ASLB 26 Impairment Cash
Accounting Standard for Local Bodies (ASLB) 26
Impairment of Cash-Generating Assets
Contents
Paragraphs
OBJECTIVE 1
SCOPE 2-12
DEFINITIONS 13-20
Cash-Generating Assets 14-18
Depreciation 19
Impairment 20
IDENTIFYING AN ASSET THAT MAY BE IMPAIRED 20A-30
MEASURING RECOVERABLE AMOUNT 31-70
“Fair Value less Costs to Sell” 38-42
Value in Use 43-70
Basis for Estimates of Future Cash Flows 46-51
Composition of Estimates of Future Cash Flows 52-66
Foreign Currency Future Cash Flows 67
Discount Rate 68-70
RECOGNISING AND MEASURING AN IMPAIRMENT LOSS 71-75
CASH-GENERATING UNITS AND GOODWILL 76-97
Identifying the Cash-Generating Unit to which an
Asset Belongs 77-84
Recoverable Amount and Carrying Amount of a Cash-
Generating Unit 85-90
Impairment Loss for a Cash-Generating Unit 91-97
Impairment testing cash-generating units with goodwill
and non-controlling interests 97A-97H
REVERSING AN IMPAIRMENT LOSS 98-111
Reversing an Impairment Loss for an Individual Asset 106-109
Compendium of Accounting Standards for Local Bodies (ASLBs)
Reversing an Impairment Loss for a Cash-Generating
Unit 110-111
Reversing an impairment loss for goodwill 111A-111B
Redesignation of Assets 112-113
DISCLOSURE 114-125
APPENDIX A: APPLICATION GUIDANCE
ILLUSTRATIVE DECISION TREE
IMPLEMENTATION GUIDANCE
APPENDIX 1 COMPARISON WITH IPSAS 26, „IMPAIRMENT OF CASH-
GENERATING ASSETS‟
APPENDIX 2 COMPARISON WITH AS 28, „IMPAIRMENT OF ASSETS‟
366
Accounting Standard for Local Bodies (ASLB) 26
Impairment of Cash-Generating Assets
(This Accounting Standard includes paragraphs set in bold italic type and
plain type, which have equal authority. Paragraphs in bold italic type indicate
the main principles. This Accounting Standard should be read in the context
of its objective and the “Preface to Accounting Standards for Local Bodies 1.)
The Accounting Standards for Local Bodies (ASLB) 26, „Impairment of Cash-
Generating Assets‟, issued by the Council of the Institute of the Chartered
Accountants of India, will be recommendatory in nature in the initial years for
use by the local bodies. This Standard will be mandatory for local bodies in a
State from the date specified in this regard by the State Government
concerned2.
The following is the text of the Accounting Standard for Local Bodies:
Objective
1. The objective of this Standard is to prescribe the procedures that an
entity applies to determine whether a cash-generating asset is
impaired, and to ensure that impairment losses are recognised. This
Standard also specifies when an entity should reverse an impairment
loss, and prescribes disclosures.
Scope
2. An entity that prepares and presents financial statements under
the accrual basis of accounting should apply this Standard in
accounting for the impairment of cash-generating assets, except
for:
(a) Inventories (see ASLB 12, „Inventories‟);
(b) Assets arising from construction contracts (see ASLB 11,
„Construction Contracts‟);
1 Attentionis specifically drawn to paragraph 4.2 of the „Preface to Accounting
Standards for Local Bodies‟, according to which Accounting Standards are intended
to apply only to items which are material.
2 In respect of compliance with the Accounting Standards for Local Bodies, reference
may be made to the paragraph 7.1 of the „Preface to the Accounting Standards for Local
Bodies‟.
Compendium of Accounting Standards for Local Bodies (ASLBs)
(c) Financial assets3;
(d) Investment property that is measured using the fair value
model (see ASLB 16, „Investment Property‟);
(e) [Deleted];
(f) [Refer to Appendix 1];
(g) Assets arising from employee benefits (see ASLB 39,
„Employee Benefits‟);
(h-i) [Deleted];
(j-k) [Refer to Appendix 1];
(l) [Deleted]; and
(m) Other cash-generating assets in respect of which
accounting requirements for impairment are included in
another Standard.
3. This Standard applies to all entities that are described as the
Local Bodies in the Preface to the Accounting Standards for
Local Bodies4.
4. [Deleted]
5. Entities that hold non-cash-generating assets as defined in paragraph
13 apply ASLB 21, „Impairment of Non-Cash-Generating Assets‟, to
such assets. Entities that hold cash-generating assets apply the
requirements of this Standard.
6-7. [Deleted]
8. This Standard does not apply to inventories, cash-generating assets
arising from construction contracts and assets related to employee
3 A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another entity;
(ii) to exchange financial assets or financial liabilities with another entity
under conditions that are potentially favourable to the entity.
4 Refer paragraph 1.3 of the „Preface to the Accounting Standards for Local Bodies‟.
368
Impairment of Cash-Generating Assets
benefits, because ASLBs applicable to these assets contain
requirements for recognising and measuring such assets.
9. This Standard does not apply to any financial assets.
10. This Standard does not require the application of an impairment test
to an investment property that is carried at fair value in accordance
with ASLB 16. This is because, under the fair value model in ASLB
16, an investment property is carried at fair value at the reporting
date, and any impairment will be taken into account in the valuation.
11. [Deleted]
12. Investments in:
(a) Controlled entities, as defined in ASLB 35, „Consolidated
Financial Statements‟;
(b) Associates, as defined in ASLB 36, „Investments in
Associates and Joint Ventures‟; and
(c) Joint arrangements, as defined in ASLB 37, „Joint
Arrangements‟5,
are financial assets. Where such investments are in the nature of
cash-generating assets, they are dealt with under this Standard.
Where these assets are in the nature of non-cash-generating assets,
they are dealt with under ASLB 21.
Definitions
13. The following terms are used in this Standard with the meanings
specified:
A cash-generating unit is the smallest identifiable group of
assets held with the primary objective of generating a
commercial return that generates cash inflows from continuing
use that are largely independent of the cash inflows from other
assets or groups of assets.
5 The Guidance with regard to consolidation and joint arrangements may be
obtained from other corresponding pronouncements as per the hierarchy prescribed
in paragraph 15 of the ASLB 3, „Accounting Policies, Changes in Accounting
Estimates, and Errors‟ till the time ASLBs 35 and 37 are not formulated.
369
Compendium of Accounting Standards for Local Bodies (ASLBs)
Impairment of cash-generating assets is a loss in the future
economic benefit of a cash generating asset over and above the
loss recognised through depreciation.
An impairment loss of cash-generating asset is the amount by
which the carrying amount of a cash-generating asset exceeds
its recoverable amount.
Recoverable amount is the higher of an asset's or a cash-
generating unit's “fair value less costs to sell” and its value in
use.
Value in use of a cash-generating asset 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.
Terms defined in other ASLBs are used in this Standard with the
same meaning as in those other Standards.
Cash-Generating Assets
14. Cash-generating assets are assets held with the primary objective of
generating a commercial return. An asset generates a commercial
return when it is deployed in a manner consistent with that adopted
by a profit-oriented entity. Holding an asset to generate a
"commercial return" indicates that an entity intends to (a) generate
positive cash inflows from the asset (or from the cash-generating unit
of which the asset is a part), and (b) earn a commercial return that
reflects the risk involved in holding the asset. An asset may be held
with the primary objective of generating a commercial return even
though it does not meet that objective during a particular reporting
period. Conversely, an asset may be a non-cash-generating asset
even though it may be breaking even or generating a commercial
return during a particular reporting period. Unless stated otherwise,
references to "an asset" or "assets" in the following paragraphs of this
Standard are references to "cash-generating asset(s)".
15. There are a number of circumstances in which local bodies may hold
some assets with the primary objective of generating a commercial
return, although the majority of their assets are not held for that
purpose. For example, a municipal hospital/dispensary may deploy a
370
Impairment of Cash-Generating Assets
building for fee-paying patients. Cash-generating assets of an entity
may operate independently of the non-cash-generating assets of the
entity. For example, the deeds office may earn land registration fees
independently from the department of land affairs.
16. In certain instances, an asset may generate cash flows although it is
primarily held for service delivery purposes. For example, a waste
disposal plant is operated to ensure the safe disposal of medical
waste generated by a hospital controlled by a Local Body, and, is
accordingly, a non-cash-generating asset, but the plant also treats a
small amount of medical waste generated by other private hospitals
on a commercial basis. The treatment of medical waste from the
private hospitals is incidental to the activities of the plant, and the
assets that generate cash flows cannot be distinguished from the
non-cash-generating assets.
17. In other instances, an asset may generate cash flows and also be
used for non-cash-generating purposes. For example, a public
hospital has ten wards, nine of which are used for fee-paying patients
on a commercial basis, and the other is used for non-fee-paying
patients. Patients from both wards jointly use other hospital facilities
(for example, operating facilities). The extent to which the asset is
held with the objective of providing a commercial return needs to be
considered to determine whether the entity should apply the
provisions of this Standard or ASLB 21. If, as in this example, the
non-cash-generating component is an insignificant component of the
arrangement as a whole, the entity applies this Standard, rather than
ASLB 21.
18. In some cases it may not be clear whether the primary objective of
holding an asset is to generate a commercial return. In such cases it
is necessary to evaluate the significance of the cash flows. It may be
difficult to determine whether the extent to which the asset generates
cash flows is so significant that this Standard is applicable, rather
than ASLB 21. Judgment is needed to determine which Standard to
apply. An entity develops criteria so that it can exercise that judgment
consistently in accordance with the definition of cash-generating
assets and non-cash-generating assets and with the related guidance
in paragraphs 14-17. Paragraph 114 requires an entity to disclose the
criteria used in making this judgment. However, given the overall
371
Compendium of Accounting Standards for Local Bodies (ASLBs)
objectives of most entities, the presumption is that assets are non-
cash-generating in these circumstances and, therefore, ASLB 21 will
apply. For example, a municipal school has started tuition classes for
students during summer vacation on commercial basis. However, the
primary objective of municipal school is to provide education service
on non-commercial basis. The commercial activities (tuition classes)
carried out by municipal school during summer vacation is
insignificant. In this case, the municipal school is a non-cash-
generating asset, and, therefore, ASLB 21 will apply.
18A. For the purposes of impairment, goodwill is considered a cash -
generating asset. Goodwill does not generate economic benefits
independently of other assets, and is assessed for impairment as part
of a group of assets. ASLB 21 deals with the assessment of individual
assets. Goodwill is only recognised where it gives rise to cash inflows
or reductions in an acquirer‟s net cash outflows. No goodwill is
recognised in respect of service potential that does not give rise to
related cash flows. The recoverable service amount used to assess
impairment in ASLB 21 includes service potential. Consequently, an
entity applies this Standard to determine whether to impair goodwill.
Depreciation
19. Depreciation and amortisation are the systematic allocation of the
depreciable amount of an asset over its useful life. In the case of an
intangible asset, the term "amortisation" is generally used instead of
"depreciation". Both terms have the same meaning.
Impairment
20. This Standard defines an "impairment" as 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. Impairment of a
cash-generating asset, therefore, reflects a decline in the future
economic benefits embodied in an asset to the entity that controls it.
For example, an entity may have a municipal parking lot that is
currently being used at 25 percent of capacity. It is held for
commercial purposes, and management has estimated that it
generates a commercial rate of return when usage is at 75 percent of
capacity and above. The decline in usage has not been accompanied
372
Impairment of Cash-Generating Assets
by a significant increase in parking charges. The asset is regarded as
impaired because its carrying amount exceeds its recoverable
amount.
Identifying an Asset that may be Impaired
20A. Paragraphs 21-30 specify when recoverable amount should be
determined. These requirements use the term „an asset‟ but apply
equally to an individual asset or a cash-generating unit. The
remainder of this Standard is structured as follows:
(a) Paragraphs 31-70 set out the requirements for measuring
recoverable amount. These requirements also use the term
„an asset‟ but apply equally to an individual asset and a cash-
generating unit.
(b) Paragraphs 71-97 set out the requirements for recognising
and measuring impairment losses. Recognition and
measurement of impairment losses for individual assets other
than goodwill are dealt with in paragraphs 71-75. Paragraphs
76-97 deal with the recognition and measurement of
impairment losses for cash-generating units and goodwill.
(c) Paragraphs 98-105 set out the requirements for reversing an
impairment loss recognised in prior periods for an asset or a
cash-generating unit. Again, these requirements use the term
„an asset‟ but apply equally to an individual asset or a cash-
generating unit. Additional requirements for an individual
asset are set out in paragraphs 106-109, for a cash-
generating unit in paragraphs 110-111, and for goodwill in
paragraphs 111A-111B.
(d) Paragraphs 112-113 set out the requirements for the
redesignation of an asset from a cash-generating asset or
from a non-cash generating asset to a cash-generating asset.
(e) Paragraphs 114-122A specify the information to be disclosed
about impairment losses and reversals of impairment losses
for assets and cash-generating units. Paragraphs 123-125
specify additional disclosure requirements for cash-generating
units to which goodwill have been allocated for impairment
testing purposes.
373
Compendium of Accounting Standards for Local Bodies (ASLBs)
21. An asset is impaired when its carrying amount exceeds its
recoverable amount. Paragraphs 25-27 describe some indications
that an impairment loss may have occurred. If any of those
indications is present, an entity is required to make a formal estimate
of recoverable amount. Except for the circumstances described in
paragraph 23, this Standard does not require an entity to make a
formal estimate of recoverable amount if no indication of an
impairment loss is present.
22. An entity should assess at each reporting date whether there is
any indication that an asset may be impaired. If any such
indication exists, the entity should estimate the recoverable
amount of the asset.
23. Irrespective of whether there is any indication of impairment, an
entity should also:
(a) Test an intangible asset that is not yet available for use
for impairment annually by comparing its carrying
amount with its recoverable amount. This impairment test
may be performed at any time during the reporting period,
provided it is performed at the same time every year.
Different intangible assets may be tested for impairment
at different times. However, if such an intangible asset
was initially recognised during the current reporting
period, that intangible asset should be tested for
impairment before the end of the current reporting period.
(b) Test goodwill acquired in an acquisition for impairment
annually in accordance with paragraphs 90A-90O.
24. The ability of an intangible asset to generate sufficient future
economic benefits or service potential to recover its carrying amount
is usually subject to greater uncertainty before the asset is available
for use than after it is available for use. Therefore, this Standard
requires an entity to test for impairment, at least annually, the
carrying amount of an intangible asset that is not yet available for
use.
25. In assessing whether there is any indication that an asset may
be impaired, an entity should consider, as a minimum, the
following indications:
374
Impairment of Cash-Generating Assets
External sources of information
(a) During the period, an asset's market value has declined
significantly more than would be expected as a result of
the passage of time or normal use;
(b) Significant changes with an adverse effect on the entity
have taken place during the period, or will take place in
the near future, in the technological, market, economic, or
legal environment in which the entity operates, or in the
market to which an asset is dedicated;
(c) Market interest rates or other market rates of return on
investments have increased during the period, and those
increases are likely to affect the discount rate used in
calculating an asset's value in use and decrease the
asset's recoverable amount materially;
Internal sources of information
(d) Evidence is available of obsolescence or physical
damage of an asset;
(e) Significant changes with an adverse effect on the entity
have taken place during the period, or are expected to
take place in the near future, in the extent to which, or the
manner in which, an asset is used or is expected to be
used. These changes include the asset becoming idle,
plans to discontinue or restructure the operation to which
an asset belongs, and plans to dispose of an asset before
the previously expected date;
(e) A decision to halt the construction of the asset before it
is complete or in a usable condition; and
(f) Evidence is available from internal reporting that
indicates that the economic performance of an asset is,
or will be, worse than expected.
26. The list in paragraph 25 is not exhaustive. An entity may identify
other indications that an asset may be impaired, and these would
also require the entity to determine the asset's recoverable amount.
375
Compendium of Accounting Standards for Local Bodies (ASLBs)
27. Evidence from internal reporting that indicates that an asset may be
impaired includes the existence of:
(a) Cash flows for acquiring the asset, or subsequent cash needs
for operating or maintaining it, that are significantly higher
than those originally budgeted;
(b) Actual net cash flows or surplus or deficit flowing from the
asset that are significantly worse than those budgeted;
(c) A significant decline in budgeted net cash flows or surplus, or
a significant increase in budgeted loss, flowing from the asset;
or
(d) Deficits or net cash outflows for the asset, when current
period amounts are aggregated with budgeted amounts for
the future.
28. As indicated in paragraph 23, this Standard requires an intangible
asset that is not yet available for use to be tested for impairment, at
least annually. Apart from when the requirements in paragraph 23
apply, the concept of materiality applies in identifying whether the
recoverable amount of an asset needs to be estimated. For example,
if previous calculations show that an asset's recoverable amount is
significantly greater than its carrying amount, the entity need not re-
estimate the asset's recoverable amount if no events have occurred
that would eliminate that difference. Similarly, previous analysis may
show that an asset's recoverable amount is not sensitive to one (or
more) of the indications listed in paragraph 25.
29. As an illustration of paragraph 28, if market interest rates or other
market rates of return on investments have increased during the
period, an entity is not required to make a formal estimate of an
asset's recoverable amount in the following cases:
(a) If the discount rate used in calculating the asset's value in use
is unlikely to be affected by the increase in these market
rates. For example, increases in short-term interest rates may
not have a material effect on the discount rate used for an
asset that has a long remaining useful life.
(b) If the discount rate used in calculating the asset's value in
use is likely to be affected by the increase in these market
376
Impairment of Cash-Generating Assets
rates, but previous sensitivity analysis of recoverable amount
shows that:
(i) It is unlikely that there will be a material decrease in
recoverable amount because future cash flows are
also likely to increase (for example, in some cases, an
entity may be able to demonstrate that it adjusts its
revenues (mainly exchange revenues) to compensate
for any increase in market rates); or
(ii) The decrease in recoverable amount is unlikely to
result in a material impairment loss.
30. If there is an indication that an asset may be impaired, this may
indicate that the remaining useful life, the depreciation (amorti sation)
method, or the residual value for the asset needs to be reviewed and
adjusted in accordance with the Standard applicable to the asset,
even if no impairment loss is recognised for the asset.
Measuring Recoverable Amount
31. This Standard defines "recoverable amount" as the higher of an
asset's “fair value less costs to sell” and its value in use. Paragraphs
32-70 set out the requirements for measuring recoverable amount.
These requirements use the term "an asset" but apply equally to an
individual asset or a cash-generating unit.
32. It is not always necessary to determine both an asset's “fair value
less costs to sell” and its value in use. If either of these amounts
exceeds the asset's carrying amount, the asset is not impaired and it
is not necessary to estimate the other amount.
33. It may be possible to determine “fair value less costs to sell”, even if
an asset is not traded in an active market. However, sometimes it will
not be possible to determine “fair value less costs to sell” because
there is no basis for making a reliable 6 estimate of the amount
obtainable from the sale of the asset in an arm's length transaction
6 Information that is reliable is free from material error and bias, and can be
depended on by users to faithfully represent that it purports to represent or could
reasonably be expected to represent.
377
Compendium of Accounting Standards for Local Bodies (ASLBs)
between knowledgeable and willing parties. In this case, the entity
may use the asset's value in use as its recoverable amount.
34. If there is no reason to believe that an asset's value in use materially
exceeds its “fair value less costs to sell”, the asset's “fair value less
costs to sell” may be used as its recoverable amount. This will often
be the case for an asset that is held for disposal. This is because the
value in use of an asset held for disposal will consist mainly of the net
disposal proceeds, as the future cash flows from continuing use of
the asset until its disposal are likely to be negligible.
35. Recoverable amount is determined for an individual asset, unless the
asset does not generate cash inflows that are largely independent of
those from other assets or groups of assets. If this is the case,
recoverable amount is determined for the cash-generating unit to
which the asset belongs (see paragraphs 85-90), unless either:
(a) The asset's “fair value less costs to sell” is higher than its
carrying amount; or
(b) The asset is a part of a cash-generating unit but is capable of
generating cash flows individually, in which case the asset's
value in use can be estimated to be close to its “fair value less
costs to sell” and the asset's “fair value less costs to sell” can
be determined.
36. In some cases, estimates, averages and computational shortcuts may
provide reasonable approximations of the detailed computations for
determining fair value less costs to sell or value in use.
37. [Refer to Appendix 1]
Fair Value less Costs to Sell
38. The best evidence of an asset's “fair value less costs to sell” is the
price in a binding sale agreement in an arm's length transaction,
adjusted for incremental costs that would be directly attributable to
the disposal of the asset.
39. If there is no binding sale agreement but an asset is traded in an
active market, “fair value less costs to sell” is the asset's market price
less the costs of disposal. The appropriate market price is usually the
current bid price. When current bid prices are unavailable, the price
378
Impairment of Cash-Generating Assets
of the most recent transaction may provide a basis from which to
estimate “fair value less costs to sell”, provided that there has not
been a significant change in economic circumstances between the
transaction date and the date as at which the estimate is made.
40. If there is no binding sale agreement or active market for an asset,
“fair value less costs to sell” is based on the best information
available that reflects the amount that an entity could obtain, at the
reporting date, from the disposal of the asset in an arm's length
transaction between knowledgeable, willing parties, after deducting
the costs of disposal. In determining this amount, an entity considers
the outcome of recent transactions for similar assets within the same
industry. “Fair value less costs to sell” does not reflect a forced sale.
41. Costs of disposal, other than those that have been recognised as
liabilities, are deducted in determining “fair value less costs to sell”.
Examples of such costs are legal costs, stamp duty and similar
transaction taxes, costs of removing the asset, and direct incremental
costs to bring an asset into condition for its sale. However,
termination benefits and costs associated with reducing or
reorganising an operation following the disposal of an asset are not
direct incremental costs to dispose of the asset.
42. Sometimes, the disposal of an asset would require the buyer to
assume a liability, and only a single “fair value less costs to sell” is
available for both the asset and the liability. Paragraph 89 explains
how to deal with such cases.
Value in Use
43. The following elements should be reflected in the calculation of
an asset's value in use:
(a) An estimate of the future cash flows the entity expects to
derive from the asset;
(b) Expectations about possible variations in the amount or
timing of those future cash flows;
(c) The time value of money, represented by the current
market risk free rate of interest;
379
Compendium of Accounting Standards for Local Bodies (ASLBs)
(d) The price for bearing the uncertainty inherent in the
asset; and
(e) Other factors, such as illiquidity, that market participants
would reflect in pricing the future cash flows the entity
expects to derive from the asset.
44. Estimating the value in use of an asset involves the following steps:
(a) Estimating the future cash inflows and outflows to be derived
from continuing use of the asset and from its ultimate
disposal; and
(b) Applying the appropriate discount rate to those future cash
flows.
45. The elements identified in paragraph 43(b), (d) and (e) can be
reflected either as adjustments to the future cash flows or as
adjustments to the discount rate. Whichever approach an entity
adopts to reflect expectations about possible variations in the amount
or timing of future cash flows, the result should be to reflect the
expected present value of the future cash flows, i.e., the weighted
average of all possible outcomes. The Application Guidance provides
additional guidance on the use of present value techniques in
measuring an asset's value in use.
Basis for Estimates of Future Cash Flows
46. In measuring value in use, an entity should:
(a) Base cash flow projections on reasonable and
supportable assumptions that represent management's
best estimate of the range of economic conditions that
will exist over the remaining useful life of the asset.
Greater weight should be given to external evidence;
(b) Base cash flow projections on the most recent financial
budgets/forecasts approved by management, but should
exclude any estimated future cash inflows or outflows
expected to arise from future restructurings or from
improving or enhancing the asset's performance.
Projections based on these budgets/ forecasts should
380
Impairment of Cash-Generating Assets
cover a maximum period of five years, unless a longer
period can be justified; and
(c) Estimate cash flow projections beyond the period
covered by the most recent budgets/forecasts by
extrapolating the projections based on the
budgets/forecasts using a steady or declining growth rate
for subsequent years, unless an increasing rate can be
justified. This growth rate should not exceed the long-
term average growth rate for the products, industries, or
country or countries in which the entity operates, or for
the market in which the asset is used, unless a higher
rate can be justified.
47. Management assesses the reasonableness of the assumptions on
which its current cash flow projections are based by examining the
causes of differences between past cash flow projections and actual
cash flows. Management should ensure that the assumptions on
which its current cash flow projections are based are consistent with
past actual outcomes, provided that the effects of subsequent events
or circumstances that did not exist when those actual cash flows were
generated make this appropriate.
48. Detailed, explicit, and reliable financial budgets/forecasts of future
cash flows for periods longer than five years are generally not
available. For this reason, management's estimates of future cash
flows are based on the most recent budgets/forecasts for a maximum
of five years. Management may use cash flow projections based on
financial budgets/forecasts over a period longer than five years if it is
confident that these projections are reliable, and it can demonstrate
its ability, based on past experience, to forecast cash flows
accurately over that longer period.
49. Cash flow projections until the end of an asset's useful life are
estimated by extrapolating the cash flow projections based on the
financial budgets/forecasts, using a growth rate for subsequent years.
This rate is steady or declining, unless an increase in the rate
matches objective information about patterns over a product or
industry lifecycle. If appropriate, the growth rate is zero or negative.
50. [Refer to Appendix 1]
381
Compendium of Accounting Standards for Local Bodies (ASLBs)
51. In using information from financial budgets/forecasts, an entity
considers whether the information reflects reasonable and
supportable assumptions and represents management's best
estimate of the set of economic conditions that will exist over the
remaining useful life of the asset.
Composition of Estimates of Future Cash Flows
52. Estimates of future cash flows should include:
(a) Projections of cash inflows from the continuing use of the
asset;
(b) Projections of cash outflows that are necessarily incurred
to generate the cash inflows from continuing use of the
asset (including cash outflows to prepare the asset for
use) and can be directly attributed, or allocated on a
reasonable and consistent basis, to the asset; and
(c) Net cash flows, if any, to be received (or paid) for the
disposal of the asset at the end of its useful life.
53. Estimates of future cash flows and the discount rate reflect consistent
assumptions about price increases attributable to general inflation.
Therefore, if the discount rate includes the effect of price increases
attributable to general inflation, future cash flows are estimated in
nominal terms. If the discount rate excludes the effect of price
increases attributable to general inflation, future cash flows are
estimated in real terms (but include future specific price increases or
decreases).
54. Projections of cash outflows include those for the day-to-day
servicing of the asset as well as future overheads that can be
attributed directly, or allocated on a reasonable and consistent basis,
to the use of the asset.
55. When the carrying amount of an asset does not yet include all the
cash outflows to be incurred before it is ready for use or sale, the
estimate of future cash outflows includes an estimate of any further
cash outflow that is expected to be incurred before the asset is ready
for use or sale. For example, this is the case for a building under
construction or for a development project that is not yet completed.
382
Impairment of Cash-Generating Assets
56. To avoid double-counting, estimates of future cash flows do not
include:
(a) Cash inflows from assets that generate cash inflows that are
largely independent of the cash inflows from the asset under
review (for example, financial assets such as receivables);
and
(b) Cash outflows that relate to obligations that have been
recognised as liabilities (for example, payables, pensions, or
provisions).
57. Future cash flows should be estimated for the asset in its
current condition7. Estimates of future cash flows should not
include estimated future cash inflows or outflows that are
expected to arise from:
(a) A future restructuring to which an entity is not yet
committed; or
(b) Improving or enhancing the asset's performance.
58. Because future cash flows are estimated for the asset in its current
condition, value in use does not reflect:
(a) Future cash outflows or related cost savings (for example,
reductions in staff costs) or benefits that are expected to arise
from a future restructuring to which an entity is not yet
committed; or
(b) Future cash outflows that will improve or enhance the asset's
performance or the related cash inflows that are expected to
arise from such outflows.
59. A restructuring is a program that is (a) planned and controlled by
management, and (b) materially changes either the scope of the
entity's activities or the manner in which those activities are carried
out. ASLB 19, „Provisions, Contingent Liabilities and Contingent
Assets‟, contains guidance clarifying when an entity is committed to a
restructuring.
7 The term „asset in its current condition‟ encompasses the usual maintenance or
servicing of asset that is done in the normal course which is incidental to its smooth
running/ operation.
383
Compendium of Accounting Standards for Local Bodies (ASLBs)
60. When an entity becomes committed to a restructuring, some assets
are likely to be affected by this restructuring. Once the entity is
committed to the restructuring:
(a) Its estimates of future cash inflows and cash outflows for the
purpose of determining value in use reflect the cost savings
and other benefits from the restructuring (based on the most
recent financial budgets/forecasts approved by management);
and
(b) Its estimates of future cash outflows for the restructuring are
included in a restructuring provision in accordance with ASLB
19.
61. Until an entity incurs cash outflows that improve or enhance the
asset's performance, estimates of future cash flows do not include
the estimated future cash inflows that are expected to arise from the
increase in economic benefits or service potential associated with the
expected cash outflow.
62. Estimates of future cash flows include future cash outflows necessary
to maintain the level of economic benefits or service potential
expected to arise from the asset in its current condition. When a unit
consists of assets with different estimated useful lives, all of which
are essential to the ongoing operation of the unit, the replacement of
assets with shorter lives is considered to be part of the day-to-day
servicing of the unit when estimating the future cash flows associated
with the unit. Similarly, when a single asset consists of components
with different estimated useful lives, the replacement of components
with shorter lives is considered to be part of the day-to-day servicing
of the asset when estimating the future cash flows generated by the
asset.
63. Estimates of future cash flows should not include:
(a) Cash inflows or outflows from financing activities; or
(b) Income tax payments 8.
64. Estimated future cash flows reflect assumptions that are consistent
with the way the discount rate is determined. Otherwise, the effect of
8 Wherever applicable.
384
Impairment of Cash-Generating Assets
some assumptions will be counted twice or ignored. Because the time
value of money is considered by discounting the estimated future
cash flows, these cash flows exclude cash inflows or outflows from
financing activities. Similarly, since the discount rate is determined on
a pre-tax basis, future cash flows are also determined on a pre-tax
basis.
65. The estimate of net cash flows to be received (or paid) for the
disposal of an asset at the end of its useful life should be the
amount that an entity expects to obtain from the disposal of the
asset in an arm's length transaction between knowledgeable,
willing parties, after deducting the estimated costs of disposal.
66. The estimate of net cash flows to be received (or paid) for the
disposal of an asset at the end of its useful life is determined in a
similar way to an asset's “fair value less costs to sell”, except that, in
estimating those net cash flows:
(a) An entity uses prices prevailing at the date of the estimate for
similar assets that have reached the end of their useful life
and have operated under conditions similar to those in which
the asset will be used; and
(b) The entity adjusts those prices for the effect of both future
price increases due to general inflation and specific future
price increases or decreases. However, if estimates of future
cash flows from the asset's continuing use and the discount
rate exclude the effect of general inflation, the entity also
excludes this effect from the estimate of net cash flows on
disposal.
Foreign Currency Future Cash Flows
67. Future cash flows are estimated in the currency in which they will be
generated, and then discounted using a discount rate appropriate for
that currency. An entity translates the present value using the spot
exchange rate at the date of the value in use calculation.
Discount Rate
68. The discount rate (rates) should be a pre-tax rate (rates) that
reflect(s) current market assessments of:
385
Compendium of Accounting Standards for Local Bodies (ASLBs)
(a) The time value of money, represented by the current risk-
free rate of interest; and
(b) The risks specific to the asset for which the future cash
flow estimates have not been adjusted.
69. A rate that reflects current market assessments of the time value of
money and the risks specific to the asset is the return that investors
would require if they were to choose an investment that would
generate cash flows of amounts, timing, and risk profile equivalent to
those that the entity expects to derive from the asset. This rate is
estimated from the rate implicit in current market transactions for
similar assets. However, the discount rate(s) used to measure an
asset's value in use should not reflect risks for which the future cash
flow estimates have been adjusted. Otherwise, the effect of some
assumptions will be double-counted.
70. When an asset-specific rate is not directly available from the market,
an entity uses surrogates to estimate the discount rate. The
Application Guidance provides additional guidance on estimating the
discount rate in such circumstances.
Recognising and Measuring an Impairment Loss
71. Paragraphs 72-75 set out the requirements for recognising and
measuring impairment losses for an individual asset other than
goodwill. The recognition and measurement of impairment losses for
cash-generating units and goodwill are dealt with in paragraphs 76-
97H.
72. 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.
73. An impairment loss should be recognised immediately in surplus
or deficit, unless the asset is carried at revalued amount in
accordance with another standard (for example, in accordance
with the revaluation model in ASLB 17 and ASLB 31). Any
impairment loss of a revalued asset should be treated as a
revaluation decrease in accordance with that other Standard.
386
Impairment of Cash-Generating Assets
73A. An impairment loss on a non-revalued asset is recognised in surplus
or deficit. However, an impairment loss on a revalued asset is
recognised in revaluation surplus to the extent that the impairment
loss does not exceed the amount in the revaluation surplus for that
class of assets. Such an impairment loss on a revalued asset reduces
the revaluation surplus for that class of assets.
74. When the amount estimated for an impairment loss is greater
than the carrying amount of the asset to which it relates, an
entity should recognise a liability if, and only if, that is required
by another Standard.
75. After the recognition of an impairment loss, the depreciation
(amortisation) charge for the asset should 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.
Cash-Generating Units and Goodwill
76. Paragraphs 77-97H set out the requirements for identifying the cash-
generating unit to which an asset belongs and determining the
carrying amount of, and recognising impairment losses for, cash-
generating units and goodwill.
Identifying the Cash-Generating Unit to which an Asset
Belongs
77. If there is any indication that an asset may be impaired, the
recoverable amount should be estimated for the individual asset.
If it is not possible to estimate the recoverable amount of the
individual asset, an entity should determine the recoverable
amount of the cash-generating unit to which the asset belongs
(the asset's cash-generating unit).
78. The recoverable amount of an individual asset cannot be determined
if
(a) The asset's value in use cannot be estimated to be close to its
“fair value less costs to sell” (for example, when the future
cash flows from continuing use of the asset cannot be
estimated to be negligible); and
387
Compendium of Accounting Standards for Local Bodies (ASLBs)
(b) The asset does not generate cash inflows that are largely
independent of those from other assets and is not capable of
generating cash flows individually.
In such cases, value in use and, therefore, recoverable amount can
be determined only for the asset's cash-generating unit.
79. As defined in paragraph 13, an asset's cash-generating unit is the
smallest group of assets that (a) includes the asset, and (b)
generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets. Identification of an
asset's cash-generating unit involves judgment. If recoverable
amount cannot be determined for an individual asset, an entity
identifies the lowest aggregation of assets that generate largely
independent cash inflows.
80. Cash inflows are inflows of cash and cash equivalents received from
parties external to the entity. In identifying whether cash inflows from
an asset (or group of assets) are largely independent of the cash
inflows from other assets (or groups of assets), an entity considers
various factors, including how management (a) monitors the entity's
operations (such as by service lines, individual locations, districts, or
regional areas), or (b) makes decisions about continuing or disposing
of the entity's assets and operations. The Implementation Guidance
gives an example of the identification of a cash-generating unit.
81. If an active market exists for the output produced by an asset or
group of assets, that asset or group of assets should be
identified as a cash-generating unit, even if some or all of the
output is used internally. If the cash inflows generated by any
asset or cash-generating unit are affected by internal transfer
pricing, an entity should use management's best estimate of
future price(s) that could be achieved in arm's length
transactions in estimating:
(a) The future cash inflows used to determine the asset's or
cash generating unit's value in use; and
(b) The future cash outflows used to determine the value in
use of any other assets or cash-generating units that are
affected by the internal transfer pricing.
388
Impairment of Cash-Generating Assets
82. Even if part or all of the output produced by an asset or a group of
assets is used by other units of the entity, this asset or group of
assets forms a separate cash-generating unit if the entity could sell
the output on an active market. This is because the asset or group of
assets could generate cash inflows that would be largely independent
of the cash inflows from other assets or groups of assets. In using
information based on financial budgets/forecasts that relates to such
a cash-generating unit, or to any other asset or cash-generating unit
affected by internal transfer pricing, an entity adjusts this information
if internal transfer prices do not reflect management's best estimate
of future prices that could be achieved in arm's length transactions.
83. Cash-generating units should be identified consistently from
period to period for the same asset or types of assets, unless a
change is justified.
84. If an entity determines that an asset belongs to a cash-generating
unit different from that in previous periods, or that the types of assets
aggregated for the asset's cash-generating unit have changed,
paragraph 120 requires disclosures about the cash-generating unit if
an impairment loss is recognised or reversed for the cash-generating
unit.
Recoverable Amount and Carrying Amount of a Cash-
Generating Unit
85. The recoverable amount of a cash-generating unit is the higher of the
cash generating unit's “fair value less costs to sell” and its value in
use. For the purpose of determining the recoverable amount of a
cash-generating unit, any reference in paragraphs 31-70 to an asset
is read as a reference to a cash-generating unit.
86. The carrying amount of a cash-generating unit should be
determined on a basis consistent with the way the recoverable
amount of the cash-generating unit is determined.
87. The carrying amount of a cash-generating unit:
(a) Includes the carrying amount of only those assets that can be
attributed directly, or allocated on a reasonable and
consistent basis, to the cash-generating unit and will generate
389
Compendium of Accounting Standards for Local Bodies (ASLBs)
the future cash inflows used in determining the cash-
generating unit's value in use; and
(b) Does not include the carrying amount of any recognised
liability, unless the recoverable amount of the cash-generating
unit cannot be determined without consideration of this
liability.
This is because “fair value less costs to sell” and value in use of a
cash generating unit are determined excluding cash flows that relate
to assets that are not part of the cash-generating unit and liabilities
that have been recognised (see paragraphs 41 and 56).
88. When assets are grouped for recoverability assessments, it is
important to include in the cash-generating unit all assets that
generate, or are used to generate, the relevant stream of cash
inflows. Otherwise, the cash-generating unit may appear to be fully
recoverable when in fact an impairment loss has occurred. The
Illustrated Decision Tree provides a flow diagram illustrating the
treatment of individual assets that are part of cash-generating units.
In some cases, although some assets contribute to the estimated
future cash flows of a cash-generating unit, they cannot be allocated
to the cash-generating unit on a reasonable and consistent basis.
This might be the case for goodwill. Paragraphs 90A-90O explain
how to deal with these assets in testing a cash-generating unit for
impairment.
89. It may be necessary to consider some recognised liabilities to
determine the recoverable amount of a cash-generating unit. This
may occur if the disposal of a cash-generating unit would require the
buyer to assume the liability. In this case, the “fair value less costs to
sell” (or the estimated cash flow from ultimate disposal) of the cash -
generating unit is the estimated selling price for the assets of the
cash-generating unit and the liability together, less the costs of
disposal. To perform a meaningful comparison between the carrying
amount of the cash-generating unit and its recoverable amount, the
carrying amount of the liability is deducted in determining both the
cash-generating unit's value in use and its carrying amount.
90. For practical reasons, the recoverable amount of a cash-generating
unit is sometimes determined after consideration of (a) assets that
390
Impairment of Cash-Generating Assets
are not part of the cash-generating unit (for example, receivables or
other financial assets), or (b) liabilities that have been recognised (for
example, payables, pensions and other provisions). In such cases,
the carrying amount of the cash-generating unit is increased by the
carrying amount of those assets and decreased by the carrying
amount of those liabilities.
Goodwill9
Allocating goodwill to cash-generating units
90A. For the purpose of impairment testing, goodwill acquired in an
acquisition should, from the acquisition date, be allocated to
each of the acquirer‟s cash-generating units, or groups of cash-
generating units, that is expected to benefit from the synergies
of the combination, irrespective of whether other assets or
liabilities of the acquired operation are assigned to those units
or groups of units. Where goodwill is acquired in an acquisition
of a non-cash-generating operation that results in a reduction in
the net cash outflow of the acquirer, the acquirer should be
considered as the cash-generating unit. Except where goodwill
relates to the acquisition of a non-cash-generating operation,
each unit or group of units to which the goodwill is so allocated
should:
(a) Represent the lowest level within the entity at which the
goodwill is monitored for internal management purposes;
and
(b) Not be larger than a segment as defined by paragraph 9
of ASLB 18, „Segment Reporting‟.
90B. Goodwill recognised in an acquisition is an asset representing the
future economic benefits arising from other assets acquired in an
acquisition that are individually identified and separately recognised.
Goodwill does not generate cash flows, or reductions in net cash
outflows, independently of other assets or group of assets, and often
contributes to the cash flows of multiple cash-generating units.
Goodwill sometimes cannot be allocated on a non-arbitrary basis to
9 This concept may not be relevant for local bodies in India in current scenario.
However, the same may be relevant in future, hence retained here.
391
Compendium of Accounting Standards for Local Bodies (ASLBs)
individual cash-generating units, but only to groups of cash-
generating units. As a result, the lowest level within the entity at
which the goodwill is monitored for internal management purposes
sometimes comprises a number of cash-generating units to which the
goodwill relates, but to which it cannot be allocated. References in
paragraphs 90D–90O and 97A–97H to a cash-generating unit to
which goodwill is allocated should be read as references also to a
group of cash-generating units to which goodwill is allocated. Where
goodwill is acquired in an acquisition of a non-cash-generating
operation that results in a reduction in the net cash outflows of the
acquirer, references in paragraphs 90D–90O and 97A–97H to a cash-
generating unit to which goodwill is allocated should be read as
references also to the acquirer.
90C. Applying the requirements in paragraph 90A results in goodwill being
tested for impairment at a level that reflects the way an entity
manages its operations and with which the goodwill would naturally
be associated. Therefore, the development of additional reporting
systems is typically not necessary.
90D. A cash-generating unit to which goodwill is allocated for the purpose
of impairment testing may not coincide with the level at which
goodwill is allocated in accordance with ASLB 4, „The Effects of
Changes in Foreign Exchange Rates‟, for the purpose of measuring
foreign currency gains and losses. For example, if an entity is
required by ASLB 4 to allocate goodwill to relatively low levels for the
purpose of measuring foreign currency gains and losses, it is not
required to test the goodwill for impairment at that same level unless
it also monitors the goodwill at that level for internal management
purposes.
90E. If the initial allocation of goodwill acquired in an acquisition
cannot be completed before the end of the annual period in
which the acquisition is effected, that initial allocation should be
completed before the end of the first annual period beginning
after the acquisition date.
90F. In accordance with ASLB 40, „Entity Combinations 10‟, if the initial
accounting for an acquisition can be determined only provisionally by
10 This ASLB is yet to be formulated.
392
Impairment of Cash-Generating Assets
the end of the period in which the combination is effected, the
acquirer:
(a) Accounts for the acquisition using those provisional values;
and
(b) Recognises any adjustments to those provisional values as a
result of completing the initial accounting within the
measurement period, which will not exceed twelve months
from the acquisition date.
In such circumstances, it might also not be possible to complete the
initial allocation of the goodwill recognised in the acquisition before
the end of the annual period in which the combination is effected.
When this is the case, the entity discloses the information required by
paragraph 122A.
90G. If goodwill has been allocated to a cash-generating unit and the
entity disposes of an operation within that unit, the goodwill
associated with the operation disposed of should be:
(a) Included in the carrying amount of the operation when
determining the gain or loss on disposal; and
(b) Measured on the basis of the relative values of the
operation disposed of and the portion of the cash-
generating unit retained, unless the entity can
demonstrate that some other method better reflects the
goodwill associated with the operation disposed off.
90H. If an entity reorganises its reporting structure in a way that
changes the composition of one or more cash-generating units
to which goodwill has been allocated, the goodwill should be
reallocated to the units affected. This reallocation should be
performed using a relative value approach similar to that used
when an entity disposes of an operation within a cash-
generating unit, unless the entity can demonstrate that some
other method better reflects the goodwill associated with the
reorganised units.
393
Compendium of Accounting Standards for Local Bodies (ASLBs)
Testing cash-generating units with goodwill for impairment
90I. When, as described in paragraph 90B, goodwill relates to a cash-
generating unit but has not been allocated to that unit, the unit
should be tested for impairment, whenever there is an indication
that the unit may be impaired, by comparing the unit‟s carrying
amount, excluding any goodwill, with its recoverable amount.
Any impairment loss should be recognised in accordance with
paragraph 91.
90J. If a cash-generating unit described in paragraph 90I includes in its
carrying amount an intangible asset that is not yet available for use
and that asset can be tested for impairment only as part of the cash -
generating unit, paragraph 23 requires the unit also to be tested for
impairment annually.
90K. A cash-generating unit to which goodwill has been allocated
should be tested for impairment annually, and whenever there is
an indication that the unit may be impaired, by comparing the
carrying amount of the unit, including the goodwill, with the
recoverable amount of the unit. If the recoverable amount of the
unit exceeds the carrying amount of the unit, the unit and the
goodwill allocated to that unit should be regarded as not
impaired. If the carrying amount of the unit exceeds the
recoverable amount of the unit, the entity should recognise the
impairment loss in accordance with paragraph 91.
Timing of impairment tests
90L. The annual impairment test for a cash-generating unit to which
goodwill has been allocated may be performed at any time
during an annual period, provided the test is performed at the
same time every year. Different cash-generating units may be
tested for impairment at different times. However, if some or all
of the goodwill allocated to a cash-generating unit was acquired
in an acquisition during the current annual period, that unit
should be tested for impairment before the end of the current
annual period.
90M. If the assets constituting the cash-generating unit to which
goodwill has been allocated are tested for impairment at the
same time as the unit containing the goodwill, they should be
394
Impairment of Cash-Generating Assets
tested for impairment before the unit containing the goodwill.
Similarly, if the cash-generating units constituting a group of
cash-generating units to which goodwill has been allocated are
tested for impairment at the same time as the group of units
containing the goodwill, the individual units should be tested for
impairment before the group of units containing the goodwill.
90N. At the time of impairment testing, a cash-generating unit to which
goodwill has been allocated, there may be an indication of an
impairment of an asset within the unit containing the goodwill. In such
circumstances, the entity tests the asset for impairment first, and
recognises any impairment loss for that asset before testing for
impairment the cash-generating unit containing the goodwill.
Similarly, there may be an indication of an impairment of a cash-
generating unit within a group of units containing the goodwill. In such
circumstances, the entity tests the cash-generating unit for
impairment first, and recognises any impairment loss for that unit,
before testing for impairment the group of units to which the goodwill
is allocated.
90O. The most recent detailed calculation made in a preceding period
of the recoverable amount of a cash-generating unit to which
goodwill has been allocated may be used in the impairment test
of that unit in the current period provided all of the following
criteria are met:
(a) The assets and liabilities making up the unit have not
changed significantly since the most recent recoverable
amount calculation;
(b) The most recent recoverable amount calculation resulted
in an amount that exceeded the carrying amount of the
unit by a substantial margin; and
(c) Based on an analysis of events that have occurred and
circumstances that have changed since the most recent
recoverable amount calculation, the likelihood that a
current recoverable amount determination would be less
than the current carrying amount of the unit is remote.
395
Compendium of Accounting Standards for Local Bodies (ASLBs)
Impairment Loss for a Cash-Generating Unit
91. An impairment loss should be recognised for a cash-generating
unit (the smallest group of cash-generating units to which
goodwill has been allocated) if, and only if, the recoverable
amount of the unit (group of units) is less than the carrying
amount of the unit (group of units). The impairment loss should
be allocated to reduce the carrying amount of the cash-
generating assets of the unit (group of units) in the following
order:
(a) First, to reduce the carrying amount of any goodwill
allocated to the cash-generating unit (group of units); and
(b) Then, to the other assets of the unit (group of units) on a
pro rata basis, based on the carrying amount of each
asset in the unit.
These reductions in carrying amounts should be treated as
impairment losses on individual assets and recognised in
accordance with paragraph 73.
92. In allocating an impairment loss in accordance with paragraph
91, an entity should not reduce the carrying amount of an asset
below the highest of:
(a) Its “fair value less costs to sell” (if determinable);
(b) Its value in use (if determinable); and
(c) Zero.
The amount of the impairment loss that would otherwise have
been allocated to the asset should be allocated pro rata to the
other cash-generating assets of the unit (group of units).
93. Where a non-cash-generating asset contributes to a cash-
generating unit, a proportion of the carrying amount of that non-
cash-generating asset should be allocated to the carrying
amount of the cash-generating unit prior to estimation of the
recoverable amount of the cash-generating unit. The carrying
amount of the non-cash-generating asset should reflect any
impairment losses at the reporting date that have been
determined under the requirements of ASLB 21.
396
Impairment of Cash-Generating Assets
94. If the recoverable amount of an individual asset cannot be
determined (see paragraph 78):
(a) An impairment loss is recognised for the asset if its carrying
amount is greater than the higher of its “fair value less costs
to sell” and the results of the allocation procedures described
in paragraphs 91-93; and
(b) No impairment loss is recognised for the asset if the related
cash generating unit is not impaired. This applies even if the
asset's “fair value less costs to sell” is less than its carrying
amount.
95. In some cases, non-cash-generating assets contribute to cash-
generating units. This Standard requires that, where a cash-
generating unit subject to an impairment test contains a non-cash-
generating asset, that non-cash generating asset is tested for
impairment in accordance with the requirements of ASLB 21. A
proportion of the carrying amount of that non-cash generating asset,
following that impairment test, is included in the carrying amount of
the cash-generating unit. The proportion reflects the extent to which
the service potential of the non-cash-generating asset contributes to
the cash-generating unit. The allocation of any impairment loss for
the cash-generating unit is then made on a pro-rata basis to all cash-
generating assets in the cash-generating unit, subject to the limits in
paragraph 92. The non-cash generating asset is not subject to a
further impairment loss beyond that which has been determined in
accordance with ASLB 21.
96. [Deleted]
97. After the requirements in paragraphs 91-93 have been applied, a
liability should be recognised for any remaining amount of an
impairment loss for a cash-generating unit if, and only if, that is
required by another Standard.
397
Compendium of Accounting Standards for Local Bodies (ASLBs)
Impairment testing cash-generating units with goodwill
and non-controlling interests11
97A. In accordance with ASLB 40, the acquirer measures and recognises
goodwill as of the acquisition date as the excess of (a) over (b)
below:
(a) The aggregate of:
(i) The consideration transferred measured in
accordance with ASLB 40, which generally requires
acquisition-date fair value;
(ii) The amount of any non-controlling interest in the
acquired operation measured in accordance with
ASLB 40; and
(iii) In an acquisition achieved in stages, the acquisition
date fair value of the acquirer‟s previously held equity
interest in the acquired operation.
(b) The net of the acquisition date amounts of the identifiable
assets acquired and liabilities assumed measured in
accordance with ASLB 40.
Allocation of goodwill
97B. Paragraph 90A of this Standard requires goodwill acquired in an
acquisition to be allocated to each of the acquirer‟s cash-generating
units, or groups of cash-generating units, expected to benefit from the
synergies of the combination, irrespective of whether other assets or
liabilities of the acquired operation are assigned to those units, or
groups of units. It is possible that some of the synergies resulting
from an acquisition will be allocated to a cash-generating unit in
which the non-controlling interest does not have an interest.
Testing for impairment
97C. Testing for impairment involves comparing the recoverable amount of
a cash-generating unit with the carrying amount of the cash-
generating unit.
11 This concept may not be relevant for local bodies in India in current scenario.
However, the same may be relevant in future, hence retained here.
398
Impairment of Cash-Generating Assets
97D. If an entity measures non-controlling interests as its proportionate
interest in the net identifiable assets of a controlled entity at the
acquisition date, rather than at fair value, goodwill attributable to non-
controlling interests is included in the recoverable amount of the
related cash-generating unit but is not recognised in the controlling
entity‟s consolidated financial statements. As a consequence, an
entity should gross up the carrying amount of goodwill allocated to
the unit to include the goodwill attributable to the non-controlling
interest. This adjusted carrying amount is then compared with the
recoverable amount of the unit to determine whether the cash-
generating unit is impaired.
Allocating an impairment loss
97E. Paragraph 91 requires any identified impairment loss to be allocated
first to reduce the carrying amount of goodwill allocated to the unit
and then to the other assets of the unit pro-rata on the basis of the
carrying amount of each asset in the unit.
97F. If a controlled entity, or part of a controlled entity, with a non-
controlling interest is itself a cash-generating unit, the impairment
loss is allocated between the controlling entity and the non-controlling
interest on the same basis as that on which surplus or deficit is
allocated.
97G. If a controlled entity, or part of a controlled entity, with a non-
controlling interest is part of a larger cash-generating unit, goodwill
impairment losses are allocated to the parts of the cash-generating
unit that have a non-controlling interest and the parts that do not. The
impairment losses should be allocated to the parts of the cash-
generating unit on the basis of:
(a) To the extent that the impairment relates to goodwill in the
cash-generating unit, the relative carrying values of the
goodwill of the parts before the impairment; and
(b) To the extent that the impairment relates to identifiable assets
in the cash-generating unit, the relative carrying values of the
net identifiable assets of the parts before the impairment. Any
such impairment is allocated to the assets of the parts of each
unit pro-rata on the basis of the carrying amount of each
asset in the part.
399
Compendium of Accounting Standards for Local Bodies (ASLBs)
In those parts that have a non-controlling interest, the impairment
loss is allocated between the controlling entity and the non-controlling
interest on the same basis as that on which surplus or deficit is
allocated.
97H. If an impairment loss attributable to a non-controlling interest relates
to goodwill that is not recognised in the controlling entity‟s
consolidated financial statements (see paragraph 97D), that
impairment is not recognised as a goodwill impairment loss. In such
cases, only the impairment loss relating to the goodwill that is
allocated to the controlling entity is recognised as a goodwill
impairment loss.
Reversing an Impairment Loss
98. Paragraphs 99-105 set out the requirements for reversing an
impairment loss recognised for an asset or a cash-generating unit in
prior periods. These requirements use the term "an asset," but apply
equally to an individual asset or a cash-generating unit. Additional
requirements for an individual asset are set out in paragraphs 106-
109 and, for a cash-generating unit in paragraphs 110 and 111, and
for goodwill in paragraphs 111A and 111B.
99. An entity should assess at each reporting date whether there is
any indication that an impairment loss recognised in prior
periods for an asset other than goodwill may no longer exist or
may have decreased. If any such indication exists, the entity
should estimate the recoverable amount of that asset.
100. In assessing whether there is any indication that an impairment
loss recognised in prior periods for an asset other than goodwill
may no longer exist or may have decreased, an entity should
consider, as a minimum, the following indications:
External sources of information
(a) The asset's market value has increased significantly
during the period;
(b) Significant changes with a favourable effect on the entity
have taken place during the period, or will take place in
the near future, in the technological, market, economic, or
400
Impairment of Cash-Generating Assets
legal environment in which the entity operates or in the
market to which the asset is dedicated;
(c) Market interest rates or other market rates of return on
investments have decreased during the period, and those
decreases are likely to affect the discount rate used in
calculating the asset's value in use and increase the
asset's recoverable amount materially;
Internal sources of information
(d) Significant changes with a favourable effect on the entity
have taken place during the period, or are expected to
take place in the near future, in the extent to which, or the
manner in which, the asset is used or is expected to be
used. These changes include costs incurred during the
period to improve or enhance the asset's performance or
restructure the operation to which the asset belongs;
(dA) A decision to resume construction of the asset that was
previously halted before it was completed or in a usable
condition; and
(e) Evidence is available from internal reporting that
indicates that the economic performance of the asset is,
or will be, better than expected.
101. Indications of a potential decrease in an impairment loss in paragraph
100 mainly mirror the indications of a potential impairment loss in
paragraph 25.
102. If there is an indication that an impairment loss recognised for an
asset other than goodwill may no longer exist or may have
decreased, this may indicate that (a) the remaining useful life, (b) the
depreciation (amortisation) method, or (c) the residual value may
need to be reviewed and adjusted in accordance with the Standard
applicable to the asset, even if no impairment loss is reversed for the
asset.
103. An impairment loss recognised in prior periods for an asset
other than goodwill should be reversed if, and only if, there has
been a change in the estimates used to determine the asset's
recoverable amount since the last impairment loss was
401
Compendium of Accounting Standards for Local Bodies (ASLBs)
recognised. If this is the case, the carrying amount of the asset
should, except as described in paragraph 106, be increased to
its recoverable amount. That increase is a reversal of an
impairment loss.
104. A reversal of an impairment loss reflects an increase in the estimated
service potential of an asset, either from use or from sale, since the
date when an entity last recognised an impairment loss for that asset.
An entity is required to identify the change in estimates that causes
the increase in estimated service potential. Examples of changes in
estimates include:
(a) A change in the basis for recoverable amount (i.e., whether
recoverable amount is based on “fair value less costs to sell”
or value in use);
(b) If recoverable amount was based on value in use, a change
in the amount or timing of estimated future cash flows, or in
the discount rate; or
(c) If recoverable amount was based on “fair value less costs to
sell”, a change in estimate of the components of “fair value
less costs to sell”.
105. An asset's value in use may become greater than the asset's carrying
amount simply because the present value of future cash inflows
increases as they become closer. However, the service potential of
the asset has not increased. Therefore, an impairment loss is not
reversed just because of the passage of time (sometimes called the
unwinding of the discount), even if the recoverable amount of the
asset becomes higher than its carrying amount.
Reversing an Impairment Loss for an Individual Asset
106. The increased carrying amount of an asset other than goodwill
attributable to a reversal of an impairment loss should not
exceed the carrying amount that would have been determined
(net of amortisation or depreciation) had no impairment loss
been recognised for the asset in prior years.
107. Any increase in the carrying amount of an asset other than goodwill
above the carrying amount that would have been determined (net of
402
Impairment of Cash-Generating Assets
amortisation or depreciation) had no impairment loss been
recognised for the asset in prior years is a revaluation. In accounting
for such a revaluation, an entity applies the standard applicable to the
asset.
108. A reversal of an impairment loss for an asset other than goodwill
should be recognised immediately in surplus or deficit, unless
the asset is carried at revalued amount in accordance with
another Standard (for example, the revaluation model in ASLB 17
and ASLB 31). Any reversal of an impairment loss of a revalued
asset should be treated as a revaluation increase in accordance
with that other Standard.
108A. A reversal of an impairment loss on a revalued asset is recognised
directly in the revaluation reserve and increases the revaluation
surplus for that class of assets. However, to the extent that an
impairment loss on the same class of revalued assets was previously
recognised in surplus or deficit, a reversal of that impairment loss is
also recognised in surplus or deficit.
109. After a reversal of an impairment loss is recognised, the
depreciation (amortisation) charge for the asset should 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 for a Cash-Generating
Unit
110. A reversal of an impairment loss for a cash-generating unit
should be allocated to the cash-generating assets of the unit,
except for goodwill, pro-rata with the carrying amounts of those
assets. These increases in carrying amounts should be treated
as reversals of impairment losses for individual assets and
recognised in accordance with paragraph 108. No part of the
amount of such a reversal should be allocated to a non-cash-
generating asset contributing service potential to a cash-
generating unit.
403
Compendium of Accounting Standards for Local Bodies (ASLBs)
111. In allocating a reversal of an impairment loss for a cash-
generating unit in accordance with paragraph 110, the carrying
amount of an asset should not be increased above the lower of:
(a) Its recoverable amount (if determinable); and
(b) The carrying amount that would have been determined
(net of amortisation or depreciation) if no impairment loss
had been recognised for the asset in prior periods.
The amount of the reversal of the impairment loss that would
otherwise have been allocated to the asset should be allocated
pro-rata to the other assets of the unit, except for goodwill.
Reversing an impairment loss for goodwill
111A. An impairment loss recognised for goodwill should not be
reversed in a subsequent period.
111B. ASLB 31 prohibits the recognition of internally generated goodwill.
Any increase in the recoverable amount of goodwill in the periods
following the recognition of an impairment loss for that goodwill is
likely to be an increase in internally generated goodwill, rather than a
reversal of the impairment loss recognised for the acquired goodwill.
Redesignation of Assets
112. The redesignation of an asset from a cash-generating asset to a
non-cash- generating asset or from a non-cash-generating asset
to a cash-generating asset should only occur when there is clear
evidence that such a redesignation is appropriate. A
redesignation, by itself, does not necessarily trigger an
impairment test or a reversal of an impairment loss. At the
subsequent reporting date after a redesignation, an entity should
consider, as a minimum, the listed indications in paragraph 25.
113. There are circumstances in which entities may decide that it is
appropriate to redesignate a cash-generating asset as a non-cash-
generating asset. For example, an effluent treatment plant was
constructed primarily to treat industrial effluent from an industrial
estate at commercial rates, and excess capacity has been used to
treat effluent from a social housing unit, for which no charge is made.
The industrial estate has recently closed and, in future, the site will
404
Impairment of Cash-Generating Assets
be developed for social housing purposes. In light of the closure of
the industrial estate, the entity decides to redesignate the effluent
treatment plant as a non-cash-generating asset.
Disclosure
114. An entity should disclose the criteria developed by the entity to
distinguish cash-generating assets from non-cash-generating
assets.
115. An entity should disclose the following for each class of assets:
(a) The amount of impairment losses recognised in surplus
or deficit during the period, and the line item(s) of the
statement of income and expenditure in which those
impairment losses are included;
(b) The amount of reversals of impairment losses recognised
in surplus or deficit during the period, and the line item(s)
of the statement of income and expenditure in which
those impairment losses are reversed;
(c) The amount of impairment losses on revalued assets
recognised directly in revaluation surplus during the
period; and
(d) The amount of reversals of impairment losses on
revalued assets recognised directly in revaluation surplus
during the period.
116. In some cases it may be not be clear whether the primary objective of
holding an asset is to generate a commercial return. That judgment is
needed to determine whether to apply this Standard or ASLB 21.
Paragraph 114 requires the disclosure of the criteria used for
distinguishing cash-generating and non-cash-generating assets.
117. A class of assets is a grouping of assets of a similar nature or
function in an entity's operations that is shown as a single item for the
purpose of disclosure in the financial statements.
118. The information required in paragraph 115 may be presented with
other information disclosed for the class of assets. For example, this
information may be included in a reconciliation of the carrying amount
405
Compendium of Accounting Standards for Local Bodies (ASLBs)
of property, plant, and equipment at the beginning and end of the
period, as required by ASLB 17.
119. An entity that reports segment information in accordance with
ASLB 18, „Segment Reporting‟, should disclose the following for
each reported segment based on an entity's reporting format:
(a) The amount of impairment losses recognised in surplus
or deficit during the period; and
(b) The amount of reversals of impairment losses recognised
in surplus or deficit during the period.
120. An entity should disclose the following for each material
impairment loss recognised or reversed during the period for a
cash-generating asset (including goodwill) or a cash-generating
unit:
(a) The events and circumstances that led to the recognition
or reversal of the impairment loss;
(b) The amount of the impairment loss recognised or
reversed;
(c) For a cash-generating asset:
(i) The nature of the asset; and
(ii) If the entity reports segment information in
accordance with ASLB 18, the reported segment to
which the asset belongs, based on the entity's
reporting format.
(d) For a cash-generating unit:
(i) A description of the cash-generating unit (such
as whether it is a service line, a plant, an
operation, a geographical area, or a reported
segment);
(ii) The amount of the impairment loss recognised or
reversed by class of assets, and, if the entity
reports segment information in accordance with
ASLB 18, by reported segment based on the
entity's reporting format; and
406
Impairment of Cash-Generating Assets
(iii) If the aggregation of assets for identifying the
cash-generating unit has changed since the
previous estimate of the cash-generating unit's
recoverable amount (if any), a description of the
current and former way of aggregating assets and
the reasons for changing the way the cash-
generating unit is identified.
(e) Whether the recoverable amount of the asset (cash-
generating unit) is its “fair value less costs to sell” or its
value in use;
(f) If the recoverable amount is “fair value less costs to
sell”, the basis used to determine “fair value less costs to
sell” (such as whether fair value was determined by
reference to an active market); and
(g) If the recoverable amount is value in use, the discount
rate(s) used in the current estimate and previous estimate
(if any) of value in use.
121. An entity should disclose the following information for the
aggregate impairment losses and the aggregate reversals of
impairment losses recognised during the period for which no
information is disclosed in accordance with paragraph 120:
(a) The main classes of assets affected by impairment losses
and the main classes of assets affected by reversals of
impairment losses; and
(b) The main events and circumstances that led to the
recognition of these impairment losses and reversals of
impairment losses.
122. An entity is encouraged to disclose assumptions used to determine
the recoverable amount of assets during the period.
122A. If, in accordance with paragraph 90E, any proportion of the
goodwill acquired in an acquisition during the period has not
been allocated to a cash-generating unit (group of units) at the
end of the reporting period, the amount of the unallocated
goodwill should be disclosed together with the reasons why that
amount remains unallocated.
123-127. [Refer to Appendix 1]
407
Compendium of Accounting Standards for Local Bodies (ASLBs)
Appendix A
Application Guidance
This Appendix is an integral part of ASLB 26.
Using Present Value Techniques to Measure Value in Use
It provides guidance on the use of present value techniques in measuring
value in use. Although the guidance uses the term "asset”, it equally applies
to a group of assets forming a cash-generating unit.
The Components of a Present Value Measurement
AG1. The following elements together capture the economic differences
between cash-generating assets:
(a) An estimate of the future cash flow, or, in more complex
cases, series of future cash flows that the entity expects to
derive from the asset;
(b) Expectations about possible variations in the amount or timing
of those cash flows;
(c) The time value of money, represented by the current market
risk-free rate of interest;
(d) The price for bearing the uncertainty inherent in the asset
and
(e) Other, sometimes unidentifiable, factors (such as illiquidity)
that market participants would reflect in pricing the future cash
flows the entity expects to derive from the asset.
AG2. This appendix contrasts two approaches to computing present value,
either of which may be used to estimate the value in use of an asset,
depending on the circumstances. Under the traditional approach,
adjustments for factors (b) - (e) described in paragraph AG1 are
embedded in the discount rate. Under the expected cash flow
approach, factors (b), (d) and (e) cause adjustments in arriving at
risk-adjusted expected cash flows. Whichever approach an entity
adopts to reflect expectations about possible variations in the amount
or timing of future cash flows, the result should be to reflect the
408
Impairment of Cash-Generating Assets
expected present value of the future cash flows, i.e., the weighted
average of all possible outcomes.
General Principles
AG3. The techniques used to estimate future cash flows and interest rates
will vary from one situation to another depending on the
circumstances surrounding the asset in question. However, the
following general principles govern any application of present value
techniques in measuring assets:
(a) Interest rates used to discount cash flows should reflect
assumptions that are consistent with those inherent in the
estimated cash flows. Otherwise, the effect of some
assumptions will be double-counted or ignored. For example,
a discount rate of 12 percent might be applied to contractual
cash flows of a loan receivable. That rate reflects
expectations about future defaults from loans with particular
characteristics. That same 12 percent rate should not be used
to discount expected cash flows, because those cash flows
already reflect assumptions about future defaults.
(b) Estimated cash flows and discount rates should be free from
both bias and factors unrelated to the asset in question. For
example, deliberately understating estimated net cash flows
to enhance the apparent future profitability of an asset
introduces a bias into the measurement.
(c) Estimated cash flows or discount rates should reflect the
range of possible outcomes rather than a single most likely
minimum or maximum possible amount.
Traditional and Expected Cash Flow Approaches to Present Value
Traditional Approach
AG4. Accounting applications of present value have traditionally used a
single set of estimated cash flows and a single discount rate, often
described as the rate commensurate with the risk. In effect, the
traditional approach assumes that a single discount rate convention
can incorporate all the expectations about the future cash flows and
the appropriate risk premium. Therefore, the traditional approach
places most of the emphasis on selection of the discount rate.
409
Compendium of Accounting Standards for Local Bodies (ASLBs)
AG5. In some circumstances, such as those in which comparable assets
can be observed in the marketplace, a traditional approach is
relatively easy to apply. For assets with contractual cash flows, it is
consistent with the manner in which marketplace participants
describe assets, as in a 12 percent bond.
AG6. However, the traditional approach may not appropriately address
some complex measurement problems, such as the measurement of
non-financial assets for which no market for the item or a comparable
item exists. A proper search for the rate commensurate with the risk
requires analysis of at least two items - an asset that exists in the
marketplace and has an observed interest rate and the asset being
measured. The appropriate discount rate for the cash flows being
measured must be inferred from the observable rate of interest in that
other asset. To draw that inference, the characteristics of the other
asset's cash flows must be similar to those of the asset being
measured. Therefore, the measurer must do the following:
(a) Identify the set of cash flows that will be discounted;
(b) Identify another asset in the marketplace that appears to have
similar cash flow characteristics;
(c) Compare the cash flow sets from the two items to ensure that
they are similar (for example, are both sets contractual cash
flows, or is one contractual and the other an estimated cash
flow?);
(d) Evaluate whether there is an element in one item that is not
present in the other (for example, is one less liquid than the
other?); and
(e) Evaluate whether both sets of cash flows are likely to behave
(i.e., vary) in a similar fashion in changing economic
conditions.
Expected Cash Flow Approach
AG7. The expected cash flow approach is, in some situations, a more
effective measurement tool than the traditional approach. In
developing a measurement, the expected cash flow approach uses all
expectations about possible cash flows instead of the single most
410
Impairment of Cash-Generating Assets
likely cash flow. For example, a cash flow might be ` 10012, ` 200, or `
300, with probabilities of 10 percent, 60 percent and 30 percent,
respectively. The expected cash flow is ` 220. The expected cash
flow approach thus differs from the traditional approach by focusing
on direct analysis of the cash flows in question and on more explicit
statements of the assumptions used in the measurement.
AG8. The expected cash flow approach also allows use of present value
techniques when the timing of cash flows is uncertain. For example, a
cash flow of ` 1,000 may be received in one year, two years, or three
years, with probabilities of 10 percent, 60 percent, and 30 percent,
respectively. The example below shows the computation of expected
present value in that situation.
Present value of Rs.1,000 in 1 year at 5% 952.38
Probability 10% 95.24
Present value of Rs.1,000 in 2 years at 5.25% 902.73
Probability 60% 541.63
Present value of Rs.1,000 in 3 years at 5.50% 851.61
Probability 30% 255.48
Expected present value 892.36
AG9. The expected present value of ` 892.36 differs from the traditional
notion of a best estimate of ` 902.73 (the 60 percent probability). A
traditional present value computation applied to this example requires
a decision about which of the possible timings of cash flows to use
and, accordingly, which would not reflect the probabilities of other
timings. This is because the discount rate in a traditional present
value computation cannot reflect uncertainties in timing.
AG10. The use of probabilities is an essential element of the expected cash
flow approach. Some question whether assigning probabilities to
highly subjective estimates suggests greater precision than, in fact,
exists. However, the proper application of the traditional approach (as
described in paragraph AG6) requires the same estimates and
12 In this and other examples monetary amounts are denominated in rupees (Rs.).
411
Compendium of Accounting Standards for Local Bodies (ASLBs)
subjectivity without providing the computational transparency of the
expected cash flow approach.
AG11. Many estimates developed in current practice already incorporate the
elements of expected cash flows informally. In addition, accountants
often face the need to measure an asset using limited information
about the probabilities of possible cash flows. For example, an
accountant might be confronted with the following situations:
(a) The estimated amount falls somewhere between ` 50 and `
250, but no amount in the range is more likely than any other
amount. Based on that limited information, the estimated
expected cash flow is ` 150 [(50+250)/2];
(b) The estimated amount falls somewhere between ` 50 and `
250, and the most likely amount is ` 100. However, the
probabilities attached to each amount are unknown. Based on
that limited information, the estimated expected cash flow is `
133.33 [(50+100+250)/3]; or
(c) The estimated amount will be ` 50 (10 percent probability), `
250 (30 percent probability), or ` 100 (60 percent probability).
Based on that limited information, the estimated expected
cash flow is ` 140 [(50 x 0.10) + (250 x 0.30) + (100 x 0.60)].
In each case, the estimated expected cash flow is likely to provide a
better estimate of value in use than the minimum, most likely, or
maximum amount taken alone.
AG12. The application of an expected cash flow approach is subject to a
cost benefit constraint. In some cases, an entity may have access to
extensive data and may be able to develop many cash flow
scenarios. In other cases, an entity may not be able to develop more
than general statements about the variability of cash flows without
incurring substantial cost. The entity needs to balance the cost of
obtaining additional information against the additional reliability that
information will bring to the measurement.
AG13. Some maintain that expected cash flow techniques are inappropriate
for measuring a single item or an item with a limited number of
possible outcomes. They offer an example of an asset with two
possible outcomes: a 90 percent probability that the cash flow will be
412
Impairment of Cash-Generating Assets
` 10 and a 10 percent probability that the cash flow will be ` 1,000.
They observe that the expected cash flow in that example is ` 109,
and criticise that result as not representing either of the amounts that
may ultimately be paid.
AG14. Assertions like the one just outlined reflect underlying disagreement
with the measurement objective. If the objective is accumulation of
costs to be incurred, expected cash flows may not produce a
representationally faithful estimate of the expected cost. However,
this Standard is concerned with measuring the recoverable amount of
an asset. The recoverable amount of the asset in this example is not
likely to be ` 10, even though that is the most likely cash flow. This is
because a measurement of ` 10 does not incorporate the uncertainty
of the cash flow in the measurement of the asset. Instead, the
uncertain cash flow is presented as if it were a certain cash flow. No
rational entity would sell an asset with these characteristics for ` 10.
Discount Rate
AG15. Whichever approach an entity adopts for measuring the value in use
of an asset, interest rates used to discount cash flows should not
reflect risks for which the estimated cash flows have been adjusted.
Otherwise, the effect of some assumptions will be double-counted.
AG16. When an asset-specific rate is not directly available from the market,
an entity uses surrogates to estimate the discount rate. The purpose
is to estimate, as far as possible, a market assessment of
(a) The time value of money for the periods until the end of the
asset's useful life; and
(b) Factors (b), (d) and (e) described in paragraph AG1, to the
extent those factors have not caused adjustments in arriving
at estimated cash flows.
AG17. As a starting point in making such an estimate, the entity might take
into account the following rates:
(a) The entity's weighted average cost of capital determined
using techniques such as the Capital Asset Pricing Model;
(b) The entity's incremental borrowing rate; and
(c) Other market borrowing rates.
413
Compendium of Accounting Standards for Local Bodies (ASLBs)
AG18. However, these rates must be adjusted:
(a) To reflect the way that the market would assess the specific
risks associated with the asset's estimated cash flows; and
(b) To exclude risks that are not relevant to the asset's estimated
cash flows or for which the estimated cash flows have been
adjusted.
Consideration should be given to risks such as country risk, currency
risk, and price risk.
AG19. The discount rate is independent of the entity's capital structure and
the way the entity financed the purchase of the asset, because the
future cash flows expected to arise from an asset do not depend on
the way in which the entity financed the purchase of the asset.
AG20. Paragraph 68 requires the discount rate used to be a pre-tax rate.
Therefore, when the basis used to estimate the discount rate is post-
tax, that basis is adjusted to reflect a pre-tax rate.
AG21. An entity normally uses a single discount rate for the estimate of an
asset's value in use. However, an entity uses separate discount rates
for different future periods where value in use is sensitive to a
difference in risks for different periods or to the term structure of
interest rates.
414
Impairment of Cash-Generating Assets
Illustrative Decision Tree
This decision tree accompanies, but is not part of, ASLB 26.
For simplicity and clarity, this flow chart assumes that any asset that is part
of a CGU also contributes service potential to non-cash-generating activities.
Can the recoverable amount or recoverable
service amount of the asset be estimated on
an individual basis?
Yes
Is asset a cash-generating asset?
Yes No
No
Apply this Standard and Apply ASLB 21 and modify
modify carrying amount carrying amount if an
if an impairment loss impairment loss
Is asset part of a cash-generating unit?
Yes No
Include carrying amount or
allocation of proportion of carrying No further action necessary
amount of asset in CGU
Is recoverable amount of CGU greater Yes No impairment loss
or equal to carrying amount of CGU? attributable to CGU
No
Impairment loss allocated to cash-
generating assets in CGU on pro -
rata basis to carrying amount,
subject to limits in paragraph 92
415
Compendium of Accounting Standards for Local Bodies (ASLBs)
Implementation Guidance
The guidance accompanies, but is not part of ASLB 26.
Most assets held by local bodies are non-cash-generating assets, and
accounting for their impairment should be undertaken in accordance with
ASLB 21.
In those circumstances when an asset held by a local body is held with the
objective of generating a commercial return, the provisions of this Standard
should be followed. An example is a seed producing unit run on a
commercial basis that is part of an agricultural research entity.
For the purposes of all these examples, a local body undertakes commercial
activities.
Identification of Cash-Generating Units
The purpose of this example is:
(a) To indicate how cash-generating units are identified in various
situations; and
(b) To highlight certain factors that an entity may consider in identifying
the cash-generating unit to which an asset belongs.
A- Reduction in Demand Related to a Single-Product Unit
Background
IG1. A local body has an electricity-generating utility. The utility has two
turbine generators in a single electric plant. In the current period, a
major manufacturing plant in the area is closed and demand for
power was significantly reduced. In response, the local body shut
down one of the generators.
Analysis
IG2. The individual turbine generators do not generate cash flows in and
of themselves. Therefore, the cash-generating unit to be used in
determining an impairment is the electric plant as a whole.
B -IG3-IG4 [Refer Appendix-1]
416
Impairment of Cash-Generating Assets
C- Crushing Plant in Waste Disposal Entity
Background
IG5. A municipality runs a waste disposal entity that owns a crushing plant
to support its waste disposal activities. The crushing plant could be
sold only for scrap value, and it does not generate cash inflows that
are largely independent of the cash inflows from the other assets of
the waste disposal entity.
Analysis
IG6. It is not possible to estimate the recoverable amount of the crushing
plant, because its value in use cannot be determined and is probably
different from the scrap value. Therefore, the entity estimates the
recoverable amount of the cash-generating unit to which the crushing
plant belongs, i.e., the waste disposal entity as a whole.
D- Routes Provided by Bus Company
Background
IG7. A bus company (Special Purpose Vehicle of municipality) provides
services under contract with a municipality that specifies minimum
service on each of five separate routes. Assets devoted to each route
and the cash flows from each route can be identified separately. One
of the routes operates at a significant loss.
Analysis
IG8. Because the entity does not have the option to curtail any one bus
route, the lowest level of identifiable cash inflows that are largely
independent of the cash inflows from other assets or groups of assets
is the cash inflows generated by the five routes together. The cash-
generating unit is the bus company as a whole.
Calculation of Value in Use and Recognition of an
Impairment Loss
Background and Calculation of Value in Use
IG9. At the beginning of 20X0, Local Body R, through its Department of
Power, puts into service a power plant that it constructed for ` 250
million.
417
Compendium of Accounting Standards for Local Bodies (ASLBs)
IG10. At the beginning of 20X4, power plants constructed by competitors
are put into service, resulting in a reduction in the revenues produced
by the power plant of Local Body R. Reductions in revenue result
because the volume of electricity generated has decreased from
expectations, and also because the prices for electricity and stand-by
capacity have decreased from expectations.
IG11. The reduction in revenue is evidence that the economic performance
of the asset is worse than expected. Consequently, Local Body R is
required to determine the asset's recoverable amount.
IG12. Local Body R uses straight-line depreciation over a 20-year life for
the power plant and anticipates no residual value.
IG13. It is not possible to determine the “fair value less costs to sell” of the
power plant. Therefore, recoverability can only be determined through
the calculation of value in use. To determine the value in use for the
power plant (see Schedule l), Local Body R:
(a) Prepares cash flow forecasts derived from the most recent
financial budgets/forecasts for the next five years (years
20X5-20X9) approved by management;
(b) Estimates subsequent cash flows (years 20Y0-20Y9) based
on declining growth rates ranging from -6 percent per annum
to -3 percent per annum; and
(c) Selects a 6 percent discount rate, which represents a rate that
reflects current market assessments of the time value of
money and the risks specific to Local Body R's power plant.
Recognition and Measurement of Impairment Loss
IG14. The recoverable amount of Local Body R's power plant is ` 121.1
million.
IG15. Local Body R compares the recoverable amount of the power plant to
its carrying amount (see Schedule 2).
IG16. Because the carrying amount exceeds the recoverable amount by `
78.9 million, an impairment loss of ` 78.9 million is recognised
immediately in surplus or deficit.
418
Impairment of Cash-Generating Assets
Schedule 1- Calculation of the Value in Use of Local Body R's Power
Plant at the End of 20X4
Year Long Future Present Discounted
term cash flows value factor future cash
growth at 6% flows (Rs.)
rates discount
rate***
20X5 (n=l) 16.8* 0.94340 15.8
20X6 14.4* 0.89000 12.8
20X7 14.2* 0.83962 11.9
20X8 14.1* 0.79209 11.2
20X9 13.9* 0.74726 10.4
20Y0 6% 13.1 0.70496 9.2
20Y1 6% 12.3 0.66506 8.2
20Y2 6% 11.6 0.62741 7.3
20Y3 5% 11.0 0.59190 6.5
20Y4 5% 10.5 0.55839 5.9
20Y5 5% 10.0 0.52679 5.3
20Y6 4% 9.6 0.49697 4.8
20Y7 4% 9.2 0.46884 4.3
20Y8 3% 8.9 0.44230 3.9
20Y9 3% 8.6 0.41727 3.6
Value in use 121.1
* Based on management's best estimate of net cash flow projections.
Based on an extrapolation from preceding year cash flow using declining
growth rates.
* The present value factor is calculated as k = 1/1 (+a) n, where a = discount
rate and n = period discount
419
Compendium of Accounting Standards for Local Bodies (ASLBs)
Schedule 2- Calculation of the Impairment Loss for Local Body R's
Power Plant at the Beginning of 20X5
Beginning of 20X5 Total ` (m)
Historical cost 250.0
Accumulated depreciation (20X4) (50.0)
Carrying amount 200.0
Carrying amount after impairment loss 121.1
Impairment loss (78.9)
Reversal of an Impairment Loss
This Example relies on the data for Local Body R as presented in Example 2,
with supplementary information provided in this Example. In this Example,
tax effects are ignored.
Background
IG17. By 20X6 some competitors have closed down power plants and this
has meant that the negative impact on the revenues of Local Body R
has been less than projected at the end of 2004. This favourable
change requires the local body to re-estimate the recoverable amount
of the power plant.
IG18. Calculations similar to those in Example 2 show that the recoverable
amount of the power plant is now ` 157.7 million.
Reversal of Impairment Loss
IG19. Local Body R compares the recoverable amount and the net carrying
amount of the power plant and reverses part of the impairment loss
previously recognised at Example 2.
Non-Cash-Generating Asset that Contributes to a Cash-
Generating Unit Background
Background
IG20. A local body hospital owns and operates a Magnetic Resonance
Imaging (MRI) scanner that is primarily used by wards for non-fee
paying patients. However, 20% of its usage is for treatment of fee-
paying patients. The fee-paying patients are accommodated and
420
Impairment of Cash-Generating Assets
treated in a separate building that includes wards, an operating
theatre, and numerous pieces of capital equipment used solely for
fee-paying patients. At December 31, 20X6, the carrying value of the
building and capital equipment is ` 30,000. It is not possible to
estimate the recoverable amount of the building and the items of
capital equipment on an individual basis. Therefore, the building and
capital equipment are considered as a cash-generating unit (CGU). At
January 1, 20X6 the MRI scanner had a carrying value of ` 3,000. A
depreciation expense of ` 600 is recognised for the MRI scanner at
December 31, 20X6. Because there have been significant
technological advances in the field, the MRI scanner is tested for
impairment at December 31, 20X6 and an impairment loss of ` 400 is
determined, so that the carrying value of the MRI scanner at
December 31, 20X6 is ` 2,000.
Determination of Recoverable amount of Cash-Generating Unit
IG21. During the year there had been a significant reduction in the number
of fee-paying patients at the hospital. The CGU is therefore, tested
for impairment. The recoverable amount of the CGU, based on its
value in use, is assessed as ` 27,400. 20% of the revised carrying
value of the MRI scanner (` 400) is allocated to the carrying amount
of the CGU before determining the impairment loss (` 3,000). The
impairment loss is allocated to the building and capital equipment
pro-rata based on their carrying values. No further impairment loss is
allocated to the MRI scanner, as an impairment loss has already
been determined under the requirements of ASLB 21, „Impairment of
Non-Cash-Generating Assets‟.
Inclusion of Recognised Liabilities in Calculation of
Recoverable Amount of a Cash-Generating Unit
Background
IG22. A municipality operates a waste disposal site and is required to
restore the site on completion of its operations. The cost of
restoration includes the replacement of the topsoil, which must be
removed before waste disposal operations commence. A provision for
the costs to replace the top soil was recognised as soon as the top
soil was removed. The amount provided was recognised as part of
the cost of the site and is being depreciated over the site's useful life.
421
Compendium of Accounting Standards for Local Bodies (ASLBs)
The carrying amount of the provision for restoration costs is ` 500,
which is equal to the present value of the restoration costs.
Impairment Testing
IG23. The municipality is testing the site for impairment. The cash-
generating unit is the site as a whole. The municipality has received
various offers to buy the site at a price of around ` 800. This price
reflects the fact that the buyer will assume the obligation to restore
the topsoil. Disposal costs for the site are negligible. The value in use
of the site is approximately ` 1,200, excluding restoration costs. The
carrying amount of the waste disposal site is ` 1,000.
IG24. The cash-generating unit's “fair value less costs to sell‟‟ is ` 800. This
amount includes restoration costs that have already been provided
for. As a consequence, the value in use for the cash-generating unit
is determined after consideration of the restoration costs, and is
estimated to be ` 700 (` 1,200 minus ` 500). The carrying amount of
the cash-generating unit is ` 500, which is the carrying amount of the
site (` 1,000) minus the carrying amount of the provision for
restoration costs (` 500). Therefore, the recoverable amount of the
cash-generating unit exceeds its carrying amount.
Including Goodwill in the Carrying Amount of an
Operation on Disposal
Background
IG24A. A municipality sells for ` 100, an operation that was part of a cash-
generating unit to which goodwill has been allocated. The goodwill
allocated to the unit cannot be identified or associated with an asset
group at a level lower than that unit, except arbitrarily. The
recoverable amount of the portion of the cash-generating unit retained
is ` 300.
Accounting Treatment
IG24B. Because the goodwill allocated to the cash-generating unit cannot be
non-arbitrarily identified or associated with an asset group at a level
lower than that unit, the goodwill associated with the operation
disposed of is measured on the basis of the relative values of the
operation disposed of and the portion of the unit retained. Therefore,
422
Impairment of Cash-Generating Assets
25 percent of the goodwill allocated to the cash-generating unit is
included in the carrying amount of the operation that is sold.
Reallocation of Goodwill when a Cash-Generating Unit is
Restructured
Background
IG24C. Goodwill had previously been allocated to cash-generating unit A. The
goodwill allocated to A cannot be identified or associated with an
asset group at a level lower than A, except arbitrarily. A is to be
divided and integrated into three other cash-generating units, B, C and
D.
Accounting Treatment
IG24D. Because the goodwill allocated to A cannot be non-arbitrarily
identified or associated with an asset group at a level lower than A, it
is reallocated to units B, C and D on the basis of the relative values
of the three portions of A before those portions are integrated with B,
C and D.
Accounting Treatment of an Individual Asset in a Cash-
Generating Unit dependent on whether Recoverable
Amount can be Determined
Background
IG25. A holding tank at a water purification plant has suffered physical
damage but is still working, although not as well as before it was
damaged. The holding tank's “fair value less costs to sell” is less than
its carrying amount. The holding tank does not generate independent
cash inflows. The smallest identifiable group of assets that includes
the holding tank and generates cash inflows that are largely
independent of the cash inflows from other assets is the plant to
which the holding tank belongs. The recoverable amount of the plant
shows that the plant taken as a whole is not impaired.
Recoverable Amount of Holding Tank Cannot be Determined
IG26. Assumption 1: Budgets/forecasts approved by management reflect no
commitment of management to replace the holding tank.
423
Compendium of Accounting Standards for Local Bodies (ASLBs)
IG27. The recoverable amount of the holding tank alone cannot be
estimated because the holding tank's value in use:
(a) May differ from its “fair value less costs to sell”; and
(b) Can be determined only for the cash-generating unit to which
the holding tank belongs (the water purification plant).
The plant is not impaired. Therefore, no impairment loss is
recognised for the holding tank. Nevertheless, the entity may need to
reassess the depreciation period or the depreciation method for the
holding tank. Perhaps, a shorter depreciation period or a faster
depreciation method is required to reflect the expected remaining
useful life of the holding tank or the pattern in which economic
benefits are expected to be consumed by the entity.
Recoverable Amount of Holding Tank Can be Determined
IG28. Assumption 2: Budgets/forecasts approved by management reflect a
commitment of management to replace the holding tank and sell it in
the near future. Cash flows from continuing use of the holding tank
until its disposal are estimated to be negligible.
IG29. The holding tank's value in use can be estimated to be close to its “fair
value less costs to sell”. Therefore, the recoverable amount of the
holding tank can be determined, and no consideration is given to the
cash-generating unit to which the holding tank belongs (i.e., the
production line). Because the holding tank's “fair value less costs to
sell” is below its carrying amount, an impairment loss is recognised
for the holding tank.
424
Impairment of Cash-Generating Assets
Appendix 1
Note: This Appendix is not a part of the Accounting Standard for Local
Bodies. The purpose of this Appendix is only to bring out the major
differences, if any, between Accounting Standard for Local Bodies (ASLB) 26
and the corresponding International Public Sector Accounting Standard
(IPSAS) 26, „Impairment of Cash-Generating Assets‟.
Comparison with IPSAS 26, „Impairment of Cash-
Generating Assets‟
1. Different terminologies have been used in ASLB 26 as compared to
corresponding IPSAS 26, e.g., the terms „statement of income and
expenditure‟ and „entities‟ have been used in place of „statement of
financial performance‟ and „public sector entities‟.
2. The following paragraphs of IPSAS 26 have been deleted. In order to
maintain consistency with the corresponding IPSAS 26, the
paragraph numbers have been retained:
I. Scope exclusions with regard to deferred tax assets (para
2(f)), biological assets related to agricultural activity that are
measured at fair value less cost to sell (para 2(j)), deferred
acquisition costs and intangible assets arising under
insurance contracts (para 2(k)), provided in paragraph 2 of
IPSAS 26 have been deleted/removed in ASLB 26 as it may
not be relevant for Local Bodies in India.
II. The concept of intangible assets with an indefinite useful life
has not been retained in ASLBs. Accordingly, paragraph 23
has been modified and paragraphs 37 and 123-125 have
been deleted.
III. Paragraph 50 of IPSAS 26 has been deleted as the main
objective of Local Bodies is to provide services and not to
earn profit.
IV. Paragraphs 126-127 pertaining to effective date have been
deleted as ASLB 26 would become mandatory for Local
Bodies in a State from the date specified by the State
Government concerned.
V. Example in IG3-IG4 under Implementation Guidance, found
not relevant in context of Local Bodies, hence, deleted.
425
Compendium of Accounting Standards for Local Bodies (ASLBs)
3. Paragraph 3 of IPSAS 26 that pertained to applicability of IPSASs
has been deleted by the IPSASB from this Standard because a
separate document of IPSASB on „Applicability of IPSASs‟ now deals
with the same. However, the provision pertaining to applicability of
ASLBs has been covered in the Standard itself in line with other
issued ASLBs.
4. The following paragraphs of IPSAS 26 have been amended to make
the same more relevant in the context of Local Bodies in India:
I. The terms „impairment of cash generating asset‟ and
„impairment loss of cash generating asset‟ have been defined
additionally (paragraph 14).
II. The footnotes have been appended to the below mentioned
paragraphs for more clarifications with regard to the following
concepts:
(i) Paragraph 63 (b) with regard to income tax expenses.
(ii) Paragraphs 90A-90O and 97A-97H with regard to
concept of goodwill and impairment testing CGUs with
goodwill and non-controlling interest.
5. The following paragraphs appear as „Deleted‟ in IPSAS 26. In order
to maintain consistency with paragraph numbers of IPSAS 26, the
paragraph numbers are retained in ASLB 26:
I. Paragraph 2 (e), (h), (i) & (l)
II. Paragraph 4
III. Paragraph 6
IV. Paragraph 7
V. Paragraph 11
VI. Paragraph 96
6. Some examples of IPSAS 26 have been deleted/ modified in light of
Indian conditions. Some examples have also been included in ASLB
26 (refer paragraphs 15, 18).
7. Consequential changes resulting from the above departures have
been made in ASLB 26.
426
Impairment of Cash-Generating Assets
Appendix 2
Note: This Appendix is not a part of the Accounting Standard for Local
Bodies. The purpose of this Appendix is only to bring out the major
differences, if any, between Accounting Standard for Local Bodies (ASLB) 26
and the existing Accounting Standard (AS) 28, „Impairment of Assets‟.
Comparison with Existing AS 28, „Impairment of Assets‟
1. ASLB 26 deals with the impairment of cash-generating assets of
Local Bodies, whereas existing AS 28 deals with the impairment of
cash-generating assets of commercial entities.
2. ASLB 26 requires annual impairment testing for an intangible asset
not yet available for use and goodwill acquired in an acquisition,
irrespective of whether there is any indication of impairment.
However, existing AS 28 does not require the annual impairment
testing for the goodwill unless there is an indication of impairment.
3. ASLB 26 defines cash-generating assets and includes additional
commentary to distinguish cash-generating assets and non-cash-
generating assets.
4. The definition of a cash-generating unit in ASLB 26 is modified from
that in existing AS 28.
5. Existing AS 28 deals with impairment of corporate assets separately
whereas there is no such concept in ASLB 26.
6. ASLB 26 does not treat the fact that the carrying amount of the net
assets of an entity is more than the entity's market capitalisation as
indicating impairment. The fact that the carrying amount of the net
assets is more than the entity's market capitalisation is treated by
existing AS 28 as part of the minimum set of indications of
impairment.
7. Existing AS 28 requires that the impairment loss recognised for
goodwill should be reversed in a subsequent period when it was
caused by a specific external event of an exceptional nature that is
not expected to recur and subsequent external events that have
occurred that reverse the effect of that event whereas ASLB 26
prohibits the recognition of reversals of impairment loss for goodwill.
427
Compendium of Accounting Standards for Local Bodies (ASLBs)
8. ASLB 26 includes requirements and guidance dealing with the
redesignation of assets from cash-generating to non-cash-generating
and non-cash-generating to cash-generating. ASLB 26 also requires
entities to disclose the criteria developed to distinguish cash-
generating assets from non-cash-generating assets. There are no
equivalent requirements in existing AS 28.
428