Template: Impairment test (Value in Use)

Introduction

Under International Financial Reporting Standards (IFRS), companies must periodically review the value of their assets to ensure they are accurately reflected on financial statements. One of the key methods for doing this is through an impairment test. For Cash Generating Units (CGUs), an impairment test is critical in ensuring that a company’s assets are not overstated. CGUs are the smallest identifiable group of assets that generate cash flows independently from other assets.

Impairment test

The impairment test for a CGU is triggered when there are indications that the carrying amount of the CGU may not be recoverable. Common indicators include adverse market conditions, significant changes in technology, or a drop in the market value of assets. Certain assets also require annual impairment testing regardless of trigger indicators.

The impairment process under IFRS involves comparing the carrying value of the CGU to its recoverable amount, which is the higher of the CGU’s fair value less costs to sell (FVLCTS) and its value in use (VIU). The carrying amount refers to the book value of the CGU, while the recoverable amount is the expected future cash flows from the CGU. If the carrying value exceeds the recoverable amount, the CGU is considered impaired, and the company must record an impairment loss. In practice, most companies utilise VIU approach as FVLCTS may not be easily obtainable.

This impairment loss is recognized in the profit and loss statement and reduces the carrying value of the assets. The loss is allocated first to goodwill (if applicable), then to other assets within the CGU.

Excel file attachment

Attached Excel file contains an example of VIU impairment test prepared for the purpose of financial reporting date 31 December 2024, using the previous post’s calculated CGU carrying amounts, with the subject of impairment test being CGU Domestic cars. In the real case, the impairment test would also contain further files that contain sub-calculations which are currently referred to only in footnotes within the file.

Conclusion

Performing a CGU impairment test ensures that financial statements remain accurate, reflecting the true value of assets. This helps provide a clearer financial picture to stakeholders, and prevents overstated asset values, which can mislead investors and other interested parties. A well-structured impairment process is essential for transparency and compliance with IFRS. The article provides a template for VIU calculation.

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