This Standard prescribes the accounting and disclosure for impairment of all assets. It includes requirements for identifying an impaired asset, measuring its recoverable amount, recognising or reversing any resulting impairment loss, and disclosing information on impairment losses or reversals of impairment losses. Prior to the development of this Standard, the treatment of impaired assets was dealt with in a cursory manner in a number of individual Financial Reporting Standards, for example, FRS 1162004, Property, Plant and Equipment. Although the issue of reduction in value (impairment) was addressed in each of those Standards, there was little guidance provided with respect to recognition and measurement in instances of impairment.
In addition to the problems with respect to individual standards, there have also been variations between the treatment of impaired assets between jurisdictions. For example, under the United States generally accepted accounting principles (US GAAP), an entity assesses whether impairment has occurred based on the undiscounted, as opposed to discounted, future cash flows expected to result from the use of the asset and its eventual disposal.
Based upon the conclusion that existing requirements and guidance in IASs are not detailed enough to ensure that enterprises identify, recognise and measure impairment losses in a similar way, and there is also a need to eliminate alternatives for measuring an impairment loss such as the option not to use discounting, the IASC developed IAS 36. Both IAS 36, Impairment of Assets and FRS 11 (the United Kingdom), Impairment of Fixed Assets and Goodwill have introduced detailed requirements and guidance on impairment and write-downs to recoverable amounts.
The fundamental requirement of this Financial Reporting Standard is that an impairment loss should be recognised whenever the recoverable amount of an asset is less than its carrying amount (sometimes called "book value"). However, if the review of the carrying amount of an asset finds no evidence of conditions of impairment (i.e. no indication that an asset may be impaired. determination of the asset's recoverable amount is not required. See Figure 1.
This Standard covers investments in subsidiaries, investments in associates, interests in joint ventures, fixed assets, intangible assets and goodwill. In addition, the provisions of this Standard replace the requirements for the recoverability of an asset that are included in FRS 1092004, Research and Development Costs, FRS 1282004, Investment in Associates, and FRS 1162004, Property, Plant and Equipment.
This Standard does not cover impairment of: inventories; deferred tax assets; assets arising from construction contracts; assets arising from employee benefits; and financial assets that are included in FRS 1322004, Financial Instruments: Disclosure and Presentation.
With the introduction of this Financial Reporting Standard, Malaysian companies will need to focus more attention on the carrying value of their assets and after review, to consider whether there are any impairment losses.
Requirements of FRS 1362004
This Standard requires that the recoverable amount of an asset should be estimated whenever there is indication that the asset may be impaired.
This Standard requires an impairment loss to be recognised (an asset is impaired) whenever the carrying amount of an asset exceeds its recoverable amount. See Figure 1. An impairment loss should be recognised in the income statement for assets carried at cost and treated as a revaluation decrease for assets carried at revalued amount.
This Standard requires recoverable amount to be measured as the higher of net selling price and value in use:
net selling price is the amount obtained from the sale of an asset in an arm's length transaction between knowledgeable, willing parties, after deducting any direct incremental disposal costs; and
value in use is the present value of estimated future cash flows expected to arise from continuing use of an asset and from its disposal at the end of its useful life. The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset.
In determining an asset's value in use, this Standard requires that an enterprise should use, among other things:
cash flow projections based on reasonable and supportable assumptions that:
reflect the asset in its current condition; and
represent management's best estimate of the set of economic conditions that will exist over the remaining useful life of the asset; and
a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The discount rate should not reflect risks for which future flows have been adjusted.
Recoverable amount should be estimated for an individual asset. If it is not possible to do so, the Standard requires an enterprise to determine recoverable amount for the cash-generating unit to which the asset belongs. See Figure 1 and Figure 3. A cash-generating unit is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. However, if the output produced by an asset or group of assets is traded in an active market, this asset or group of assets should be identified as a separate cash-generating unit, even if some or all of the production of these assets are used internally. Appendix 2, Illustrative Examples, includes examples on the identification of cash-generating units.
In testing a cash-generating unit for impairment, this Standard requires that goodwill and corporate assets (such as Head Office assets) that relate to the cash-generating unit should be considered. This Standard specifies how this should be done.
Principles for recognising and measuring impairment losses for a cash-generating unit are the same as those for an individual asset. This Standard specifies how to determine the carrying amount of a cash-generating unit and how to allocate an impairment loss between the assets of the unit.
This Standard requires that an impairment loss recognised in prior years should be reversed if, and only if, there has been a change in the estimates used to determine recoverable amount since the last impairment loss was recognised. However, an impairment loss is reversed only to the extent that it does not increase the carrying amount of an asset above the carrying amount that would have been determined for the asset (net of amortisation or depreciation) had no impairment loss been recognised in prior years. A reversal of an impairment loss should be recognised in the income statement for assets carried at cost and treated as a revaluation increase for assets carried at revalued amount. See Figure 2.
This Standard requires that an impairment loss for goodwill should not be reversed unless:
the impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur; and
subsequent external events have reversed the effect of that event.
When impairment losses are recognised (reversed), this Standard requires certain information to be disclosed:
by class of assets; and
by reportable segments based on the enterprise's primary format (only required if an enterprise applies Financial Reporting Standard on segment reporting).
This Standard requires further disclosure if impairment losses recognised (reversed) during the period are material to the financial statements of the reporting enterprise as a whole.
On first adoption, this Standard should be applied on a prospective basis only. Impairment losses recognised (reversed) should be treated under this Standard and not under the benchmark or the allowed alternative treatment for other changes in accounting policies in FRS 1082004, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies.