Training workshop on preparation of financial

statements using IPSAS Accrual

IMPAIREMENT OF NON CASH GENERATING

ASSETS
 Testing for Impairment

➢ Assess at each reporting date if any indication of

impairment exist.
➢ If an indication exists, estimate the recoverable amount
of the asset.
➢ Compare recoverable amount and carrying amount.
➢ If recoverable amount is higher than the carrying
amount.
➢ No impairment loss.
➢ If recoverable amount is less than the carrying amount.
➢ Recognise impairment loss (the difference).
Meaning of impairment
Impairment
a loss in the future economic benefits or service potential
of an asset, over and above the systematic recognition of
the loss of the asset’s future economic benefits or service
potential through depreciation.

Decline in the utility of an asset.

 Important terms
Important terms
Carrying Amount
Recoverable amount
Fair value less cost to sell
Value in use
Cash generating Assets
 Important terms

Carrying amount
The amount at which an asset is recognised after deducting any
accumulated deprecation (amortisation) and accumulated
impairment losses thereon.

Fair value less cost to sell

Amount obtainable from the sell of an asset in an arms length
transaction between knowledgeable, willing parties less the cost
of disposal
Important terms
Value in use
❑For cash generating assets
“Is the present value of the estimated future cash flows
expected to be derived from the continuing use of an
asset and from its disposal at the end of its useful life”.

❑ For non cash generating assets

“Is the present value of the asset’s remaining service
potential”.
 Important terms
❑Recoverable amount
❑is the higher of
✓ Fair Value less cost to sell, and
✓ Value in use
 When to impair?
❑ An asset is impaired when
➢ Its carrying amount (CA) exceeds its recoverable amount(RA).

Carrying Amount: Recoverable Amount:

Amount recognized in the SFP less The higher of –
(Acc. Depr. + Acc. Impair. Loss) ➢ FV less costs to sell , and,
➢ Value in use
Example 1 : The impairment decision

Carrying amount TZS. 10,000,000

Fair value less costs to sell TZS. 12,000,000
Value in use TZS. 13,000,000

No impairment because carrying amount < recoverable amount.

 Example 2 : The impairment decision

Carrying amount TZS. 55,000,000

Fair value less costs to sell TZS. 45,000,000
Value in use TZS. 43,000,000

Impairment = carrying amount less recoverable amount

= 55,000,000 – 45,000,000
= 10,000,000
 Example 3 : The impairment decision

Carrying amount TZS. 15,000,000

Fair value less costs to sell TZS. 12,000,000
Value in use TZS. 12,500,000

Impairment = carrying amount less recoverable amount

= 15,000,000 – 12,500,000
= 2,500,000
 Testing for Impairment

➢ Assess at each reporting date if any indication of

impairment exist.
➢ If an indication exists, estimate the recoverable amount of
the asset.
➢ Compare recoverable amount and carrying amount.
➢ If recoverable amount is higher than the carrying amount.
➢ No impairment loss.
➢ If recoverable amount is less than the carrying amount.
➢ Recognise impairment loss (the difference).
 Internal Indicators
❑Physical damage of the asset
❑Significant changes in the extent to which, or manner in
which, an asset is used or expected to be used that have
an adverse effect on the entity, have taken place during
the period or are expected to take place in the near future.
i.e.
➢The asset becoming idle,
➢Plans to discontinue or restructure the operation to which
as asset belongs, or
➢Plans to dispose of an asset before the previously
expected date.
 External Indicators
❖Change in technological,
❖Change in legal or government policy environment in
which the entity operates.
❖Market value of the asset has declined significantly during
the period.
❖Cessation of the demand or need for services provided by the
asset
 Estimate the recoverable amount of the asset.

❑If indicator(s) exist , estimate recoverable amount.

❑Recoverable amount is the higher of

✓ Fair Value less cost to sell, and
✓ Value in use
VALUE IN USE FOR A NON CASH
GENERATING ASSET
 Value in use of a non cash generating asset

❑For non cash generating assets

“Is the present value of the asset’s remaining
service potential”.
❑For cash generating assets
“Is the present value of the estimated future cash
flows expected to be derived from the continuing
use of an asset and from its disposal at the end of
its useful life”.
Approaches used
The present value of the remaining service potential of
the asset can be obtained through the following:-
❑ Depreciated replacement cost approach
❑ Restoration cost approach
❑ Service units approach

Selection of the approach depends on the:

❑Nature of impairment, and
❑Data available
Depreciated replacement cost approach:

❑The present value of the remaining service

potential of an asset is determined as the
depreciated replacement cost of the asset.

❑The replacement cost of an asset is the cost to

replace the asset’s gross service potential. This
cost is depreciated to reflect the asset in its
used condition.
 Depreciated replacement cost approach
Used when impairments identified from significant
long-term changes in:
the technological,
legal or government policy environment
Extent or manner of use
Decrease in demand on the services/product
provided by the asset,
 Illustration
In 1983, the Kinondoni District constructed a school at the cost of Tshs.250
million. The entity estimated the school would be used for 40 years. In 2003,
the enrolment declined from 1000 to 200 students as the result of population
shift caused by the bankruptcy of Urafiki Textile as the major employer in the
area.

The management decided to close the top two floors of the three-story
school building. Kinondoni District has no expectation that enrolments will
increase in the future such that the upper stories would be reopened. The
current replacement cost of the one-story school is estimated at Tshs.130
million.

Required: Determine the value in use and the impairment loss for the school.
 Illustration
Impairment Indicator:
Significant decline in the students enrolment, and is expected to remain at the
same level for the foreseeable future.

Calculations:
A. Acquisition cost, 1983 250,000,000
Accumulated depreciation, 2003 (a × 20 ÷ 40) 125,000,000
B. Carrying amount, 2003 125,000,000
C. Replacement cost 130,000,000
Accumulated depreciation (c × 20 ÷ 40) 65,000,000
D. Recoverable Service Amount 65,000,000
Impairment loss (B - D) 60,000,000
 Restoration cost approach:
❑This approach is usually used when impairment losses arise from
damage.

❑the present value of the remaining service potential of the asset

is determined by subtracting the estimated restoration cost of
the asset from the current cost of replacing the remaining
service potential of the asset before impairment.

❑The latter cost is usually determined as the depreciated

reproduction or replacement cost of the asset whichever is
lower.
 Illustration

In 2015, entity X under the Public Sector acquired a bus at the
cost of TZS. 200 M , help staff from a nearby town to commute
free of charge. Entity X estimated a useful life of 10 years for the
bus. In 2020, the bus sustained damage in a road accident
requiring TZS. 40 M to be restored to a usable condition. The
restoration will not affect the useful life of the asset. The cost of
a new bus to deliver a similar service is TZS. 250M in 2020.
 Illustration
Impairment Indicator:
the office bus has sustained physical damage due accident.

Calculations:
A. Acquisition cost, 2015 200,000,000
Accumulated depreciation, 2020 (200M × 5 ÷ 10) 100,000,000
B. Carrying amount, 2020 100,000,000

Replacement cost (of a new bus) 250,000,000

C. Accumulated depreciation (250M × 5 ÷ 10) 125,000,000
Depreciated replacement cost (undamaged) 125,000,000
Less: restoration cost 40,000,000
D. Recoverable Service Amount 85,000,000

Impairment loss (B - D) 15,000,000

 Illustration
In 1984, the City of Mwanza built an office building at a cost of
Tshs.500 million. The building was expected to provide service for 40
years. In 2003, after 19 years of use, fire caused severe structural
problems.
Due to safety reasons, the office building is closed, and structural
repairs costing Tshs.355 million are to be made to restore the office
building to an occupiable condition. The replacement cost of a
new office building is Tshs.1 billion.

Required: Determine the value in use and the impairment loss for
the office building.
 Illustration
Impairment Indicator:
the office building has sustained physical damage due to the fire.

Calculations:
A. Acquisition cost, 1984 500,000,000
Accumulated depreciation, 2003 (a × 19 ÷ 40) 237,500,000
B. Carrying amount, 2003 262,500,000
C. Replacement cost (of a new building) 1,000,000,000
D. Accumulated depreciation (c × 19 ÷ 40) 475,000,000
Depreciated replacement cost (undamaged) 525,000,000
Less: restoration cost 355,000,000
E. Recoverable Service Amount 170,000,000
Impairment loss (B - E) 92,500,000
 Illustration
In 2015, TARURA constructed 50 KMs tarmac roads in Michenzani District at a
cost of 50B. The estimated useful life is 20 years. In June 2020 due to heavy
rainfall this road faced severe structural problems, as a result this road was
closed.
Engineering estimate indicates that TZS. 12B will be required to repair this
road to usable condition. The current replacement cost of a new 1 KM
tarmac road was estimated to be 1.2B.

Required: Determine the value in use and impairment loss if any building.
Service units approach:
❑the present value of the remaining service potential of the
asset is determined by reducing the current cost of the
remaining service potential of the asset before impairment to
conform with the reduced number of service units expected
from the asset in its impaired state.

❑As in the restoration cost approach, the current cost of

replacing the remaining service potential of the asset before
impairment is usually determined as the depreciated
reproduction or replacement cost of the asset before
impairment, whichever is lower.
Service units approach:
Used when impairments identified from
significant long-term changes in:
the technological,
legal or government policy environment
Extent or manner of use
Demand,
 Illustration
In 1988, Missenyi District Council constructed a 20-story office building
for use by the Council at the cost of Tshs80 million. The building was
expected to have a useful life of 40 years.
In 2003, National Safety Regulations required that the top four stories
of high rise buildings should be left unoccupied for the foreseeable
future.
The building has a fair value less costs to sell of Tshs45 million in 2003
after regulations came into force. The current replacement cost of a
similar 20-story building is Tshs85 million.

Required: Determine the value in use and the impairment loss for the
office building.
 Illustration
Impairment Indicator:
The extent of use of the office building has changed from 20 floors to 16 floors as the result of
new National Safety Regulations, and is expected to remain at the same level for the
foreseeable future.

Calculations:
A. Acquisition cost, 1988 80,000,000
Accumulated depreciation, 2003 (a × 15 ÷ 40) 30,000,000
B. Carrying amount, 2003 50,000,000
C. Replacement cost (20-story building) 85,000,000
Accumulated depreciation (c × 15 ÷ 40) 31,875,000
D. Depreciated replacement cost before adjustment for remaining service unit 53,125,000
E. Value in Use of the building after the regulation came into force(d×16 ÷20) 42,500,000
F. Fair value less costs to sell of the building after regulation came into force 45,000,000
G. Recoverable service amount (higher of e and f) 45,000,000
Impairment loss (b - g) 5,000,000
 Recognition
❑ If, and only if, the recoverable amount of an asset is less than its
carrying amount, the carrying amount of the asset should be
reduced to its recoverable amount.
❑That reduction is an impairment loss.
❑ An impairment loss should be recognized immediately in surplus or
deficit.
❑ When the amount estimated for an impairment loss exceeds the
carrying amount of the asset to which it relates, an entity shall
recognize a liability if, and only if, that is required by another IPSAS.
❑ After the recognition of an impairment loss, the depreciation
(amortization) charge for the asset shall be adjusted in future
periods to allocate the asset’s revised carrying amount, less its
residual value (if any), on a systematic basis over its remaining
useful life.
 Recognition of impairment loss

❑The journal entry to account for impairment loss:

DR CR
Impairment loss (S&D) XXX

Asset (F/P) XXX

 Recognition
❑ Revenue X
❑ Employee benefits costs X
❑ Depreciation & amortization X

Treatment of Impairment loss ❑ Impairment loss X

❑ Other expenses X
❑ TOTAL expenses X
❑ Surplus X
 Impairment for revalued assets
❑For Revalued Assets (PPE and Intangibles ) the impairment loss
should be recognized in Revaluation Reserves – treated as
revaluation decrease to the extent that the loss doesn’t exceed the
amount of revaluation surplus for that class of asset .
When the impairment loss is greater than carrying amount of the
asset, the Carrying amount of the asset is reduced to ZERO, with
corresponding amount recognised in Statement of Financial
Performance – no recognition of liability.
Reversal of an impairment
Assessment

.
 Indications of a reversal

Internal sources External source

.
Significant long-term changes with a
increase in market favourable effect on the entity have
value of asset taken place during the period, or are
expected to take place in the near
future, in the extent to which, or
significant favourable manner in which, the asset is used or is
changes in technological, expected to be used.
market, economic or legal
environment A decision to resume construction of the
asset that was previously halted before it
A significant long-term increase was completed or in a usable condition
in the demand or need for the
services provided by the asset
evidence that performance of asset is
better than expected
 Reversing an Impairment Loss

❑ An impairment loss recognized in prior periods for an asset

shall be reversed if, and only if, there has been a change in
the estimates used to determine the asset’s recoverable
service amount since the last impairment loss was
recognized.
❑ If this is the case, the carrying amount of the asset shall be
increased to its recoverable service amount. That increase is
a reversal of an impairment loss.
 Reversing an Impairment Loss

Principle on reversing impairment loss.

 The increased carrying amount of an asset attributable to a reversal of an
impairment loss shall not exceed the carrying amount that would have been
determined (net of depreciation or amortization) if no impairment loss had
been recognized for the asset in prior periods.
 A reversal of an impairment loss for an asset shall be recognized
immediately in surplus or deficit.
 After a reversal of an impairment loss is recognized, the depreciation
(amortization) charge for the asset shall be adjusted in future periods
to allocate the asset’s revised carrying amount, less its residual value (if
any), on a systematic basis over its remaining useful life.
 Reversing an Impairment Loss
Illustration:
An entity acquired a machine with an estimated useful life of 10 years at a
cost of TZS 200,000. at the end of year 3 there was an indication that the
machine might be impaired.

The recoverable amount was estimated to be TZS 120,000 at that stage. 2

years later there was an indication that the impairment loss might have
reversed, and consequently the recoverable amount was re-estimated at TZS
105,000.

Required: Determine the amount of impairment loss that can be reversed and
its related journal entries.
 Reversing an Impairment Loss
Solution:
The CA of the machine amounted to TZS 140,000 (7/10 x 200,000) at the end of year 3. as the recoverable
amount is TZS 120,000, an impairment loss of TZS 20,000 (140,000 – 120,000) must be recognised.

The new CA of TZS 120,000 is then depreciated over the remaining useful life of 7 years, resulting in
depreciation of TZS 17,140 p.a.
At the end of year 5 the CA is thus TZS 85,720 (120,000 – 17,140 – 17,140). At that stage the recoverable
amount is estimated to be TZS 105,000, resulting in a potential reversal of an impairment loss of TZS
19,280 (105,000 – 85,720).

However, if the impairment loss had not been recognised at the end of year 3, the CA of the machine
would have been TZS 100,000 (200,000 x 5/10) at the end of year 5. the maximum reversal that may be
recognised is therefore TZS 14,280 (100,000 – 85,720).
Disclosure Requirements
 Disclosures
Criteria developed by the entity to distinguish non-cash-
generating assets from cash-generating assets.
Amount of impairment losses and reversals recognised in
surplus or deficit and line item in statement of financial
performance in which they are included.
Amount of impairment loss on revalued assets recognized
directly in revaluation Reserve during that period.
The amount of reversals of impairment loss on revalued
assets recognized directly in revaluation reserve during that
period.
 Disclosures:-
For each material impairment loss recognized or reversed during the period
❑The events and circumstances that led to the recognition or
reversal of the impairment loss
❑The amount of the impairment loss recognized or reversed
❑ The nature of the asset;
❑The segment to which the asset belongs, if the entity reports
segment information.
❑Whether the recoverable service amount of the asset is its fair
value less costs to sell or its value in use.
❑If the recoverable service amount is fair value less costs to sell,
the basis used to determine fair value less costs to sell.
❑If the recoverable service amount is value in use, the approach
used to determine value in use.
Disclosures:-
For aggregate of impairment losses and aggregate reversals
of impairment losses
The main classes of assets affected by impairment losses
The main classes of assets affected by reversals of
impairment losses); and
The main events and circumstances that led to the
recognition of these impairment losses and reversals of
impairment losses
 .

Impairment is a continuous process , therefore

Conclusion continuously check for external environment and
internal environment with regard to the operation of
the assets in question.
49 ASANTENI SANA!!—

: Reporting and Disclosures: 4/20/2022