HKAS 36 - Impairment of Assets

HKAS 36 - Impairment of Assets

OBJECTIVE

The objective of HKAS 36 is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.

SCOPE

This Standard shall be applied in accounting for the impairment of all assets, other than:

Excluded Assets	Applicable Standard
Inventories	HKAS 2
Contract assets and assets arising from costs to obtain or fulfil a contract recognised under HKFRS 15	HKFRS 15
Deferred tax assets	HKAS 12
Assets arising from employee benefits	HKAS 19
Financial assets within scope of HKFRS 9	HKFRS 9
Investment property measured at fair value	HKAS 40
Biological assets measured at fair value less costs to sell	HKAS 41
Insurance contract assets and insurance acquisition cash flows	HKFRS 17
Non-current assets classified as held for sale	HKFRS 5

This Standard applies to financial assets classified as:

Subsidiaries (as defined in HKFRS 10)

Associates (as defined in HKAS 28)

Joint ventures (as defined in HKFRS 11)

For impairment of other financial assets, refer to HKFRS 9.

This Standard applies to assets carried at revalued amount (i.e., fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses) in accordance with other HKFRSs, such as the revaluation model in HKAS 16 and HKAS 38.

Key Point: If disposal costs are negligible, the recoverable amount of a revalued asset is necessarily close to or greater than its revalued amount, making impairment unlikely. If disposal costs are not negligible, fair value less costs of disposal is necessarily less than fair value, so impairment may exist.

DEFINITIONS

Term	Definition
Carrying amount	The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses
Cash-generating unit (CGU)	The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets
Corporate assets	Assets other than goodwill that contribute to the future cash flows of both the CGU under review and other CGUs
Costs of disposal	Incremental costs directly attributable to the disposal of an asset or CGU, excluding finance costs and income tax expense
Depreciable amount	Cost of an asset, or other amount substituted for cost, less its residual value
Depreciation (Amortisation)	The systematic allocation of the depreciable amount of an asset over its useful life
Fair value	The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (see HKFRS 13)
Impairment loss	The amount by which the carrying amount of an asset or CGU exceeds its recoverable amount
Recoverable amount	The higher of an asset's or CGU's fair value less costs of disposal and its value in use
Useful life	Either (a) the period over which an asset is expected to be used by the entity, or (b) the number of production or similar units expected to be obtained from the asset
Value in use	The present value of the future cash flows expected to be derived from an asset or CGU

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: An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.

Paragraph 10: Irrespective of whether there is any indication of impairment, an entity shall also:

(a) Test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. Different intangible assets may be tested at different times. However, if such an intangible asset was initially recognised during the current annual period, it shall be tested for impairment before the end of the current annual period.

(b) Test goodwill acquired in a business combination for impairment annually in accordance with paragraphs 80-99.

Indications of Impairment

External Sources of Information:

(a) Observable indications that the asset's value has declined during the period significantly more than would be expected as a result of the passage of time or normal use

(b) Significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated

(c) Market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset's value in use and decrease the asset's recoverable amount materially

(d) The carrying amount of the net assets of the entity is more than its market capitalisation

Internal Sources of Information:

(e) Evidence is available of obsolescence or physical damage of an asset

(f) Significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite

(g) Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected

Dividend from a subsidiary, joint venture or associate:

(h) For an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from the investment and evidence is available that:

(i) 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

(ii) The dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared

Evidence from Internal Reporting

Paragraph 14 specifies that evidence from internal reporting that indicates impairment includes:

Cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are significantly higher than those originally budgeted

Actual net cash flows or operating profit or loss flowing from the asset that 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

Operating losses or net cash outflows for the asset, when current period amounts are aggregated with budgeted amounts for the future

Materiality Considerations

The concept of materiality applies. If previous calculations show that an asset's recoverable amount is significantly greater than its carrying amount, the entity need not re-estimate the asset's recoverable amount if no events have occurred that would eliminate that difference.

Example: If market interest rates have increased, an entity is not required to make a formal estimate of recoverable amount if:

- The discount rate used is unlikely to be affected by the increase (e.g., short-term rate increases for an asset with long remaining useful life)

- Previous sensitivity analysis shows that a material decrease in recoverable amount is unlikely

Other Implications

If there is an indication that an asset may be impaired, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value for the asset needs to be reviewed and adjusted in accordance with the Standard applicable to the asset, even if no impairment loss is recognised.

MEASURING RECOVERABLE AMOUNT

Basic Principle

Recoverable amount is the higher of:

Fair value less costs of disposal (FVLCD)

Value in use (VIU)

Key Rule: It is not always necessary to determine both. If either amount exceeds the carrying amount, the asset is not impaired.

When to Use Each Measure

It may be possible to measure FVLCD even without a quoted price in an active market. However, if no reliable estimate can be made, use VIU as recoverable amount.

If there is no reason to believe that VIU materially exceeds FVLCD, FVLCD may be used as recoverable amount (often the case for assets held for disposal).

Determining Recoverable Amount for Individual Assets vs. CGUs

Recoverable amount is determined for an individual asset unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. In that case, recoverable amount is determined for the CGU to which the asset belongs, unless either:

(a) The asset's FVLCD is higher than its carrying amount; or

(b) The asset's VIU can be estimated to be close to its FVLCD and FVLCD can be measured

FAIR VALUE LESS COSTS OF DISPOSAL

Costs of disposal deducted in measuring FVLCD include:

Legal costs

Stamp duty and similar transaction taxes

Costs of removing the asset

Direct incremental costs to bring an asset into condition for its sale

Excluded: Termination benefits (HKAS 19) and costs associated with reducing or reorganising a business following disposal are NOT direct incremental costs of disposal.

VALUE IN USE

Elements to be Reflected

The following elements shall be reflected in the calculation of an asset's value in use:

(a) An estimate of the future cash flows the entity expects to derive from the asset

(b) Expectations about possible variations in the amount or timing of those future cash flows

(c) The time value of money, represented by the current market risk-free rate of interest

(d) The price for bearing the uncertainty inherent in the asset

(e) Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows

Steps in Estimating Value in Use

Estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal

Applying the appropriate discount rate to those future cash flows

Note: Elements (b), (d) and (e) can be reflected either as adjustments to future cash flows or as adjustments to the discount rate.

Basis for Estimates of Future Cash Flows

Paragraph 33: In measuring value in use an entity shall:

(a) Base cash flow projections on reasonable and supportable assumptions that represent management's best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Greater weight shall be given to external evidence.

(b) Base cash flow projections on the most recent financial budgets/forecasts approved by management, but shall exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset's performance. Projections based on these budgets/forecasts shall cover a maximum period of five years, unless a longer period can be justified.

(c) Estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified.

Management's Assessment of Reasonableness

Management shall:

Assess the reasonableness of assumptions by examining causes of differences between past cash flow projections and actual cash flows

Ensure that current assumptions are consistent with past actual outcomes (unless subsequent events or circumstances make this inappropriate)

Composition of Estimates of Future Cash Flows

Paragraph 39: Estimates of future cash flows shall include:

(a) Projections of cash inflows from the continuing use of the asset

(b) Projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset

(c) Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life

Inflation Treatment

Estimates of future cash flows and the discount rate reflect consistent assumptions about price increases attributable to general inflation:

If the discount rate includes the effect of general inflation, future cash flows are estimated in nominal terms

If the discount rate excludes the effect of general inflation, future cash flows are estimated in real terms (but include future specific price increases or decreases)

Items Excluded from Future Cash Flows

Paragraph 43: To avoid double-counting, estimates of future cash flows do not include:

(a) Cash inflows from assets that generate cash inflows that are largely independent of the cash inflows from the asset under review (e.g., financial assets such as receivables)

(b) Cash outflows that relate to obligations that have been recognised as liabilities (e.g., payables, pensions or provisions)

Current Condition Principle

Paragraph 44: Future cash flows shall be estimated for the asset in its current condition. Estimates shall not include estimated future cash inflows or outflows expected to arise from:

(a) A future restructuring to which an entity is not yet committed

(b) Improving or enhancing the asset's performance

Financing and Tax Items

Paragraph 50: Estimates of future cash flows shall not include:

(a) Cash inflows or outflows from financing activities

(b) Income tax receipts or payments

Discount Rate

Paragraph 55: The discount rate(s) shall be a pre-tax rate(s) that reflect(s) current market assessments of:

(a) The time value of money

(b) The risks specific to the asset for which the future cash flow estimates have not been adjusted

Key Point: The discount rate shall not reflect risks for which the future cash flow estimates have been adjusted (to avoid double-counting).

Estimating the Discount Rate

When an asset-specific rate is not directly available from the market, an entity uses surrogates such as:

The entity's weighted average cost of capital (WACC)

The entity's incremental borrowing rate

Other market borrowing rates

These rates must be adjusted to reflect the way the market would assess the specific risks associated with the asset's estimated cash flows and to exclude risks not relevant or already adjusted for.

Foreign Currency Future Cash Flows

Future cash flows are estimated in the currency in which they will be generated, then discounted using a discount rate appropriate for that currency. The entity translates the present value using the spot exchange rate at the date of the value in use calculation.

RECOGNISING AND MEASURING AN IMPAIRMENT LOSS

For Individual Assets (Other than Goodwill)

Paragraph 59: If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

Paragraph 60: An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (e.g., revaluation model in HKAS 16). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard.

Treatment of Revalued Assets

An impairment loss on a non-revalued asset is recognised in profit or loss

An impairment loss on a revalued asset is recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset

When Impairment Loss Exceeds Carrying Amount

When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another Standard.

Subsequent Depreciation

After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset's revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

Tax Implications

If an impairment loss is recognised, any related deferred tax assets or liabilities are determined in accordance with HKAS 12 by comparing the revised carrying amount of the asset with its tax base.

CASH-GENERATING UNITS AND GOODWILL

Identifying the Cash-Generating Unit

Paragraph 66: If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the CGU to which the asset belongs.

Paragraph 67: The recoverable amount of an individual asset cannot be determined if:

(a) The asset's value in use cannot be estimated to be close to its fair value less costs of disposal (e.g., when future cash flows from continuing use cannot be estimated to be negligible)

(b) The asset does not generate cash inflows that are largely independent of those from other assets

Example - Private Railway: A mining entity owns a private railway to support its mining activities. The railway could be sold only for scrap value and does not generate cash inflows independent of the mine. Therefore, the entity estimates the recoverable amount of the CGU (the mine as a whole).

Identification Criteria

An asset's CGU is the smallest group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Identification involves judgement.

Example - Bus Company: A bus company provides services under contract requiring minimum service on five separate routes. Assets and cash flows for each route can be identified separately. One route operates at a significant loss. Because the entity cannot curtail any one route, the lowest level of largely independent cash inflows is the five routes together. The CGU for each route is the bus company as a whole.

Active Market for Output

Paragraph 70: If an active market exists for the output produced by an asset or group of assets, that asset or group of assets shall be identified as a CGU, even if some or all of the output is used internally. If cash inflows are affected by internal transfer pricing, the entity shall use management's best estimate of future arm's length prices in estimating:

(a) Future cash inflows used to determine the asset's or CGU's value in use

(b) Future cash outflows used to determine the value in use of other assets or CGUs affected by the internal transfer pricing

Consistency Requirement

Cash-generating units shall be identified consistently from period to period for the same asset or types of assets, unless a change is justified.

RECOVERABLE AMOUNT AND CARRYING AMOUNT OF A CGU

Determination

The recoverable amount of a CGU is the higher of the CGU's fair value less costs of disposal and its value in use.

Carrying Amount of a CGU

Paragraph 75: The carrying amount of a CGU shall be determined on a basis consistent with the way the recoverable amount of the CGU is determined.

Paragraph 76: The carrying amount of a CGU:

(a) Includes the carrying amount of only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, to the CGU and will generate the future cash inflows used in determining the CGU's value in use

(b) Does not include the carrying amount of any recognised liability, unless the recoverable amount of the CGU cannot be determined without consideration of this liability

Treatment of Liabilities

Paragraph 78: It may be necessary to consider some recognised liabilities to determine the recoverable amount of a CGU. This may occur if the disposal of a CGU would require the buyer to assume the liability. In this case, the FVLCD (or estimated cash flow from ultimate disposal) is the price to sell the assets and the liability together, less costs of disposal. The carrying amount of the liability is deducted in determining both the CGU's value in use and its carrying amount.

Example - Mine Restoration: A company operates a mine where legislation requires site restoration. A provision for restoration costs of CU500 was recognised. The mine's FVLCD is CU800 (reflecting buyer assuming restoration obligation). VIU is CU1,200 excluding restoration costs, so CU700 after deducting CU500. Carrying amount of mine is CU1,000, less provision of CU500 = CU500. Recoverable amount (higher of CU800 and CU700) = CU800 > CU500, so no impairment.

GOODWILL

Allocating Goodwill to CGUs

Paragraph 80: For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer's CGUs, or groups of CGUs, that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which goodwill is so allocated shall:

(a) Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes

(b) Not be larger than an operating segment as defined by paragraph 5 of HKFRS 8 before aggregation

Timing of Initial Allocation

Paragraph 84: If the initial allocation of goodwill acquired in a business combination cannot be completed before the end of the annual period in which the business combination is effected, that initial allocation shall be completed before the end of the first annual period beginning after the acquisition date.

Disposal of an Operation within a CGU

Paragraph 86: If goodwill has been allocated to a CGU and the entity disposes of an operation within that unit, the goodwill associated with the operation disposed of shall be:

(a) Included in the carrying amount of the operation when determining the gain or loss on disposal

(b) Measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained, unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of

Example - Disposal: An entity sells an operation for CU100 that was part of a CGU to which goodwill has been allocated. The recoverable amount of the retained portion is CU300. Goodwill cannot be non-arbitrarily identified at a lower level. Therefore, 25% (100/(100+300)) of the goodwill is included in the carrying amount of the operation sold.

Reorganisation of Reporting Structure

Paragraph 87: If an entity reorganises its reporting structure in a way that changes the composition of one or more CGUs to which goodwill has been allocated, the goodwill shall be reallocated to the units affected using a relative value approach similar to that used when an entity disposes of an operation within a CGU, unless the entity can demonstrate that some other method better reflects the goodwill associated with the reorganised units.

Testing CGUs with Goodwill for Impairment

Paragraph 88: When goodwill relates to a CGU but has not been allocated to that unit, the unit shall be tested for impairment whenever there is an indication that the unit may be impaired, by comparing the unit's carrying amount, excluding any goodwill, with its recoverable amount.

Paragraph 90: A CGU to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount exceeds the carrying amount, the unit and goodwill are regarded as not impaired. If the carrying amount exceeds the recoverable amount, the entity shall recognise the impairment loss.

Timing of Impairment Tests

Paragraph 96: The annual impairment test for a CGU to which goodwill has been allocated may be performed at any time during an annual period, provided the test is performed at the same time every year. Different CGUs may be tested at different times. However, if some or all of the goodwill allocated to a CGU was acquired in a business combination during the current annual period, that unit shall be tested for impairment before the end of the current annual period.

Paragraph 97: If the assets constituting the CGU to which goodwill has been allocated are tested for impairment at the same time as the unit containing the goodwill, they shall be tested for impairment before the unit containing the goodwill.

Using Previous Calculations

Paragraph 99: The most recent detailed calculation of the recoverable amount of a CGU to which goodwill has been allocated may be used in the impairment test of that unit in the current period provided all of the following criteria are met:

(a) The assets and liabilities making up the unit have not changed significantly since the most recent recoverable amount calculation

(b) The most recent recoverable amount calculation resulted in an amount that exceeded the carrying amount of the unit by a substantial margin

(c) Based on an analysis of events and circumstances since the most recent calculation, the likelihood that a current determination would be less than the current carrying amount is remote

CORPORATE ASSETS

Definition and Characteristics

Corporate assets include group or divisional assets such as the building of a headquarters or a division, EDP equipment or a research centre. Their distinctive characteristics are:

They do not generate cash inflows independently of other assets or groups of assets

Their carrying amount cannot be fully attributed to the CGU under review

Testing Corporate Assets for Impairment

Paragraph 101: Because corporate assets do not generate separate cash inflows, the recoverable amount of an individual corporate asset cannot be determined unless management has decided to dispose of the asset. If there is an indication that a corporate asset may be impaired, recoverable amount is determined for the CGU or group of CGUs to which the corporate asset belongs.

Paragraph 102: In testing a CGU for impairment, an entity shall identify all the corporate assets that relate to the CGU under review.

Paragraph 103:

(a) If a portion of the carrying amount of a corporate asset can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the carrying amount of the unit, including the allocated portion, with its recoverable amount.

(b) If a portion cannot be allocated on a reasonable and consistent basis, the entity shall:

(i) Compare the carrying amount of the unit, excluding the corporate asset, with its recoverable amount and recognise any impairment loss

(ii) Identify the smallest group of CGUs that includes the CGU under review and to which a portion of the corporate asset can be allocated on a reasonable and consistent basis

(iii) Compare the carrying amount of that group of CGUs, including the allocated portion, with the recoverable amount of the group

IMPAIRMENT LOSS FOR A CASH-GENERATING UNIT

Allocation of Impairment Loss

Paragraph 104: An impairment loss shall be recognised for a CGU (the smallest group of CGUs to which goodwill or a corporate asset has been allocated) if, and only if, the recoverable amount of the unit (group of units) is less than the carrying amount of the unit (group of units). The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:

First, to reduce the carrying amount of any goodwill allocated to the CGU (group of units)

Then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in the unit (group of units)

These reductions in carrying amounts shall be treated as impairment losses on individual assets and recognised in accordance with paragraph 60.

Limitation on Allocation

Paragraph 105: In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below the highest of:

(a) Its fair value less costs of disposal (if measurable)

(b) Its value in use (if determinable)

(c) Zero

The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit (group of units).

When Individual Asset Recoverable Amount Cannot Be Determined

Paragraph 107: If the recoverable amount of an individual asset cannot be determined:

(a) An impairment loss is recognised for the asset if its carrying amount is greater than the higher of its FVLCD and the results of the allocation procedures

(b) No impairment loss is recognised for the asset if the related CGU is not impaired, even if the asset's FVLCD is less than its carrying amount

Example - Damaged Machine: A machine has physical damage but is still working. FVLCD is less than carrying amount. The machine does not generate independent cash inflows. The production line (CGU) is not impaired. Therefore, no impairment loss is recognised for the machine. However, the entity may need to reassess the depreciation period or method.

REVERSING AN IMPAIRMENT LOSS

Assessment Requirement

Paragraph 110: An entity shall assess at the end of each reporting period whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset.

Indications of Reversal

External Sources:

(a) Observable indications that the asset's value has increased significantly during the period

(b) Significant changes with a favourable effect on the entity have taken place or will take place in the near future in the technological, market, economic or legal environment

(c) Market interest rates or other market rates of return have decreased, likely affecting the discount rate and increasing recoverable amount materially

Internal Sources:

(d) Significant changes with a favourable effect on the entity have taken place or are expected in the extent to which or manner in which the asset is used

(e) Evidence from internal reporting indicates that the economic performance of the asset is or will be better than expected

Conditions for Reversal

Paragraph 114: An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If this is the case, the carrying amount of the asset shall be increased to its recoverable amount.

Limitation on Reversal

Paragraph 117: The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.

Recognition of Reversal

Paragraph 119: A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount. Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase.

Reversal for a Cash-Generating Unit

Paragraph 122: A reversal of an impairment loss for a CGU shall be allocated to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets. These increases shall be treated as reversals of impairment losses for individual assets.

Paragraph 123: In allocating a reversal, the carrying amount of an asset shall not be increased above the lower of:

(a) Its recoverable amount (if determinable)

(b) The carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised

Prohibition on Reversal for Goodwill

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

Rationale: Any increase in the recoverable amount of goodwill following recognition of an impairment loss is likely to be an increase in internally generated goodwill, rather than a reversal of the impairment loss recognised for the acquired goodwill.

DISCLOSURE

General Disclosure Requirements

Paragraph 126: An entity shall disclose the following for each class of assets:

(a) The amount of impairment losses recognised in profit or loss during the period and the line item(s) of the statement of comprehensive income in which they are included

(b) The amount of reversals of impairment losses recognised in profit or loss during the period and the line item(s) in which they are included

(c) The amount of impairment losses on revalued assets recognised in other comprehensive income during the period

(d) The amount of reversals of impairment losses on revalued assets recognised in other comprehensive income during the period

Segment Information

Paragraph 129: An entity that reports segment information in accordance with HKFRS 8 shall disclose for each reportable segment:

(a) The amount of impairment losses recognised in profit or loss and in other comprehensive income during the period

(b) The amount of reversals of impairment losses recognised in profit or loss and in other comprehensive income during the period

Disclosures for Individual Assets or CGUs with Impairment

Paragraph 130: An entity shall disclose the following for an individual asset (including goodwill) or a CGU for which an impairment loss has been recognised or reversed during the period:

(a) The events and circumstances that led to the recognition or reversal

(b) The amount of the impairment loss recognised or reversed

(c) For an individual asset: the nature of the asset and the reportable segment to which it belongs

(d) For a CGU: a description of the CGU, the amount of impairment loss recognised or reversed by class of assets and by reportable segment, and if aggregation has changed, a description of the change

(e) The recoverable amount and whether it is FVLCD or VIU

(f) If FVLCD: the level of the fair value hierarchy, valuation technique(s) used, key assumptions, and discount rate(s) if present value technique used

(g) If VIU: the discount rate(s) used

Disclosures for Goodwill and Intangible Assets with Indefinite Useful Lives

Paragraph 134: An entity shall disclose the following for each CGU (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated is significant in comparison with the entity's total carrying amount of such assets:

(a) Carrying amount of goodwill allocated

(b) Carrying amount of intangible assets with indefinite useful lives allocated

(c) Basis on which recoverable amount has been determined (VIU or FVLCD)

(d) If VIU: each key assumption, management's approach to determining values, projection period (and justification if >5 years), growth rate (and justification if exceeding long-term average), discount rate(s)

(e) If FVLCD: valuation technique(s), key assumptions, management's approach, fair value hierarchy level, changes in valuation technique, and if discounted cash flow projections used: projection period, growth rate, discount rate(s)

(f) Sensitivity analysis: if a reasonably possible change in a key assumption would cause carrying amount to exceed recoverable amount, disclose the excess, value assigned to key assumption, and amount by which the assumption must change

Paragraph 135: If goodwill or intangible assets with indefinite useful lives are allocated across multiple CGUs and the amount allocated to each is not significant individually but the aggregate is significant, the entity shall disclose that fact, the aggregate carrying amounts, and sensitivity information if the same key assumptions are used.

Unallocated Goodwill

Paragraph 133: If any portion of goodwill acquired in a business combination during the period has not been allocated to a CGU at the end of the reporting period, the amount of unallocated goodwill shall be disclosed together with the reasons why it remains unallocated.

APPENDIX A: USING PRESENT VALUE TECHNIQUES TO MEASURE VALUE IN USE

Components of Present Value Measurement

The following elements capture the economic differences between assets:

(a) Estimate of future cash flow(s)

(b) Expectations about possible variations in amount or timing

(c) Time value of money (current market risk-free rate)

(d) Price for bearing uncertainty

(e) Other factors (e.g., illiquidity)

Two Approaches to Present Value

Traditional Approach:

Uses a single set of estimated cash flows and a single discount rate

Assumes a single discount rate convention can incorporate all expectations about future cash flows and the appropriate risk premium

Places most emphasis on selection of the discount rate

Relatively easy to apply when comparable assets can be observed in the marketplace

Expected Cash Flow Approach:

Uses all expectations about possible cash flows instead of a single most likely cash flow

Focuses on direct analysis of cash flows and explicit statements of assumptions

Allows use of present value techniques when timing of cash flows is uncertain

Use of probabilities is an essential element

General Principles

Interest rates used to discount cash flows should reflect assumptions consistent with those inherent in the estimated cash flows

Estimated cash flows and discount rates should be free from bias

Estimated cash flows or discount rates should reflect the range of possible outcomes rather than a single most likely amount

Discount Rate Estimation

When an asset-specific rate is not directly available, an entity uses surrogates such as:

The entity's weighted average cost of capital (WACC)

The entity's incremental borrowing rate

Other market borrowing rates

These rates must be adjusted to reflect the market's assessment of specific risks and to exclude risks not relevant or already adjusted for.

The discount rate is independent of the entity's capital structure and the way the entity financed the purchase of the asset.

KEY TAKEAWAYS SUMMARY TABLE

Topic	Key Rule
Objective	Ensure assets are carried at no more than recoverable amount
Recoverable Amount	Higher of FVLCD and VIU
Impairment Testing Frequency	Annual for goodwill, indefinite-life intangibles, and intangibles not yet available for use; otherwise when indicators exist
Value in Use	Present value of future cash flows from continuing use and disposal
Cash-Generating Unit	Smallest group of assets generating largely independent cash inflows
Goodwill Allocation	Allocate to CGUs expected to benefit from synergies; not larger than an operating segment
Impairment Loss Allocation (CGU)	First to goodwill, then pro rata to other assets
Reversal	Permitted for assets other than goodwill; prohibited for goodwill
Reversal Limit	Carrying amount cannot exceed what it would have been without impairment (net of depreciation)
Discount Rate	Pre-tax rate reflecting time value of money and asset-specific risks