Impairment Tests

The Values of Assets need to be tested from time to time to ensure that there is nothing wrong with Past Valuations.

Accounting standards provide some guidance on the process to be followed, but a strong appreciation of Valuations is also needed.

As the accounting world moves to one in which Fair Value rules the roost, Impairment Testing is basically a regular check-in to make sure that there is nothing badly wrong with past valuations.

And though we are certainly not here to decipher “IAS 36: Impairment of Assets”, we do need to touch on some of its important concepts.

I often say that IAS 36 is the baby brother of “IFRS 3: Business Combinations” (see our section on Purchase Price Allocations (PPA’s)). If the original PPA has been done correctly, and assuming that the original forecasts actually transpired, then the Impairment Test should be nothing more than a pedestrian exercise.

So how do you set about an impairment test, when you suspect that something may have gone wrong with one of your Assets?

Well, the starting point is the Carrying Amount of your Asset. Take note that we deliberately avoided “Fair Value” – the Carrying Value could be some historical cost, some depreciated cost, some recent valuation, and so on and on – how we get there is not all that relevant.

We then need to compare this Carrying Amount to the Recoverable Amount of your Asset. IAS 36 gives us two options to calculate this Recoverable Amount:

  1. What might you get should you decide to sell your Asset, after deducting all those selling costs? Assuming that these Selling Costs are negligible, this is essentially the Market Value of your Asset.
  2. What benefits can you derive from still using your Asset? If this sounds like a DCF Valuation, you would be right. There are some very strict rules that IAS 36 puts in place around what goes into the DCF Valuation (the “Value in Use” calculation), but that is not particularly relevant for this discussion.

This process should be fairly simply assuming that your Asset is something tangible like a Building or item of Equipment. This process becomes very tricky, however, when you are trying to test assets such Goodwill or an Intangible Asset for impairment. And, unfortunately, these class of assets are usually first in the firing line when it comes to impairment write-downs.

Please Contact us for more information on how we can assist you with any Impairment Tests queries that you may have.