What’s the issue?
Trigger for reversing an impairment loss
As the COVID-19 coronavirus pandemic continues to evolve, some companies have started to show signs of economic recovery and resumed growth. Some have changed their business model to adapt – e.g. by moving their business online, changing their products or services or implementing home or hybrid working policies. For these companies, the level of uncertainty and risk arising from the pandemic may have decreased significantly and, in some cases, there may be indicators that an impairment loss recognised in a previous period may no longer exist or may have decreased. Companies are required to assess at each reporting date (annual or interim) whether such indicators exist. [IAS 36.110]
Reversing an impairment loss
If there is an indication that an impairment loss has reversed, then a company is required to estimate the recoverable amount of the previously impaired asset or cash-generating unit (CGU). In estimating the recoverable amount, a company needs to reassess and recalibrate its assumptions to reflect the outlook for the future of the company’s assets (or CGUs) as at the reporting date.
If the recoverable amount has increased significantly, then the impairment loss may have partly or fully reversed. An impairment loss recognised for goodwill is not reversed in subsequent periods, even if it was recognised in an interim period of the same financial year. For assets carried at cost, the reversal is recognised in profit or loss. [IAS 36.114, 119, IFRIC 10.8]
IAS 36 requires a company to assess at each reporting date (annual or interim) whether triggers of impairment reversal exist.
Getting into more detail
Triggers for reversing an impairment loss
IAS 36 Impairment of Assets applies to a variety of non-financial assets including property, plant and equipment (PPE), right-of-use assets, intangible assets and goodwill, investment properties carried at cost and investments in associates and joint ventures1. [IAS 36.2, 4]
If these assets (other than goodwill) have been impaired in previous periods, then a company needs to consider whether there have been changes in circumstances or favourable events since the last impairment test that indicate that an impairment loss may have decreased or may no longer exist. Examples of such indicators include:
- significant favourable effects in the market or in the economic environment;
- indications that the performance of the asset (or CGU) is, or will be, better than expected;
- a significant increase in the value of the asset (or CGU) during the period;
- significant changes in the extent or manner in which an asset is (or is expected to be) used that have (or will have) a favourable effect on the company; and
- a decrease in market interest rates or other market rates of return in investments that will decrease the discount rate used to determine the value in use of an asset (or CGU). [IAS 36.111]
Reversing an impairment loss
To reverse an impairment loss, the estimated service potential of the asset (or CGU), either from its use or from its sale, must have improved since the company impaired the asset. An impairment loss is not reversed merely due to the passage of time – i.e. when the increase in the recoverable amount is caused only by unwinding the discount. [IAS 36.114–116]
The maximum amount of impairment loss that can be reversed is limited to the amount necessary to restore the asset to its pre-impairment carrying amount, less any subsequent depreciation or amortisation that would have been recognised (i.e. based on the asset’s pre-impairment depreciated/amortised carrying amount). [IAS 36.117]
Example – Limit on reversal of an impairment loss
At the start of Year 1, Company X acquires an investment property with a useful life of 20 years for 100. The investment property is carried at cost. At the end of Year 2, X identifies impairment triggers and determines that the investment property’s recoverable amount is 70, which is lower than the depreciated carrying amount of 90. Therefore, it recognises an impairment loss of 20. At the end of Year 4, X identifies indicators of impairment reversal and determines that the investment property’s recoverable amount is 85.
|Year 2||Year 4|
|Depreciated carrying amount at year end||90||62*|
|Recoverable amount at year end||70||85|
|(Reversal of) impairment loss||20||(18)|
* 70 - 2 x (70 / 18) = 62
When assessing how much of the impairment loss it can reverse in Year 4, X needs to consider whether there is any limit on its reversal. The carrying amount of the investment property at the end of Year 4, had no impairment loss been recognised, would be 80 (i.e. 100 - (4 x 5)). Therefore, the amount of the impairment loss that X can reverse is limited to 18 – i.e. the amount that restores the investment property (62) to its pre-impairment depreciated carrying amount of 80.
When reversing an impairment loss on a CGU, the impairment loss reversal is allocated to the CGU’s assets (other than goodwill) on a pro rata basis. However, the carrying amount of any asset within the CGU is not increased above the lower of that asset’s:
- recoverable amount (if it is determinable); and
- carrying amount (net of amortisation or depreciation), had no impairment loss been recognised for the asset in prior periods.
Having done this, if an amount of impairment loss that can be reversed still remains, then that amount is allocated pro rata to all of the other assets in the CGU (except goodwill). [IAS 36.122–123]
For assets that are carried at cost, the reversal of an impairment loss is recognised in profit or loss. For assets carried at a revalued amount (e.g. some PPE and intangible assets), the reversal is recognised in profit or loss only to the extent that it reverses an impairment loss that was previously recognised in profit or loss. Any additional increase is accounted for as a revaluation and is recognised in other comprehensive income. [IAS 36.119]
Impact on useful life and residual value
If there is an indicator of impairment reversal for an asset, then the company needs to review whether the asset’s remaining useful life, depreciation (or amortisation) method and/or its residual value remain appropriate. This review is necessary even if no impairment loss is reversed for that asset. [IAS 16.61, 36.113]
Disclosures related to impairment testing continue to be a focus area for regulators. It is important that companies provide transparent and meaningful disclosures to give users relevant information on impairment of assets and reversals thereof. [IAS 36.126(b), 126(d), 129(b), 130–132, 134]
Although economic activity in some countries is accelerating, there is substantial uncertainty around the baseline growth trajectory. Companies need to consider disclosing how this uncertainty is factored into the calculation of the recoverable amount.
IAS 1 Presentation of Financial Statements requires disclosure of the key assumptions that a company makes about the future and other major sources of estimation uncertainty at the reporting date that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year. [IAS 1.125, 129]
If the uncertainty associated with management’s assumptions about the future is significant, then it is important that management develops robust disclosures to help users understand the sensitivity of recoverable amount estimates to significant changes in key assumptions affected by the pandemic. For example, it may be appropriate to disclose management’s views about the degree of uncertainty associated with the macroeconomic outlook. [IAS 1.129(b)]
Interim condensed reports
If a company recognises or reverses a material impairment loss on non-financial assets, then it provides in its interim financial statements an explanation of, and an update to, the relevant information included in the last annual financial statements. IAS 36 provides relevant disclosures to be considered in this regard. [IAS 34.15B(b), 15C, 16A(d)]
Actions for management
- Consider whether there are any indicators of impairment reversal for the company’s assets (or CGUs).
- When updating cash flow forecasts, consider projections of central banks and other international organisations about the trajectory of economic recovery.
- Consider whether discount rates used in recent valuations have been updated to reflect the risk environment at the reporting date.
- If there is an indicator of impairment reversal for an asset, then review whether the remaining useful life, the depreciation (or amortisation) method and/or the residual value remain appropriate.
- Consider enhancing sensitivity disclosures and disclosures about the key assumptions and major sources of estimation uncertainty in the interim and annual financial statements.
1 IAS 28 Investments in Associates and Joint Ventures is silent on indicators of reversals of impairment. In our view, a company applies IAS 36 to determine if there is an indication that an impairment should be reversed. [Insights 3.10.585.20]
References to ‘Insights’ mean our publication Insights into IFRS®
Head of DPP Accounting
KPMG AZSA LLC
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