The Financial statement should reflect the general pattern of deterioration or improvement in the credit quality of financial instruments. [IFRS 13.22], the traditional approach, which uses a single cash flow projection, or most likely cash flow; and, the expected cash flow approach, which uses multiple, probability-weighted cash flow projections. IAS 36 - Impairment of non-financial assets – Expanding on the top 5 tips for impairment testing INT2015-08 Publication date: 02 Mar 2015 This economic environment could lead to revised budgets and forecasts with an expectation of lower cash flows from existing non-financial assets. In a recent statement ESMA3, the European regulator, emphasised the need for transparent and meaningful disclosures related to impairment testing. Explore challenges and top-of-mind concerns of business leaders today. © 2020 KPMG IFRG Limited, a UK company, limited by guarantee. Using Q&As and examples, this guide explains in depth the impairment models for goodwill, indefinite-lived intangible assets and long-lived assets. Interim reporting Entities are required to disclose significant changes from the previous year (see IAS 34 15–16A), for example, in relation to: • impairment of non-financial assets; • impairment of financial assets … • Allowance for expected credit losses. [IAS 36.4, 9, 33, IFRS 13.2]. Impairment of Non-Financial Assets . Any such changes are accounted for prospectively as a change in accounting estimate. Read IFRS 9 Financial Instruments amendments to other IFRSs (Appendix C) Financial assets within the scope of IFRS 9 : X: IFRS 9: Financial assets classified as subsidiaries (as defined by IFRS 10), associates (as defined by IAS 28), and joint ventures (as defined in IFRS 11) accounted for under the cost method for purposes of preparing the parent’s separate financial … The purpose of this course is to familiarise you with the guidance in IAS 36, Impairment of Assets, on testing an asset for impairment, recognising and measuring the amount of an impairment loss, if any, as well as determining when it's appropriate for an entity to reverse an impairment loss. Otherwise, the effect of some factors will be double counted. retail and industrial properties – may be considerably affected by COVID-19. whether net assets exceed market capitalisation. [IAS 36.2, 4] Tenants that have been forced to suspend operations may not be able to pay rent in the near term or may ask to renegotiate a lower rent. Considering the approach to projecting cash flows. [IAS 36.9–10, 12]. travel, tourism, entertainment, retail, insurance and education. Click anywhere on the bar, to resend verification email. All rights reserved. To cushion the economic and financial market impacts, governments in certain regions and international organisations have committed to fiscal stimulus, liquidity provisions and financial support. [Insights 3.10.300.120]. For more information, see our article on fair value measurement. financing risk, country risk and forecasting risk) used in determining the appropriate discount rate to discount future cash flows. Non-financial assets include goodwill, property, plant and equipment, leased assets under operating lease for a lessor and under finance lease for a lessee. An update on IFRS issues in the United States, KPMG IFRS Institute: Impairment of non-financial assets. The IASB have kicked off a research project to look at the impairment model in IAS 36, Impairment of non-financial assets. Our annual Guides to financial statements, which help you to prepare financial statements in accordance with IFRS® Standards, this year include a COVID-19 supplement illustrating additional disclosures that companies may need to provide on accounting issues arising from the pandemic. Please take a moment to review these changes. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. • Valuation of inventories. This webcast also highlights some of the key differences between IFRS and US GAAP related to impairment … on the financial statements in comparison to those reported in the previous annual period. It’s all exciting with Iain Selfridge, UK Partner in the latest episode of PwC IFRS Talks [IAS 36.A4–A14], the impact of measures taken to contain COVID-19 on the company’s business; and. any lasting impact on the economy or the sector. With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an … of Professional Practice, KPMG US. IFRS® 9, Financial Instruments, is the result of work undertaken by the International Accounting Standards Board (the Board) in conjunction with the Financial Accounting Standards Board (FASB) in the US.It was last revised in October 2017. Practical guide to Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 for interest rate benchmark (IBOR) reform The IASB has issued amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 that address issues arising during the reform of benchmark interest rates including the replacement of one benchmark rate with an alternative one. Get the latest KPMG thought leadership directly to your individual personalized dashboard. Sharing our expertise and perspective to inform your decision-making in an evolving global financial reporting environment. They may also become less creditworthy. You will not receive KPMG subscription messages until you agree to the new policy. Many countries are implementing stringent measures to contain the spread of the COVID-19 coronavirus. This self-study course addresses requirements of IAS 36, Impairment of Assets, including the following: KPMG International provides no client services. Many offer CPE credit. This course is part of the IFRS Certificate Program — a comprehensive, integrated curriculum that will give you the foundational training, knowledge, and practical guidance in international accounting standards necessary in today's global business environment.. the higher of fair value less costs of disposal and value in use). One CPE credit will be given to U.S. participants who meet the eligibility requirements. Under US GAAP, an asset‘s carrying amount is considered not recoverable when it exceeds the undiscounted expected future cash flows. In particular, assess: Consider whether budgets and cash flow projections reflect the following to the extent applicable to the company, based on information available at the reporting date: Consider whether discount rates used in recent valuations have been updated to reflect the risk environment at the reporting date. The expected cash flow approach inherently requires a more explicit consideration of the wider than normal range of possible future outcomes. © 2020 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. A single roadmap to testing nonfinancial assets for impairment – helping you to compare and contrast the different models: if and when a return to pre-crisis cash flow levels is assumed. This 60-minute live IFRS webcast provides an overview of the impairment model under IAS 36 and consideration of each of the steps in the IFRS impairment test. COVID-19 might have a significant impact on the risk-free rate and on entity-specific risk premiums (e.g. In a cash-generating unit, goodwill is reduced first; then other assets are reduced pro rata. Irrespective of any indicator of impairment, IAS 36 requires goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use to be tested for impairment at least annually. Significant assumptions, such as forecast sales volumes, prices, gross margins, changes in working capital, foreign exchange rates and discount rates will need to be reassessed and updated as appropriate due to the significant changes in economic and market conditions. Find out how KPMG's expertise can help you and your company. When a triggering event has occurred, management needs to determine the recoverable amount (the higher of VIU and FVLCD1) of an asset or cash-generating unit (CGU), which usually requires management to forecast future cash flows. Trigger for impairment testing. Disclosures related to impairment testing are likely to be a focus area for regulators. The annual test is required in addition to any impairment tests performed as a result of a triggering event. 11. Impairment of non-financial assets (IAS 36 Impairment of Assets) The impairment requirements in IAS 36 apply to the following types of assets: Goodwill; Intangible assets; Property, plant and equipment; Right-of-use assets; Associates and joint ventures accounted for using the equity method; Investment properties measured using the cost model Impairment occurs when the carrying amount of asset (net book value=cost of item less accumulated depreciation) is more than the recoverable amount. IAS 36 applies to a variety of non-financial assets including property, plant and equipment, right-of-use assets, intangible assets and goodwill, investment properties measured at cost and investments in associates and joint ventures 2. Observation Entities will need to assess their business models for holding financial assets. 1 VIU: value in use; FVLCD: fair value less costs of disposal. We want to make sure you're kept up to date. Companies will need to understand the terms and status of these provisions and consider what impact they might have on their cash flow projections. What’s the future of value in use…. All rights reserved. These impairment losses are referred to … KPMG refers to the global organization or to one or more of the member firms of KPMG International Limited (“KPMG International”), each of which is a separate legal entity. when significant changes have taken place during the period (or will take place in the near future) in the market or in the economic environment in which the company operates and these changes will have an adverse effect on the company; and, when the carrying amount of the company’s net assets is higher than its market capitalisation. As noted in IAS 34, when an event or transaction is significant to an understanding of the changes in an entity's financial position or performance since the last annual reporting period, as may be the case with material impairment losses recognised in an interim period, the company’s  interim financial report should provide an explanation of and an update to the relevant information included in the financial statements of the last annual reporting period. the fiscal stimulus, liquidity provision and financial support from the state or international organisations, including the potential effects of the withdrawal thereof. Since the last time you logged in our privacy statement has been updated. [IAS 1.129(b)], Interim condensed reports IAS 34 Interim Financial Reporting requires disclosure of the nature and amount of changes in estimates. This new standard brings about major changes to the classification and measurement of an entity’s financial assets and the … [IAS 36.33(a)], Under FVLCD, the estimates and assumptions used are from the perspective of market participants. Improving business performance, turning risk and compliance into opportunities, developing strategies and enhancing value are at the core of what we do for leading organizations. Any entity could have significant changes to its financial reporting as the result of this standard. Please note that your account has not been verified - unverified account will be deleted 48 hours after initial registration. What is impairment?? Cash flows used in determining FVLCD should be updated to reflect the assumptions that market participants would use based on market conditions and information available at the reporting date. PPE, intangible assets and goodwill? Director Advisory, Accounting Advisory Services, KPMG US, Managing Director, Dept. Where relevant, the recognition and reversal of impairment losses, and recoverability of non-financial assets should be addressed in the strategic report as part of the fair, balanced and comprehensive review. IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities. Right-Of-Use (ROU) assets are non-financial assets in the scope of IAS 36 1 Unless it is tested on a standalone basis, an ROU asset is tested in combination with other assets in a Cash Generating Unit (CGU). trade with countries significantly affected by COVID-19. KPMG International entities provide no services to clients. Tune in to KPMG Advisory podcasts to hear perspectives on today's business issues. non-financial assets are recoverable. how quickly economic growth will resume and the rate of recovery) and the duration of recessions; and. Due to the high degree of uncertainty and resulting challenges in forecasting cash flows, it could be helpful to base those forecasts on external sources such as economic projections by respected central banks and other international organisations if available. Our privacy policy has been updated since the last time you logged in. Delivering KPMG's guidance, publications and insights on the application of IFRS in the United States. 3.3angible assets and goodwill Int 26 3.4vestment property In 28 3.5ssociates and the equity method A 30 3.6oint arrangements J 32 3.7 [Not used] 3.8 Inventories 33 3.9 Biological assets 34 3.10 Impairment of non-financial assets 35 3. It is imperative for companies to assess the external environment and look for the indicators below to decide when to impair assets. Given below are just of the some of the indicators relevant for impairment: Credit losses are the difference between the present value (PV) of all contractual cashflows and the PV of expected future cash flows. The discount rate should reflect the impact of changes in interest rates and the risk environment at the reporting date. Similar considerations would also apply for companies that lease assets (e.g. [IAS 16.61, Insights 3.10.350.30]. Ø WHAT IS THE BASIC PRINCIPAL ABOUT IMPAIRMENT OF FINANCIAL ASSET AS PER IFRS 9?. [IFRS 13.B26, IAS 36.A7, Insights 3.10.220], Whichever approach a company adopts, the rate used to discount cash flows should not reflect adjustments for factors that have been incorporated into the estimated cash flows and vice versa. In certain jurisdictions, the yield on long-term government bonds decreased in 2020. Disclosures about the key assumptions made by management are highly relevant, because describing how management determines their values gives investors and other users additional information to assess the reliability of impairment testing and compare management’soutlook with their own. Certain types of investment properties (and right-of-use assets arising from leased real estate) – e.g. This 60-minute live IFRS webcast provides an overview of the impairment model under IAS 36 and consideration of each of the steps in the IFRS impairment test. To achieve this, management will need to apply significant judgement. For more information, see our web article on ESMA’s enforcement priorities for 2020. Impairment losses need to be recognized when the asset’s Book Value > asset’s Recoverable amount.Where Asset’s Recoverable Amount = higher of (Fair value – Selling costs) OR value in use.The value in use is calculated by discounting future cash flows expected from the continued use of the asset. [IAS 36.A1, A16, A18], The risk-free rate is generally based on the yield on government bonds that have the same or similar duration as the cash flows of the asset or CGU. The carrying amount of the asset (or cash-generating unit) is reduced. Budgets and cash flow forecasts prepared by management generally serve as the starting point for the discounted cash flows used in calculating the recoverable amount. To thrive in today's marketplace, one must never stop learning. have been hit by a fall in demand for their products or services, or by restrictions imposed by the state; are dependent on supply chains or have production facilities in countries significantly affected by COVID-19; and/or. IFRS 9 requires entities to base their measurement of expected credit losses on reasonable and supportable information that is available without undue cost or effort. When deriving the discount rate to use in your test, management may consider the company’s weighted average cost of capital, the company’s incremental borrowing rate, and other market borrowing rates that may … As a result of the issue of IFRS 9, IAS 36 is amended to: Exclude financial instruments accounted for in accordance with IFRS 9, rather than IAS 39. Under the expected cash flow approach, uncertainty about future cash flows is reflected in different probability-weighted cash flow projections, rather than in the discount rate. Furthermore, 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. Applicability. [IAS 36.56]. IAS 36 — Recoverable amount disclosures for non-financial assets Background The IASB, as a consequential amendment to IFRS 13 Fair Value Measurement , modified some of the disclosure requirements in IAS 36 Impairment of Assets regarding measurement of the … the nature, severity and duration of measures taken to contain or delay the spread of COVID-19; how long it could take for business operations and economic activity to return to normal; the expected trajectory of the recovery (i.e. entities in preparing their financial statements app lying IFRS Standards for periods ending on or after 31 December 2019. Under IFRS, an impairment loss is recognized if the carrying amount exceeds the recoverable amount of the asset. IAS 36 applies to a variety of non-financial assets including property, plant and equipment, right-of-use assets, intangible assets and goodwill, investment properties measured at cost and investments in associates and joint ventures2. Estimating future cash flows could be particularly challenging for many companies due to the increase in economic uncertainty. [IAS 1.125, 129, 36.134(d)–(f)], Because the uncertainty associated with management’s assumptions about the future is likely to be significant, 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 COVID-19. Under the traditional approach, cash flows are not adjusted for risk but, rather, risk is reflected in determining the discount rate. Under International Financial Reporting Standards (IFRS), the company should consider assesses whether events or circumstances indicate impairment of assets or not. If the asset‘s carrying amount is considered not recoverable, … KPMG does not provide legal advice. 2 The guidance in IAS 28 Investments in Associates and Joint Ventures is used to determine whether it is necessary to perform an impairment test for investments in equity-accounted investees. Here we offer our latest thinking and top-of-mind resources. IAS 36 provides relevant disclosures to be considered in this regard. Impairment losses are examples of events and transactions that require disclosure under IAS 34 if they are significant. IAS 36 provides examples of indicators of triggering events, including: The effects of COVID-19 have caused a significant deterioration in economic conditions for many companies, and an increase in economic uncertainty for others, which may constitute triggering events. Join us for upcoming webcast events. The assumptions used in calculating the recoverable amount should be reasonable and supportable, despite the high level of economic uncertainty. Impairment of Financial Assets (IFRS 9) Last updated: 8 May 2020 IFRS 9 requires recognition of impairment losses on a forward-looking basis, which means that impairment loss is recognised before the occurrence of any credit event. [IAS 34.15B(b), 15C, 16A(d)]. Making the estimate could be challenging given the degree of uncertainty about: The discount rate used to discount the forecast cash flows under both VIU and FVLCD may be significantly affected by COVID-19 due to the increase in uncertainty and risks. Contrary to widespread belief, IFRS 9 affects more than just financial institutions. For more detail about our structure please visit https://home.kpmg/governance. Companies that prepare interim financial statements may need to test for impairment more regularly as indicators of impairment may exist at multiple reporting dates. If there is an indication of impairment, then the impairment test follows the principles of IAS 36. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. IFRS 9 mandatory for use since January 01, 2018, was intended to eliminate the shortcomings of then applicable IAS 39, simplify the logic of classification of financial instruments, increase the reliability of information about impairment of financial assets. Due to the increase in the level of uncertainty, a higher number of key assumptions may need to be disclosed – e.g. This webcast also highlights some of the key differences between IFRS and US GAAP related to impairment of non-financial assets. If recent events have changed a company’s usage or retention strategy for any of its property, plant and equipment, then management should review whether the useful life and residual value of these assets, and the depreciation method applied to them, remains appropriate. Under IFRS, IAS 36 is the primary source of guidance on the impairment of tangible assets. Given the uncertain macroeconomic outlook, with scenarios ranging from a relatively quick rebound in economic activity and strong long-term growth, through to a muted recovery or recession followed by slow long-term growth, estimation uncertainty will be significantly higher than normal and there will probably be a wider range of reasonably possible cash flow projections. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. Greater weight is given to external evidence. Consider enhancing sensitivity disclosures and disclosures about the key assumptions and major sources of estimation uncertainty in the interim and annual reports. © 2020 Copyright owned by one or more of the KPMG International entities. Management should also consider disclosing how uncertainty was factored into the impairment test. [IAS 36.55–56]. Refer to IFRS 9 for the impairment of financial assets not within the scope of IAS 36. Resource centre on the financial reporting impacts of coronavirus. 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 example, it may be appropriate to disclose management’s views about the degree of uncertainty associated with the macroeconomic outlook (such as the severity and duration of the impact that COVID-19 is expected to have on the company’s business). That is certain to be the case for those with long-term loans, equity investments, or any non- vanilla financial assets. All rights reserved. Annual reports In the context of impairment testing of goodwill and indefinite-lived intangible assets, IAS 36 requires disclosure of the key assumptions used to determine the recoverable amount. This article focuses on the accounting requirements relating to financial assets and financial liabilities only. IAS 36 Impairment of Assets IFRS 13 Fair Value Measurement IFRIC 10 Interim Financial Reporting and Impairment IAS 16 Property, Plant and Equipment IAS 38 Intangible Assets IAS 41 Agriculture IFRS 3 Business Combinations IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 8 Operating Segments IFRS 9 Financial Instruments Ias 34.15B ( b ), 15C, 16A ( d ) ] market participants impairment of non financial assets ifrs prospectively as result. Some or all of the CGU ’ s forecasts may be larger usual... 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And deep, practical industry knowledge, skills and capabilities help our clients meet challenges respond. Premiums ( e.g the annual test is required in addition to any impairment tests performed as a of! Sure you 're kept up to date and perspective to inform your decision-making in an evolving financial... Wider than normal range of possible future outcomes accounting Advisory services, KPMG IFRS Institute is pleased to a., Refresh on impairment of non- financial assets 're kept up to date subject the... Contractual cashflows and the rate of recovery ) and the PV of expected future cash flows could be particularly for! The increase in the credit quality of financial instruments carrying amount is considered not recoverable when it exceeds undiscounted...