Materiality and sensitivity of the indicators

Learning objectives

• Assess, in the light of materiality and previous calculations, whether an indication (for example, an increase in market interest rates) requires a new formal estimate of the recoverable amount.L2, L3

Normative references

• IAS 36 §15Applies the concept of materiality to the analysis of indications: if a previous calculation showed a recoverable amount significantly greater than the carrying amount and no event has eliminated that difference, a new estimate is not required; the same applies when a previous analysis shows that the recoverable amount is not sensitive to the indication concerned.
• IAS 36 §16Illustrates paragraph 15: an increase in market interest rates does not require a formal estimate of the recoverable amount if the discount rate is unlikely to be affected (for example, an increase in short-term rates for an asset with a long remaining useful life), or if a previous sensitivity analysis shows that a material decrease is unlikely (future cash flows also increasing) or would not result in a material impairment loss.

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

8 questions

• In the previous year's test, Ferlane estimated the recoverable amount of a CGU at 40% above its carrying amount. This year, a minor indication appears, but no event since then could have eliminated this difference. What does the standard provide?L2
• 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
• A previous analysis by Quintal showed that the recoverable amount of its distribution network is not sensitive to changes in the price of diesel. This year, that price fluctuates sharply, which management regards as an indication. No other new factor is identified. What does the standard allow?L3
• In the 20X0 test, the recoverable amount of Sorbel's Packaging CGU exceeded its carrying amount by 25%. In 20X1, its main customer, which accounted for 45% of the CGU's revenue, terminates its contract. The finance director proposes not to re-estimate the recoverable amount, relying on the headroom found in 20X0. What should be concluded?L2
• Market interest rates rise sharply in 20X1. Amarante operates car parks whose prices are contractually indexed to inflation. A sensitivity analysis performed in 20X0 showed that an increase in rates would come with a comparable increase in future cash flows, so that a significant fall in the recoverable amount would be unlikely. Nothing has changed in the contracts since then. What should be concluded for 20X1?L3
• Belcourt owns a fleet of vessels with a remaining useful life of six years. In 20X1, market rates of return rise sharply and Belcourt considers that its discount rate will be affected. The last calculation showed a recoverable amount only 2% above the carrying amount, and no sensitivity analysis has been performed. What should be concluded?L3
• Delvaux operates a network of water treatment plants with a remaining useful life of about 30 years. In 20X1, central banks raise their policy rates sharply: short-term rates increase markedly, long-term rates much less. The 20X0 test showed a recoverable amount 35% above the carrying amount, and a sensitivity analysis showed that a noticeable increase in the discount rate would not result in a significant impairment loss. No other event is identified. The finance director wonders whether a full new estimate is needed. Write a judgement memo.L3
• In 20X0, Garance estimated the recoverable amount of its yoghurt production unit at 18,000,000, against a carrying amount of 12,000,000. In 20X1, internal reporting shows a gross margin slightly below budget, which the entity treats as an indication. No other significant event is identified. The consolidation manager asks whether a new full calculation is needed. Set out your position and its justification.L2