IAS 16 : Impairment and Derecognition

Impairment and Derecognition

Impairment is presented in the income statement as:

Impairment losses or impairment gains if presenting the income statement by nature of expense, or an expense within the function if presenting the income statement by function.

Impairment gains represent reversals of impairment losses (see below).

Impairment is presented in the balance sheet as:

Accumulated impairment:

Beginning of 2XX9	Goodwill		Identifiable  assets		Total
Historical cost (or valuation)	1,000		2,000		3,000
Accumulated depreciation (2XX9)	0		(167)		(167)
Carrying amount	1,000		1,833		2,833
Accumulated impairment	(1,000)		(473)		(1,473)
Carrying amount after impairment loss	0		1,360		1,360

Accumulated impairment is never a positive number.

IFRS 3 Business Combinations workbook explains how to account for an impairment relating to acquisitions.

To determine whether an asset is impaired, apply IAS 36 Impairment of Assets, which explains how to review the carrying amount, the recoverable amount and when to recognise, or reverse the recognition of, an impairment loss.

 

Compensation for impairment

Compensation from third parties (such as insurance organisations) for assets that were impaired, lost, or given up, will be included in the income statement, when the compensation becomes receivable. The compensation will be an offset to impairment losses previously recorded.

 

Separate Economic Events

The following are separate economic events, and are accounted for separately:

(1)   impairments of items of property, plant and equipment are recorded under IAS 36;

An impairment is a reduction in value of an asset that is still in use. The reduction may be caused by damage (to a car, for example). It may be due to new, cheaper technology having eroded the fair value of the firm’s current equipment.

(2)   derecognition of items of property, plant and equipment retired, or disposed of, is determined under IAS 16; This is the action of eliminating an asset from the books, to reflect that it is no longer in use . Any gain, or loss, on disposal will be recorded at this time.

(3)   compensation from third parties for assets that were impaired, lost, or given up, is included in determining the income statement when it becomes receivable; Compensation may become payable from an insurance policy or if the state nationalises assets, either wholly or partly, in order to build a new road over the land on which the building stands, or to rebuild an area for government purposes.

(4)   the cost of items of property, plant and equipment restored, bought, or constructed as replacements is determined under IAS 16.

Replacements should be treated as new assets. The old asset is eliminated from the books, and the new asset introduced as an addition.

Derecognition (Eliminated from the balance sheet)

The carrying amount of an asset will be derecognised:

(1)      on disposal; or

(2)      when no future benefits are expected from its use or disposal.

The gain, or loss, arising from the derecognition of an asset will be included in the income statement when the asset is derecognised (unless IAS 17 requires otherwise e.g. on a sale and leaseback).

Gains will not be classified as revenue but will be shown as gains (or losses) on disposal of property, plant and equipment in the income statement.

The IASB 2007 Annual Improvements project is proposing that:

However, an entity that, in the course of its ordinary activities, routinely sells items of property, plant and equipment that it has held for rental to others shall transfer such assets to inventories at their carrying amount when they cease to be rented and are held for sale.

The proceeds from the sale of such assets shall be recognised as revenue in accordance with IAS 18 Revenue. The proposed amendment would primarily apply to lessors.

EXAMPLE sale at a profit Your policy is to keep company vehicles for 4 years. You have bought a new vehicle for $30.000. $16.000 is the estimated residual value of the vehicle. The depreciation amount was $30.000-$16.000= $14.000, and the annual depreciation charge is $14.000 / 4 years = $3.500. At the end of the 4 years, you sell the vehicle for $18.000. You record a gain of $2.000 ($18.000-$16.000) in the income statement.
	I/B	DR	CR
Cash	B	18.000
Property, plant & equipment	B		30.000
Accumulated depreciation	B	14.000
Gain on disposal of vehicle	I		2.000
Sale of vehicle for cash at a profit of 2.000

The disposal may occur in a variety of ways (for example: by sale, by entering into a finance lease, or by donation). In determining the date of disposal, an undertaking applies the criteria in IAS 18 Revenue for recording revenue from the sale of goods. IAS 17 Leasing applies to disposal by a sale and leaseback.

The gain, or loss, arising from derecognition is the difference between the net disposal proceeds and the carrying amount.

The consideration receivable on disposal is recorded initially at its fair value.

If payment for the item is deferred, the consideration received is recorded initially at the cash equivalent.

The difference between the nominal amount of the consideration and the cash equivalent is recorded as interest revenue under IAS 18, reflecting the effective yield on the receivable.

EXAMPLE fair value of disposal A vehicle that cost $30.000 is fully depreciated to its residual value of $16.000. You offer to sell it for $18.000 cash, or for $19.000 payable in 1 year’s time. You record a gain of $2.000 ($18.000-$16.000) in the income statement for either payment method.
	I/B	DR	CR
Cash	B	18.000
Property, plant & equipment	B		30.000
Accumulated depreciation	B	14.000
Gain on disposal of vehicle	I		2.000
Sale of vehicle for cash

If the buyer pays $19.000 in 1 year’s time, the extra $1.000 will be treated as interest receivable.

	I/B	DR	CR
Accounts receivable	B	19.000
Accumulated depreciation	B	14.000
Property, plant & equipment	B		30.000
Gain on disposal of vehicle	I		2.000
Unexpired interest income	B		1.000
Sale of vehicle
Cash	B	19.000
Accounts receivable	B		19.000
Unexpired interest income	B	1.000
Interest income	I		1.000
Cash receipt and recognition of interest

EXAMPLE  Does property, plant and equipment carried at revalued amount need to be revalued at the date of disposal? Issue The gain or loss on derecognition of property, plant and equipment is included in the income statement when the item is derecognised.  Gains are not classified as revenue. The gain or loss is calculated as the difference between the net disposal proceeds, if any, and the asset’s carrying amount. Should management revalue property, plant and equipment at the date of disposal before calculating the gain or loss on sale? Background Management revalues a bank’s owner-occupied building at the end of each calendar year. As at 31 December 20X3, the revalued amount of the building is 20 million. The building was sold on 30 June 20X4 for 21.5 million.  The carrying amount of the building on 30 June 20X4 was 19.9 million. Solution Management does not have to revalue an asset at the date of disposal, provided revaluations are reasonably frequent. Any gain or loss arising in the period should therefore be recognised in the income statement. However, a gain or loss arising on disposal of revalued PPE may indicate that the remainder of that class of assets should be revalued in order to ensure that the carrying amount is not materially different from fair value.