Module 12

PAS 36 – Impairment of Assets

Introduction

Philippine Accounting Standards 36 prescribes the procedures necessary to ensure that the assets
are not carried in excess of their recoverable amount.

PAS 36 applies in accounting for the impairment of the following assets:

a. Property, plant and equipment
b. Investment property measured under the cost model
c. Investment in associates, joint ventures and subsidiaries
d. Intangible assets
e. Goodwill

Learning outcomes:
1. State the core principle of PAS 36.
2. Account for the impairment of individual assets and cash-generating units.
3. Account for the reversal of impairment.

Objective of PAS 36

The objective of PAS 36 to ensure that assets are carried at no more than their recoverable amount,
and to define how recoverable amount is determined.

Core Principle
If the carrying amount of an asset is greater than its recoverable amount, the asset is impaired. The
excess is impairment loss.

Scope
PAS 36 applies to all assets except:

a. inventories (see PAS 2)

b. assets arising from construction contracts (see PAS 11)
c. deferred tax assets (see PAS 12)
d. assets arising from employee benefits (see PAS 19)
e. financial assets (see PAS 39)
f. investment property carried at fair value (see PAS 40)
g. agricultural assets carried at fair value (see PAS 41)
h. insurance contract assets (see PFRS 4)
i. non-current assets held for sale (see PFRS 5)

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
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 Therefore, PAS 36 applies to (among other assets):

a. land
b. buildings
c. machinery and equipment
d. investment property carried at cost
e. intangible assets
f. goodwill
g. investments in subsidiaries, associates, and joint ventures carried at cost
h. assets carried at revalued amounts under PAS 16 and PAS 38

Key definitions

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit
exceeds its recoverable amount

Carrying amount: the amount at which an asset is recognized in the balance sheet after deducting
accumulated depreciation and accumulated impairment losses

Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called
net selling price) and its value in use
* Prior to consequential amendments made by PFRS 13 Fair Value Measurement, this was
referred to as 'fair value less costs to sell'.

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 PFRS 13 Fair Value
Measurement)

Value in use: the present value of the future cash flows expected to be derived from an asset or
cash-generating unit

Computation of Impairment loss

Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx

Identifying an asset that may be impaired

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.

If there is no indication that an asset may be impaired, an entity is not required to estimate the

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 recoverable amount of the asset.

Indications of impairment

I. External sources of information

a. Significant decline in the asset’s value more than what is expected as a result of passage of
time of normal use.
b. Significant changes in technological, market, economic or legal environment in which the
entity operates or in the market to which an asset is dedicated.
c. Increase in market interest rates or other market rates of return on investments which are
likely to affect discount rates used in calculating asset’s value in use and decrease asset’s
recoverable amount materially.
d. Carrying amount of the net assets is more than its market capitalization.

II. Internal sources of information

a. Evidence of obsolescence or physical damage

b. Significant change with adverse effect to the entity has taken place or will take place, which
will affect expected use of asset, e.g., discontinuance, disposal, restructuring plans.
c. Evidence is available from internal reporting that indicates that the economic performance
of an asset is, or will be, worse than expected.

Required testing for impairment

The following assets are required to be tested for impairment at least annually, whether or not
there are indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination

Measuring recoverable amount

Recoverable amount is the higher of the asset’s fair value less costs of disposal and value in use.

However, if there is no reason to believe that an asset’s value in use materially exceeds its fair
value less costs of disposal, the asset’s fair value less costs of disposal may be used as its
recoverable amount. This will often be the case for an asset that is held for disposal.

Value in use
Value in use is the present value of the future cash flows expected to be derived from an asset or
cash-generating unit.

• Any residual value of the asset and disposal costs should be included in estimating future
cash inflows and outflows.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 • Cash flow projections shall cover a maximum period of 5 years.
• Projections beyond 5 years are extrapolated.
• The discount rate to be used shall be a pre-tax rate

When making estimates of future cash flows for purposes of computing value in use:

Ex c lu d e c a s h f lo w s a r is in g In c l u d e c a s h f l o w s a r i s i n g
fr om : fr om :

1. Future restructurings not 1. Revenues to be derived

yet committed from the continuing use of
2. Improving or enhancing the asset
the asset’s performance 2. Day-to-day costs of using
3. Income taxes the asset
4. Financing activities 3. Any residual value of the
asset and disposal costs

Recognizing and measuring an impairment loss

Impairment loss is recognized in profit or loss, unless the asset is carried at revalued amount, in
which case revaluation surplus is decreased first and any excess is recognized in profit or loss. The
decrease in the revaluation surplus is recognized in other comprehensive income.

Depreciation after impairment

After the recognition of an impairment loss, the depreciation (amortization) 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.

Cash-generating unit (CGU)

Cash-generating unit (CGU) is 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.

Impairment of individual assets included in a CGU

• Assets whose recoverable amount can be determined reliably are tested for impairment
individually.
• Assets whose recoverable amount cannot be determined reliably (e.g., assets that do not
generate their own cash flows) are included in a CGU. The CGU is the one tested for
impairment.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 Allocating goodwill to CGU’s

For purposes of impairment testing, goodwill acquired in a business combination shall be allocated
to each of the acquirer’s CGU in the year of business combination.

Impairment loss for a CGU

The impairment loss on a CGU shall be allocated
1. First, to any goodwill allocated to the CGU
2. Then, to the other assets of the unit pro rata on the basis of the carrying amount of each asset
in the unit.

Reversal of Impairment loss

• Same approach as for the identification of impaired assets: assess at each balance sheet
date whether there is an indication that an impairment loss may have decreased. If so,
calculate recoverable amount.
• No reversal for unwinding of discount.
• The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been recognized.
• Reversal of an impairment loss is recognized in the profit or loss unless it relates to a
revalued asset
• Adjust depreciation for future periods.
• Reversal of an impairment loss for goodwill is prohibited.

Disclosure
Disclosure by class of assets:

• Impairment losses recognized in profit or loss

• Impairment losses reversed in profit or loss
• Which line item(s) of the statement of comprehensive
• Income impairment losses on revalued assets recognized in other comprehensive income
• Impairment losses on revalued assets reversed in other comprehensive income

Disclosure by reportable segment:

• impairment losses recognized

• impairment losses reversed

Other disclosures:
If an individual impairment loss (reversal) is material disclose

• events and circumstances resulting in the impairment loss

• amount of the loss or reversal
• individual asset: nature and segment to which it relates

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 • cash generating unit: description, amount of impairment loss (reversal) by class of assets
and segment
• if recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy
(from PFRS 13 Fair Value Measurement) within which the fair value measurement is
categorized, the valuation techniques used to measure fair value less costs of disposal and
the key assumptions used in the measurement of fair value measurements categorized
within 'Level 2' and 'Level 3' of the fair value hierarchy*
• if recoverable amount has been determined on the basis of value in use, or on the basis of
fair value less costs of disposal using a present value technique*, disclose the discount rate
* Amendments introduced by Recoverable Amount Disclosures for Non-Financial Assets,
effective for annual periods beginning on or after 1 January 2014.

If impairment losses recognized (reversed) are material in aggregate to the financial statements as
a whole, disclose:
• main classes of assets affected
• main events and circumstances

Disclose detailed information about the estimates used to measure recoverable amounts of cash
generating units containing goodwill or intangible assets with indefinite useful lives.

References:

Millan, Z. V. (2018). PAS 36 Impairment of Assets. In Conceptual Framework and Accounting

Standards (2018 Edition, pp. 373-390). Bandolin Enterprise.

IAS 36- Impairment of assets

2020).http://www.iasplus.com/.https://www.iasplus.com.en/standards/oas/ais36

Activity:
Answer Problem 1, PAS 36 Impairment of Assets (pp. 391) in your textbook.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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