hkas 16 and 36 today's agenda - nelson and company, certified

Microsoft PowerPoint - HKICPA-20071210-(Presented) [Compatibility Mode]© 2005-07 Nelson 1
Nelson LamNelson Lam MBA MSc BBA ACA ACS CFA CPA(Aust) CPA(US) FCCA FCPA(Practising) MSCA
Property, Plant and Equipment (HKAS 16)
Today’s Agenda Simple but
Comprehensive
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DefinitionDefinition 1 Objecti e and ScopeDefinitionDefinition
RecognitionRecognition
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5. Measurement After Recognition
11 Objective and ScopeObjective and Scope1.1. Objective and ScopeObjective and Scope
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1. Objective and Scope
• The objective of HKAS 16 is – to prescribe the accounting treatment for
property plant and equipment (PPE) Definitionsproperty, plant and equipment (PPE) – so that users of the financial statements can
discern information about an entity’s investment in its PPE and the changes in such investment.
• The principal issues in accounting for property, plant and equipment (PPE) are: a) the recognition of the assets, Recognition
What are PPE?
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a) the recognition of the assets, b) the determination of their carrying amounts and c) the depreciation charges and impairment losses
to be recognised in relation to them. Measurement
Recognition
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• HKAS 16 shall be applied in accounting for PPE – except when another standard requires or permits a
different accounting treatment.g
• HKAS 16 does not apply to: a) property, plant and equipment classified as held for sale in
accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
b) biological assets related to agricultural activity (see HKAS 41 Agriculture);
) th iti d t f l ti d
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c) the recognition and measurement of exploration and evaluation assets (see HKFRS 6 Exploration for and Evaluation of Mineral Resources); or
d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
However, HKAS 16 applies to PPE used to develop or maintain the assets described in (a) and (d).
• Building acquired under an
What are PPE? Are the following PPE?What are PPE? Are the following PPE?
Example
• Freehold property used for rental purpose
• Investment property under re-development
from the leasehold building
1. Objective and Scope – Implication Exemption for not-for-profit entities eliminated
• The exemption in SSAP 17 for Implies that all such entities are charitable, government subvented and not-for-profit organisations was eliminated in HKAS 16
required to depreciate its PPE from the financial period beginning from 1 Jan. 2005
• Specific transitional provisions for this elimination additionally introduced in Nov. 2005
Those entities that have previously taken advantage of the exemption under SSAP 17 are permitted
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are permitted to deem the carrying amount of an item of PPE immediately before applying HKAS 16 on its effective date (or earlier) as the cost of that item
Charities, not-for-profit entities must follow
Agenda on Property, Plant & Equipment
DefinitionDefinition 1 Objecti e and ScopeDefinitionDefinition 1. Objective and Scope
2.2. DefinitionsDefinitions What are PPE?
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2. Definitions
• Property, plant and equipment (PPE) are tangible items that: a) are held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes; andfor rental to others, or for administrative purposes; and b) are expected to be used during more than one period.
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2. Definitions
Cost • is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction, orq ,
• where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other HKFRSs e.g. HKAS 39, HKFRS 2
Residual value
2. Definitions Example
• Entity GV buys a machine by granting share options to the supplier, who can subscribe 100 shares of Entity GV.
• The cash price of the machine is $200The cash price of the machine is $200. • The fair value of the options at the grant date is $300. • How much should be recognised as the cost of machine?
• Per HKAS 16, the amount attributed to the machine should refer to the specific requirements of HKFRS 2 Share-based Payments.
• Under HKFRS 2, GV shall recognise an increase in equity if the machine is received in an equity-settled share-based payment transaction.
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q y p y • While the transaction is with a party other than employees and other
providing similar services, there is a rebuttable presumption that the fair value of goods received can be estimated reliably (i.e. $200 in this case).
• In rare case (if presumption rebutted), the transaction is measured by reference to the fair value of the equity instruments (i.e. share options) granted.
Agenda on Property, Plant & Equipment
Definition 1 Objecti e and ScopeDefinition
3. Recognition
• The cost of an item of PPE shall be recognised as an asset if, and only if: a) it is probable that future economic benefits associated with the itema) it is probable that future economic benefits associated with the item
will flow to the entity; and b) the cost of the item can be measured reliably.
• Major spare parts, servicing equipment, replacement and inspection can also be qualified as PPE.
Recognition CriteriaRecognition Criteria
• If the recognition criteria is met such cost is recognised; the carrying
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• If the recognition criteria is met, such cost is recognised; the carrying amount of the replaced parts or previous inspection is derecognised.
3. Recognition – Principle Updated
Expenditure
ImprovementImprovement is no is no longer a thresholdlonger a threshold
Improvement
Now Same
• Probable that future economic benefit of the asset will flow to the enterprise
• Cost measured reliably
• Probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the entity
• Probable that future economic benefit of the asset
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Now Same criteria
• Probable that future economic benefit of the asset will flow to the entity
• Cost measured reliably Same criteria applied to both costs
Clearer approach on so-called Component Accounting
Expenditure not fulfilling the recognition criteria – will be charged to income statement
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Hong Kong Aircraft Engineering Company Limited Annual Report 2005 states:
Case
Capitalise
– Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses.
– Cost includes expenditure that is directly attributable to the acquisition of the items.
– Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when
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• it is probable that future economic benefits associated with the item will flow to the Group and
• the cost of the item can be measured reliably. – All other repairs and maintenance are expensed in the
profit and loss account during the financial period in which they are incurred.
Expense
3. Recognition – Principle Updated Galaxy Entertainment Group Limited (2005 Annual Report) – Major costs incurred in restoring assets to their normal
Case
working condition • are charged to the profit and loss statement.
– Improvements • are capitalised and depreciated over their expected
useful lives to the Group.
Denway Motors Limited (2005 Annual Report) – Major costs incurred in restoring the plant components
to their normal working condition to allow continued use
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to their normal working condition to allow continued use of the overall asset are capitalised and depreciated over the period to the
next overhaul. – Improvements
are capitalised and depreciated over their expected useful lives to the Group.
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Recognition
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MeasurementMeasurement
4. Measurement at Recognition • An item of PPE that qualifies for recognition as an
asset shall be measured at its costcost. • The costcost of an item of PPE comprises:
a) its purchase price, including import duties and non- refundable purchase taxes, after deducting trade discounts and rebates;
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
c) the initial estimate of the costs of dismantling and removing the item and restoring the site
Purchase Price
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g g on which it is located, the obligation for which an entity incurs either – when the item is acquired or – as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period.
Dismantling Cost
4. Measurement at Recognition
• Entity A leased an office for a lease term of 5 years in 2005 and i d $500 000 illi i
The cost of the decoration:
Example
Cost of decoration: incurred $500,000 million in decorating the office.
• The lease requires Entity A to restore the office to its original status when the lease expires.
• Entity A estimates that the cost of restoration will be around $60,000 at that time
$500,000
Present value of $60 000
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decoration.
Present value of $60,000
Assuming discount rate is 6%, • PV of $60,000 is $ 44,835 • Total initial cost is $ 544,835
IFRIC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities set out how to account for the change of this estimate
• Several same air-condition plants have been installed by GV in several leasehold properties. When the properties are returned to the landlord in 4 years, the plants should be removed.
Example
• The properties include factory (3 plants installed), show room (1 plant installed) and head office (2 plants installed).
• The purchase cost of each plant is $1,000. The installation cost is $1,000 for each plant. Present value of removal costs of the plant include $400 resulted from installation only and $400 from the usage during the 4 years.
• What is the cost of each plant to be recognised?
In accordance with HKAS 16 th t f h l t i t ll d i th f t h ld b $2 400 (th h
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• the cost of each plant installed in the factory should be $2,400 (the purchase cost, installation cost and present value of removal cost from installation).
• the cost of each plant installed in the show room and head office should be $2,800 (including the present value of all removal costs)
• Since the removal costs of such plants are incurred as a consequence of having used the machine during a particular period for purposes, other than to produce inventories during that period
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4. Measurement at Recognition Case
A-Max Holding Limited () – Notes to the financial statements for year ended 31.3.2006
• The cost of self-constructed items of property, plant and equipment includes – the cost of materials, – direct labour,
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– the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and
– an appropriate proportion of production overheads and borrowing costs
Same amendment in Same amendment in HKAS 38 and
HKAS 40 Element of cost extended
Commercial
Rule on Exchange of Assets Revised
Cost of PPE acquired in exchange is measured at fair value
But not required if:
In SSAP 17 – it is an exchange for similar assets
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If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.
Commercial Substance
the exchange transaction lack of Commercial Substance, or
– the Fair Value is not reliably measurable (both asset received and given up)
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Recognition
Cost ModelCost Model
Revaluation Model
• as its accounting policy and • the entity shall apply that policy to
an entire class of PPE.
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Cost Model
After recognition as an asset, an item of PPE shall be carried at
Its costCost Model
• any accumulated depreciation and • any accumulated impairment losses
After recognition as an asset, an item of PPE shall be carried at – a revalued amount, being its fair value at
th d t f th l ti
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• any subsequent accumulated depreciation and
• subsequent accumulated impairment losses.
5. Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair value?What is fair value?
All HKFRS/HKAS have same definition on fair value now.
• Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
• The fair value of – land and buildings ⇒ is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers.
– items of PPE ⇒ is usually their market value determined by
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y y appraisal.
• If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold, ⇒ an entity may need to estimate fair value using
• an income or • a depreciated replacement cost approach.
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Revaluation Model Revaluations shall be made with sufficient regularity – to ensure that the carrying amount does notto ensure that the carrying amount does not
differ materially from the fair value at the balance sheet date.
• When an item of PPE is revalued, any accumulated depreciation at the date of the revaluation is treated in one of the following ways: a) restated proportionately with the change in the gross carrying
amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount
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revaluation equals its revalued amount. This method is often used when an asset is revalued by means of applying an index to its depreciated replacement cost.
b) eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. This method is often used for buildings.
$
Example
– Revalued amount of that class of motor vehicles is $90,000 • Show the revaluation effect
• Accumulated depreciation restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. – Cost restated ($100,000 x 90,000 / 60,000) $ 150,000
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( , , , ) , – Accumulated depreciation restated ($40,000 x 90,000 / 60,000) ($ 60,000 )
• Accumulated depreciation eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount – Cost $ 100,000 – Accumulated depreciation eliminated ($40,000 - $30,000) ($ 10,000 )
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Revaluation Model
• If an item of property, plant and equipment is revalued, Entirep p y p q p – the entire class of PPE to which that asset belongs shall
be revalued • If an asset’s carrying amount is increased as a result of
a revaluation, the increase shall be credited directly to equity under the heading of revaluation surplus. – However, the increase shall be recognised in profit or
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
Class Entire class
To Equity directly
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• If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. – However, the decrease shall be debited directly to equity
under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
Negative to P/L
Example
Revaluation Model
• In 2005, an entity buys a PPE at $1,000 and adopts revaluation model.
• At year end of 2005, – PPE’s fair value rises to
$1,500.
Dr PPE (1,500 – 1,000) 500 Cr Revaluation reserves 500
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• At year end of 2006, – PPE’s fair value falls to $800.
• Ignore the depreciation, prepare journal for each situation above.
Dr Revaluation reserves 500 Profit and loss 200
Cr PPE (1,500 – 800) 700
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Revaluation Model
• The revaluation surplus included in equity in respect of an item of PPE may be transferred directly to retained earnings when the asset is derecognised.
• However, some of the surplus may be transferred as the asset is used by an entity. – In such a case, the amount of the surplus transferred would be the
difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost.
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• Transfers from revaluation surplus to retained earnings are not made through profit or loss.
Dr Revaluation surplus (depreciation based on the revalued carrying amount less depreciation based on the asset’s historical cost) Cr Retained earnings
Example
Revaluation Model Year ended 31.12.2005Year ended 31.12.2005
g with a cost of $50,000 on 1 Jan. 2005 and adopted the revaluation model.
• The estimated useful life of the car is 5 years.
• On 1 Jan. 2006, the car was revalued with a fair
Dr PPE 50,000 Cr Cash 50,000
Dr P/L ($50K ÷ 5 years) 10,000 Cr Accumulated depreciation 10,000
Dr Accumulated depreciation (48K – (50K – 10K)) 8,000
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value of $48,000 at that date.
• Prepare the journal entries for the year ended 31 December 2005 and 31 December 2006.
Cr Revaluation reserves 8,000
Dr P/L ($48K ÷ 4 years) 12,000 Cr Accumulated depreciation 12,000 Dr Revaluation reserves 2,000 Cr Retained earnings 2,000
Year ended 31.12.2006Year ended 31.12.2006
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Revaluation Model
• Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
• Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
• Useful life is: a) the period over which an asset is expected to be available for use by an entity; or
Revaluation Model
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a) the period over which an asset is expected to be available for use by an entity; or b) the number of production or similar units expected to be obtained from the asset by
an entity.
• The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.
Depreciation
Each significant component• Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately. – e.g. it may be appropriate to
depreciate separately the airframe and engines of an aircraft
• The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
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p g period shall be recognised in profit or loss unless it is included in the carrying amount of another asset.
Clearer approach on so-called Component Accounting
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• Cost of each part is significant in l i h l f h
Example
Depreciation
relation to the total cost of the parts • Each part should be depreciated
separately
printing machine of HK$50 million • The machine will be used for
5 years (maximum useful life) and then dispose of at zero value
• The machine’s laser head can operate 500 hours, after that
Laser machine other than laser head is depreciated over 5 years
Laser head is depreciated over 500 hours
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replacement of a new laser head is needed
• The cost of a new laser head was HK$10 million at that time and its residual value is zero.
Under usage methods of depreciation, the depreciation charges can be zero while there is no production
Example
• Assume the laser head can operate 500 hours or 5 years which is
Depreciation
Depreciation for 2nd year
500 hours or 5 years, which is shorter.
• If the machine has not been used in the 2nd year, calculate depreciation on the laser head under different depreciation methods
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for 2nd year If the laser head is depreciated • over 500 hours
(unit of production) • 5 years on
a straight-line basis
zero
Depreciable amount
• The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.
• The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
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– if expectations differ from previous estimates, the change shall be accounted for as a change in an accounting estimate in accordance with HKAS 8
5. Measurement after Recognition Depreciation
Depreciable amountResidual Value
• Residual Value is revised as
the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset – were already of the age and – in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
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Implication: • If estimated residual value > carrying amount ⇒ no depreciation is required • But feasible only if the management clearly intends to dispose of the PPE
before the end of its physical usage life – otherwise, the estimated residual value is minimal or even zero
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Example
Same laser machine example as before
• At 31 Dec. 2005, the price of a printing machine of HK$50 million • The machine will be used for
new laser machine increases to HK$75 million
• No change in cost of a new laser head and estimated maximum useful life
• Shall AX revise the residual value at 31 Dec. 2005?
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No! • AX has not changed its usage
plan and the residual value after the estimated useful live would still be zero
Another one • At 1 Jan. 1985, Entity A bought a flat in Tai Koo Shing at HK$ 500,000.
• Entity A aimed to use it for 50 years until the end of its estimated useful life
Example
Entity A aimed to use it for 50 years until the end of its estimated useful life • The original estimated residual value is zero • Depreciation is calculated on a straight-line basis • At 31 Dec. 2004, the depreciated historical cost (and carrying amount) of
the property was HK$0.3 million
• Now, the price of a similar flat in Tai Koo is about HK$ 3M
• Shall A revise the residual value?
No! A has not changed its usage plan and the residual value after the estimated useful live would still be around zero
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Shall A revise the residual value?
• If A changes its intention and aims to dispose of the flat in 10 years (i.e. 2015)
• Shall A revise the residual value?
live would still be around zero
Yes! If A can demonstrate that it has an intention to dispose of it before the end of its economic life
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5. Measurement after Recognition Case
Annual Report 2005Annual Report 2005 • Where an item of property and equipment comprises
major components having different useful lives, – they are accounted for as separate items of property
and equipment. • Depreciation
is calculated to write off the cost or deemed cost less
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– is calculated to write off the cost or deemed cost, less residual value if applicable, of property and equipment and
– is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property and equipment.
Depreciation
Depreciable amountDepreciation of an asset begins when it is available for use – i.e. when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management.
• Depreciation of an asset ceases at the earlier of the date that – the asset is classified as held for sale (or
included in a disposal group that is
Implied that depreciation still required even PPE – becomes idle or
is retired from active use
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p g p classified as held for sale) in accordance with HKFRS 5 and
– the date that the asset is derecognised • Land and buildings are separable assets
and are accounted for separately, even when they are acquired together.
– is retired from active use
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• The depreciation method used – shall reflect the pattern in which the
asset’s future economic benefits are
Depreciation
Depreciable amount asset s future economic benefits are expected to be consumed by the entity
– shall be reviewed at least at each financial year-end and
– such a change shall be accounted for as a change in an accounting estimate in accordance with HKAS 8
• Other than the above that method is
Depreciation method
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Other than the above, that method is applied consistently from period to period • unless there is a change in the expected
pattern of consumption of those future economic benefits.
can be used to allocate the
Depreciation
Depreciable amount can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life.
• These methods include:
Straight Line results in a constant charge over the useful life if the asset’s residual value does not change
Depreciation method
results in a decreasing charge over the useful life
results in a charge based on the expected use or output
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• To determine whether an item of PPE is impaired, an entity applies HKAS 36
• Compensation from third parties for items of
Depreciation
Depreciable amount • Compensation from third parties for items of
property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
DefinitionDefinition 1 Objecti e and ScopeDefinitionDefinition
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6.6. DerecognitionDerecognition
6. Derecognition
• The carrying amount of an item of PPE shall be derecognised: a) on disposal; or b) h f t i b fit t d f itb) when no future economic benefits are expected from its use or
disposal. • The gain or loss arising from the derecognition of an item of PPE shall
be included in profit or loss when the item is derecognised (unless HKAS 17 requires otherwise on a sale and leaseback).
• Gains shall not be classified as revenue.
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6. Derecognition
• Derecognition on disposal – The disposal of an item of PPE may occur in a variety of
ways (e.g. by sale, by entering into a finance lease or byways (e.g. by sale, by entering into a finance lease or by donation).
– In determining the date of disposal of an item, an entity applies the criteria in HKAS 18 Revenue for recognising revenue from the sale of goods.
– HKAS 17 Leases applies to disposal by a sale and leaseback.
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• Derecognition on replacement – If, under the initial recognition principle,
• an entity recognises in the carrying amount of an item of PPE the cost• an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item,
• then it derecognises the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately.
• The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
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– the net disposal proceeds, if any, and – the carrying amount of the item.
• At 31 Dec. 2006, replacement • At 31 Dec. 2006, replacement
6. Derecognition Example
Same laser machine example as before
of the laser head is needed after 400 hours of operation • The carrying amount of the
laser head alone would be HK$ 2 million at that date [$10M – ($10M ÷ 500 x 400)]
• The cost of a new laser head is HK$ 8 million.
of the laser head is needed after 400 hours of operation • The carrying amount of the
laser head alone would be HK$ 2 million at that date [$10M – ($10M ÷ 500 x 400)]
• The cost of a new laser head is HK$ 8 million.
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$$
• If the laser head is replaced • Replaced laser head with HK$ 2
million shall be derecognised • New laser head of HK$ 8 million
shall be recognised
• If the laser head is replaced • Replaced laser head with HK$ 2
million shall be derecognised • New laser head of HK$ 8 million
shall be recognised
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Recognition
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5. Measurement After Recognition
6. Derecognition
7.7. DisclosureDisclosure
7. Disclosure
• The financial statements shall disclose, for each class of PPE: a) the measurement bases used for determining the gross
carrying amount; b) the depreciation methods used; c) the useful lives or the depreciation rates used; d) the gross carrying amount and the accumulated
depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and ……
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7. Disclosure
• Detailed information and reconciliation of the carrying amount of PPE are required
• The reconciliation of the carrying amount of PPE for prior period, i.e. comparative reconciliation is now required
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The carrying amount of the PPE net book value of PPE • In HK SSAP 17, the requirement is
“a reconciliation of the gross carrying amount and the accumulated depreciation at the beginning and end of the period ……”
7. Disclosure
• Information include: i) additions; ii) disposals; iii) acquisitions through business combinations; iv) increases or decreases resulting from revaluations and from impairment
losses recognised or reversed directly in equity in accordance with HKAS 36;
v) impairment losses recognised in profit or loss in accordance with HKAS 36; vi) impairment losses reversed in profit or loss in accordance with HKAS 36; vii) depreciation;
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vii) depreciation; viii) the net exchange differences arising on the translation of the financial
statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and
ix) other changes.
Case
7. Disclosure
• The financial statements shall also disclose: a) the existence and amounts of restrictions on title, and
PPE l d d it f li bilitiPPE pledged as security for liabilities; b) the amount of expenditures recognised in the carrying
amount of an item of PPE in the course of its construction;
c) the amount of contractual commitments for the acquisition of PPE; and
d) if it is not disclosed separately on the face of the income statement, the amount of compensation from third parties
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for items of PPE that were impaired, lost or given up that is included in profit or loss.
• Similar disclosures are required on the PPE measured by using Revaluation Model.
• Other disclosures
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Impairment of Assets – Summary
Triggering events At each reporting date, an entity shall assess whether there is any indication that an asset may
It is the higher of an asset’s
Triggering events
Recoverable Amount
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.
andFair Value Less Costs to Sell Value in Use
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Impairment Loss
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.
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1. Objective D fi itiD fi iti
j
4. Measuring Recoverable Amount
6 C h ti U it d G d ill
DefinitionDefinition
MeasurementMeasurement
7. Impairment Loss
9. Disclosures
1. Objective
• HKAS 36 Impairment of Assets – is to prescribe the procedures that an entity applies
to ensure that its assets are carried at no more thanto ensure that its assets are carried at no more than their recoverable amount
– The recoverable amount of an asset or a cash- generating unit is the higher of its fair value less costs to sell and its value in use
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1. Objective
• HKAS 36 Impairment of Assets – An asset is carried at more than its recoverable
amountamount • if its carrying amount exceeds the amount to be
recovered through use or sale of the asset. – If this is the case,
• the asset is described as impaired and • HKAS 36 requires the entity to recognise an
impairment loss.
Carrying amount is the amount at which an asset is
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• Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.
• An impairment loss is the amount by which the carrying amount of an asset (or a cash-generating unit) exceeds its recoverable amount.
Agenda for Impairment of Assets
1. Objectivej
2. Scope
2. Scope
HKAS 36 shall be applied in accounting for the impairment of all assets, other than: a) inventories (see HKAS 2)a) inventories (see HKAS 2) b) assets arising from construction contracts (see HKAS 11) c) deferred tax assets (see HKAS 12) d) assets arising from employee benefits (see HKAS 19) e) financial assets that are within the scope of HKAS 39
Financial Instruments: Recognition and Measurement (see HKAS 39) f) investment property that is measured at fair value (see HKAS 40) g) biological assets related to agricultural activity that are
d f i l l i d i f l ( HKAS 41)
© 2005-07 Nelson 65
measured at fair value less estimated point-of-sale costs (see HKAS 41) h) deferred acquisition costs, and intangible assets, arising from
an insurer’s contractual rights under insurance contracts within the scope of HKFRS 4 Insurance Contracts (see HKFRS 4)
i) non-current assets (or disposal groups) classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations (see HKFRS 5)
2. Scope
HKAS 36 applies to financial assets classified as: a) subsidiaries, as defined in HKAS 27 Consolidated and Separate Financial
Statements;; b) associates, as defined in HKAS 28 Investments in Associates; and c) joint ventures, as defined in HKAS 31 Interests in Joint Ventures.
For impairment of other financial assets, refer to HKAS 39.
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1. Objectivej
2. Scope
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3. Identify An Asset That May Be Impaired
• An entity shall assess at each reporting date whether there is any indication that an assetTriggering events 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.
Triggering events
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For all assets within the For all assets within the scope of HKAS 36, scope of HKAS 36,
except for ……except for ……
Triggering events • Irrespective of whether there is any indication of
impairment an entity shall also:Triggering events impairment, an entity shall also: a) test
• an intangible asset with an indefinite useful life, or
• an intangible asset not yet available for use
for impairment annually by comparing its carrying amount with its recoverable
Intangible AssetsIntangible Assets
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b) test • goodwill acquired in a business
combination for impairment annually
2006 Annual Report states: • Assets that have an indefinite useful life
– are not subject to amortisation, – but are tested at least annually for impairment
and also reviewed for impairment whenever e ents or changes in circ mstances indicate
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events or changes in circumstances indicate that the carrying amount may not be recoverable.
• Goodwill – is tested annually for impairment and carried
at cost less accumulated impairment losses.
GoodwillGoodwill
36
Galaxy Entertainment Group Limited (2005 Annual Report) Accounting policy on impairment of assets – Assets that have an indefinite useful life
• are not subject to amortisation, which are at least tested annually for impairment and
• are reviewed for impairment whenever events or changes
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in circumstances indicate that the carrying amount may not be recoverable.
– Assets that are subject to amortisation • are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable.
Timing of impairment test on intangible assets • This impairment test may be performed at any time
d i l i d
during an annual period – provided it is performed at the same time every
year. • Different intangible assets may be tested for
impairment at different times. • However, if such an intangible asset was initially
recognised during the current annual period – that intangible asset shall be tested for
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g impairment before the end of the current annual period.
GoodwillGoodwill Timing of impairment test on goodwill • To be discussed later ……
37
• In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications: External sources of information a) an asset’s market value declined significantly more than would be expected b) significant changes with an adverse effect on the entity in the technological,
market, economic or legal environment c) market interest rates or other rates increased that likely affects the discount
rate used in calculating an asset’s value in use d) the carrying amount of the net assets of the entity is more than its market
capitalisation
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capitalisation Internal sources of information e) evidence is available of obsolescence or physical damage of an asset f) significant changes with an adverse effect on the entity in which, an asset is
used or is expected to be used. g) evidence is available from internal reporting that indicates that the economic
performance of an asset is, or will be, worse than expected.
1. Objectivej
2. Scope
Triggering eventsTriggering events
It is the higher of an asset’sRecoverable Amount & Fair value less
costs to sell Value in Use
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• HKAS 36 defines recoverable amount as the higher of an asset’s or cash-generating unit’s
F i V l L C t t S ll V l i UdFair Value Less Costs to Sell Value in Useand
• Recoverable amount is determined for an individual asset – unless the asset does not generate cash
inflows that are largely independent of those from other assets or groups of assets.
If thi i th bl t i
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• If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs
39
• It is the amount obtainable from the sale of an asset or cash-generating
Fair Value Less Costs to Sell
unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.
The best evidence ⇒ is a price in a binding sale agreement in an arm’s length transaction,
adjusted for incremental costs to the disposal
If no binding sale agreement but an asset is traded in an active market ⇒ the asset’s market price less the costs of disposal
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⇒ the asset s market price less the costs of disposal
If there is no binding sale agreement or active market for an asset ⇒ based on the best information available to reflect the amount that an
entity could obtain, at the balance sheet date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal
• Value in use is the present value of the future cash fl t d t b d i d f t h
Value in Use
flows expected to be derived from an asset or cash- generating unit. – The following elements shall be reflected in the
calculation of an asset’s value in use: a) an estimate of the future cash flows the entity
expects to derive from the asset; b) expectations about possible variations in the
amount or timing of those future cash flows; c) time value of money represented by the current
(b), (d) and (e) can be reflected as dj t t t
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c) time value of money, represented by the current market risk-free rate of interest;
d) price for bearing the uncertainty inherent in the asset; and
e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.
Not precisely stated before!
flows or • discount rate
40
4. Measuring Recoverable Amount • Estimating the value in use of an asset
involves the following steps: a) estimating the future cash inflows and
Value in Use Basis for Estimates of
Future Cash Flows) g outflows to be derived • from continuing use of the asset, and • from its ultimate disposal; and
b) applying the appropriate discount rate to those future cash flows.
Future Cash Flows Composition of Estimates
of Future Cash Flows Foreign Currency Future
Cash Flows
Discount Rates
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4. Measuring Recoverable Amount In measuring value in use an entity shall: a) base cash flow projections on reasonable
and supportable assumptions that represent
Value in Use Basis for Estimates of
Future Cash Flows management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Greater weight shall be given to external evidence.
b) base cash flow projections on the most recent financial budgets/forecasts approved by management, but shall exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset’s performance. Projections based on these budgets/forecasts shall cover a maximum period of five years unless a longer period can be justified
Future Cash Flows
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of five years, unless a longer period can be justified. c) estimate cash flow projections beyond the period covered by the most recent
budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified.
41
4. Measuring Recoverable Amount Value in Use
Estimates of future cash flows shall include: a) projections of cash inflows from the continuing use of the asset; b) projections of cash outflows that are necessarily incurred to generate
the cash inflows from continuing use of the asset (including cash
Composition of Estimates of Future Cash Flows
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outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and
c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
• Future cash flows are estimated in the currency in which they will be generated
Value in Use
currency in which they will be generated and then discounted using a discount rate appropriate for that currency.
• An entity translates the present value using the spot exchange rate at the date of the value in use calculation.
• The discount rate(s) shall be a pre-tax rate(s) that reflect current market
Foreign Currency Future Cash Flows
Discount Rates
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( ) assessments of: a) the time value of money; and b) the risks specific to the asset for which the
future cash flow estimates have not been adjusted.
42
1. Objectivej
2. Scope
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5. Recognising an Impairment Loss
• If, and only if, the recoverable amount of an asset is less than its carrying amountTriggering events
Recoverable Amount
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 recognised immediately in profit or loss, – unless the asset is carried at revalued amount
in accordance with another Standard
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Impairment Loss
– for example, in accordance with the revaluation model in HKAS 16 Property, Plant and Equipment
– any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard.
43
5. Recognising an Impairment Loss
• 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 (for example, HKAS 37)
• After the recognition of an impairment loss, – the depreciation (amortisation) charge for the
asset shall be adjusted in future periods to allocate the asset’s revised carrying amount,
© 2005-07 Nelson 85
less its residual value (if any), on a systematic basis over its remaining useful life.
Impairment Loss
Galaxy Entertainment Group Limited (2005 Annual Report) Accounting policy on impairment of assets – An impairment loss is recognised for the amount
• by which the carrying amount of the asset exceeds its recoverable amount.
– The recoverable amount is the higher of
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The recoverable amount is the higher of • the fair value of an asset less costs to sell and • value in use.
– For the purposes of assessing impairment, • assets are grouped at the lowest levels for which there
are separately identifiable cash flows.
CashCash-- generating generating
1. Objectivej
2. Scope
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6. Cash-Generating Unit & Goodwill
• If it is not possible to estimate the recoverable amount of the individual assetamount 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).
• Intangible assets may be such individual asset.
• Goodwill is definitely such individual asset.
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y
GoodwillGoodwill Amendments of HKAS 36 are mainly for the requirements on cash-generating unit and goodwill
45
• A 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 g y p g p assets.
• Discussion points on CGU and goodwill include:
Allocating Goodwill to CGUAllocating Goodwill to CGU
Testing CGU with Goodwill for ImpairmentTesting CGU with Goodwill for Impairment
Minority InterestMinority Interest
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• For the purpose of impairment testing, goodwill acquired in a business
Allocating Goodwill to CGUAllocating Goodwill to CGU Initial allocation
p p p g, g q combination shall – from the acquisition date, be allocated to each of the acquirer’s CGUs (or
groups of CGUs) that are expected to benefit from the synergies of the combination
– irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
© 2005-07 Nelson 90
Goodwill
46
• Each unit or group of units to which the goodwill is so allocated shall:
g p g a) represent the lowest level within the entity at which the goodwill is
monitored for internal management purposes; and b) not be larger than a segment based on either
the entity’s primary or the entity’s secondary reporting format determined in accordance with HKAS 14 Segment Reporting.
As amended by HKFRS 8: “not be larger than an operating segment determined in accordance with HKFRS 8 O i S ”
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Goodwill
• If the initial allocation of goodwill cannot be completed as required
g p q – that initial allocation shall be completed before the end of the first annual
period beginning after the acquisition date (i.e. within 12 months).
• In accordance with HKFRS 3 – if the initial accounting for a business
combination can be determined only provisionally, the acquirer: a) accounts for the combination using those
© 2005-07 Nelson 92
Goodwill
) g provisional values; and
b) recognises any adjustments to those provisional values as a result of completing the initial accounting within 12 months of the acquisition date.
47
Case
• Goodwill is allocated to cash-generating units for the purposes of impairment testing.
• Goodwill is tested for impairment at the lowest level at which goodwill is monitored for internal management purposes.
• This is not at a higher level than a segment based on either the primary or secondary
© 2005-07 Nelson 93
Goodwill
p y y reporting format (as determined in accordance with HKAS 14 ‘Segment reporting’).
• If goodwill has been allocated to a CGU and the entity disposes of an
Allocating Goodwill to CGUAllocating Goodwill to CGU Disposal
g y p operation within that CGU – the goodwill associated with the operation disposed of shall be:
a) included in the carrying amount of the operation • when determining the gain or loss on disposal; and
b) measured on the basis of the relative values of • the operation disposed of, and • the portion of the CGU retained
What kind of value?
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the portion of the CGU retained, unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of.
48
• An entity sells for $100 an operation that was part of a CGU to which
Example
Allocating Goodwill to CGUAllocating Goodwill to CGU Disposal
$100goodwill has been allocated. • The goodwill allocated to the unit cannot be identified or associated
with an asset group at a level lower than that unit, except arbitrarily. • The recoverable amount of the portion of the CGU retained is $300.
• Because the goodwill allocated to the CGU cannot be non-arbitrarily identified or associated with an asset group at a level lower than that
$100
$300
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unit, the goodwill associated with the operation disposed of is measured on the basis of the relative values of • the operation disposed of, and • the portion of the unit retained.
• Therefore, 25% of the goodwill ($100 / $400) allocated to the CGU is included in the carrying amount of the operation that is sold.
Case
• At the date of disposal of a business – attributable goodwill is included in the
Group’s share of net assets in the calculation of the gain or loss on disposal.
• In its 2006 Annual Report, full set f HKFRS d t d
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Any improvement?
of HKFRS was adopted: – Separately recognized goodwill is tested annually for
impairment and carried at cost less accumulated impairment losses.
– Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
49
Subsidiary S at $3,500 by cash.
Property $ 0 $ 6,000
y y • Fair value of the property of S was
$8,000. During 2005 • Parent P reported nil profit and profit
of S was HK$6,000 (became cash). • Fair value of S is HK$30,000 at
year-end. P t d f S h ld f
Property $ 0 $ 6,000 Investment 0 0 Cash at bank 30,000 2,000
30,000 8,000
(30,000) (8,000)
• P accounted for S as held for trading.
On 1.1.2006 • P acquired additional 60% interest in
S at $22,000 by cash. • Fair value of the property of S was
$11,000.
Example
J#1 J#2 Consolidated 5,000 $ 11,000
Goodwill 0 0 Investment 28,000 0 Cash at bank 4,500 8,000
32,500 14,000
12,100 12,100 (2,500) (25,500) 0
12,500 35,600
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(32,500) (14,000)
6. Cash-Generating Unit & Goodwill Example
• Assume S mainly involved in holding investment property to derive rental and had 2 properties managed independently. On 2 1 2006 S disposed of one property at $8 000 (cost $3 000) and the• On 2.1.2006, S disposed of one property at $8,000 (cost $3,000) and the remaining property’s recoverable amount was $14,000 (cost $3,000).
On company level of S: Sales proceed of property $ 8,000 Cost of property (3,000) Gain on disposal $ 5 000
© 2005-07 Nelson 99
Gain on disposal $ 5,000 On consolidated level: Sales proceed of property $ 8,000 Cost of property to the group ($11,000 ÷ 22,000 x 8,000) (4,000) Gain on disposal at group level $ 4,000
That’s all? Goodwill written off in accordance with HKAS 36 ($12,100 ÷ 22,000 x 8,000) $ 4,400
Original consolidation journals: Example
Cr Investment 2,500 To restate the initial 20% investment in Subsidiary S to cost
Dr Property – fair value adjustment ($11,000 - $6,000) 5,000 Issued equity – subsidiary (given) 5,000 Retained earnings – subsidiary (given) 9,000 Goodwill (as calculated in last slide) 12,100
C I t t t f bi ti (t i ) 25 500
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Cr Investment – cost of combinations (twice) 25,500 Minority interest (19,000 x 20%) 3,800 Retaining earnings recognised (to the extent that they relate to the previously held ownership interests) 1,200 Revaluation reserves 600
To recognise the goodwill and eliminate the investments with the equity shares
51
Additional consolidation journals: Example
Cr Property 1,000 To adjust the gain recognised in S as fair value had been taken up at group level before
Dr Retained earnings 800 Cr Minority interest (4,000 x 20%) 800 To allocate the gain on disposal of property to minority interest
© 2005-07 Nelson 101
Dr Income statement (Retained earnings) 4,400 Cr Goodwill 4,400 To write off the goodwill allocated to the “business” in accordance with HKAS 36
Property $ 0 $ 3,000
J#1 J#2 J#3 Consolidated
5,000 (1,000) $ 7,000Property $ 0 $ 3,000 Goodwill 0 0 Investment 28,000 0 Cash at bank 4,500 16,000
32,500 19,000
Issued equity $ (30,000) $ (5,000) Retained earnings (2 500) (14 000)
5,000 (1,000) $ 7,000 12,100 (4,400) 7,700
(2,500) (25,500) 0 20,500 35,200
5,000 $ (30,000) 2 500 7 800 6 200 0
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Retained earnings (2,500) (14,000) Revaluation reserves 0 0 Minority interest 0 0
(32,500) (19,000)
(3,800) (800) (4,600) (35,200)
A portion of the fair value changes from 1st to 2nd acquisition relating to the 2 properties should also be realised when one of them was disposed of, $600 ÷ 22,000 x 8,000 = $218. Please suggest journal!
52
Allocating Goodwill to CGUAllocating Goodwill to CGU Reorganise
• If an entity reorganises its reporting structure in a way that changes the composition of one or more CGUs to which goodwill has been allocated – the goodwill shall be reallocated to the
CGUs affected.
Example
p y
• The goodwill allocated to CGU A cannot be identified or associated with an asset group at a level lower than CGU A, except arbitrarily.
• A is to be divided and integrated into 3 other CGUs, namely B, C and D.
• Because the goodwill allocated to CGU A cannot be non-arbitrarily identified or associated with an asset group at a level lower than CGU
© 2005-07 Nelson 104
g p A
• Goodwill is reallocated to CGU B, C and D on the basis of the relative values of the 3 portions of CGU A before those portions are integrated with CGU B, C and D.
53
• When goodwill relates to a CGU but has not been
Testing CGU with Goodwill for ImpairmentTesting CGU with Goodwill for Impairment
Goodwill g allocated to that unit – the unit shall be tested for impairment, whenever
there is an indication that the CGU may be impaired – any impairment loss shall be recognised
Goodwill Unallocated
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Allocated – shall be tested for impairment • annually, and • whenever there is an indication that the unit may
be impaired – If the carrying amount of the CGU exceeds its
recoverable amount, the entity shall recognise any impairment loss
• In accordance with HKFRS 3 – goodwill recognised in a business combination represents
• the goodwill acquired by a parent based on the parent’s ownership interest,
• rather than the amount of goodwill controlled by the parent as a result of the business combination.
– Thus, goodwill attributable to a minority interest is not recognised in the parent’s consolidated financial statements.
© 2005-07 Nelson 106
New requirement ……
• For the purpose of impairment testing a non-wholly-owned CGU with
• For the purpose of impairment testing a non-wholly-owned CGU with goodwill – the carrying amount of that CGU is notionally adjusted, before being
compared with its recoverable amount • Notional adjustment
– accomplished by grossing up the carrying amount of goodwill allocated to the CGU to include the goodwill attributable to the minority interest.
– this notionally adjusted carrying amount is then compared with the
© 2005-07 Nelson 107
y j y g p recoverable amount of the unit to determine whether the CGU is impaired.
– If it is impaired, the entity allocates the impairment loss first to reduce the carrying amount of goodwill allocated to the CGU.
• Entity A acquires 80% interest in GV at $1 600 on 1 Jan 2005
Example
• Entity A acquires 80% interest in GV at $1,600 on 1 Jan. 2005 • It implies that 100% interest of GV to Entity A would be $2,000. • Subsidiary GV has identifiable net assets at a fair value of $1,500
80% 100% Cost of combination $1,600 $2,000 Fair value of GV 1,200 1,500 Goodwill 400 500
© 2005-07 Nelson 108
• Goodwill recognised in the consolidation is $400. • Assume at 30 Jun. 2005, the carrying amount of all the balances are the
same but the recoverable amount of GV (a single CGU) is $1,900. • Compare the calculation with or without notional adjustment on goodwill
attributable to minority interest
Example
Without Notional AdjustmentWithout Notional Adjustment Carrying amount of GV in A’s consolidation $ 1,500 Goodwill recognised (attributable to A) 400 Total carrying amount $ 1,900 Recoverable amount of GV $ 1,900
With Notional Adjustment
No impairment observed
© 2005-07 Nelson 109
j Total carrying amount (as above) $ 1,900 Notional adjustment • Goodwill attributable to minority interest 100 Notionally adjusted carrying amount $ 2,000 Recoverable amount of GV $ 1,900
Impairment loss of $100
• Annual impairment test for a CGU to which goodwill has been allocated
Timing of Impairment TestsTiming of Impairment Tests
• Annual impairment test for a CGU to which goodwill has been allocated – may be performed at any time during an annual period, provided the test is
performed at the same time every year. • Different CGUs may be tested for impairment at different times. • However, if some or all of the goodwill allocated to a CGU was acquired
in a business combination during the current annual period, – that unit shall be tested for impairment before the end of the current annual
period
56
• The most recent detailed calculation made in a preceding period of the
Timing of Impairment TestsTiming of Impairment Tests
• The most recent detailed calculation made in a preceding period of the recoverable amount of a CGU to which goodwill has been allocated – may be used in the impairment test of that CGU in the current period
provided all of the following criteria are met: a) the assets and liabilities making up the CGU have not changed
significantly b) the most recent recoverable amount calculation resulted in an
amount that exceeded the carrying amount of the CGU by a
© 2005-07 Nelson 111
substantial margin; and c) the likelihood that a current recoverable amount determination would
be less than the current carrying amount of the CGU is remote.
Corporate AssetsCorporate Assets are assets other than goodwill that contribute to the future cash flows of both • the CGU under review andthe CGU under review and • other CGUs.
• In testing a CGU for impairment
Examples include: • Building of a headquarter • EDP Equipment • Research centre
© 2005-07 Nelson 112
assets that relate to the CGU under review.
– The allocation approach of the corporate assets is also amended ……
57
such portion shall be included as part of the carrying amount of the CGU for impairment test
Corporate AssetsCorporate Assets
Can be allocated on bl d amount of the CGU for impairment testa reasonable and
consistent basis
Cannot be allocated on a reasonable and consistent basis
The entity shall: 1) compare the carrying amount of the CGU (excluding the
corporate asset) with its recoverable amount • recognise any impairment loss first
Firstly, test 2) identify the smallest group of CGUs that includes the CGU
under review and to which a portion of the carrying amount
© 2005-07 Nelson 113
Then, test larger CGU containing the goodwill
of the corporate asset can be allocated on a reasonable and consistent basis; and
3) compare the carrying amount of that group of CGUs, including the portion of the carrying amount of the corporate asset allocated to that group of CGUs, with the recoverable amount of the group of CGUs.
• Any impairment loss shall be recognised.
1. Objectivej
2. Scope
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7. Impairment Loss
• An impairment loss – shall be recognised for a CGU
• if and only if the recoverable amount of the CGU• if, and only if, the recoverable amount of the CGU (group of CGUs) is less than the carrying amount of the CGU (group of CGUs).
– shall be allocated to reduce the carrying amount of the assets of the CGU (group of CGUs) in the following order: a) first, to reduce the carrying amount of any goodwill
allocated to the CGU (group of CGUs); and Goodwill
first
© 2005-07 Nelson 115
b) then, to the other assets of the CGU (group of CGUs) pro rata on the basis of the carrying amount of each asset in the CGU (group of CGUs).
These reductions in carrying amounts shall be treated as impairment losses on individual assets
Other on pro rata
7. Impairment loss for CGU
• In allocating an impairment loss for a CGU, an entity shall not reduce the carrying amount of an asset below the highest of: a) its fair value less costs to sell (if determinable);a) its fair value less costs to sell (if determinable); b) its value in use (if determinable); and c) zero.
• The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the CGU (group of CGUs).
• A liability shall be recognised for any remaining amount of an i i t l f CGU
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impairment loss for a CGU – if, and only if, that is required by another HKAS/HKFRS.
59
7. Impairment loss for CGU Example
Entity A performed an impairment review on the CGU X, which has the following assets on hand:
Carrying amountCarrying amount Goodwill $ 1,500 Property, plant and equipment
(carried at revalued amounts) 4,000 Property, plant and equipment
(carried at cost) 5,700 Inventory, at net realisable value 2,400 AFS financial assets, at recoverable amount 1,300
© 2005-07 Nelson 117
Total 14,900
• After an impairment review, Entity A found that the recoverable amount of CGU X is $12,000.
• Calculate the impairment loss and allocate to the individual asset.
7. Impairment loss for CGU Example
Carrying Carrying amount after Allocated amount after
impairment loss impairment loss impairment lossimpairment loss impairment loss impairment loss
Goodwill $ 1,500 $ (1,500) $ 0 Property, plant and equipment
(carried at revalued amounts) 4,000 (577) 3,423 Property, plant and equipment
(carried at cost) 5,700 (823) 4,877 Inventory 2,400 - 2,400 AFS financial assets 1,300 - 1,300
© 2005-07 Nelson 118
• Then, the residual loss is allocated to other non-current assets pro rata based on the carrying amounts of those non-current asset.
Total 14,900 (2,900) 12,000
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Melco Development Limited (2005 Annual Report)
Case
Accounting policy on goodwillg p y g – When the recoverable amount of the cash-generating unit is
less than the carrying amount of the unit, the impairment loss is allocated • to reduce the carrying amount of any goodwill allocated to
the unit first, and • then to the other assets of the unit pro rata on the basis of
the carrying amount of each asset in the unit. A i i t l f d ill
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– Any impairment loss for goodwill • is recognised directly in the income statement.
1. Objectivej
2. Scope
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7. Impairment Loss
61
8. Reversing an Impairment Loss
• Annual Assessment on Any Indication
• An entity shall assess at each reporting date h th th i i di ti th t i i t l– 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 amount of that
asset. • In assessing whether there is any indication that an
impairment loss recognised in prior periods for an asset
© 2005-07 Nelson 121
other than goodwill may no longer exist or may have decreased, an entity shall consider, as a minimum, the following indications: – External sources of information – Internal sources of information
• Recognition of reversal on recognised impairment loss
• An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if and only if there hasother than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised.
• If this is the case, the carrying amount of the asset shall be increased to its recoverable amount.
• That increase is a reversal of an impairment loss.
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• Reversing an impairment loss for an individual asset
• The increased carrying amount of an asset (other than goodwill) attributable to a reversal of an impairment loss shall not exceed the carrying amount thatto a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.
• A reversal of an impairment loss for an asset (other than goodwill) shall be recognised immediately in profit or loss, – unless the asset is carried at revalued amount in accordance with another
Standard (for example, the revaluation model in HKAS 16 Property, Plant and Equipment).
A l f i i t l f l d t h ll b t t d
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• Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with that other Standard.
• After a reversal of an impairment loss is recognised, the depreciation (amortisation) 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.
• Reversing an impairment loss for a CGU
• A reversal of an impairment loss for a CGU shall be allocated to the assets of the unit except for goodwill pro rata with the carrying amounts of thosethe unit, except for goodwill, pro rata with the carrying amounts of those assets.
• These increases in carrying amounts shall be treated as reversals of impairment losses for individual assets and recognised.
• In allocating a reversal of an impairment loss for a CGU in accordance with the above paragraph, the carrying amount of an asset shall not be increased above the lower of: a) its recoverable amount (if determinable); and
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b) the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior periods.
• The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit, except for goodwill.
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• Reversing an impairment loss for goodwill
• An impairment loss recognised for goodwill shall not be reversed in a subsequent periodsubsequent period.
• HKAS 38 Intangible Assets prohibits the recognition of internally generated goodwill.
• Any increase in the recoverable amount of goodwill subsequent to the recognition of an impairment loss for that goodwill is likely to be an increase in internally generated goodwill, rather than a reversal of the impairment loss recognised for the acquired goodwill.
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Melco Development Limited (2005 Annual Report)
Case
Accounting policy on goodwillg p y g – An impairment loss for goodwill
• is not reversed in subsequent periods.
Accounting policy on impairment – When an impairment loss subsequently reverses,
• the carrying amount of the asset is increased to the revised estimate of its recoverable amount,
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• but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years.
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1. Objectivej
2. Scope
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7. Impairment Loss
9. Disclosures
9. Disclosure • More extensive disclosure required now • Main additional disclosure requirements include:
– Extensive information for each CGU (or group of CGUs) for which the ( g p ) carrying amount of goodwill or intangible assets with indefinite useful lives allocated, including • Key assumptions used and the management approach to measure the
recoverable amounts (aligned with revised HKAS 1) • Period for cash flow projection, growth rate, discount rate …… • Certain other information when a reasonably possible change in a keey
assumption would cause the carrying amount of CGUs to exceed its recoverable amount
ti f th d ill i d i b i bi ti d i th
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– any portion of the goodwill acquired in a business combination during the period has not been allocated to a CGU (group of CGUs) at the reporting date • the amount of the unallocated goodwill shall be disclosed together with
the reasons why that amount remains unallocated.
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its annual impairment test for Esprit trademarks by comparing their
Case
its annual impairment test for Esprit trademarks by comparing their recoverable amount to their carrying amount as at June 30, 2007.
• The Group has conducted a valuation of the Esprit trademarks as one corporate asset based on a value-in-use calculation.
• The resulting value of the Esprit trademarks as at June 30, 2007 was significantly higher than their carrying amount.
• This valuation uses cash flow projections based on financial estimates covering a three-year period,
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g y p expected royalty rates deriving from the Esprit trademarks in the
range of 3% to 6% and a discount rate of 10%.
• The cash flows beyond the three-year period are extrapolated using a steady 3% growth rate. This growth rate does not exceed the long-term average growth rate for apparel markets in which the Group operates.
9. Disclosure
Annual report 2006 • For the purposes of impairment tests, the recoverable amount of goodwill is
determined based on value in use calculations.
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• The value in use calculations primarily use cash flow projections based on five year financial budgets approved by management and estimated terminal value at the end of the five year period.
• There are a number of assumptions and estimates involved for the preparation of cash flow projections for the period covered by the approved budget and the estimated terminal value.
• Key assumptions include the expected growth in revenues and gross margin, timing of future capital expenditures growth rates and selection of discount
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timing of future capital expenditures, growth rates and selection of discount rates and the earnings multiple that can be realised for the estimated terminal value.
• Management prepared the financial budgets reflecting actual and prior year performance and market development expectations.
• The discount rates for the test were based on country specific pre-tax risk adjusted discount rate and ranged from 8% to 10% ……
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HKAS 16 and 36 10 December 2007
Full set of slides in PDF can be found in N l CPA hkwww.NelsonCPA.com.hk
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HKAS 16 and 36 10 December 2007
Full set of slides in PDF can be found in N l CPA hk
Q&A SessionQ&A SessionQ&A SessionQ&A Session
www.NelsonCPA.com.hk

hkas 16 and 36 today's agenda - nelson and company, certified

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