[IFRS 13.B26, IAS 36.A7, Insights 3.10.220], Whichever approach a company adopts, the rate used to discount cash flows should not reflect adjustments for factors that have been incorporated into the estimated cash flows and vice versa. Tune in to KPMG Advisory podcasts to hear perspectives on today's business issues. This webcast also highlights some of the key differences between IFRS and US GAAP related to impairment … [IAS 36.56]. Trigger for impairment testing. For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance. KPMG International provides no client services. the nature, severity and duration of measures taken to contain or delay the spread of COVID-19; how long it could take for business operations and economic activity to return to normal; the expected trajectory of the recovery (i.e. For more information, see our web article on ESMA’s enforcement priorities for 2020. They may also become less creditworthy. Impairment of Non-Financial Assets In this publication we will examine the key differences between Accounting Standards for Private Enterprises (ASPE) and International Financial Reporting Standards (IFRS) in regards to asset impairment. Due to the high degree of uncertainty and resulting challenges in forecasting cash flows, it could be helpful to base those forecasts on external sources such as economic projections by respected central banks and other international organisations if available. PPE, intangible assets and goodwill? whether net assets exceed market capitalisation. This self-study course addresses requirements of IAS 36, Impairment of Assets, including the following: This course is part of the IFRS Certificate Program — a comprehensive, integrated curriculum that will give you the foundational training, knowledge, and practical guidance in international accounting standards necessary in today's global business environment.. [IAS 34.15B(b), 15C, 16A(d)]. Disclosures about the key assumptions made by management are highly relevant, because describing how management determines their values gives investors and other users additional information to assess the reliability of impairment testing and compare management’soutlook with their own. Impairment losses need to be recognized when the asset’s Book Value > asset’s Recoverable amount.Where Asset’s Recoverable Amount = higher of (Fair value – Selling costs) OR value in use.The value in use is calculated by discounting future cash flows expected from the continued use of the asset. All entities; Key impacts. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities. Financial assets designated at FVTPL are not subject to the reclassification requirements of IFRS 9. To cushion the economic and financial market impacts, governments in certain regions and international organisations have committed to fiscal stimulus, liquidity provisions and financial support. [IAS 36.A1, A16, A18], The risk-free rate is generally based on the yield on government bonds that have the same or similar duration as the cash flows of the asset or CGU. Ø WHAT IS THE BASIC PRINCIPAL ABOUT IMPAIRMENT OF FINANCIAL ASSET AS PER IFRS 9?. This article focuses on the accounting requirements relating to financial assets and financial liabilities only. As a result of the issue of IFRS 9, IAS 36 is amended to: Exclude financial instruments accounted for in accordance with IFRS 9, rather than IAS 39. IFRS 9 Financial Instruments, published in July 2014, is the new financial instruments standard which replaced IAS 39 Financial Instruments: Recognition and Measurement, and is effective for annual periods beginning on or after 1 January 2018. financing risk, country risk and forecasting risk) used in determining the appropriate discount rate to discount future cash flows. IFRS 9 mandatory for use since January 01, 2018, was intended to eliminate the shortcomings of then applicable IAS 39, simplify the logic of classification of financial instruments, increase the reliability of information about impairment of financial assets. on the financial statements in comparison to those reported in the previous annual period. This 60-minute live IFRS webcast provides an overview of the impairment model under IAS 36 and consideration of each of the steps in the IFRS impairment test. Furthermore, IAS 1 Presentation of Financial Statements requires disclosure of the key assumptions that a company makes about the future and other major sources of estimation uncertainty at the reporting date that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year. [IAS 36.55–56]. Join us for upcoming webcast events. Greater weight is given to external evidence. Refer to IFRS 9 for the impairment of financial assets not within the scope of IAS 36. Certain sectors have been significantly impacted – e.g. Get the latest KPMG thought leadership directly to your individual personalized dashboard. [IAS 36.A4–A14], the impact of measures taken to contain COVID-19 on the company’s business; and. IAS 36 — Recoverable amount disclosures for non-financial assets Background The IASB, as a consequential amendment to IFRS 13 Fair Value Measurement , modified some of the disclosure requirements in IAS 36 Impairment of Assets regarding measurement of the … entities in preparing their financial statements app lying IFRS Standards for periods ending on or after 31 December 2019. Archived recordings can be accessed anytime. if and when a return to pre-crisis cash flow levels is assumed. Find out how KPMG's expertise can help you and your company. Please note that your account has not been verified - unverified account will be deleted 48 hours after initial registration. It is imperative for companies to assess the external environment and look for the indicators below to decide when to impair assets. trade with countries significantly affected by COVID-19. Our multi-disciplinary approach and deep, practical industry knowledge, skills and capabilities help our clients meet challenges and respond to opportunities. Under IFRS, IAS 36 is the primary source of guidance on the impairment of tangible assets. when significant changes have taken place during the period (or will take place in the near future) in the market or in the economic environment in which the company operates and these changes will have an adverse effect on the company; and, when the carrying amount of the company’s net assets is higher than its market capitalisation. KPMG refers to the global organization or to one or more of the member firms of KPMG International Limited (“KPMG International”), each of which is a separate legal entity. The KPMG IFRS Institute is pleased to announce a webcast on Thursday, October 8, Refresh on Impairment of non-financial assets. Under IFRS, an impairment loss is recognized if the carrying amount exceeds the recoverable amount of the asset. The KPMG IFRS Institute is pleased to announce a webcast on Thursday, October 8, Refresh on Impairment of non-financial assets. In particular, assess: Consider whether budgets and cash flow projections reflect the following to the extent applicable to the company, based on information available at the reporting date: Consider whether discount rates used in recent valuations have been updated to reflect the risk environment at the reporting date. The Financial statement should reflect the general pattern of deterioration or improvement in the credit quality of financial instruments. Otherwise, the effect of some factors will be double counted. aircraft and shipping vessels) to the transport sector. Could we be saying goodbye to pre-tax measures? Here we offer our latest thinking and top-of-mind resources. The expected cash flow approach inherently requires a more explicit consideration of the wider than normal range of possible future outcomes. If the expected cash flow approach is used, the discount rate should exclude risks that have been reflected in the cash flows to avoid double counting. Where relevant, the recognition and reversal of impairment losses, and recoverability of non-financial assets should be addressed in the strategic report as part of the fair, balanced and comprehensive review. Please take a moment to review these changes. Impairment occurs when the carrying amount of asset (net book value=cost of item less accumulated depreciation) is more than the recoverable amount. IAS 36 provides examples of indicators of triggering events, including: The effects of COVID-19 have caused a significant deterioration in economic conditions for many companies, and an increase in economic uncertainty for others, which may constitute triggering events. The assumptions used in calculating the recoverable amount should be reasonable and supportable, despite the high level of economic uncertainty. 1 VIU: value in use; FVLCD: fair value less costs of disposal. Significant assumptions, such as forecast sales volumes, prices, gross margins, changes in working capital, foreign exchange rates and discount rates will need to be reassessed and updated as appropriate due to the significant changes in economic and market conditions. Improving business performance, turning risk and compliance into opportunities, developing strategies and enhancing value are at the core of what we do for leading organizations. Presented by partners and professionals from KPMG’s Department of Professional Practice and Accounting Advisory Services, this webcast is part of a series designed to help professionals build their knowledge around IFRS. Any entity could have significant changes to its financial reporting as the result of this standard. Estimating future cash flows could be particularly challenging for many companies due to the increase in economic uncertainty. Credit losses are the difference between the present value (PV) of all contractual cashflows and the PV of expected future cash flows. Corporate strategy insights for your industry, Explore Corporate strategy insights for your industry, Financial Services Regulatory Insights Center, Explore Financial Services Regulatory Insights Center, Explore Risk, Regulatory and Compliance Insights, Explore Corporate Strategy and Mergers & Acquisitions, Customer service transformation & technology. When a triggering event has occurred, management needs to determine the recoverable amount (the higher of VIU and FVLCD1) of an asset or cash-generating unit (CGU), which usually requires management to forecast future cash flows. Cash flows used in determining FVLCD should be updated to reflect the assumptions that market participants would use based on market conditions and information available at the reporting date. Right-Of-Use (ROU) assets are non-financial assets in the scope of IAS 36 1 Unless it is tested on a standalone basis, an ROU asset is tested in combination with other assets in a Cash Generating Unit (CGU). Click anywhere on the bar, to resend verification email. For example, it may be appropriate to disclose management’s views about the degree of uncertainty associated with the macroeconomic outlook (such as the severity and duration of the impact that COVID-19 is expected to have on the company’s business). This new standard brings about major changes to the classification and measurement of an entity’s financial assets and the … the fiscal stimulus, liquidity provision and financial support from the state or international organisations, including the potential effects of the withdrawal thereof. Due to the increase in the level of uncertainty, a higher number of key assumptions may need to be disclosed – e.g. Resource centre on the financial reporting impacts of coronavirus. Certain types of investment properties (and right-of-use assets arising from leased real estate) – e.g. Using Q&As and examples, this guide explains in depth the impairment models for goodwill, indefinite-lived intangible assets and long-lived assets. It’s all exciting with Iain Selfridge, UK Partner in the latest episode of PwC IFRS Talks IAS 36 also requires sensitivity disclosures if a reasonably possible change in a key assumption would cause a CGU's carrying amount to exceed its recoverable amount. [IAS 1.129(b)], Interim condensed reports IAS 34 Interim Financial Reporting requires disclosure of the nature and amount of changes in estimates. An impairment loss recognised for goodwill is not reversed in subsequent periods, even if it was recognised in an interim period of the same financial year. If there is an indication of impairment, then the impairment test follows the principles of IAS 36. [IAS 36.9–10, 12]. © 2020 Copyright owned by one or more of the KPMG International entities. projections of central banks and other international organisations about the duration and severity of the impact of COVID-19; supply of and demand for the CGU’s products or services; the impact of restrictions on transport, travel and quarantines; the impact of exchange rates and commodity prices; and. Irrespective of any indicator of impairment, IAS 36 requires goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use to be tested for impairment at least annually. IFRS 9 requires entities to base their measurement of expected credit losses on reasonable and supportable information that is available without undue cost or effort. Similar considerations would also apply for companies that lease assets (e.g. In a recent statement ESMA3, the European regulator, emphasised the need for transparent and meaningful disclosures related to impairment testing. Budgets and cash flow forecasts prepared by management generally serve as the starting point for the discounted cash flows used in calculating the recoverable amount. [IAS 28.40-42], 3 European Securities and Markets Authority, References to ‘Insights’ mean our publication Insights into IFRS. [IAS 36.4, 9, 33, IFRS 13.2]. What’s the future of value in use…. Impairment of non-financial assets (IAS 36 Impairment of Assets) The impairment requirements in IAS 36 apply to the following types of assets: Goodwill; Intangible assets; Property, plant and equipment; Right-of-use assets; Associates and joint ventures accounted for using the equity method; Investment properties measured using the cost model An update on IFRS issues in the United States, KPMG IFRS Institute: Impairment of non-financial assets. These impairment losses are referred to … [IFRS 13.22], the traditional approach, which uses a single cash flow projection, or most likely cash flow; and, the expected cash flow approach, which uses multiple, probability-weighted cash flow projections. Sharing our expertise and perspective to inform your decision-making in an evolving global financial reporting environment. We want to make sure you're kept up to date. If the asset‘s carrying amount is considered not recoverable, … KPMG International entities provide no services to clients. Making the estimate could be challenging given the degree of uncertainty about: The discount rate used to discount the forecast cash flows under both VIU and FVLCD may be significantly affected by COVID-19 due to the increase in uncertainty and risks. Tenants that have been forced to suspend operations may not be able to pay rent in the near term or may ask to renegotiate a lower rent. Explore challenges and top-of-mind concerns of business leaders today. IAS 36 Impairment of Assets requires a company to assess at the end of each reporting period whether there is any indication of impairment (or an indication that a previously recognised impairment loss has reversed). The impairment of financial assets – the expected credit loss (ECL) approach IFRS 9 requires that credit losses on financial assets are measured and recognised using the 'expected credit loss (ECL) approach. Two approaches can be used to project cash flows: Given the high degree of uncertainty, it may be helpful to consider using an expected cash flow approach as opposed to the traditional approach. [IAS 16.61, Insights 3.10.350.30]. Contrary to widespread belief, IFRS 9 affects more than just financial institutions. [IAS 36.2, 4] Our privacy policy has been updated since the last time you logged in. 2 The guidance in IAS 28 Investments in Associates and Joint Ventures is used to determine whether it is necessary to perform an impairment test for investments in equity-accounted investees. Disclosures related to impairment testing are likely to be a focus area for regulators. Under the traditional approach, cash flows are not adjusted for risk but, rather, risk is reflected in determining the discount rate. COVID-19 might have a significant impact on the risk-free rate and on entity-specific risk premiums (e.g. IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. Practical guide to Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 for interest rate benchmark (IBOR) reform The IASB has issued amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 that address issues arising during the reform of benchmark interest rates including the replacement of one benchmark rate with an alternative one. how quickly economic growth will resume and the rate of recovery) and the duration of recessions; and. Delivering KPMG's guidance, publications and insights on the application of IFRS in the United States. Read IFRS 9 Financial Instruments amendments to other IFRSs (Appendix C) Under International Financial Reporting Standards (IFRS), the company should consider assesses whether events or circumstances indicate impairment of assets or not. IFRS® 9, Financial Instruments, is the result of work undertaken by the International Accounting Standards Board (the Board) in conjunction with the Financial Accounting Standards Board (FASB) in the US.It was last revised in October 2017. • Allowance for expected credit losses. The purpose of this course is to familiarise you with the guidance in IAS 36, Impairment of Assets, on testing an asset for impairment, recognising and measuring the amount of an impairment loss, if any, as well as determining when it's appropriate for an entity to reverse an impairment loss. IAS 36 Impairment of Assets IFRS 13 Fair Value Measurement IFRIC 10 Interim Financial Reporting and Impairment IAS 16 Property, Plant and Equipment IAS 38 Intangible Assets IAS 41 Agriculture IFRS 3 Business Combinations IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 8 Operating Segments IFRS 9 Financial Instruments The recoverable amount of an asset is defined as “the higher of the asset’s fair value minus costs of disposal and its value in use.” The value in use is a discounted measure of expected future cash flows. 3.3angible assets and goodwill Int 26 3.4vestment property In 28 3.5ssociates and the equity method A 30 3.6oint arrangements J 32 3.7 [Not used] 3.8 Inventories 33 3.9 Biological assets 34 3.10 Impairment of non-financial assets 35 3. [Insights 3.10.300.120]. Applicability. Many offer CPE credit. 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