2.1 Scope

The scope of Section 27 includes inventories unlike IAS 36. The requirements for impairment of inventories under IFRS are dealt with in IAS 2 – Inventories. Differences between IAS 2 and Section 27 are discussed in Chapter 11.

The scope of Section 27 is discussed at 3.1 below.

2.2 Timing of impairment tests

On an annual basis, entities must consider whether there are indicators of impairment in respect of all assets within the scope of Section 27. Entities need only undertake a full impairment test when such indicators are found. Indicators of impairment are discussed at 4.3 below.

This differs to IAS 36, which requires annual impairment tests for goodwill, indefinite-lived intangibles and intangibles not yet available for use. [IAS 36.10].

The timing of impairment tests under Section 27 is discussed at 4.1 below.

2.3 Allocation of goodwill

Under both IAS 36 and Section 27, goodwill acquired in a business combination is allocated to each of the acquirer's CGUs that are expected to benefit from the acquisition, whether or not the acquiree's other assets or liabilities are assigned to those units. [IAS 36.80, FRS 102.27.25].

However, if it is not possible to allocate goodwill to a CGU (or group of CGUs) non-arbitrarily, Section 27 contains provisions that allow entities to test for impairment by determining the recoverable amount of either the acquired entity as a whole (if goodwill relates to a non-integrated acquired entity) or the entire group of entities, excluding non-integrated entities (if goodwill relates to an integrated entity). [FRS 102.27.27]. IAS 36 contains no such provision. All goodwill must be allocated to a CGU (or group of CGUs).

The allocation of goodwill under Section 27 is discussed further at 5 below.

2.4 Disclosure differences

Section 27 requires less detailed disclosures than IAS 36. The specific disclosure requirements under Section 27 are discussed at 8 below.

3.1 Objective and scope

Section 27 explains that an impairment loss occurs when the carrying amount of an asset exceeds its recoverable amount, whether that is its value in use or its fair value less costs to sell. If, and only if, the recoverable amount of an asset is less than its carrying amount, the entity should reduce the carrying amount of the asset to its recoverable amount. That reduction is an impairment loss. [FRS 102.27.5]. Section 27 has a general application to all assets, but the following are outside its scope: [FRS 102.27.1]

• assets arising from construction contracts (see Section 23 – Revenue);
• deferred tax assets (see Section 29 – Income Tax);
• assets arising from employee benefits (see Section 28 – Employee Benefits);
• financial assets within the scope of Section 11 – Basic Financial Instruments – or Section 12 – Other Financial Instruments Issues;
• investment property measured at fair value (see Section 16 – Investment Property);
• biological assets related to agricultural activity measured at fair value less estimated costs to sell (see Section 34 – Specialised Activities); and
• deferred acquisition costs and intangible assets arising from contracts within the scope of FRS 103 – Insurance Contracts.

A parent, in its separate financial statements, must select and adopt a policy of accounting for the following investments at either cost less impairment; at fair value with changes in fair value recognised in other comprehensive income in accordance with Section 17 – Property, Plant and Equipment; or, at fair value with changes in fair value recognised in profit or loss: [FRS 102.9.26]

• subsidiaries (as defined in Section 9 – Consolidated and Separate Financial Statements);
• associates (as defined in Section 14 – Investments in Associates); and
• jointly controlled entities (as defined in Section 15 – Investments in Joint Ventures).

When entities make an accounting policy choice to account for these investments at cost less impairment, they fall within scope of Section 27 for impairment purposes. [FRS 102.9.26]. Similarly, where an entity that is not a parent makes an accounting policy choice to account for their investments in associates and jointly controlled entities at cost less impairment in their individual financial statements, as permitted by Sections 14 and 15 respectively, those investments also fall within scope of Section 27. [FRS 102.14.5, 15.10]. Section 27 also includes within its scope investments in associates and joint ventures accounted for using the equity method in the consolidated accounts of a group. [FRS 102.14.8(d), 15.13]. The requirements of Sections 9, 14 and 15 are discussed further in Chapters 8, 12 and 13.

3.2 Terms used in Section 27

The key definitions used in FRS 102 are set out in the Glossary in Appendix I to FRS 102 and are given below. [FRS 102 Appendix I].

3.3 Impairment of inventories

While Section 27 includes specific requirements relating to the impairment of inventories, readers should refer to Chapter 11 where we have chosen to discuss those requirements together with the other principles on the recognition and measurement of inventories.

4.1 General principles

Section 27 requires entities to assess at each reporting date whether there is any indication that an asset may be impaired. Entities are only required to carry out an impairment test if there is an indication of impairment. An entity is not required to perform an impairment test if there is no indication of impairment. [FRS 102.27.7].

As it might be unduly onerous for all assets in scope to be tested for impairment every year, Section 27 requires assets to be tested only if there is an indication that impairment may have occurred. If there are indications that the carrying amount of an asset may not be fully recoverable, an entity should estimate the recoverable amount. The ‘indications’ of impairment may relate to either the assets themselves or to the economic environment in which they are operated. Possible indicators of impairment are discussed further at 4.3 below.

The purpose of the impairment test is to ensure that tangible and intangible assets, including goodwill, are not carried at a figure greater than their recoverable amount. This recoverable amount is compared with the carrying value of the asset to determine if the asset is impaired.

Recoverable amount is defined as the higher of fair value less costs to sell (FVLCS) and value in use (VIU); the general principle being that an asset should not be carried at more than the amount it will raise, either from selling it now or from using it. [FRS 102.27.11].

Fair value less costs to sell essentially means what the asset could be sold for, having deducted costs of disposal (incrementally incurred direct selling costs). Value in use is defined in terms of discounted future cash flows, as the present value of the cash flows expected from the future use and eventual sale of the asset at the end of its useful life. As the recoverable amount is to be expressed as a present value, not in nominal terms, discounting is a central feature of the impairment test. Diagrammatically, this comparison between carrying value and recoverable amount, and the definition of recoverable amount, can be shown as follows:

It may not always be necessary to identify both VIU and FVLCS, as if either of VIU or FVLCS is higher than the carrying amount then there is no impairment and no write-down is necessary. Thus, if FVLCS is greater than the carrying amount then no further consideration need be given to VIU, or to the need for an impairment write down. The more complex issues arise when the FVLCS is not greater than the carrying value, and so a VIU calculation is necessary.

If, and only if, the recoverable amount of an asset is less than its carrying amount, the entity should reduce the carrying amount of the asset to its recoverable amount. That reduction is an impairment loss. [FRS 102.27.5].

4.2 Testing individual assets or cash generating units

If it is not possible to estimate the recoverable amount of the individual asset, an entity should estimate the recoverable amount of the cash generating unit to which the asset belongs. This may be the case because measuring recoverable amount requires forecasting cash flows, and sometimes individual assets do not generate cash inflows by themselves. An asset's cash generating unit is the smallest identifiable group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. [FRS 102.27.8].

The group of assets that is considered together should be as small as is reasonably practicable, i.e. the entity should be divided into as many CGUs as possible – an entity must identify the lowest aggregation of assets that generate largely independent cash inflows. It should be emphasised that the focus is on the asset group's ability to generate cash inflows. Cash outflows or any bases for cost allocation have no relevance for the identification of CGUs. The division should not go beyond the level at which each income stream is capable of being separately monitored. For example, it may be difficult to identify a level below an individual factory as a CGU but of course an individual factory may or may not be a CGU.

A practical approach to identifying CGUs involves two stages, the first being to work down to the smallest group of assets for which a stream of cash inflows can be identified. These groups of assets will be CGUs unless the performance of their cash inflow-generating assets is dependent on those generated by other assets, or vice versa their cash inflows are affected by those of other assets. If the cash inflows generated by the group of assets are not largely independent of those generated by other assets, the second stage is to add other assets to the group to form the smallest collection of assets that generates largely independent cash inflows. The existence of a degree of flexibility over what constitutes a CGU is obvious.

The identification of cash generating units will require judgement and Section 27 itself does not give any further guidance on this area. However, under the hierarchy in Section 10 – Accounting Policies, Estimates and Errors, users may wish to refer to the associated guidance in IAS 36.

Under IAS 36, in identifying whether cash inflows from an asset are largely independent of the cash inflows from other assets, entities are advised to consider various factors including:

• how management monitors the entity's operations (such as by product lines, businesses, individual locations, districts or regional areas); or
• how management makes decisions about continuing or disposing of the entity's assets and operations. [IAS 36.69].

While monitoring by management may help identify CGUs, it does not override the requirement that the identification of CGUs is based on largely independent cash inflows. The following examples illustrate how an entity might identify their CGUs.

In addition to monitoring by management, IAS 36 stresses the significance of an active market for the output of an asset in identifying a CGU. 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. [IAS 36.70]. The existence of an active market means that the assets or CGU could generate cash inflows independently from the rest of the business by selling on the active market. There are active markets for many metals, energy products (various grades of oil product, natural gas) and other commodities that are freely traded.

An active market is defined in FRS 102 as one in which all of the items traded are homogeneous, where willing buyers and sellers can normally be found at any time and which has prices that are available to the public.

In practice, different entities will have varying approaches to determining their CGUs. While a CGU as defined in Section 27 is the smallest identifiable group of assets that generates cash inflows that are largely independent, the level of judgement involved means that there is still likely to be a reasonable degree of flexibility in most organisations. In practice, most entities may tend towards larger rather than smaller CGUs to keep the complexity of the process within reasonable bounds, but this leads to the risk that lower level impairments are avoided because poor cash flows from some assets may be offset by better ones from other assets in the CGU.

4.3 Indicators of impairment

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. If there is no indication of impairment, it is not necessary to estimate the recoverable amount. [FRS 102.27.7].

The ‘indications’ of impairment may relate to either the assets themselves or to the economic environment in which they are operated. Section 27 gives examples of indications of impairment, but makes it clear this is not an exhaustive list. An entity may identify other indications that an asset is impaired that would equally trigger an impairment review.

The indicators given in Section 27 are divided into external and internal indications.

External sources of information:

1. 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.
2. 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.
3. Market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect materially the discount rate used in calculating an asset's value in use and decrease the asset's fair value less costs to sell.
4. The carrying amount of the net assets of the entity is more than the estimated fair value of the entity as a whole (such an estimate may have been made, for example, in relation to the potential sale of part or all of the entity).

Internal sources of information:

5. Evidence is available of obsolescence or physical damage of an asset.
6. 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 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, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.
7. Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected. In this context economic performance includes operating results and cash flows. [FRS 102.27.9].

While it is not specifically set out in Section 27, the presence of indicators of impairment will not necessarily mean that the entity has to calculate the recoverable amount of the asset. A previous calculation may have shown that an asset's recoverable amount was significantly greater than its carrying amount and it may be clear that subsequent events have been insufficient to eliminate this headroom. Similarly, previous analysis may show that an asset's recoverable amount is not sensitive to one or more of these indicators.

Clearly there is an important judgement to be made in deciding whether an impairment review is needed. As discussed below, once triggered, an impairment review can become a complicated process with serious implications for the financial statements of an entity. Many will therefore wish to avoid performing such a process and thus may wish to argue that there has not been an indication of impairment of significant consequence. Much might turn on the judgement of matters such as whether there has been a significant adverse change in the market or just an adverse change.

Section 27 also explains that if there is an indication that an asset may be impaired, this may indicate that the entity should review the remaining useful life, the depreciation (amortisation) method or the residual value for the asset and adjust it in accordance with the applicable section of FRS 102 (e.g. Section 17 – Property, Plant and Equipment – and Section 18 – Intangible Assets other than Goodwill), even if no impairment loss is recognised for the asset. [FRS 102.27.10].

4.4 Measuring recoverable amount

Section 27 requires the carrying amount to be compared with the recoverable amount when there is an indicator of impairment. The recoverable amount of an asset or a CGU is the higher of its fair value less costs to sell and its value in use. [FRS 102.27.11]. If either the FVLCS or the VIU is higher than the carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. [FRS 102.27.12].

Recoverable amount is calculated for an individual asset, unless that asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount should be estimated for the CGU to which the asset belongs. [FRS 102.27.8].

VIU is defined as the present value of the future cash flows expected to be derived from an asset or CGU. FVLCS is defined as the amount obtainable from the sale of an asset or CGU in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal.

Estimating the VIU of an asset involves estimating the future cash inflows and outflows that will be derived from the continuing use of the asset and from its ultimate disposal, and discounting them at an appropriate rate. [FRS 102.27.15]. There can be complex issues involved in determining the relevant cash flows and choosing a discount rate and these are discussed at 4.6 below.

When estimating FVLCS, the best evidence is a price in a binding sale agreement in an arm's length transaction or a market price in an active market. Where such evidence is not available, management should base their estimate of FVLCS on the best information available. [FRS 102.27.14]. This can be a complex process as discussed at 4.5 below.

Section 27 mentions circumstances in which it may be appropriate to use an asset or CGU's FVLCS without calculating its VIU, as the measure of its recoverable amount. There may be no reason to believe that an asset's VIU materially exceeds its FVLCS, in which case the asset's FVLCS may be used as its recoverable amount. [FRS 102.27.13]. This is the case, for example, if management is intending to dispose of the asset or CGU, as apart from its disposal proceeds there will be few if any cash flows from further use.

It is not uncommon for the FVLCS of an asset to be readily obtainable while the asset itself does not generate largely independent cash inflows, as is the case with many property assets held by entities. If the FVLCS of the asset is lower than its carrying value then the recoverable amount (which means both FVLCS and VIU) will have to be calculated by reference to the CGU of which the asset is a part. However, as explained at 4.3.2 above, it may be obvious that the CGU to which the property belongs has not suffered an impairment. In such a case it would not be necessary to assess the recoverable amount of the CGU.

4.5 Fair value less costs to sell (FVLCS)

FVLCS is defined as the amount obtainable from the sale of an asset (or CGU) in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal. The best evidence of an asset's FVLCS is a price in a binding sale agreement in an arm's length transaction or a market price in an active market. If there is no binding sale agreement or active market for an asset, FVLCS is based on the best information available to reflect 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. [FRS 102.27.14].

Section 27 therefore makes clear that if there is a binding sales agreement in an arm's length transaction or an active market then that price must be used. In reality, however, there are few active markets for most tangible and intangible assets. An active market is defined as one in which all of the items traded are homogeneous, where willing buyers and sellers can normally be found at any time and which has prices that are available to the public. [FRS 102 Appendix I]. Consequently, most estimates of fair value will be based on estimates of the market price of the asset in an arm's length transaction. This will involve consideration of the outcome of recent transactions for similar assets in the same industry. The entity will use the best information it has available at the balance sheet date to construct the price payable in an arm's length transaction between knowledgeable, willing parties.

While Section 27 does not mention any other valuation techniques, it may be that the use of such techniques is the only way to obtain the best estimate of fair value. This may be the case where there is no binding sales agreement, where no active market for the asset exists and transactions for similar assets do not happen often enough to provide a reliable measure of fair value. In such cases entities need to rely on other valuation techniques in considering the best information available at the balance sheet date. This is discussed further at 4.5.1 below.

In all cases, FVLCS should take account of estimated disposal costs. These include legal costs, stamp duty and other transaction taxes, costs of moving the asset and other direct incremental costs.

The following simple example illustrates how an entity might determine FVLCS for an asset.

4.6 Value in use (VIU)

Value in use (VIU) is defined as the present value of the future cash flows expected to be derived from an asset or cash-generating unit. [FRS 102 Appendix I].

The calculation of VIU involves the following steps: [FRS 102.27.15]

• estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and
• applying the appropriate discount rate to those future cash flows.

The following elements are required to be reflected in the VIU calculation: [FRS 102.27.16]

1. an estimate of the future cash flows the entity expects to derive from the asset;
2. expectations about possible variations in the amount or timing of those future cash flows;
3. the time value of money, represented by the current market risk-free rate of interest;
4. the price for bearing the uncertainty inherent in the asset; and
5. other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.

Uncertainty as to the timing of cash flows or the market's assessment of risk in the assets ((d) and (e) above) must be taken into account either by adjusting the cash flows or the discount rate. Specifically, the discount rate used to measure an asset's VIU should not reflect risks for which the future cash flow estimates have been adjusted, to avoid double counting. [FRS 102.27.20].

If it is not possible to estimate the recoverable amount of an individual asset, the entity should estimate the recoverable amount of the CGU to which the asset belongs. [FRS 102.27.8]. This will frequently be necessary because:

• the single asset may not generate sufficiently independent cash inflows, as is often the case; and
• in the case of the possible impairment of a single asset, FVLCS will frequently be lower than the carrying amount.

Where a CGU is being reviewed for impairment, this will involve calculation of the VIU of the CGU as a whole unless a reliable estimate of the CGU's FVLCS can be made and the resulting FVLCS is above the total of the CGU's net assets.

VIU calculations at the level of the CGU will thus be required when no satisfactory FVLCS is available or FVLCS is below the CGU's carrying amount and:

• goodwill is suspected of being impaired;
• a CGU itself is suspected of being impaired; or
• individual assets are suspected of being impaired and individual future cash flows cannot be identified for them.

In order to calculate VIU there are a series of steps to follow, as set out below. Within each step, we should discuss the practicalities and difficulties in determining the VIU of an asset. The steps in the process are:

1. Dividing the entity into CGUs (at 4.2 above).
2. Estimating the future pre-tax cash flows of the CGU under review (at 4.6.1-4.6.4 below).
3. Identifying an appropriate discount rate and discounting the future cash flows (at 4.6.5 below).
4. Comparing carrying value with VIU and recognising impairment losses (at 6 below).

Although this process describes the determination of the VIU of a CGU, steps 2 to 4 are the same as those that would be applied to an individual asset if it generated cash inflows independently of other assets.

Example 24.6 illustrates a simple example of how an entity would calculate the VIU of an individual asset following the principles set out at 4.6.1-4.6.5 below.

¹ The present value factor is calculated as k+1/(1+i)ⁿ where i is the discount rate and n is the number of periods of discount e.g. for 20Y0 the present value factor is calculated as follows: 1/(1.14)¹⁰ = 1/3.707221 = 0.269744.

² The expected future cash flow for year 20Y0 includes £2,500 expected to be paid for the disposal of the asset at the end of its useful life. The residual value is nil because it is expected that the machine will be scrapped at the end of 20Y0.

Assuming that the FVLCS is lower than VIU (and thus VIU is the recoverable amount), the calculation of the impairment loss at the end of 20X0 is as follows:

As a consequence of the impairment loss recognised at 31 December 20X0, the carrying amount of the machine immediately after the impairment recognition is equal to the recoverable amount of the machine i.e. £97,118. In this case, in subsequent periods, assuming all variables remain the same as at the end of 20X0, the depreciable amount will be £97,118, so the depreciation charge will be £9,712 per year.

5.1 Goodwill on non-controlling interests

As required by Section 19 – Business Combinations and Goodwill, an acquirer should, at the acquisition date: [FRS 102.19.22]

• recognise goodwill acquired in a business combination as an asset; and
• initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer's interest in the net amount of the identifiable assets, liabilities and contingent liabilities recognised and measured in accordance with the various requirements for those assets, liabilities and contingent liabilities.

Non-controlling interests (NCI) are measured at the acquisition date at their proportionate share of the acquiree's identifiable net assets, which excludes goodwill i.e. goodwill attributable to NCI is not recognised in the parent's consolidated financial statements. However the recoverable amount would be calculated for the whole CGU, i.e. part of the recoverable amount of the CGU determined in accordance with Section 27 that is attributable to the non-controlling interest in goodwill.

Therefore, for the purposes of impairment testing of a non-wholly owned CGU with goodwill, the carrying amount of that unit is notionally adjusted, before being compared with its recoverable amount, by grossing up the carrying amount of goodwill allocated to the unit to include the goodwill attributable to the NCI. This notionally adjusted carrying amount is then compared with the recoverable amount of the unit to determine whether the CGU is impaired. [FRS 102.27.26].

There is no specific guidance on how the gross up should be performed, but we expect the default method will be a simple mechanical gross up based on ownership percentages. This is shown in Example 24.12 below. However, in the absence of specific guidance we consider that an entity is not precluded from grossing up goodwill on a basis other than ownership percentages if to do so is reasonable.

In the event of an impairment, the entity allocates the impairment loss as usual, first reducing the carrying amount of goodwill allocated to the CGU. However, because only the parent's goodwill is recognised, the impairment loss is apportioned between that attributable to the parent and that attributable to the NCI, with only the former being recognised.

Example 24.15 at 6.4 below shows an impairment calculation where goodwill has been notionally adjusted to take account of NCI.

6.1 Recognising an impairment loss on an individual asset

In the case of individual assets, an entity should recognise an impairment loss immediately in profit or loss, unless the asset is carried at a revalued amount in accordance with another section of FRS 102 (for example in accordance with the revaluation model in Section 17). Any impairment loss of a revalued asset should be treated as a revaluation decrease in accordance with that other section. [FRS 102.27.6].

If there is an impairment loss on an asset that has not been revalued, it is recognised in profit or loss. An impairment loss on a revalued asset is first used to reduce the revaluation surplus for that asset. Only when the impairment loss exceeds the amount in the revaluation surplus for that same asset is any further impairment loss recognised in profit or loss. [FRS 102.17.15F].

An impairment loss will reduce the depreciable amount of an asset and the revised amount will be depreciated or amortised prospectively over the remaining life. However, an entity ought also to review the useful life and residual value of its impaired asset as both of these may need to be revised. The circumstances that give rise to impairments frequently affect these as well. [FRS 102.27.10].

6.2 Recognising an impairment loss on a CGU

An impairment loss should be recognised for a CGU if, and only if, the recoverable amount of the unit is less than the carrying amount of the unit. The impairment loss should be allocated to reduce the carrying amount of the assets of the unit in the following order: [FRS 102.27.21]

• first, to reduce the carrying amount of any goodwill allocated to the CGU; and
• then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the CGU.

This principle is illustrated in Example 24.13 below.

⁽¹⁾ Impairment allocated pro-rata to identifiable assets e.g. for Asset A this is (500 ÷ 1,833) × 473 = 129.

The impairment loss is recorded first against the carrying amount of goodwill (£800) and next, pro-rata against the carrying amount of Country A's identifiable assets (£473).

However, an entity should not reduce the carrying amount of any asset in the CGU below the highest of: [FRS 102.27.22]

• its fair value less costs to sell (if determinable);
• its value in use (if determinable); and
• zero.

Any excess amount of the impairment loss that cannot be allocated to an asset because of the restriction above should be allocated to the other assets of the unit pro rata on the basis of the carrying amount of those other assets. [FRS 102.27.23]. Example 24.14 below illustrates how this approach would be applied in practice.

However, this allocation would reduce the carrying amount of Machine A to £11,000, which is lower than its FVLCS of £12,500. Consequently, in accordance with FRS 102.27.22(a), the impairment loss allocated to Machine A is limited to £500 (i.e. £13,000 carrying amount less £12,500 FVLCS). The remaining impairment loss of £1,500 (i.e. £2,000 less £500 allocated to Machine A) is allocated to Machines B and C on the basis of each machine's carrying amount in relation to the total carrying amount of the two machines as follows:

The total impairment loss allocated to each machine is shown below, together with the carrying amounts of Machines A, B and C immediately after recognising the impairment loss.

In the above example, the impairment loss is fully allocated across the assets of the CGU. However, as individual assets cannot be written down below the higher of their FVLCS and their VIU, this may not always be the case, thus an element of the impairment charge may not be recognised.

6.3 Recognising an impairment loss on a group of CGUs

It is important when applying the requirements above, that impairment testing is conducted in the right order. If there are indicators of impairment in connection with a CGU with which goodwill is associated, i.e. the CGU is part of a CGU group to which goodwill is allocated, the individual CGU should be tested and any necessary impairment loss taken, before the ‘CGU group’ goodwill is tested for impairment. These impairment losses and consequent reductions in carrying values are treated in exactly the same way as those for individual assets as explained at 6.1 above.

6.4 Recognising an impairment loss on a CGU with goodwill and non-controlling interests

As noted at 5.1 above, when impairment testing a non-wholly owned CGU with goodwill, the carrying amount of that unit must be notionally adjusted, before being compared with its recoverable amount, by grossing up the carrying amount of goodwill allocated to the unit to include the goodwill attributable to the NCI. [FRS 102.27.26].

If there is an impairment, the entity allocates the impairment loss as usual, first reducing the carrying amount of goodwill allocated to the CGU. However, because only the parent's goodwill is recognised, the impairment loss is apportioned between that attributable to the parent and that attributable to the NCI, with only the former being recognised.

If any impairment loss remains, it is allocated in the usual way to the other assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU.

These requirements are illustrated in the following example.

The impairment loss of £850 is allocated to the assets in the CGU by first reducing the carrying amount of goodwill to zero. Therefore, £500 of the £850 impairment loss for Entity Y is allocated to the goodwill. However, because Entity X only holds a 80% ownership interest in Entity Y, it recognises only 80 per cent of that goodwill impairment loss (i.e. £400). The remaining impairment loss of £350 is recognised by reducing the carrying amounts of Entity Y's identifiable assets, as follows:

Of the impairment loss of £350 relating to Entity Y's identifiable assets, £70 (i.e. 20% thereof) would be attributed to the non-controlling interest.

In this example the same result would have been achieved by just comparing the recoverable amount of £1,000 with the carrying amount of £1,750. However, what if the recoverable amount of the CGU had been greater than the carrying amount of the identifiable net assets prior to recognising the impairment loss?

Assume the same facts as above, except that at the end of 20X0, Entity X determines that the recoverable amount of Entity Y is £1,400. In this case, testing Entity Y for impairment at the end of 20X0 gives rise to an impairment loss of £450 calculated as follows:

All of the impairment loss of £450 is allocated to the goodwill. However, Entity X recognises only 80 per cent of that goodwill impairment loss (i.e. £360). This allocation of the impairment loss results in the following carrying amounts for Entity Y in the financial statements of Entity X at the end of 20X0:

Of the impairment loss of £360, none of it is attributable to the non-controlling interest since it all relates to the majority shareholder's goodwill.

In this case the total carrying amount of the identifiable net assets and the goodwill has not been reduced to the recoverable amount of £1,400, but is actually less than the recoverable amount. This is because the recoverable amount of goodwill relating to the non-controlling interest (20% of [£500 – £450]) is not recognised in the consolidated financial statements.

6.5 Impairment of assets of a subsidiary which is part of a larger CGU

When testing for impairment in consolidated accounts, entities must divide the group into CGUs, being the smallest group of assets that generate largely independent cash inflows. The identification of a group's CGUs may not be consistent with the legal structure of the group, such that the activities of an individual subsidiary may form part of a larger CGU in the group. When this is the case the cash flows attributable to an individual subsidiary may appear not to support the carrying value of that entity's assets, while from a group perspective no impairment is identified as the subsidiary forms part of a larger and profitable CGU.

An example of this would be where plant X manufactures an intermediate product used as an input by plant Y. Plant X is loss making and is owned by subsidiary A, while plant Y is owned by another subsidiary within the group. From a group perspective plants X and Y are one CGU, which is highly profitable. While the cash flows for subsidiary A may not support the carrying value of its assets, from the perspective of the consolidated accounts the CGU is profitable and therefore no impairment is required at that level.

As a result of the different levels at which impairment testing is performed, impairment losses in individual subsidiaries' financial statements may not follow the losses recognised in the consolidated financial statements.

7.1 Reversal where recoverable amount was estimated for an individual impaired asset

When the prior impairment loss was based on the recoverable amount of the individual impaired asset, the following requirements apply: [FRS 102.27.30]

1. The entity should estimate the recoverable amount of the asset at the current reporting date.
2. If the estimated recoverable amount of the asset exceeds its carrying amount, the entity should increase the carrying amount to recoverable amount, subject to the limitation described in (c) below. That increase is a reversal of an impairment loss. The entity should recognise the reversal immediately in profit or loss unless the asset is carried at revalued amount in accordance with another section of FRS 102 (for example, the revaluation model in Section 17). Any reversal of an impairment loss of a revalued asset should be treated as a revaluation increase in accordance with the relevant section of FRS 102.
3. The reversal of an impairment loss should not increase the carrying amount of the asset above 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.
4. After a reversal of an impairment loss is recognised, the entity should adjust the depreciation (amortisation) charge for the asset 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.

Therefore if there are indications that a previously recognised impairment loss has disappeared or reduced, it is necessary to determine the recoverable amount (i.e. the higher of FVLCS or VIU) so that the reversal can be quantified.

In the event of an individual asset's impairment being reversed, Section 27 makes it clear that the reversal may not raise the carrying value above the figure it would have been (after taking into account the depreciation charge which would have applied) had no impairment originally been recognised. This requirement is illustrated in the example below.

The difference is only an indication of the amount of the reversal because the reversal cannot increase the carrying amount of the asset above the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. At 31 December 20X4, the carrying amount that would have been determined, had no impairment loss been recognised for the asset in prior years, is £120,000 (cost £300,000 less accumulated depreciation £180,000). Thus £120,000 is the maximum carrying amount for the asset after the reversal of impairment.

The entity compares the carrying amount at 20X4 if no impairment loss had been recognised, with the carrying amount at 20X4 and determines that the maximum impairment reversal is £61,729.

As a consequence of the reversal of part of the impairment loss recognised at 31 December 20X0, the carrying amount of the machine is £120,000 i.e. equal to the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. In subsequent periods, assuming that all variables remain the same as at the end of 20X4, the depreciable amount will be £120,000, so the depreciation charge will be £20,000 (£120,000 depreciable amount depreciated over remaining 6 year remaining useful life).

7.2 Reversal when recoverable amount was estimated for a cash-generating unit

When the original impairment loss was based on the recoverable amount of the cash-generating unit to which the asset, including goodwill belongs, the following requirements apply: [FRS 102.27.31]

1. The entity should estimate the recoverable amount of that cash-generating unit at the current reporting date.
2. If the estimated recoverable amount of the cash-generating unit exceeds its carrying amount, that excess is a reversal of an impairment loss. The entity should allocate the amount of that reversal to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets subject to the limitation described in (c) below. Those increases in carrying amounts should be treated as reversals of impairment losses and recognised immediately in profit or loss unless the asset is carried at revalued amount in accordance with another section of this FRS (for example, the revaluation model in Section 17). Any reversal of an impairment loss of a revalued asset should be treated as a revaluation increase in accordance with the relevant section of this FRS.
3. In allocating a reversal of an impairment loss for a cash-generating unit, the reversal should not increase the carrying amount of any asset above the lower of:
   1. its recoverable amount; and
   2. the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior periods.
4. Any excess amount of the reversal of the impairment loss that cannot be allocated to an asset because of the restriction in (c) above should be allocated pro rata to the other assets of the cash-generating unit.
5. After a reversal of an impairment loss is recognised, if applicable, the entity should adjust the depreciation (amortisation) charge for each asset in the cash-generating unit 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.

The above requirements are illustrated in the example below.

¹ Goodwill was being amortised over a period of five years (£1000 ÷ 5 years = £200), while the identifiable assets were deemed to have a useful life of 12 years (£2000 ÷ 12 years = £166.70 depreciation per year).

² Two years of depreciation based on carrying amount of £1,360 at 1/1/20X4 and remaining useful life of 11 years ((£1,360 ÷ 11 years = £123.6 per year) × 2 years = £247).

The difference is only an indication of the amount of the possible reversal because of the restriction in FRS 102.27.31(b)(i), which requires that any impairment reversal can only be applied to assets of the unit other than goodwill (subject to the limitation that the reversal cannot increase the carrying amount of any asset above the lower of its recoverable amount and the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior periods). As can be seen below, this results in the impairment reversal being restricted to £387.

¹ Identifiable assets continue to be depreciated over their 12 year useful life @£166.70 per year ((£2000 ÷ 12 years = £166.70 per year) × 3 years) = £500. Gives carrying amount of £2000 less depreciation of £500 = £1,500).

Note: if management were able to estimate the recoverable amount for any of the individual identifiable assets then these amounts (if lower) would be used in restricting the impairment reversal.

8.1 Companies Act disclosure requirements

Schedule 1 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, (SI 2008/410) (the Regulations), requires provisions for diminution in value to be made in respect of any fixed asset if the reduction in value is expected to be permanent. Where the reasons for the provision have ceased to apply, the provision must be written back to the extent that it is no longer necessary. In either case, amounts not shown in the profit and loss account must be disclosed in the notes to the accounts. [1 Sch 19-20].

As accounts prepared under FRS 102 are Companies Act accounts, entities subject to Schedule 1 to the Regulations have a choice of:

• applying one of the two statutory formats set out in Section B of Part 1 of Schedule 1 to the Regulations; or
• applying paragraph 1A(2) of Schedule 1 to the Regulations and using the ‘adapted’ formats as set out in Section 5 – Statement of Comprehensive Income and Income Statement.

Under Format 2 of Schedule 1 to the Regulations, where expenses are classified by nature, there is a specific line item, 7(a), headed ‘Depreciation and other amounts written off tangible and intangible fixed assets’ where impairment losses should be shown. Under Format 1, where expenses are classified by function, impairment losses should generally be shown in the same category of expense as depreciation of the relevant asset, with the amount of depreciation and other amounts written off tangible and intangible assets disclosed in a note to the accounts.

Under the adapted format, an entity shall present an analysis of expenses, either in the income statement or the notes, equivalent to what would have been presented had the profit and loss account format not been adapted. [FRS 102.5.5B].

Under both the statutory and adapted formats, FRS 102 requires entities to present additional line items, headings and subtotals in the income statement when such presentation is relevant to an understanding of the entity's financial performance. [FRS 102.5.9]. So, in practice, we would not anticipate differences in the level of information given about impairment charges whether entities apply the statutory or adapted formats for the income statement.

The Regulations also require certain information to supplement the balance sheet. In respect of fixed assets, this includes:

• the cumulative amount of provisions for depreciation or diminution in value as at the beginning of the financial year and at the balance sheet date;
• the amount of any such provisions made in respect of the financial year;
• the amount of any adjustments made in respect of any such provisions during that year in consequence of the disposal of any assets; and
• the amount of any other adjustments made in respect of any such provisions during that year. [1 Sch 51(3)].

The statutory disclosures overlap with disclosures in FRS 102 of depreciation, amortisation and impairment charges (see above at 8, Chapter 15 at 3.9 and Chapter 16 at 3.5.2). [FRS 102.17.31, 18.27(e) 27.32-33)].