disclosure Requirements

Paragraph 126: For each class of assets, disclose:

• Amount of impairment losses recognised in profit or loss (and line item)
• Amount of reversals recognised in profit or loss
• Amount of impairment losses on revalued assets in OCI
• Amount of reversals on revalued assets in OCI

Segment Information

Paragraph 129: For each reportable segment (HKFRS 8), disclose impairment losses and reversals recognised in profit or loss and OCI.

Disclosures for Individual Assets or CGUs with Impairment

Paragraph 130: For each material impairment or reversal, disclose:

• Events and circumstances leading to recognition/reversal
• Amount of impairment loss recognised/reversed
• Nature of asset (or description of CGU)
• Recoverable amount and whether it is FVLCD or VIU
• If FVLCD: fair value hierarchy level, valuation technique, key assumptions, discount rate
• If VIU: discount rate(s) used

Disclosures for Goodwill and Indefinite-Life Intangibles

Paragraph 134: For each CGU with significant goodwill/indefinite-life intangibles, disclose:

• Carrying amount of goodwill and intangibles
• Basis for recoverable amount (VIU or FVLCD)
• Key assumptions, growth rates, discount rates
• Sensitivity analysis: if reasonably possible change in key assumption would cause carrying amount to exceed recoverable amount, disclose the excess and the amount by which the assumption must change

Paragraph 133: If any goodwill acquired during the period remains unallocated at year-end, disclose the amount and reasons.