Indicators of impairment

Learning objectives

• Identify external indications (market value, environment, interest rates, market capitalisation below net assets) and internal indications (obsolescence, physical damage, restructuring, performance) of impairment.L1, L2
• Analyse a situation to conclude whether or not an indication exists, including on the basis of internal reporting and indications not listed in the Standard.L2, L3

Normative references

• IAS 36 §12Lists the minimum indications to be considered: external sources (significant and unexpected decline in market value, adverse changes in the technological, economic, legal or market environment, increases in market interest rates or rates of return, carrying amount of net assets exceeding market capitalisation), internal sources (obsolescence or physical damage, adverse change in the use of the asset, including plans to discontinue or restructure the operation or to dispose of the asset early, economic performance worse than expected according to internal reporting) and, for an investment in a subsidiary, joint venture or associate, a dividend received together with evidence that the carrying amount in the separate financial statements exceeds the carrying amount of the net assets in the consolidated financial statements or that the dividend exceeds the total comprehensive income of the period.
• IAS 36 §13States that the list of indications in paragraph 12 is not exhaustive: other indications identified by the entity also require the recoverable amount to be estimated or, for goodwill, the impairment test to be performed.
• IAS 36 §14Illustrates the evidence from internal reporting that indicates worsening performance (actual cash flows below budget, operating losses, increased cash needs).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

13 questions

• True or false? The carrying amount of an entity's net assets exceeding its market capitalisation is one of the external sources of information to consider when looking for an indication of impairment.L1
• True or false? An entity can conclude that there is an indication of impairment only if the situation observed matches one of the cases listed by the standard.L1
• True or false? A machine whose market value is stable may nevertheless show an indication of impairment if internal reporting shows that the actual cash flows it generates are significantly lower than budgeted.L2
• Which of the following is an internal source of information that may reveal an indication of impairment?L1
• Transvaulx, a road haulier, is listing the indications of impairment affecting its fleet. Which of the following events is an external source of information?L2
• Which of the following are among the indications of impairment that the entity must consider as a minimum?L2
• Holvane holds a subsidiary, Brissac, presented at cost in its separate financial statements. During the year, Brissac pays it a large dividend. Which of the following pieces of information, together with this dividend, constitute an indication of impairment of the investment in Holvane's separate financial statements?L3
• Vernalis operates a plant producing insulation panels. At the end of 20X1, the market value of comparable equipment is stable. However, internal reporting shows that the plant's net cash flows are 30% below budget and that the parent had to grant it unexpected cash advances to fund its operations. What conclusion should the controller reach?L2
• Ostrale operates a patented manufacturing process that relies entirely on the know-how of a small team of engineers. In November 20X1, the whole team leaves to join a competitor and no replacement is feasible in the short term. The finance director argues that this situation does not appear as such in the standard's list of indications. Which position should be taken?L3
• In September 20X1, the board of Talmeyre decides to sell, as early as 20X2, a printing press that it had planned to operate until 20X6. The market value of comparable presses has not changed and the machine is in perfect condition. How should this decision be analysed in terms of indications of impairment?L3
• A cold-storage warehouse owned by Lunaria was severely damaged by fire in October 20X1. At the year-end, the accountant writes the analysis below. Which step contains the error?L2
• Corvane, a listed company, reports at the end of 20X1 net assets with a carrying amount of 55,000,000 and a market capitalisation of 40,000,000. The analysis of indications written by a staff member includes the following steps. Which one is wrong?L3
• Short-term market interest rates have risen during the year. Pradel owns a hydroelectric plant with a remaining useful life of 35 years, and its analysis shows that the discount rate used for this asset is unlikely to be affected by this increase. What conclusion should be reached?L2