Section 27: Impairment of Assets
Section 27 deals with the measuring, recognising and disclosing impairments for all assets with the exception of:
- assets arising from construction contracts covered by Section 23;
- deferred tax assets covered by section 29;
- Asset arising from employee benefits covered by Section 28;
- Financial assets within the scope of Section 11 and Section 12 dealing with financial instruments;
- Investment property measured at fair value under Section 16;
- Biological assets relating to agricultural activity dealt with in Section ; and
- Impairment of deferred acquisition costs and intangible assets arising from insurance contracts which are dealt with in FRS 103.
What is new?
Section 27 states that an impairment review must be carried out when there are indicators of impairment. This contrasts with old GAAP where mandatory annual testing for goodwill and intangible assets with an estimated useful life of more than 20 years, tangible fixed assets of more than 50 years and on which no depreciation is charged on the grounds of immateriality.
Section 27 does not require an entity to carry out post impairment monitoring whereas under old GAAP (FRS 11) subsequent monitoring of cash flows explicitly required for 5 years after the impairment was booked where the recoverable amount was based on value in use, with re-performance of original impairment calculation if actual cash flows are significantly less than forecast.
Reversal of an impairment for goodwill will not be allowed under Section 27 (subject to the implementation of the EU accounting directive 2013/34 by Ireland) however, under old GAAP the reversal of a previous impairment was allowed under certain circumstances.
Section 27 makes it clear where assets are held for service potential then it is possible to use the depreciated replacement cost as a measurement model. Old GAAP had no specific guidance.
Under Section 27, deferred tax must be taken into account when determining the recoverable amount. This was not required under old GAAP.
If goodwill cannot be allocated to an individual cash generating unit (CGU) or group of CGUs on a non-arbitrary basis the test for impairment of goodwill should be carried out by determining the recoverable amount of either the acquired entity in its entirety; or the entire group of companies that have not been integrated. This concept was not in old GAAP.
When performing an impairment review of goodwill acquired in a business combination, the carrying value of the goodwill is first grossed up to include goodwill attributable to any non-controlling interest. This was not detailed in old GAAP.
What is different?
Section 27 only requires disclosures of the amount of impairment losses recognised or reversed in the period and circumstances leading to it. This compares with old GAAP where the disclosures were more onerous and required details of discount rates, periods over which cash flows projected and growth rates used in the value in use calculation.
The wording in FRS 11 has changed from an income generating unit (IGU) to a cash generating unit (CGU). An IGU may sometimes be identified at a higher level than CGUs, however it should not create major differences in practice.
Section 27 provides very little guidance on the identification of IGUs, treatment of central assets, basis for cash flow estimates and discount rates. All of the aforementioned were dealt with under FRS 11. It is likely the guidance in FRS 11 will be utilised in relation to these.
Under Section 27.21 if a CGU is impaired the impairment will be first set against goodwill and then set against other assets on a pro-rata basis. In contrast under FRS 11 the impairment loss was set against intangibles first and then finally against other assets on a pro-rata basis.
Section 27 makes it clear that impairment losses should be recognised in the profit and loss account unless it relates to a revalued asset, in which case it will go to the revaluation reserve first. However, under old GAAP, impairment losses should be recognised in the profit and loss account regardless of whether the asset was revalued or not, where it was due to the consumption of economic benefits.
Other standards affecting Section 27 where differences arise:
Section 35 – Transition to FRS 102 – Ability to show the deemed cost equal to the revalued value such that these assets are not considered to be revalued assets and instead that is deemed to be the cost of the asset.
What are the key points?
Impairment review only required to be performed if indicators of an impairment exists.
Indicators of impairment as defined in Section 27.9 are:
- An asset’s market value has declined significantly more than would be expected as a result of the passage of time;
- Significant changes occurred/are due to occur in technology, market, economic or legal environment;
- Market interest rates have increased during the period which are likely to affect materially the discount rate and value in use;
- The carrying amount of the net assets is more than the estimated fair value of the entity as a whole;
- Evidence available of obsolescence and damage of an asset;
- Significant changes with adverse effect on the entity have or is due to take place which, in the extent to which an asset is used/expected to be used e.g. plans to restructure, make idle or discontinue an operation;
- Reassessment of an asset from infinite to finite; and
- Evidence showing the economic environment of an asset is worse than expected.
A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.
An impairment exists if the recoverable amount is less than the carrying amount.
The recoverable amount of an asset or cash generating unit is the higher of its fair value less costs to sell and its value in use.
Fair value less costs to sell is based on the sale of the asset in an arm’s length transaction between knowledgeable and willing parties.
Value in use is the present value of the future cash flows expected to be derived from the asset.
If an impairment loss arises on a cash generating unit, it is allocated first against goodwill and then against other assets of the unit, prorata based on their carrying values.
For individual assets, reversals are recognised in profit or loss (or in other comprehensive income, for previously revalued assets in accordance with the requirements of the relevant section). The asset carrying value is never restored to more than what it would have been had the impairment never occurred.
For cash generating units, the reversal is allocated pro-rata to the assets in the unit, excluding goodwill.
Future of cash flows included in the value in use calculation cannot include future cash flows from future restructuring or improvements to the asset’s performance. The pre-tax discount rate should be used.
What do accountants need to do?
Be aware of the differences between old GAAP and FRS 102 in relation to impairments so that they can advise clients of these. Get to know the new standard in detail.
Advise clients who have previously had to carry out impairment reviews on an annual basis, that this may no longer be required if there are no indicators of impairment. Similarly, advise clients of the non-necessity for a look back test under Section 27.
What do companies need to do?
Be aware of the differences between old GAAP and FRS 102 in relation to impairments and the non-necessity of performing impairment reviews on an annual basis or performing a look back test in future years following an impairment.
Be aware of the method in which an impairment should be set off so that companies correctly account for these under FRS 102.