HOW TO TREAT..MFRS 136 IMPAIRMENT ASSET

HOW TO TREAT ...

Masliza Idani binti Mahmood
Nirazmilah binti Sulaiman
Saima binti Saleng



i

Preface

HOW TO TREAT …... MFRS 136 IMPAIRMENT ASSET is a
comprehensive e-book designed for students of Diploma
in Accountancy from Polytechnic Malaysia taking up
FINANCIAL ACCCOUNTING. Each subtopic of the e-book
deals with information in detail and has the following
reader-friendly features. Learning objectives briefly
explain what to expect when going through the text. They
give an initial framework for reading. Therefore, this e-
book might come in handy for quick reference for both
lecturer and students during lecture or revision. This E-
book amply fulfils its objective of providing simple notes,
comprehensive examples and exercise for MFRS 136. We
hope that this E-book will be beneficial for the students
and the readers. We welcome any suggestions for further
improve in the future edition.

Table of content

1

Did you know that the worldwide economic crisis

followed by the recession caused a sharp downfall

in assets’ prices?

Such a steep and fast decrease had an impact on

the MFRS financial reporting, too. Companies

showing assets in their accounts had to reassess

theirbook value.

What should you do when you think the value of

your assets went down ? And how do you

determine it?
That’s where the standard MFRS136 Impairment of

Assets comes in. So let’s see what’s inside.

2

Learning Outcome

Explain the objective and scope of MFRS 136

Discussion on the circumstance of impairments to

assets

Demonstrate the impairment review process

Discussion on the recognition and measurement

of an impairment Loss

3

What is the objective of MFRS136?

MFRS 136 Impairment of Assets operationalizes

the testing of impairment of assets.

The objective of MFRS 136 Impairment of assets is

to make sure that entity’s assets are carried at not

more than their recoverable amount

When an asset’s carrying amount > recoverable

amount = Asset is impaired (impairment loss)

The Standard also defines when an asset is

impaired, how to recognize an impairment loss,

when an entity should reverse this loss and what

information related to impairment should be

disclosed in the financial statements.

Recognition Impairment Loss 4

MFRS 136 prescribes that "if, and only if, the recoverable amount of an asset is

less than its carrying amount, the carrying amount of the asset shall be

reduced to its recoverable amount.

That reduction is an impairment loss". An impairment loss shall be recognized

immediately in profit or loss, unless the asset is carried at the revalued

amount in accordance with another Standard (for example, in accordance with

the revaluation model in MFRS 116 Property, Plant and Equipment). Any

impairment loss of a revalued asset shall be treated as a revaluation decrease

in accordance with that other Standard.

(Tan Liong Tong, 2019)

Recognition Impairment Loss 5

For an asset carried on the revaluation model, any impairment loss

shall first be recognised in other comprehensive income (OCI) and

then offset against the revaluation surplus of that asset, if any, and the

balance of the loss recognised as an expense in profit or loss.

When impairment loss is greater than carrying amount 6

MFRS 136 also prescribes that when the amount estimated for an

impairment loss is greater than the carrying amount of the asset to which

it relates, an entity shall recognise a liability if, and only if, that is required

by another Standard.

In most cases, the maximum impairment loss for an asset would be its

carrying amount, where the asset would be written down to a nil value.

When impairment loss is greater than carrying amount 7

However, in some exceptional circumstances, the impairment loss for an

asset may exceed its carrying amount, such as in the case of an onerous

contract. where the costs to fulfil the contract exceed the benefits and the

entity has no realistic alternative but to meet the obligations of the

contract.

Another example is when an investor has provided a guarantee to make

good is share of losses in an associate. The investor shall take its full

share of losses even if the net amount is a liability in the statement of

financial position.

8

The following shows what the assets MFRS136 does and does not apply:-

Circumstances of Impairment 9

An asset may be impaired due to many reasons. For

instance, due to changes in the market value or

evidence of obsolescence. However, there are some

indicators that may assist users to identify if the

asset may be impaired




1 Indications of Impairment
There may be elements of external and

internal sources that may assist the entity,

whether their assets need to be impaired or

not.



2 Types of Asset
Assessment of an asset for impairment is normally performed

on an individual asset by identifying if the asset has

experienced any factors that may indicate it to be impaired.

What are the indications of impairment? 10

External source information

Observable indications that the asset's value has declined during the period

significantly more than would be expected as a result of the passage of time or

normal use.

Significant changes with an adverse effect on the entity in the technological,

market, economic or legal environment in which the entity operates or in the

market to which an asset is dedicated.

11

External source information

Increased in Market interest rates or other market rates of return on

investments, and those increases are likely to affect the discount rate used in

calculating an asset’s value in use.

The carrying amount of the net assets of the entity is higher than its market

capitalization.

What are the indications of impairment? 12

Internal source information

Obsolescence or physical damage of an asset.

Significant changes with an adverse effect on the entity related to the use

of an asset, for example, an asset becoming idle, plans to discontinue or

restructure the operation to which an asset belongs, plans to dispose of an

asset before the previously expected date, and reassessing the useful life

of an asset as finite rather than indefinite.

Evidence is available from internal reporting that indicates that the

economic performance of an asset is, or will be, worse than expected.

Types of Asset 13

The asset may be among the non-current assets held by the

company, such as machinery, equipment or even property.

If there is an indication that an asset may be impaired, then

the recoverable amount need to be identified.

Goodwill and so me intangible assets are required for an

annual impairment test.

Unlike the other assets, impairment review is made when

there is presence of impairment.

Method, or residual value, may need to be reviewed or even

adjusted.

14

Impairment Review Process

An asset is impaired when its carrying amount
exceeds its recoverable amount.

Terminology : - 15

Term:Term:

Carrying amount (CA) = amount in which asset is

recognised after deducting any accumulated

depreciation/ amortisation of asset

Fair value less cost to sell (FVLCTS) = amount from

the sale of an asset less cost of disposal

Value in Use (VIU) = the present value of the future

cash flows expected to be derived from an asset or

cash-generating unit.

Recoverable amount (RA) = amount in which asset is

the higher of its fair value less cost to sell and its

value in use.

16

Impairment

Test

RM 300,000 - RM 250,000 = RM 50,000 (IL)

17

Impairment Test

18

Impairment Loss

When CA > RA , asset is deemed impaired.

RA – CA = impairment loss.

Impairment loss is to be recognised immediately

Dr Impairment loss SoPL or ARR

Cr Accumulated impairment SoFP

Impairment loss will be charged to ARR only if the

asset impaired has been revalued earlier.

# ARR = Asset Revaluation Reserve
# SoPL = Statement of Profit and Loss
# SoFP = Statement of Financial Position

19

Example 1

Asset is impaired because CA > RA. Therefore the CA

must be written down to RA.

Journal Entries 20

*Amount of impairment loss written off to ARR should not

exceed the amount in the ARR account. Any balance that

cannot be written off to ARR is to be charged to P/L.

21

Example 2

An Machine was acquired in 1 January 2019 at

cost of RM50,000 and has useful economic

life of 10 years. At 31 December 2022, an
impairment review was performed. The fair

value of the Machine is RM26,000 and is

expected to acquire selling cost at RM2,000.

The expected future cash flow are RM5,000

every year for the next 5 years. The current

interest rate is 10% and the annuity factor for

the period is given 3.791

Solution 22

Solution 23

24

Example 3

Digoil Bhd has a patent on green and sustainable oil processing

technology, with a carrying value of RM5,800,000 at the end of

2014. Unfortunately, during the year a severe economic and

financial crisis has affected oil industry worldwide and this has

adversely affected the demand for its technology. This condition

was an indication that the patent is impaired. Digoil Bhd estimates

that the patent's value-in- use was RM3,200,000, based on the

discounted expected net future cash flows at its market rate of

interest while the net fair value was RM2,800,000. Calculate the

impairment loss.

Solution 25

Impairment loss:
= RM5,800,00 - RM3,200,00
= RM2,600,00

Entry to record the impairment loss:

26

27

Learning Outcome

Discuss the definition of cash generating unit

Determine the allocation basis of impairment

losses (CGU)

Demonstrate the reversal of an impairment

Presentation and disclosure in Extract of Financial

Statement for impairment of assets

Identifying the CGU to which an asset belongs 28

If it is not possible to estimate the recoverable amount of the

individual asset, an entity shall determine the recoverable

amount of the cash-generating unit to which the asset

belongs (the asset's cash-generating unit).

Example 29

A logging company owns a substantial plant, machinery, and equipment to


support its logging business. Except for some tractors and bulldozers, the other


plant, machinery, and equipment could only be sold for scrap value. Each plant,


machinery, or equipment does not generate cash inflows from continuing use


that are largely independent of the cash inflows from the other assets of the


logging business. In this case, it is not possible to estimate the recoverable


amount of each individual plant, machinery, or equipment because the value in


use cannot be determined and it is probably different from scrap value.

Accordingly, the logging company shall estimate the recoverable amount of the
cash-generating unit to which each plant, machinery and equipment belongs,

probably, to the cash-generating unit related to the logging business as a

whole.

(Tan Liong Tong, 2019)

Identifying the CGU to which an asset belongs 30

The Standard further requires that "if an active market exists for the

output produced by an asset or a group of assets, that asset or group of

assets shall be identified as a cash-generating unit, even if some or all is

the output is used internally.

It the cash inflows generated by any asset or cash-generating unit are

affected by internal transfer pricing, an entity shall use management's
best estimate of future price(s) that could be achieved in arm's length

transactions in estimating:

Identifying the CGU to which an asset belongs 31

It the cash inflows generated by any asset or cash-generating unit are

affected by internal transfer pricing, an entity shall use management's best

estimate of future price(s) that could be achieved in arm's length

transactions in estimating:

the future cash inflows used to determine the asset's or cash-generating

unit's value in use; and

the future cash outflows used to determine the value in use of any other

assets or cash-generating units that are affected by the internal transfer

pricing"

What is Cash Generating Unit? 32

Cash Generating Unit (CGU) = smallest identifiable group of

assets that generates cash inflows that are largely

independent of the cash inflows from other assets or another

group of assets.

33

BRAND NAME

Bakery shops cannot generate income independently from other assets; other equipment is

needed to make the bread, put bread on a rack, and need a lorry to make delivery, and

requires a store before sales can be made. Therefore, the smallest group of assets that can

generate income are the assets in the bakery shop.

Example 4 34

A cash generating unit had the following assets:

Additional information:
One of the machines which had a carrying amount of RM 500 was

damaged and scrapped. The recoverable og the CGU is estimated to be

RM 9,500.

Question
How much allocation is the impairment loss?

35

Solution

36

37

38

Reversal of an Impairment Loss 39

The indications of reversal of impairment loss are mirror images of the indications that led to thceonimsipdaeirr,maesnatmloisnsim, ausmth, tehyemfoalylohwavinegainfadvicoautriaobnlse or positive effect on the value of the related assets. The Standard requires that an entity shall


MFRS 136 requires that "an entity shall assess at each reporting date

whether there is any indication that an impairment loss recognised in

prior periods for an asset other than goodwill may no longer exist or
may have decreased.

If any such indication exists, the entity shall estimate the recoverable of

that asset".

This requires that the entity shall consider whether the indications that

led to an impairment loss of an asset in the prior years are still
applicable or not, or the extent of the impairment loss may have

decreased that may warrant a reversal of the impairment loss.

Indications of Reversal 40

The indications of reversal of impairment loss are mirror images of the

indications that led to the impairment loss, as they may have a

favourable or positive effect on the value of the related assets. The

Standard requires that an entity shall consider, as a minimum, the

following indications:

External sources of information

Internal sources of information

External sources of information 41

the asset's market value has increased significantly during the period;

significant changes with a favourable effect on the entity have taken place

during the period, or will take place in the near future, in the

technological, market, economic or legal environment in which the entity

operates, or in the market to which the asset is dedicated;

market interest rates or other market rates of return on investments have

decreased during the period, and those decreases are likely to affect the

discount rate used in calculating the asset's value in use, and increase the

asset's recoverable amount materially;

Internal sources of information 42

significant changes with a favourable effect on the entity have taken place

during the period, or are expected to take place in the near future, in the

extent to which, or manner in which, the asset is used of is expected to be

used. These changes include cost incurred during the period to improve

or enhance an asset's performance or restructure the operation to which

the asset belongs; and

43An impairment loss shall only be reversed if it relates to a change in the


estimates used to determine the asset's recoverable amount since the last

impairment loss was recognised. This must therefore reflect an increase in the

estimated service potential of the asset, either from sale or use.

Examples of changes in estimates that may increase service potential of an

asset include:

change in the basis for recoverable amount (i.e. whether recoverable amount

is based on fair value less costs to sell or value in use);

if recoverable amount was based on value in use, a change in the amount or

timing of estimated future cash flows or in the discount rate; or

if recoverable amount was based on fair value less costs to sell, a change in

estimate of the components of fair value less costs to sell.

44

Example 5

Adibah Bhd rents out boats to customers at Mines Lake. These boats

were bought on 1 January 2017 for RM1500,000 and were depreciated

at 20% per annum on costs. An accident took place and the business

was badly hit. On 31 December 2018, the fair value less cost to sell of

these boats was RM750,000 and the value in use was RM680,000. In

December 2019, demand for boats has picked up and the boats now

have a recoverable amount of RM650,000.

45

Required:

Calculate the impairment loss (if any) for the boats as at 31

December 2018.
Calculate the impairment loss or reversal of impairment loss for

the year ended 31 December 2019.
Show the extract of balance Sheet as at 31 December 2018 and
2019.