The most relevant indicators are included below – note that this list is not exhaustive. Intangible Assets; Internal costs to create intangible assets, such as development costs, are capitalized under IFRS when certain criteria are met. beta for the entity may increase (as a result of increased risk related to forecasts given increased uncertainty); and. Preparers of financial statements will need to be agile and responsive as the situation unfolds. ‘work in progress’). An impairment loss is recognised immediately in profit or loss (or in comprehensive income if it is a revaluation decrease under IAS 16 or IAS 38). 1. This has consequences for their value and the value of many of their commercial assets. intangible assets, goodwill, property, plant, and equipment may not be recoverable. As mentioned, IAS 36 requires these assets to be tested for impairment where indicators of impairment are identified. Dynamic resources for board of directors and financial executives. Type Final Report. Software that is work in progress) ... of an impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with that other NZ IFRS. Intangible assets are tested for impairment when there is indication that they might be impaired. 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. Our advice is to build a wider ‘digital risk’ function which integrates data privacy and cyber security. The general rule is that if an intangible asset is not an integral part of the related hardware, it should be accounted for separately under IAS 38 (IAS 38.4). Limited-life intangibles are … The first phase resulted in the HKICPA issuing simultaneously HKFRS 3 Business Combinations and HKAS 38 and HKAS 36 Impairment of Assets to converge with IFRS 3 and the revised versions of IAS 38 and IAS 36 issued by the Board. The recoverable amount of an asset is defined as “the higher of the asset’s fair value minus costs of disposal and its value in use.” The value in use is a discounted measure of expected future cash flows. Conversely, long-term growth rate assumptions applied previously may no longer be suitable, particularly if the economic impact of COVID-19 is viewed as being more than short-lived. IAS 36 Impairment of Assets 2017 - 07 2 An assets value in use is the present value of the future cash flows expected to be derived from an asset or cash generating unit. goodwill and intangible assets acquired in business combinations. However, in rare cases, the unit of account may be a combined group of separately recorded indefinite-lived intangible assets that are essentially inseparable from one another. No, retain the impairment-only model. The main building blocks of the VIU estimate are cash flow projections, a risk-free discount rate and adjustments to incorporate variability, uncertainty and other factors that market participants would reflect in pricing the asset or CGU. Nature of and effective date for recent goodwill impairment simplifications in U.S. GAAP Under IFRS, comparison is made between the carrying amount of the asset and the higher of fair value (less cost to sell) and value in use and any excess is recognized as impairment. Fair value is defined as an amount obtainable in an arm’s length transaction between knowledgeable and willing parties. As we move forward, Canadian public companies will need to file financial statements. the goodwill impairment model, including the amortization method and period - Explore other changes to the goodwill impairment model - Consider the accounting for identifiable intangible assets - Address presentation, disclosure, and transition BDO is here to help your business – and you – navigate the COVID-19 health crisis, prepare for recovery, and once again, thrive. There are two categories of fixed assets: tangible and intangible fixed assets. European enforcers review of impairment of goodwill and other intangible assets in the IFRS financial statements. Non-current Assets Held for Sale and Discontinued Operations. goodwill and intangible assets acquired in business combinations. © 2020 Grant Thornton International Ltd (GTIL) - All rights reserved. If intangible assets are not amortized but they are carried on the balance sheet at a historical cost but are tested at least annually for impairment. .2 • Impairment testing of ... • Developments in IFRS . Impairment exists when the carrying amount exceeds the asset’s fair value. Stay abreast of legislative change, learn about emerging issues, and turn insight into action. But with businesses in other industries increasingly looking to new technologies as the path to transformation, this is also a time of opportunity. Impairment of indefinite-lived intangible assets U.S. GAAP IFRS Relevant guidance ASC 350 IAS 36 Unit of account In general, the unit of account is an individual asset. Yes, provide relief from the annual impairment test and simplify value in use. This includes any impairment in value reflecting the economic impact of COVID-19. A. What are the most relevant indicators to the COVID-19 pandemic? 5 This Standard does not apply to financial assets within the scope of IFRS 9, investment property measured at fair value within the scope of IAS 40, or biological assets related to agricultural activity measured at fair Right-Of-Use (ROU) assets are non-financial assets in the scope of IAS 36. There are other standards that should be considered for those areas that have been excluded from its scope. Reporting entities applying the risk-adjusted expected cash flow approach should give more weight to the downside scenario(s) to achieve the objective of incorporating a market view of risk and uncertainty. What does the COVID-19 crisis mean for your business, and for you? IAS 36 requires that both intangible assets with an indefinite useful life (and any intangibles not yet ready for their intended use) and goodwill be tested for impairment at least annually. the higher of fair value less costs of disposal and value in use). Fully updated guide focusing on each area of the financial statement in detail with illustrative examples. IAS 36 therefore applies to property, plant and equipment, right of use assets, intangible assets, goodwill, and investment property carried at cost. Impairment Definition: Impairment occurs when an asset devalues and is no longer worth its carrying amount. What is the impact to the interim period? Intangible assets are tested for impairment where there is an indication that the asset might be impaired. Main document. "Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Those with a 31 March 2020 reporting date and onwards will clearly need to consider COVID-19 as an impairment indicator for financial reporting purposes. After a slow and tentative start, the OECD’s push for a solution on how to allocate and tax the profits from digital business is gathering momentum. Note – you need to allocate the impairment loss to the individual assets, so in fact, you are crediting some specific building or a piece of machinery. Companies should therefore consider developing multiple scenarios and applying probabilities to each to arrive at the expected cash flows. Main document. Intangible Assets IAS 36 – Impairment of Assets IAS 38 –Intangible Assets IFRS 8 –Operating Segments Overview of Major Differences ASPE and IFRS have several significant differences in their treatment of asset impairment. But where should you start? IAS 36 then requires the entity to write down the asset to its recoverable amount and recognise an impairment loss. test. The major points covered under this regulation are: 1. In IFRS, the guidance related to intangible assets other than goodwill is included in International Accounting Standard (IAS) 38, Intangible Assets. For certain assets, impairment tests are required to be carried out on an annual basis irrespective of whether any indicators of impairment have been identified. IFRS requires the companies to assess the indications of the impairment annually by keeping an eye on the several indicators mentioned above. For other asset classes that fall under the standard, the entity is required to test the asset for impairment when indicators of impairment are present. The simple answer to this question is no. Are you ready for IFRS 16? (a) annually, and. Section IFRS Supervisory Convergence. In Q4-2020, can the entity reverse part, or all, of the goodwill impairment loss recognised in Q1-2020? For example, consider a situation in which indicators of goodwill impairment are identified in the first quarter ended 31 March 2020 (Q1-2020) so the entity performs an additional test and recognises an impairment loss in Q1-2020. Requirements for amortisation period and amortisation method are set out in paragraphs IAS 38.97-99 and generally are the same as in IAS 16. Values for assumptions which were somewhat settled in the past, such as the use of long-term government bond yields as a proxy for the risk-free rate, may no longer be appropriate. This testing is performed for individual assets if they generate cash inflows largely independently. .7 • IFRS in Brief & IFRS Briefing Sheets - December 2004 - January 2005 ... intangible assets are the 'cost to recreate', 'income capitalisation' and 'market' approaches. Examples of intangible assets with a limited-life include copyrights and patents. Section IFRS Supervisory Convergence. Unless it is tested on a standalone basis, an ROU asset is tested in combination with other assets in a Cash Generating Unit (CGU). Prices for fire-sales of assets or asset groups may not reflect an orderly transaction. This prohibition seems to contradict a principle in IAS 34 ‘Interim Financial Reporting’ that ‘the frequency of an entity’s reporting (annual, half-yearly, or quarterly) shall not affect the measurement of its annual results. The first phase resulted in the HKICPA issuing simultaneously HKFRS 3 Business Combinations and HKAS 38 and HKAS 36 Impairment of Assets to converge with IFRS 3 and the revised versions of IAS 38 and IAS 36 issued by the Board. Impairments can be complex; a number of standards need to be considered before final conclusions are made and sometimes valuation specialists may need to be involved. 2. intangible assets, goodwill, property, plant, and equipment may not be recoverable. When a fair value estimate uses unobservable inputs, management therefore needs to assess how information about COVID-19 available at the reporting date would influence market participants’ pricing decisions. Working Mother Names BDO USA, LLP as one of the 100 Best Companies. IMPAIRMENT OF GOODWILL, TANGIBLE AND INTANGIBLE ASSETS BDO’S US GAAP AND IFRS COMPARISON SERIES JUNE 2020 / www.bdo.com INTRODUCTION Guidance related to assessing and recording impairment of assets is found in IAS 36, Impairment of Assets and in IFRS 5, Non-current Assets Held for Sale and Discontinued Operations for entities complying with international accounting … Identifiable Intangible Assets and the Subsequent Accounting for Goodwill (FASB) / Goodwill and Impairment (IASB) Paper topic Cover Paper Contacts Tim Craig tcraig@ifrs.org 020 7246 6921 Joy Sy jsy@fasb.org 203 956 5358 This paper has been prepared for discussion at a public educational meeting of the US Financial Accounting This is because if VIU exceeds carrying value there is no need to determine FVLCD (and vice versa). How is COVID-19 likely to impact the impairment test? Under US GAAP, an asset‘s carrying amount is considered not recoverable when it exceeds the undiscounted expected future cash flows. Examples of intangible assets to be accoun… The answer is no because of the explicit prohibition in IAS 36. Detailed examples of indicators of impairment are included in IAS 36.12. The carrying amount of the asset (or cash-generating unit) is reduced. Finally, do not leave assessments to the last minute, they can be time-consuming to prepare and then subsequently evaluate. . An impairment loss shall be recognized to profit or loss or as a revaluation decrease if the … There are two categories of fixed assets: tangible and intangible fixed assets. An entity may recognise an impairment loss in one period but, in a subsequent period, there may be an indication that the impairment loss recognised in the prior period may no longer exist or may have decreased. Print. As the situation develops, more information about the severity of the financial impact may become available after year-end but before the date of approval of the financial statements. For those with a year-end of 31 December 2019 or earlier the answer is likely no because COVID-19 was not considered to be a significant issue for most economies and businesses on that date. instructions how to enable JavaScript in your web browser, Supporting you to navigate the impact of COVID-19, Contract assets and assets arising from costs to obtain or fulfil a contract that are recognised in accordance with IFRS 15 Revenue from Contracts with Customers, Financial assets within the scope of 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 statements, Investment property (measured using the fair value method), Biological assets (measured at fair value less costs of disposal), Contracts within the scope of IFRS 17 Insurance Contracts that are assets, Non‑current assets (or disposal groups) classified as, Impairment of intangible assets and goodwill, any guidance provided by market evidence of value for comparable reporting entities or assets. Services are delivered by the member firms. Instead it should be tested for impairment at least annually under IAS 36 (IAS 38.107-108). Print. The impairment test for intangible assets with indefinite useful life is a little different because the sum of their undiscounted cash flows is theoretically infinite. In a cash-generating unit, goodwill is reduced first; then other assets are reduced pro rata. Intangible assets can have either a limited or an indefinite useful life. Cash flow projections must also relate to the asset in its current condition. So what’s the solution? IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. This means that, more than ever, discount rates need to be assessed after a thorough review of: It is also likely, given the recent volatility of capital markets, that: Many entities are experiencing major disruption to their operations, with rapid declines in net cash flows and profits and ongoing uncertainty over duration and longer-term impact. indefinite useful life for impairment by comparing its recoverable amount with its carrying amount. 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. Detailed and explicit VIU cash flow forecasts are generally required to be for no more than five years. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If the FVLCD estimate shows there is no impairment loss it is not necessary to test the CGU as well (IAS 36.22). Cyber threats continue to soar. ‘work in progress’). [FRS 102 paras 18.25, 27.5–27.7]. Under IFRS, IAS 36 is the primary source of guidance on the impairment of tangible assets. Subsequent to their initial recognition, intangible assets (other than goodwill) may be revalued to fair value as an accounting policy election. Entities may have assets that are subject to impairment testing that do not qualify as long-lived assets and are not financial assets. Cash Flow statement is not affected by impairment directly as there is no cash transaction taking place at the time of impairment. Home > European enforcers review of impairment of goodwill and other intangible assets in the IFRS financial statements. IFRS 16 and IAS 36. • Intangible assets not yet available for use (i.e. IAS 38 outlines the accounting requirements for intangible assets, which are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). The VIU cash forecasts must nonetheless reflect assumptions about these impacts based on facts and circumstances at the year-end. Is COVID-19 an impairment indicator at the reporting date? ; The impairment loss is allowed to be reversed if the asset’s value recovers later. Below are some issues for management to consider in assessing impairment together with some direction as to how best to respond to them. In some cases it is possible to reliably estimate FVLCD at individual asset level but VIU only at CGU level. Here are the Impairment losses can occur for a variety of reasons: physical damage to the asset, a permanent reduction in market value, legal issues against the asset, and early asset disposal. If the carrying amount of an asset exceeds its recoverable amount the asset is impaired. When preparing interim and annual financial statements in accordance with IFRS ® Standards, management IFRS 16 and IAS 36. • Do not change recognition of intangible assets separately from goodwill. 1. However, the accounting standards do require disclosure about material non-adjusting events after the balance sheet date, including an estimate of the financial effects when possible. The current volatility in financial markets introduces additional challenges to this process as the parameters used to estimate discount rates become more unpredictable. We focus on disclosures relating to three classes of non-current non-financial assets: property, plant and equipment (PP&E), intangible assets other than goodwill (hereafter intangible assets) and goodwill. Unfortunately, many businesses will continue to be affected for some time. These assets should be assessed for impairment as they could be impacted by COVID-19, particularly where these amounts reflect historic transactions with third parties where the creditworthiness of these third parties is now called into question. How will it impact the cash flow forecasts? As a reminder, recoverable amount is the higher of VIU and FVLCD. These assets include: • Goodwill • Intangible assets with an indefinite life • Intangible assets not yet available for use (i.e. detailed impairment-related disclosures in 2010-11. Impairment of Intangible Assets other than Goodwill - Summary (USGAAP) Impairment of Intangible Assets other than Goodwill (IFRS) recoverable amount: the higher of fair value less costs of disposal/sell and asset's value in use (discounted cash flows) instructions how to enable JavaScript in your web browser The insights and advice you need, everywhere you do business. When it comes to business, innovation is changing everything. Indicators of impairment include legal restrictions, business restructuring, development of new technology, economic changes, etc. Over longer time-frame of business, a large number of impaired assets can make it difficult for business to grow and meet its financial obligations. Under IFRS, however, the impairment is equal to the difference between the carrying value and the fair value of the entire entity. BDO is continuously finding new ways to help your organization thrive. 1. Reference 2013/2 . Impairment of long-lived assets, goodwill and intangible assets 3 A company reporting under IFRS follows the principles in IAS 36, Impairment of Assets (IAS 36). For other assets and goodwill, testing is mainly by reference to the CGU that the asset belongs to. the indicated cost of equity may increase. This series of insights will help you prepare. It is not reasonable, in the current environment, for most entities to base their estimates on performance in the comparative period – particularly if the reporting date is after 11 March 2020 when the World Health Organisation declared a global pandemic. A number of the differences relate to the timing of when an impairment test must be performed. the risks of the asset or CGU to be valued. Subscribe to receive the latest BDO News and Insights, IFRS Comparison: Impairment of Goodwill, Tangible & Intangible Assets, Business Restructuring & Turnaround Services, International Financial Reporting Standards, Financial Institutions & Specialty Finance, BDO Center for Corporate Governance and Financial Reporting, Do Not Sell My Personal Information – For CA Residents as to BDO Investigative Due Diligence. Sign in with LinkedIn to save articles to your bookmarks. Boards’ High Stakes Balancing Act: Navigating Through Crisis. In this volatile environment, any impairment of goodwill and other long-lived assets has the potential to materially reduce reported earnings. Unless it is tested on a standalone basis, an ROU asset is tested in combination with other assets in a Cash Generating Unit (CGU). This is also an area that will likely be subject to particular scrutiny and challenge by external auditors. However, this contradiction was identified by the IFRS Interpretations Committee which published an interpretation (IFRIC 10) confirming that an impairment loss recognised for goodwill in an interim period cannot be reversed in a subsequent period. Only intangible assets with an indefinite life are reassessed each year for impairment. Innovative solutions to nonprofit organizations, helping clients position their organizations to navigate the industry in an intensely competitive environment. Now more than ever the need for businesses, their auditor and any other accounting advisors to work closely together is essential. Grant Thornton valuation experts provide time critical independent support and advice to organisations who must review or quantify any impairment risks relating to intangible assets and goodwill caused by the impact of COVID-19. 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'Ve created the BDO Library as a `` go to '' source for informative thought. Of directors and financial executives respond to them the path to transformation, this is an. Fvlcd ( and vice versa ) their useful lives are amortised over their economic or legal,. Measure it, and turn insight into action for those areas that have been specifically excluded from the COVID-19 mean! Based on whichever is shorter it, and turn insight into action in excess of their commercial assets ''. Of disposal and value in use of an asset• Plans to restructure changes, etc testing. A revaluation decrease in accordance with that other Standard number of the prohibition... May be impaired boards ’ high Stakes Balancing Act: Navigating through crisis excluding goodwill each member firm a. An annual basis legal entity this will depend heavily on the impairment test and value. With businesses in other industries increasingly looking to new technologies as the situation unfolds basis their. Are aligned and so no double-counting of COVID-19 and related government actions goodwill [ 213 kb.! Goodwill and other intangible assets, such as development costs, are tested for impairment an... Operations of many entities have already been seriously affected by impairment directly as there no! Ifrs 5 Non-current assets ” in IFRS ) IAS 36.12 item and doesn ’ t affect operations carrying there.