2023/1/13

Non-current assets

• IAS 16 Property, plant and equipment(PPE)

• IAS 20 Government Grants
• IAS 23 Borrowing Cost
• IAS 40 Investment Property
• IAS 38 Intangible asset
• IAS 36 Impairment of asset
• IFRS 5 Non-current assets held for sale and discontinued operations

IAS 16 Property, plant and equipment

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IAS 16 PPE Knowledge points

Items on SFP & SPL(OCI)

Definition

Recognition
- Revaluation reserve

Measurement
- Initial measurement - Depreciation expenses
- Impairment losses
- Subsequent measurement

Derecognition / Disposal - Revaluation gain or losses

Definition • Have physical substance

• Can be touched

IAS 16 defines property, plant and equipment as tangible items that:

are held for use in the production or supply of goods or services

for rental to others

or for administrative purposes

Are expected to be used during more than one period

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Initial Recognition An item of PPE should be recognised as an asset when:

 Probable that future economic benefits will flow to the entity
 Cost can be measured reliably
Initial Measurement

• Costs that are directly attributable to bringing the asset to necessary location and condition
• Purchase price+ Import duties + Non-refundable purchase taxes - Trade discount
 Employee benefit costs
 Site preparation
 Initial delivery & handling costs
 Installation & assembly costs
 Professional fees
 Costs of testing
 PV of future clean-up costs/cost of dismantling / removing the asset and restoring the site
Estimated costs of dismantling and removing the asset

Initial Measurement

The following costs should never be capitalized

 Administration and general overheads
 Abnormal costs (repairs, wastage, idle time)
 Costs incurred after the asset is physically ready for use
 Costs incurred in the initial operating period (initial operating losses)
 Costs of opening a new facility, introducing a new product (advertising and promotional costs)
and conducting business in a new location or with a new class of customer(training costs)
 Cost of relocating/reorganizing an entity’s operations

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Subsequent expenditure
Capitalized expenditure
Subsequent expenditure on property, plant and equipment should only be capitalized if:
• It enhances the economic benefits provided by the asset
• it relates to an overhaul or required major inspection of the asset – the costs associated with this should
be capitalized and depreciated over the time until the next overhaul or safety inspection
• it is replacing a component of a complex asset. This can only be capitalized if the original component has
been written off

Maintenance work
I. When major planned maintenance work is to be undertaken, the cost should be capitalized. The overhaul
will be capitalized as a new asset which will then be depreciated over the period to the next overhaul.
II.For unplanned maintenance work which happens in advance, work was required earlier than expected.
Then any remaining NBV of the overhaul cost should be expensed immediately.

Components replacement which was not separately identified

I. At the time of replacement, determine what the NBV of the component would currently be had it been
initially identified.
7
II.Write off the NBV and capitalize the replacement cost.

Subsequent Measurement

Cost model
• Cost-accumulated depreciation-impairment loss.
• The residual value, the useful life and depreciation method should be reviewed at least each year
• Separate into depreciable parts (overhaul & complex asset)
• Any adjustment are accounted for as a change in accounting estimate – only reflect current and future P&L
• Land does not depreciate.

Revaluation model
• Upward revaluation to OCI/Revaluation surplus (other components of equity)
• Downward revaluation:
E.g. 1st +100; 2nd -120 the same asset
 1st to OCI
 then in P/L
• If an item is revalued, the entire class of assets must be revalued
• Sufficient regularity that carrying amount does not differ materially from FV at end of reporting period
• Any excess depreciation can be transferred from revaluation reserve to retained earnings annually.
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Disposal

Disposal proceeds A
Carrying value B
Profit or loss on disposal C=A-B

Cost model Revaluation model

Dr. Bank-proceeds Dr. Bank-proceeds
(Dr. Loss on disposal) (Dr. Loss on disposal)
Dr. Accumulated depreciation Dr. Accumulated depreciation
Cr. NCA-original cost Cr. NCA-(revalued amount)
(Cr. Profit on disposal) (Cr. Profit on disposal)

Dr. Revaluation reserve

Cr. Retained earnings
Or the revaluation surplus may be left in the revaluation
surplus within other components of equity (OCE).
This item will not be recycled to P&L in subsequent accounting
period
9

Illustration - PPE

Cap bought a building on 2011.1.1. the purchase price was $2.9m, associated legal fees were $0.1m
and general administrative costs allocated to the purchase were $0.2m. Cap also paid sales tax of
$0.5m, which was recovered from the tax authorities.

The building was attributed a useful life of 50 years. It was revalued to $4.6m on 2014.12.31 and was
sold for $5m on 2015.12.31.

Cap purchased a machine on 2013.1.1 for $100,000 and attributed it with a useful life of 10 years. On
2015.1.1, Cap reduced the estimated remaining useful life to 4 years.

Explain the accounting treatments of PPE until 31 Dec 2015

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The building
•On 2011.1.1, the building was initially recognized at $3m ($2.9m purchase cost+$0.1m legal fees)
•Depreciation expense in year of 2011-2014 is $3m/50= $ 0.06m
•The CV just before revaluation is $3m-4*0.06m=$2.76m
•Revaluation at 2014.12.31 Dr. PPE $4.6m- $3m= $1.6m
Dr. Accumulated depreciation $ 0.24m
Cr. Revaluation gain (OCI) $1.84m
•In the year ended 2015.12.31, the depreciation charge would have been $0.1m ($4.6m/46), the CV is
$4.6m-$0.1m=$4.5m
•A profit on disposal of $0.5m ($5m-$4.5m) is recognized in P/L
•The revaluation gains previously recognized within OCI and held with equity are not reclassified to
profit or loss on the disposal.
•Cap could do a transfer within equity as
Dr. Revaluation reserve(OCE) $1.84m
Cr. Retained earnings $1.84m
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The machine
On 2013.1.1, the machine was recognized at $100,000

Depreciation expense in year of 2013-2014 is $100,000/10= $10,000

On 2015.1.1, Cap changes its useful life estimates, which is a change in accounting estimate and
therefore dealt with prospectively

The CV of the asset at the date of change:$100,000-$2*10,000=$80,000

The depreciation charge in the year ended 2015.12.31: $80,000/4=$20,000

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2015 Sep/Dec Q3

13

2015 Sep/Dec Q3
It is not acceptable to accrue the costs of the overhaul. The entity does not have a constructive obligation to
undertake the overhaul.
Under IFRS, costs related to major inspection and overhaul are recognized as part of the carrying amount of
property, plant and equipment if they meet the asset recognition criteria in IAS 16 Property, Plant and
Equipment.
The major overhaul component will then be d epreciated on a straight-line basis over its useful life (i.e. over
the period to the next overhaul) and any remaining carrying amount will be derecognized when the next
overhaul is performed.
Costs of the day-to-day servicing of the asset (i.e. routine maintenance) are expensed as incurred. Therefore
the cost of the overhaul should have been identified as a separate component of the refinery at initial
recognition and depreciated over a period of two years.
This will result in the same amount of expense being recognized in profit or loss over the same period as the
proposal to create a provision.

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Answer
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Other points
Impact on financial statements

 Upwards revaluation has increased equity in the statement of financial position. This
reduces its ROCE and gearing.
 Pay attention to cash flows arising from transactions on PPE.

Disclosure requirements

 The measurement bases

 The depreciation methods used, useful life and depreciation rates
 Carrying amount and accumulated depreciation
 A reconciliation of the carrying amount at the beginning and end of the period
15

IAS 20 Government grants

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Definition

 Government grants are transfers of resources to an entity in return for past compliance with
certain conditions relating to its operating activities. They exclude assistance that cannot be
valued and normal trade with government.
 Include:
• revenue grants, e.g. money towards wages
• capital grants, e.g. money towards purchase of non-current assets.

General principles

 Grants should not be recognized until the conditions for the receipt have been complied
with and there is reasonable assurance that the grant will be received.

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Accounting treatment-receive

Accounting treatment Entries

1. Recognized as “other income” or Dr. Bank
Revenue Cr. Other income
Grant
2. Deducted from related expenditure
1. Deducted from the cost of asset and depreciate the reduced
cost. （lower dep. exp)

Capital Grant 2. Recognized as deferred income and amortized to P/L over Dr. Bank
the life of asset. (Offsetting the higher dep. Charge on the Cr. Deferred income
original cost) Dr. Deferred income
Cr. Other income

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Accounting treatment-repay

Accounting treatment Entries

Repayment should be recognized as an expense Dr. Related expenses
Revenue
If there is an obligation to repay the grant - be provided Cr. Bank/Provision
Grant
under IAS 37
For recorded as reducing cost of asset: Dr. NCA
1st Increase the repayment to the cost of the asset Cr. Bank/Provision
2nd The cumulative additional depreciation that would have Dr. Depreciation expenses
been recognized to date in the absence of the grant should be Cr. Accumulated depreciation
Capital immediately recognized as an expense.
Grant
For recorded as deferred income Dr. Deferred income
1st derecognized repayment to any deferred income Cr. Bank/Provision
2nd Any remaining to P/L immediately Dr. Related expenses
Cr. Bank/Provision
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Illustration - TYU Government grants

On 1 June 20X1, Clock received written confirmation from a local government agency that it would
receive a $1m grant towards the purchase price of a new office building. The grant becomes
receivable on the date that Clock transfers the $10m purchase price to the vendor.

On 1 October 20X1 Clock paid $10m in cash for its new office building, which is estimated to have a
useful life of 50 years. By 1 December 20X1, the building was ready for use. Clock received the
government grant on 1 January 20X2.

Discuss the possible accounting treatments of the above in the financial statements for the year
ended 31 December 20X1.

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Government grants should be recognized when b) On 1 October 20X1

 The entity will comply with any conditions Recognize deferred income of $1m
attached (the purchase of the new building) Dr Grant receivable (asset) $1m
 It is reasonably certain that the grant will be Cr Deferred income (liability) $1m
received (written confirmation is available for
such grants) At 20X1 year end
CV of the office building
Therefore, the grant should be accounted for on 1 =10m-10m/50*1/12=$9.983m
October 20X1.
Income recognized in P/L is 1m/50*1/12=$1,667
Two acceptable accounting treatment Dr Deferred income (liability) $1,667
a) Reduce the cost of the building by $1m, and Cr P/L $1,667
depreciate the building based on $9m.
Deferred income in liability at 20X1 year end=$1m-
CV at 20X1 year end=9m-9m/50*1/12=$8.985m $1,667=$0.9983m

On 1 January 20X2
Dr Cash $1m 21
Answer Cr Grant receivable (asset) $1m

IAS 23 Borrowing costs

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Definition

Borrowing of funds to be capitalized as a part of cost of a “qualifying asset” where assets are self-
constructed over a substantial period of time.

 Qualifying asset - An asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.

 Those borrowing costs directly attributable to the acquisition, construction or production of a

qualifying asset must be identified

 Borrowing costs must be added to the cost of an asset, if the asset is one that takes a substantial
time to get ready. (capitalization)

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Recognition

 Capitalisation commences when following conditions all met:

• Expenditure being incurred
• Borrowing costs being incurred
• Activities that are necessary to prepare the asset for its intended use or sale are in progress

 Capitalisation should be suspended

when development is interrupted (e.g. strikes, bad weather).

 Capitalisation should cease

• when substantially all the activities necessary to prepare the qualifying asset for its intended use
or sale are complete.

Subsequent borrowing costs should be expensed in P/L.

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Measurement

The amount of cost capitalized:

Capital borrowing × Interest rate

 Funds borrowed specifically for a qualifying asset :

The actual borrowing costs incurred on those borrowings during the period, less any investment
income on the temporary investment of those borrowings

 Funds borrowed generally:

Weighted average of interest outstanding during the period

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Illustration - TYU Borrowing costs

On 1 January 20X1, HiRise obtained planning permission to build a new office building. Construction
commenced on 1 March 20X1. To help fund the cost of this building, a loan for $5m was taken out from the
bank on 1 April 20X1. The interest rate on the loan was 10% per annum.

Construction of the building ceased during the month of July due to an unexpected shortage of labor and
materials. By 31 December 20X1, the building was not complete. Costs incurred to date totaled $12m
(excluding interest on the loan).

Discuss the accounting treatment of the above in the financial statements of HiRise for the year ended 31
December 20X1.

I. Borrowing of funds to be capitalized as a part of cost of a “qualifying asset” where assets are self-
constructed over a substantial period of time.
II. Capitalization of borrowing costs should commence on 1 April 20X1, but it should cease for the month of
July because active development was suspended.
III. In total, 8 months’ borrowing costs should be capitalized and added to the building cost in the year 20X1.
The total capitalized costs = $5m*10%*8/12=$333,333
IV. The carrying amount of the building at year end is $12,333,333. 26

V. Since the building is not ready for use, so no depreciation is charged.

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IAS 40 Investment Property

27

Definition

Property (land or building – or part of a building – or both) held to earn rentals or for capital
appreciation or both.

 Examples of investment property  Examples of non-investment property

• Land held for long-term capital appreciation • Owner-occupied property (IAS 16 PPE)
• Land held for undecided future use • Property leased to another entity under a finance lease (IFRS
• Buildings leased out under an operating 16 Leases)
lease • Property being constructed or developed on behalf of third
• Vacant buildings held to be leased out parties (IFRS 15 Revenue)
under an operating lease. • Properties held for sale in the ordinary course of business or
in the process of construction of development for such sale
(IAS 2 Inventories)
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Measurement

Initial Subsequent  Disclosure requirements

• Whether the cost or fair value
model is used
At cost Cost model Fair value model • Amounts recognized in profit or
loss for the period
• A reconciliation between
IAS 16 No depreciation carrying amounts of investment
property at the beginning and
end of the period
Gain/loss shown directly
in SOPL

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Change in use

Fair value model

Change in use Date of change Accounting treatment
PPE----IP FV of property 视同PPE重新估值，增值或减值会计处理适用IAS16
IP---PPE/inventory FV of property 视同IP增值或减值，直接在利润表中确认gain or loss
Cost model
PPE----IP Carrying amount 后续正常折旧
IP---PPE/inventory Carrying amount 后续正常折旧

2018 SBR 2nd proof Q4(b)

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IAS 38 Intangible Assets

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IAS 38 Intangible Assets Knowledge points

Definition Initial measurement

Recognition Subsequent measurement

- Purchased VS Internal generated - Amortization
- Research & Development - Impairment
- Disposal

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Definition

 An intangible asset is an identifiable non-monetary asset without physical substance.

Recognition

 Identifiable

 control (power to obtain benefits from the asset)

 future economic benefits (such as revenue or reduce future costs)

 Cost of asset can be measured reliably

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Identifiable

 is separable if it could be rented or sold separately or

 arises from contractual or other legal rights (acquired separately through purchase)

Controlled by the entity

 Control over technical knowledge or know-how only exists if it is protected by a legal right.

The skill of employees, arising out of the benefits of training costs, are most unlikely to be recognisable
as an intangible asset, because an entity does not control the future actions of its staff.

Similarly, market share and customer loyalty cannot normally be intangible assets, since an entity
cannot control the actions of its customers

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Recognition
- Purchased separately Capitalized at cost. Include directly
attributable costs
- Acquired in business combination Capitalized at FV at date of
Acquired (Goodwill) acquisition
separately - Exchanges of assets Cost = normally FV of asset given up

Internally - Internally generated intangibles Research : expense

Generated Normally Not recognized! Development : Capitalise (if criteria are
met)
- Internally generated goodwill NEVER Capitalized

 Do not recognize an asset which is subjective and cannot be measured reliably.

 The standard prohibits the recognition of internally generated brands, publishing titles and customer lists and similar items as intangible assets
 Special points:
 Goodwill 35
 Research & development *

TYU – Intangible assets

Ten years ago, Innovate developed a new game called ‘Our Sports’. This game sold over 10 million
copies around the world and was extremely profitable. Due to its popularity, Innovate release a new
game in the Our Sports series every year. The games continue to be best-sellers.

The directors have produced cash flow projections for the Our Sports series over the next five years.
Based on these projections, they have prudently valued the Our Sports brand at $20 million and wish
to recognise this in the statement of financial position as at 30 September 20X3.

On 30 September 20X3, Innovate also paid $1 million for the rights to the ‘Pets & Me’ videogame
series after the original developer went into administration.

Required: Discuss the accounting treatment of the above in the financial statements of Innovate for
the year ended 30 September 20X3

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Our Sports brand

I.Cash flow projections suggest that the Our Sports brand will lead to future economic benefits.

II.However, the asset has been internally generated and therefore the cost of the asset cannot be
measured reliably.

III.So the Our Sports brand cannot be recognized in the financial statements.

Pets & Me brand

I.The Pets & Me brand has been purchased for $1 million.

II.Therefore, an intangible asset should be recognized at its cost of $1 million.

III.In subsequent periods, the Pets & Me brand will be amortized over its expected useful economic life.

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Answer

R&D
 Research cost
 written off as an expense as they are incurred
 Development
be recognized as an asset only if they meet certain criteria*:
 Probable future economic benefits from the asset, whether through sale or internal cost savings.
 Intention to complete the intangible asset and use or sell it
 Resources available to complete the development and to use or sell the intangible asset
 Ability to use or sell the intangible asset
 Technical feasibility of completing the intangible asset so that it will be available for use or sale
 Expenses attributable to the intangible asset during its development can be measured.

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R&D
 All expenditure related to an intangible which does not meet the criteria for recognition
should be expensed as incurred.
Examples of such expenditure:
• Start up costs
• Advertising costs/Marketing cost
• Training costs
• Business relocation costs
• Prepaid costs for services, for example advertising or marketing costs for campaigns
that have been prepared but not launched, can still be recognized as a prepayment

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TYU – R&D
During the year ended 31 December 20X1, Scone spent $2 million on researching and developing a
new product. The entity has recognised all $2 million as an intangible asset. A breakdown of the
expenditure is provided below:
$m
Research into materials 0.5
Market research 0.4
Employee training 0.2
Development activities 0.9

The expenditure on development activities was incurred evenly over the year. It was not until 1 May
20X1 that market research indicated that the product was likely to be profitable. At the reporting
date, the product development was not yet complete.

Required: Discuss the accounting treatment of the research and development expenditure in the
year ended 31 December 20X1. 40
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• Expenditure on research, market research and employee training cannot be capitalized and so must
be written off to profit or loss.

• As for development activities, $0.9*4/12=$0.3 million was incurred before the product was known
to be commercially viable. This amount must also be written off to profit or loss.

• In total, $0.5+$0.4+$0.2+$0.3=$1.4 million must be written off from intangible assets to profit or
loss:
Dr Profit or loss $1.4m
Cr Intangible assets $1.4m

• The intangible assets recognised on the statement of financial position will be $0.6million ($2-$1.4).
No amortization will be charged because the product is not yet complete.

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Answer

Measurement
 Cost model
Cost - accumulated amortization - impairment
 Finite useful life
 Amortize on systematic basis over its useful life
Initial Subsequent
 Begins when available for use/commercial production
(economic benefit)
Cost model
At cost  Residual value normally assumed = 0
• Finite (amortize with zero
residual value)  Review useful life and method at least each financial year-
• Infinite (no amortization) end
Revaluation model
 Indefinite useful life
• To FV* only if active market
 NOT amortised
 Review indefinite useful life assessment each period
 Impairment tests at least annually
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Measurement

 Revaluation model
• Quoted market price in an active market provide the most
reliable estimate of the FV of an intangible asset
Initial Subsequent • No active market, on the basis of the best information
available /similar asset/ estimating techniques
Cost model • Features of an active market are that:
At cost
• Finite (amortize with zero  the items traded within the market are homogeneous
residual value)
• Infinite (no amortization)  willing buyers and sellers can be found at any time
Revaluation model  prices are available to the public.
• To FV* only if active market  No active market: cost model
 Revalue whole class at the same time
 Revalue regularly such that BV not materially different to FV

2018 SBR Sep Q3(a) 43

Amortisation
 Acceptable methods of amortization
There is a rebuttable presumption that amortization methods that are based on revenue
generated by an activity that includes the use of an intangible asset are inappropriate.

The revenue generated by an activity that includes the use of an asset generally reflects factors
other than the consumption of the economic benefits of the intangible asset. For example,
revenue is affected by other inputs and process, selling activities and changes in sales volumes and
prices. The price component of revenue may be affected by inflation ,which has no bearing upon the
way in which an asset is consumed.

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Amortisation
 Acceptable methods of amortization
The presumption may be rebutted under the following conditions:

(a) Where the intangible asset is expressed as a measure of revenue, that is predominant limiting factor that is
inherent in an intangible asset is the achievement of a revenue threshold; or

(b) When it can be demonstrated that revenue and the consumption of the economic benefits of the intangible
asset are highly correlated.

An example of (a) might be to operate a toll road, if this rights were based on a fixed total amount of revenue to be
generated from cumulative tolls charged. A contract could, for example allow operation of the toll road until the
cumulative amount of tolls generated from operating the road reaches $100 million. Revenue would in this case be
established as the predominant limiting factor in the contract for the use of the intangible asset, so the revenue that
is to be generated might be an appropriate basis for amortising the intangible asset, provided that the contract
specifies a fixed total amount of revenue to be generated on which amortization is to be determined.

2020 SBR Mar Q3(b)(i) 45

IAS 36 Impairment of Assets

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IAS 36 Impairment of Assets Knowledge points

Definition Measurement of impairment loss

Indications of impairment Impairment of CGUs

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Definition

 An asset is impaired if its recoverable amount is below its carrying amount.

Recoverable Carrying
Amount Value

FV -
Value in use
Cost to sell

Amount obtainable from the sale of an asset in an PV of estimated future cash flows expected to arise from the
arm’s length transaction less costs of disposal continuing use of an asset and its disposal at the end of its
useful life 48
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When impairment?
The entity should look for evidence of impairment at the end of each period and conduct an
impairment review on any asset where there is evidence of impairment. (indicators of impairment)
 External
– significant fall in market value
– significant external adverse effect on the business in technological, market, legal, economic,
environment
– increase in market interest rates that reduce the value in use
 Internal
– obsolescence/ damage
– The asset is not used as much in the business
– performance of asset worse than expected
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Methods
Measuring fair value less costs to sell

 Possible indicators of FV:

I. A binding sale agreement
II. Exit price as IFRS 13 requires (active market; market price)

 Direct selling cost might be:

I. legal costs, stamp duty, costs relating to the removal of a sitting tenant (in the case of a
building).
II. Redundancy and re-organization cost are not direct selling cost.

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Methods
Measuring value in use

Estimate future cash flows

 Cash flow projections should be based on reasonable and supportable assumptions, the
most recent budgets and forecasts;

 Management should assess the reasonableness of its assumptions by examining the causes
of differences between past CF projections and actual CFs.

The discount rate should reflect:

• The time value of money
• The risks specific to the asset

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Methods
 Unable to determine value in use and net selling price

Depreciated replacement cost should be used as an approximation of the recoverable amount.

Depreciated replacement cost

=current price of the PPE of equivalent size-Accumulated depreciation

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Accounting treatment
• The recoverable amount should be calculated
• The asset is to be written down to recoverable amount
• The impairment loss should be charged to P/L as an expense
• Adjust depreciation based on impaired figures for future periods

If the impairment reserves a previous gain, taken to the revaluation reserve firstly

Dr. Revaluation reserve (1st ) (deduct from equity)

Dr. Impairment loss (bal. fig) (deduct from profit)
Cr. CV of asset (reduction of asset)

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TYU Impairment

On 2011.12.31, an entity noticed that one of its items of plant and machinery is often left idle. On
this date, the asset had a carrying amount of $500 and a fair value of $325. The estimated costs
required to dispose of the asset are $25.

If the asset is not sold, the entity estimates that it would generate cash inflows of $200 in each of the
next two years. The discount rate that reflect the risks specific to the asset is 10%.

Required:
(a) Discuss the accounting treatment of the above in the financial statements for the year ended
31 December 2011.

(b) How would the answer to part(a) be different if there was a balance of $10 in other
components of equity relating to the prior revaluation of this specific asset?

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Information in the question can be summarized as follows:

$
Carrying amount 500
Fair value less costs to sell(325-25) 300
Future cash flows (per annum) for 2 years 200
Discount rate 10%

PV of Cash flow Year 1 (200 × 0.909) 182

PV of Cash flow Year 2 (200 × 0.826) 165
347

The impairment loss is $500- $347= $153

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Answer

(a)
Dr. Profit or loss $153
Cr. PPE $153

(b) What if there was a balance of $10 in other components of equity

relating to the prior revaluation of the specific asset?

Dr. Profit or loss $143

Dr. Other comprehensive income $10
Cr. PPE $153

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Answer
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Special cases

Annual impairment tests, irrespective of whether there are indications of impairment, are required for:
 Goodwill acquired in a business combination

 An intangible asset with an indefinite useful life

 An intangible asset not yet available for use

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Cash Generating Units

Allocating assets to CGU

Definition Do not generate own cash inflows

• Corporate assets (a head office building or a
• The smallest identifiable group of
research center)
assets which generates cash
inflows independently of those of • Goodwill
other assets.
• When it is not possible to
calculate the recoverable amount  Corporate assets and goodwill should be allocated to
of a single asset, then that of its CGU on a reasonable and consistent basis.
cash generating unit should be
 A CGU to which goodwill has been allocated must be
measured instead
tested for impairment annually.

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Cash Generating Units

Treat as ONE asset! Always Exclude: cash, trade

Impairment Compare CGU CV with RA receivables & inventory

Impairment order

An impairment loss is recognized for a CGU in the following order:

1st Reduce any specific obvious damaged or destroyed
2nd Reduce the CV of any goodwill allocated to the cash-generating unit (group of units);
3rd Reduce the CV of the other assets of the unit (group of units) pro rata (weighted average) on the basis.

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TYU CGU

There was an explosion in a factory. The carrying amounts of its assets were as follows:
$000
Goodwill 100
Patents 200
Machines 300
Computers 500
Buildings 1,500
2,600
The factory operates as a cash-generating unit. An impairment review reveals a net selling price of
$1.2 million for the factory and value in use of $1.95 million. Half of the machines have been blown
to pieces but the other half can be sold for at least their carrying amount. The patents have been
superseded and are now considered worthless.

Required: Discuss, with calculations, how any impairment loss will be accounted for.
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Obvious impairment needn’t allocation

1. The patents have been superseded and have a recoverable amount of $nil. They therefore should be written down to
$nil.
2. Half of the machines have been blown to pieces. Therefore, half of the CV of the machines ($150) should be totally
written off.

Allocation of impairment loss to CGU

The total impairment charged to profit or loss is $650,000 ($200,000 + $150,000 + $300,000).

Draft Impairment Revised

$000 $000 $000
Goodwill 100 (100) Nil
Patents Nil Nil
Machines 150 150
Computers 500 (50) 450
Buildings 1,500 (150) 1,350
2,250 (300) 1,950
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Answer

Cash Generating Units

 Impairment if reasonable allocation is
not possible D E F Goodwill Total
If no reasonable allocation of corporate Carrying amount 240 360 420 150 1170
assets or goodwill is possible, then a Recoverable amount 300 420 360 1080
group of cash-generating units must be
tested for impairment together in two-
stage process.  Step 1 Review the individual units for impairment.
F is impaired. A loss of $60 is recognized and its CV is reduced to
 Example $360.
An entity acquires a business comprising The total CV of the business is now $1110 (1170-60).
three cash-generating units, D,E and F, but  Step 2 Compare the carrying value of the business as a whole,
there is no reasonable way of allocating including the goodwill, with its recoverable amount.
goodwill to them. After three years, the
CV and recoverable amount of the net A further impairment loss of $30 must then be recognised in
assets in the cash-generating units and respect of the goodwill ($1,110 – $1,080).
purchased goodwill are as follows:

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Reversal of an impairment loss

 Indicators of impairment reversal

 External indicators
I. Increases in the asset’s market value.
II. Favorable changes in the technological, market, economic or legal environment.
III.Decreases in interest rates.

 Internal indicators
I. Favorable changes in the use of the asset.
II. Improvements in the asset’s economic performance.
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Reversal of an impairment loss

 Impaired assets should be reviewed at each reporting date

 A reversal of an impairment loss is recognized immediately (as income) to P&L. if the original
impairment was charged against the revaluation reserve, recognized in revaluation reserve.

 If the reversal relates to a CGU, the reversal is allocated to the assets of the unit on a pro rata
basis according to their carrying value.

 The carrying amount of an asset must not be increased above the lower of
 Its recoverable amount;
 Its depreciated carrying amount had no impairment loss originally been recognized.

 An impairment loss recognized for goodwill cannot be reversed in a subsequent period.

 The depreciation charge for future periods should be revised to reflect the changed carrying64
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TYU Reversal

Boxer purchased a non-current asset on 1 January 20X1 at a cost of $30,000. At that date, the asset
had an estimated useful life of ten years. Boxer does not revalue this type of asset, but accounts for it
on the basis of depreciated historical cost. At 31 December 20X2, the asset was subject to an
impairment review and had a recoverable amount of $16,000.

At 31 December 20X5, the circumstances which caused the original impairment to be recognized
have reversed and are no longer applicable, with the result that recoverable amount is now $40,000.

Explain, with supporting computations, the impact on the financial statements of the two
impairment reviews.

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Year ended 31 December 20X2

Asset carrying value (30,000*8/10) 24,000
Recoverable amount 16,000
Impairment loss 8,000

Year ended 31 December 20X5

Asset carrying value (16,000*5/8) 10,000
Recoverable amount 40,000

No impairment, original impairment can be reversed.

Year ended 31 December 20X5
If there never had been an earlier impairment
loss, asset carrying value should have been:
Asset carrying value in fact (30,000*5/10) 15,000
Reversal of the loss 16,000*5/8 10,000
5,000
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Answer
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Conclusion
I. The asset will be increased by $5,000.
II. $5,000 income will be recognized in profit or loss.
III. The whole $8,000 original impairment cannot be reversed. The carrying value of the
asset (10,000) cannot be increased above the lower of
a. Its recoverable amount(40,000);
b. The CV amount (depreciated historical cost, based upon the original cost and
estimated useful life of the asset) (15,000)

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Answer

TYU CGU Reversal

On 31 December 20X2, an impairment review was conducted on a cash generating unit and the
results were as follows:
Asset Carrying amount pre- Impairment Carrying value post-
impairment impairment
$000 $000 $000
Goodwill 100 (100) Nil
Property, plant and equipment 300 (120) 180
400 (220) 180

The property, plant and equipment was originally purchased for $400,000 on 1 January 20X1 and was
attributed a useful economic life of 8 years.
At 31 December 20X3, the circumstances which caused the original impairment have reversed and are
no longer applicable. The recoverable amount of the cash generating unit is now $420,000.
Explain, with supporting computations, the impact of the impairment reversal on the financial
statements for the year ended 31 December 20X3.
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I. The goodwill impairment cannot be reversed.

II. The impairment of the PPE can be reversed. However, this is limited to the carrying value
of the asset had no impairment loss been previously recognized.

PPE Carrying amount at 31 Dec 20X3 $150,000(180,000*5/6)

Value at 31 Dec 20X3 if no impairment $250,000(400,000*5/8)
Reversal of impairment loss $100,000

Conclusion
The carrying amount of PPE can be increased from $150,000 to $250,000. This will give rise
to a gain of $100,000 in profit or loss.

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Answer

Summary for change in value of assets

Changing in value
of asset

Increase Decrease

Previous
Previous To p/l
To RR increase
decrease

Any excess Cr to
Up to↑amount RR ↓amount of bal. in
of CV RR/OCI. Any excess Dr to p/l
(if revaluation
↑ in p/l model) ↓Asset cost
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Disclosure requirements

 Losses recognized during the period

 Reversals recognized during the period
 For each material loss or reversal:
• The amount of loss or reversal and the events causing it
• The nature of the asset
• The recoverable amount of the asset
• Whether the recoverable amount is the fair value less costs to sell or value in use
• The level of fair value hierarchy
• The discount rates used in estimating the value in use

2018 Sep Q2(a) 2021 Mar/Jun Q2(a) 71

IFRS 5
Non-current assets held for sale and
discontinued operations

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IFRS 5 Knowledge points

01 NCA held for sale

 Classification
 Measurement of NCA

02 Discontinued operations
 Presentation on FS

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Definition

 An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount
will be recovered principally through a sale transaction rather than through continuing use.

 Disposal group (IFRS 5)

A disposal group is a group of assets to be disposed of together as a group in a single transaction and
liabilities directly associated with those assets that will be transferred in the transaction.
 The disposal group may be a group of CGUs (cash generating units), a single CGU, or part of a CGU.

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Recognition-Held for sale(HFS)

 Must be available for immediate sale in its present condition, subject only to terms that are usual
and customary for sales of such assets (or disposal groups);

 The sale must be highly probable

 Management (at the appropriate level) must be committed to a plan to sell;
 Active programme to locate a buyer and complete the plan must have been initiated;
 the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value;
 Sale expected to qualify for recognition as a completed sale within one year from the date of
classification as held for sale (subject to limited specified exceptions);
 Unlikely that significant changes will be made to the plan or the plan withdrawn (indicated by
actions required to complete the plan).
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Case application

An entity that is committed to a sale plan involving loss of control of a subsidiary shall classify
all the assets and liabilities of that subsidiary as held for sale when the criteria set out are met,
regardless of whether the entity will retain a non-controlling interest in its former subsidiary
after the sale.

Non-current assets that are to be abandoned

Assets that are to be abandoned or wound down gradually cannot be classified as HFS
(although they may qualify as discontinued operations once they have been abandoned),
because their CV will not be recovered principally through a sale transaction.

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Measurement
An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its
carrying amount and fair value less costs to sell

Impairment
 At the time of classification as held for sale
 Immediately before the initial classification of the asset (or disposal group) as held for sale, the carrying amounts of the
asset (or all the assets and liabilities in the group) shall be measured in accordance with applicable IFRSs.
 Where FV less costs to sell is lower than CV, the item is written down as an impairment loss in P/L .
 If a NCA has been previously revalued(i.e. using a revaluation model) and is now classified as being held for sale, it
should be revalued to FV immediately before it is classified as held for sale. It is then revalued again at the lower of the
CV and the fair value less costs to sell. The difference is the selling costs and these should be charged against profits in
the period.
 A gain can be recognized for any subsequent increase in FV less costs to sell, but not in excess of the cumulative
impairment loss that has already been recognized.
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2014 Dec Q1(6)

• The year end is 30 November 2014.

• Any remaining revaluation surplus is not required to transfer to retained earnings on disposal.
Discuss, with supporting calculations, the accounting treatment of the non-current assets held for sale.
5 marks
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2014 Dec Q1(6)

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Answer

Changes to plan
Held for sale

 If a sale does not take place within one year, an asset (or disposal group) can still be classified as
held for sale if:
 The delay has been caused by events or circumstances beyond the entity' s control
 There is sufficient evidence that the entity is still committed to the sale.

Not held for sale

 If the criteria for 'held for sale' are no longer met, the assets or disposal group must be measured at
the lower of:
 its CV before it was classified as held for sale adjusted for any depreciation, amortization or
revaluations that would have been recognized had it not been classified as held for sale
 its recoverable amount at the date of the subsequent decision not to sell
 Any adjustment required is charged to P&L
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Discontinued operations

A discontinued operation is a component of an entity that either has been disposed of, or is classified
as held for sale, and
a. represents a separate major line of business or geographical area of operations,
b. is part of a single co-ordinated plan to dispose of a separate major line of business or geographical
area of operations or
c. is a subsidiary acquired exclusively with a view to resale.
 A component of an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity. In other words, a
component of an entity will have been a cash-generating unit or a group of cash-generating units
while being held for use.
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终止经营，是指企业满足下列条件之一的、能够单独区分的组成部分，
且该组成部分已经处置或划分为持有待售类别：
（一）该组成部分代表一项独立的主要业务或一个单独的主要经营地
区；
（二）该组成部分是拟对一项独立的主要业务或一个单独的主要经营
地区进行处置的一项相关联计划的一部分；
（三）该组成部分是专为转售而取得的子公司。
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Presentation in the SOFP

 Assets classified as held for sale should be presented separately from other assets in the statement
of financial position
 A separate line under current assets
 The liabilities of a disposal group classified as held for sale should be presented separately from
other liabilities in the SOFP
 Assets and liabilities should not be offset
 A single amount in the statement of comprehensive income comprising the total of:
I. the post-tax profit or loss of discontinued operations and
II. the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on
the disposal of the assets or disposal group(s) constituting the discontinued operation

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Disclosures in notes to the accounts

 A description of the non-current asset (or disposal group)

 A description of the facts and circumstances of the sale or expected sale
 Any impairment losses or reversals recognized

2018 Dec SBR Q1(c)

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Practice on this topic

Non-current assets Investment property

SBR 2nd proof Q3(b); 2018 Sep SBR Q2; SBR 2nd proof Q4(b);

2018 DEC SBR Q3(b); 2021 Mar/Jun Q2&Q4 NCA held for sale and discontinued

Intangible assets operations

SBR 2nd proof Q3(a)(i); 2018 SEP SBR Q3; 2018 Dec SBR Q1(c);2018 Sep SBR Q2;

2020 Mar SBR Q3; 2020 Sep/Dec SBR Q3; 2020 Mar SBR Q1&Q3; 2020 Sep/Dec SBR Q3

2021 Mar/Jun Q3

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