Effects of Impairement

[Zikria Yamin]

Dear Seniors,
Plz Explain in detail,
the Effects of Impairment on Followings,

--- Deffered Tax
--- Minority Interest
--- Corporate Assets

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Please also,

How the value of Reversal of Impairment can be measured in case of Cash generating units?

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Please also.

who is the Best Teacher for P2 Corporate Reporting in Lahore ?

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[Muhammad Amir]

<blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"> Dear Seniors,
Plz Explain in detail,
the Effects of Impairment on Followings,

--- Deffered Tax
--- Minority Interest
--- Corporate Assets <hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

<b>--- Deferred Tax</b>

Impairment will reduce the Carrying Amount of the asset but the tax base remains unchanged, due to this reason a Deferred Tax Asset or Liability will arise, this will in turn be adjusted with pre-impairment deferred tax liability and asset.

Look at this example.

Suppose that a company has a CGU. The value of Property, Plant and Equipment of this CGU is $12m and the goodwill associated with this CGU was $2m. During the current year an impairment loss of $4m has occurred. The tax base of Property, Plant and Equipment was $8m. Tax rate is 40%

Now, first we allocate the Impairment to goodwill and then to other assets. Now, goodwill becomes zero=>($2m-$2m=$0) and the carrying amount becomes $10m=>($12m-$2m). However the tax base remains unchanged.

A Deferred Tax liability of $0.8m([$10m-$8m]*40%).

Before Impairment the Deferred Tax Liability was $1.6m([$12m-$8m]*40%).

So, due to impairment the deferred tax liability will be reduced by $0.8m($1.6-$0.8).



<b>---Minority Interest</b>

Traditionally under IFRS-3 we calculate the Goodwill of the parent only(i.e. up to the extent of prent's holding). Under IAS-36 if there is an impairment in subsidiary then the impairment loss shall be allocated to the goodwill first and then to other assets.

Now, as per IFRS-3 we only calculate the parent's share of Goodwill only but for the allocation of impairment loss we need to gross-up the goodwill so that the minority share of impairment will be allocated to it.

Consider this example.

Suppose that a company 'P' acquired 80% of a subsidiary 'S' for $100m the net assets of subsidiary 'S' at that date were $120m. Carrying amount of the subsidiary at the end is $80 and recoverable amount of it is $83 at the year end.

Now, first we calculate the goodwill.

Goodwill in 'S' is $4m($100m-[$120m*80%]). This $4m of goodwill only shows the parent's 80% holding so we need to gross it up to calculate the total goodwill of CGU(i.e. subsidiary).

Total good will of CGU is $5=>($4/80*100).

Total Value of the CGU is

Goodwill===========>$5m
Carrying Amount====>$80m
_____________________________
Total==============>$85m
Recoverable Amount=>($83)
_____________________________
Impairment =========>$2

This $2 impairment of $2 will be allocated to goodwill which will become $3=>($5-$2).

Now, the remaining goodwill will of $3 be allocated between parent($2.4) and subsidiary($0.6[this will not be shown in consolidated accounts]) according the their respective holding i.e. 80% and 20%.

Note Only the impairment loss relating to the parent's goodwill is recognized.



<b>--- Corporate Assets</b>

Corporate assets are those that are shared among different CGUs. Thus, they do not pertain to specific CGU. In this case we first need to allocate the share of corporate assets to different CGUs and then they will be compared with their respective recoverable amount so that an impairment loss can be identified.

Let's take a look at this example.

A company has two CGUs 'A' and 'B'. Carrying amount of both CGUs is A $800; B $ 600. Carrying amount of the corporate building is $300.

Remaining life of 'A' is 5 years and 'B' is 10 years. Recoverable amounts of A and B are $710 and $620 respectively.

Now we first allocate the share of building(corporate asset) to both CGUs so that total carrying amount of both CGUs cn be determined and then we will compare it with recoverable amount.


===============A=================B==========Total
===============$=================$============$==

Carrying Amount=>800===============600==========1400
Useful Life=====5 years=============10 years===========
Weight ========1===================2==============
Weighted Carring
Amounts======800==================1200========2,000
% for Allocation==40%(8/20)==========60%(12/20)=========
Allocation of
Corporate Building=120(300*40%)=======180(300*60%)===300

Total Carrying Amount
After Corporate Building==920(800+120)====780(600+180)====
Recoverable Amounts====710============620===========
_________________________________________________________
Impairment Loss=======210=============160===========
_________________________________________________________


Now, we will allocate these impairment losses on pro rata basis to A and B.

For A.

Corporate Building=$120====($27.4)===$92.6
Other Assets=====$800=====($182.6)===$617.4
____________________________________________
Total============$920=====$210========$710

Similar approach will be used to allocate impairment losses to 'B'.


<blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"> Please also,

How the value of Reversal of Impairment can be measured in case of Cash generating units?
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

In case of CGUs If there is evidence that impairment has been reversed then the entity has to reverse the impairment losses back to the CGUs to the extent that the value of the CGU would have been, had the impairment not been occurred. The value should be post depreciation value.

For example, if the carrying amount of the asset was $700 previous to impairment but there was an impairment of $200 which reduces the amount of asset to $500. After two years the asset has been valued upward and if there was not impairment then the carrying amount of the asset would be $600. Now the company can't value this asset more than $600.