Asset Impairment Testing for Impairment and Measurement

Asset Impairment – Testing for Impairment and
Measurement

Tim Beavon
[email protected]

+27 21 943 3900

Agenda

• What is Impairment?
• Why measure Impairment?
• Step 1 - What is the asset used for?
• Step 2 - Identifying an Impairment Indicator
• Step 3 - Recoverable Amount and Impairment losses

• Cash Generating Assets
• Non-Cash Generating Assets
• Step 4 - Reduce the assets carrying value
• Step 5 - Reversing an Impairment Loss

What is Impairment?

• An unexpected decrease in the future economic
benefits or service potential of an asset or cash-
generating unit.

• Impairment losses are the difference between the
asset’s Carrying Amount (aka Book Value) and its
Recoverable Amount (aka Market Value).

Why measure Impairment?

• We cannot predict the future.
• The assumptions we make today may not be valid

tomorrow:

– Examples: Interest rates, population movement, economic
environment.

• Sometimes these assumptions affect the projected
returns from an asset.

– When it does - the asset becomes impaired because it is not
capable of meeting the design criteria.

Key Stages in the Impairment Process

Non-cash generating? Cash generating?

Measure
the asset’s
recoverable
amount.

Are there Yes Reduce the
indicators of No asset’s
impairment carrying
present? amount

Remove
impairment if
impairment
condition no
longer exists.

What is the asset used for?

Identifying an Impaired Asset

• An owner of an asset must identify indicators of
impairment on an asset. These indicators are:

– A specific event ie vandalism, accident, fire, flood etc.
– A technical event ie Obsolescence, realisation that an asset

will not perform to desired specification etc.
– A socio-economic event ie community growth/decline not in

line with projected expectations.
– A legal event ie changes in environmental legislation.
– An internal event ie change in function, discontinuation of

operations etc.

Examples

• A building is purchased for use as a revenue office,
however as a result of changes in legislation and a
consolidation of municipal function the building is
converted into a warehouse.

• A water purification plant and effluent treatment plant
are constructed to manage the water and effluent for
a paper mill. However 25 years after commissioning
the paper mill closes.

Example

• A sewage treatment package plant is designed to
discharge into a wetland.

– After 15 years the environmental legislation changes
increasing the discharge quality requirements.

– After 15 years the population feeding the plant has grown
by a factor of 100% faster than expected when the plant was
designed.

– After 15 years a new Surface Aerated plant is commissioned
in the vicinity.

Example

• A sedimentation vessel is structurally defective.

– The purification plant can still operate at design capacity as a
result of design flexibility there are no plans to upgrade or replace
the vessel.

– The purification plant can meet demand but the vessel will need
to be replaced in the event of significant population growth.

• A weir is to be constructed and construction is stopped because
a rare bird species nesting habitat will be flooded. The weir only
contains 50% of its original capacity.

• An effluent pump-station close to the coast is frequently
flooded due to spring tides. The pumps and motors are failing
frequently as a result of corrosion after 8 years of service.

Recoverable Amount and Impairment Losses

Calculating the Value-In-Use

Recognising the Impairment loss

Impairment Loss is reflected in the General
Ledger by debiting the Impairment Account and
crediting the Accumulated Depreciation.

Reversing an Impairment loss

• Check if the impairment still exists or may have decreased. The
indicators are:

– Repair work carried out after a specific event ie vandalism,
accident, fire, flood etc.

– A technical event ie Replacement of a component that affords
enable the asset to perform at the desired level.

– A socio-economic event ie community growth/decline has been
reversed.

– A legal event ie changes in environmental legislation are not
promulgated.

– An internal event ie change in function is no longer expected to
happen, discontinuation of operations has been suspended etc.

References

IPSAS 21 - Impairment of non-cash generating assets.
IAS 36 -
Impairment of cash-generating assets.

National Treasury Guidelines: Testing for
Impairment of assets.

THANK-YOU