Guide to International Financial Reporting Standards in …/media/site/r2-docs/guide to... · Guide to International Financial Reporting Standards in Canada IAS 36 Impairment of Assets

Guide to International Financial Reporting Standards in Canada

IAS 36 Impairment of AssetsIrene Wiecek, FCPA, FCA

Martha Dunlop, FCPA, FCA

Jane Bowen, FCPA, FCA

primary editor: Alex Fisher, CPA, CA

June 2013

FINANCIAL REPORTING

CANADIAN SERIES

Guide to International Financial Reporting Standards in Canada

IAS 36 Impairment of AssetsIrene Wiecek, FCPA, FCA

Martha Dunlop, FCPA, FCA

Jane Bowen, FCPA, FCA

primary editor: Alex Fisher, CPA, CA

June 2013

CANADIAN SERIES

iiiIAS 36 Impairment of Assets

June 2013

Table of ContentsPreface 1

Introduction to IAS 36 5

Standards Update 5

Key Standards Referred to in This Publication 6

IAS 36 Definitions 7

Overview of Key Requirements 8

Analysis of Relevant Issues 10

Identifying an Asset That May Be Impaired 11

Indicators of Impairment 11

Measuring Recoverable Amount 13

Determining Recoverable Amount at the Level of the Individual Asset or CGU 15

Relief for Determination of Recoverable Amount — Certain Intangible Assets and Goodwill 18

FVLCD 20

VIU 21

CGUs and Goodwill 28

Identifying an Asset’s CGU 28

Carrying Amount 30

Goodwill 31

Corporate Assets 36

Impairment Loss for a CGU 37

Interim Financial Reporting 39

Reversing an Impairment Loss 39

Recognition, Measurement and Presentation of Impairment Loss Reversals 40

Disclosure 41

Using Present Value Techniques to Measure VIU 45

iv Guide to International Financial Reporting in Canada

Impairment Testing CGUs with Goodwill and NCIs 46

NCIs Measured as Proportionate Interest 47

Accounting Policy Choices 48

Significant Judgments and Estimates 48

APPENDIX A — Acronyms Used 50

List of ExtractsExtract 1 — Excerpt from Nexen Inc. 2012 Financial Statements Note 5B — Indicators of Impairment 12

Extract 2 — Excerpt from Suncor Energy Inc. 2012 Financial Statements Note 9 — Indicators of Impairment 12

Extract 3 — Excerpt from Royal Bank of Canada 2012 Financial Statements Note 11 — Calculation of Recoverable Amount 14

Extract 4 — Excerpt from Pizza Pizza Royalty Corp. 2012 Financial Statements Note 4 — Calculation of Recoverable Amount 14

Extract 5 — Excerpt from Metro Inc. 2012 Financial Statements Note 16 — Calculation of Recoverable Amount 18

Extract 6 — Excerpt from Air Canada 2012 Notes to Financial Statements Note 5 — Relief from Calculating Recoverable Amount 20

Extract 7 — Excerpt from Corby Distilleries Limited 2012 Notes to Financial Statements Note 12 — Inputs Used to Determine Discount Rates 25

Extract 8 — Excerpt from Air Canada 2012 Financial Statements Note 5 — Calculating VIU 26

Extract 9 — Excerpt from Astral Media Inc. 2012 Financial Statements Note 8 — Calculating VIU 26

Extract 10 — Excerpt from Suncor Energy Inc. 2012 Financial Statements Note 9 — Calculating FVLCD 27

Extract 11 — Excerpt from Rona Inc. 2012 Financial Statements Note 14 — CGU Groupings 31

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Table of Contents

Extract 12 — Excerpt from Astral Media Inc. 2012 Financial Statements Note 8 — CGU at Lower Level Than Operating Segment 33

Extract 13 — Excerpt from Maple Leaf Foods Inc. 2012 Financial Statements Note 3 — Corporate Assets 37

Extract 14 — Excerpt from Astral Media Inc. 2012 Financial Statements Note 8 — Reversal of Impairment Loss 41

Extract 15 — Excerpt from Sherritt International Corporation 2012 Financial Statements Note 2.13 — Accounting Policy Note As It Relates to Impairments 43

Extract 16 — Excerpt from Bombardier Inc. 2012 Financial Statements Note 4 — Critical Accounting Estimates and Judgments As They Relate to Impairment Regarding Aerospace Program Tooling 44

Extract 17 — Excerpt from Bombardier Inc. 2012 Financial Statements Note 4 — Sensitivity Disclosures As They Relate to Aerospace Program Tooling 45

List of IllustrationsIllustration 1 — Some Indicators of Impairment As Noted in IAS 36 11

Illustration 2 — Decision Tree — Recoverable Amount 13

Illustration 3 — Level of Impairment Testing 17

Illustration 4 — Relief Regarding Calculation of Recoverable Amount for Indefinite-Lived Intangibles and Goodwill 19

Illustration 5 — The Difference between FVLCD and VIU 21

Illustration 6 — Calculating VIU — Cash Flows 22

Illustration 7 — Recognition and Presentation of Impairment Losses 38

Illustration 8 — Indicators of Impairment Reversal As Noted in IAS 36 39

Illustration 9 — Types of Disclosures Required by IAS 36 42

Illustration 10 — Two Approaches to Computing Present Value 45

Illustration 11 — Some Significant Judgments and Sources of Estimation Uncertainty under IAS 36 48

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June 2013

IAS 36 Impairment of Assets

PrefaceThis publication is part of the Guide to International Financial Reporting Stan-dards in Canada series published by the Chartered Professional Accountants of Canada (CPA Canada) to support its members.

The objective of this publication, IAS 36 Impairment of Assets, is to help you understand IAS 36 and the IASB material that accompanies the standard. The publication begins with an introduction and standards update and then includes definitions, an overview chart, an analysis section, a section on accounting policies and one on significant judgments and estimates.

Every attempt has been made to use plain language and to avoid mere restatement of the IFRS standards although, where deemed necessary, specific wording from the standards is referred to.

This publication has been carefully prepared, but it necessarily contains infor-mation in summarized form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment.

The overview section takes a high-level look at the key requirements of the standard in a chart format (the Overview chart). Specific “touchstone” refer-ences to IAS 36 are included in the Overview chart to help you navigate the standard. These are not meant to be comprehensive references, rather

2 Guide to International Financial Reporting in Canada

a starting point for your research. The analysis section analyzes the more com-plex areas of the standard in more depth. Note that, where parts of the stan-dard are more straightforward, they are included in the Overview chart only as it is felt that this coverage is at a sufficient level.

Illustrations, examples and extracts have been used to explain a particular concept and/or provide insight into how the standard is applied. Financial statement note extracts have been selected to illustrate a particular point but do not necessarily represent best practices.

Several features have been included to enhance understanding as follows:

1. Illustrations, including the following:• charts• decision trees• summaries

These illustrations add value by summarizing, grouping, highlighting simi-larities/differences and working through decision processes in applying the standard.

2. Examples, including the following:• IASB Illustrative Examples excerpts — nine deal with impairments• IASB examples excerpted from the IAS 36 standard — seven are included

within IAS 36• other examples

These examples add value by showing how a particular part of the standard might be applied in a specific situation.

3. Extracts from the IASB standards, including the following:• definitions• select quotes

Even though every attempt has been made to use plain language, in some cases it has been important to use the specific wording in the standard to get a point across.

4. Extracts from financial statements — financial statements of prominent Canadian companies have been selected, including those that were recipients of the CPA Corporate Reporting Awards. The report on the Corporate Reporting Awards, including a list of winners, may be found at www.cpacanada.ca.

The extracts included illustrate a particular aspect. It may be useful to review the complete note, which may be found at www.sedar.com.

3IAS 36 Impairment of Assets

June 2013

5. Non-IFRS Interpretations Committee insights — Items discussed but not taken to the IASB agenda, referred to as NIFRICs (non-IFRICs), have been included because in some cases, they provide insights into the standard setting decision processes.

6. IFRS Discussion Group (IDG) insights — The IDG was established by the Canadian Accounting Standards Board (AcSB) in 2009. Its aim is to provide a public forum for the discussion of issues relating to IFRSs and to collect the views of Canadians experiencing issues in implementing IFRSs. These discussions are not meant to provide authoritative guidance; however, they do help clarify issues and allow interested parties to learn how others are working through their financial reporting issues and applying judgment in the application of IFRSs. These have been drawn from the publically avail-able reports of the IDG meetings. IDG meetings are recorded and audio webcasts are archived on the AcSB website (www.frascanada.ca). Discus-sants include preparers, practitioners, regulators and users of financial statements.

7. References to relevant other CPA Canada material.

8. This publication is part of a series with various publication dates. The dates have been noted on each publication.

Where necessary, icons have been used throughout the publication to refer to many of these features so the reader can easily distinguish the sources of the information.

Insight

Application insights explain, discuss and/or debate a particular IFRS application issue.

Application insights include:• Items discussed but never incorporated into the IASB

agenda are referred to as NIFRICs (non-IFRICs)• IFRS Discussion Group reports

Viewpoints

Viewpoints refer to the Viewpoints: Applying IFRSs in the Min-ing Industry or the Viewpoints: Applying IFRSs in the Oil and Gas Industry — a series of papers that addresses specific IFRS application issues.

E xa mpleExamples illustrate how a particular part of an IFRS might be applied in a specific situation.


Statistics Statistics on particular IFRS application practices highlight common practices and/or application approaches.

Resources Resources include references to relevant other CPA Canada material.

DisclaimerThe authors, publisher and/or CPA Canada accept no responsibility for loss occasioned to any person acting, or refraining from acting, as a result of any material in this publication. In addition, neither the authors nor CPA Canada accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material.


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Introduction to IAS 36IAS 36 seeks to ensure that an entity’s assets are not carried at more than their recoverable amount. The standard provides guidance as to when to assess impairment, how to determine the recoverable amount and when to recognize an impairment loss. It also provides guidance on reversal of impairment losses.

An asset is impaired when its carrying amount exceeds its recoverable amount. When this happens, the carrying amount of the asset is reduced to its recover-able amount. Impairment losses, other than goodwill impairment losses, may be reduced or reversed in future periods if there is a change in the estimate of the asset’s recoverable amount.

IAS 36 includes a substantial Basis for Conclusions document and nine Illustra-tive Examples. IFRIC 10 Interim Financial Reporting and Impairment deals with interim reporting and impairment.

This publication is based on the requirements of IFRS standards and inter-pretations for annual periods beginning January 1, 2013. Where appropriate for illustration purposes, certain note-disclosure examples are presented from financial statements with annual periods ending before January 1, 2013.

Standards UpdateIn May 2013, the IASB published Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36). These narrow-scope amendments to IAS 36 address the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal.

In developing IFRS 13, the IASB decided to amend IAS 36 to require the disclo-sure of information about the recoverable amount of impaired assets, particu-larly if that amount is based on fair value less costs of disposal. However, it came to the IASB’s attention that some of the amendments made to IAS 36 resulted in the requirement being more broadly applied than the IASB had intended. In particular, instead of requiring an entity to disclose the recoverable amount of an asset (including goodwill) or a cash-generating unit for which a material impairment loss was recognized or reversed during the reporting period, the amendment to IAS 36 requires an entity to disclose the recover-able amount of each cash-generating unit for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit is significant in comparison with the entity’s total carrying amount of goodwill or of intangible assets with indefinite useful lives.


The amendments published in May 2013 clarify the IASB’s original intention: the scope of those disclosures is limited to the recoverable amount of impaired assets that is based on fair value less costs of disposal.

The amendments are to be applied retrospectively for annual periods begin-ning on or after January 1, 2014. Earlier application is permitted for periods when the entity has already applied IFRS 13.

Key Standards Referred to in This PublicationThe following is a list of standards mentioned in this publication. Names of the standards have been included for the sake of clarity. The standards have been separated into two groups for purposes of this list — primary and secondary. The primary standards are the main standards that deal with the topic under discussion (in this publication — impairment). The secondary standards are those referred to in this publication but not discussed in depth.

Primary standards:

IAS 36 Impairment of assetsIFRIC 10 Interim financial reporting and impairment

Secondary standards:

IFRS 3 Business combinationsIFRS 4 Insurance contractsIFRS 5 Non-current assets held for sale and discontinued operationsIFRS 8 Operating segmentsIFRS 9 Financial instrumentsIFRS 10 Consolidated financial statementsIFRS 11 Joint arrangementsIFRS 13 Fair value measurementIAS 12 Income taxesIAS 16 Property, plant and equipmentIAS 34 Interim financial reportingIAS 37 Provisions, contingent liabilities and contingent assetsIAS 38 Intangible assetsIAS 39 Financial instruments: recognition and measurement

Subsequently, only the standard number will be referenced, not the name (e.g., IAS 16).


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IAS 36 Definitions[IAS 36.6]

These definitions were taken directly from IAS 36.

Carrying amount Carrying amount is the amount at which an asset is recog-nised after deducting any accumulated depreciation (amorti-sation) and accumulated impairment losses thereon.

Cash-generating unit A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely indepen-dent of the cash inflows from other assets or groups of assets.

Corporate assets Corporate assets are assets other than goodwill that contrib-ute to the future cash flows of both the cash-generating unit under review and other cash-generating units.

Costs of disposal Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.

Depreciable amount Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.

Depreciation (Amortisation) Depreciation (Amortisation) is the systematic allocation of the depreciable amount of an asset over its useful life.

Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See IFRS 13 Fair Value Measurement.)

Impairment loss An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.

Recoverable amount The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use.

Useful life Useful life is either:1. the period of time over which an asset is expected to be

used by the entity; or2. the number of production or similar units expected to be

obtained from the asset by the entity.

Value in use Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.


Overview of Key RequirementsThe following chart provides a high-level overview of the key requirements of IAS 36 and accompanying IASB support materials. The intent is not to repeat the standard but to walk through the main requirements in the standard and identify the areas where detailed guidance is given and where complexity in application exists. Areas of greater complexity will be covered in more detail under the Analysis section of this publication.

As mentioned in the Preface, specific “touchstone” references to IAS 36 have been inserted to help the reader navigate the standard. The referencing is not meant to be all-inclusive but rather to give a starting point for further research in the standard itself.

KEY REQUIREMENTS OF IAS 36

Scope — IAS 36.2-5

Assets included within the Scope of IAS 36:• property, plant and equipment, including

assets carried at a revalued amount• intangible assets, including assets carried

at a revalued amount• goodwill• investment property carried at cost less

accumulated depreciation• biological assets measured at cost less

accumulated depreciation• subsidiaries• associates• joint ventures as defined in IFRS 11• exploration and evaluation assets

(with exceptions noted in IFRS 6)

Assets excluded from the Scope of IAS 36:• inventories• assets arising from construction contracts• deferred-tax assets• assets arising from employee benefits• financial assets within the scope of IAS 39

(or IFRS 9)• investment property measured at fair value• biological assets related to agricultural

activity that are measured at fair value less costs of disposal

• deferred acquisition costs and intangible assets arising from an insurer’s contrac-tual rights under insurance contracts within the scope of IFRS 4

• non-current assets (or disposal groups) classified as held for sale in accordance with IFRS 5

Identifying an asset that may be impaired — IAS 36.7–.17

IAS 36.9 requires an entity to assess at the end of each reporting period whether there is any indication that an asset may be impaired. If there is such indication, the asset is tested for impairment. IAS 36.12–.14 list external and internal impairment indicators and note that the guidance is not exhaustive and that other indicators may exist. The test for impairment involves estimating the recoverable amount and comparing it to the carrying amount at the end of the reporting period. Where the carrying amount exceeds the recoverable amount, an impairment loss exists and is recognized. Depreciation (amortization) calculations and policies for the asset (i.e., useful life, residual value and/or depreciation method) would be revisited in this case.

In addition, the following assets are tested for impairment at least annually, regardless of whether there is any indication of impairment:• indefinite-life intangible assets;• intangible assets not yet available for use; and• goodwill.


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Identifying an asset that may be impaired — IAS 36.7–.17 (continued)

The testing for these assets may be done anytime during the year as long as it is done at the same time each year. For these assets, where the recoverable value from previous esti-mates is significantly greater than the carrying amount, it is not necessary to re-estimate the recoverable amount as long as no events have occurred in the intervening periods that would eliminate the difference (IAS 36.15). Specific conditions are given for indefinite-lived intangible assets (IAS 36.24) and goodwill (IAS 36.99).

Increases in market or other interest rates are not necessarily indicators of impairment.

Measuring recoverable amount — IAS 36.18–.57

IAS 36 requires that assets be tested for impairment at the lowest level for which cash inflows are largely independent of those from other assets or groups of assets. This means that assets are tested for impairment at the level of the individual assets, unless the assets do not gener-ate independent cash inflows. In this case, they will be tested for impairment at the level of the cash-generating unit (CGU) to which they belong, unless certain conditions exist (e.g., the fair value less costs of disposal (FVLCD) exceeds the carrying amount or the value in use (VIU) is close to the FVLCD — for instance in the case of an asset soon to be sold).

In accordance with IAS 36.6, the recoverable amount of an asset or CGU is the higher of its FVLCD and its VIU. Even though this suggests that both FVLCD and VIU must be calculated, it is not always necessary to do so. If either FVLCD or VIU exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. For intangible assets with an indefinite life, the most recent calculation of the recoverable amount made in a prior period may be used in the current period calculation of the recoverable amount if certain conditions are met, as noted in IAS 36.24.

Guidance is given on how to measure FVLCD and VIU, including which cash flows to include and discount rates (IAS 36.28–.57). IFRS Illustrative Example 2 deals with the calculation of VIU and recognition of an impairment loss. IFRS Illustrative Examples 5 and 6 deal with future restructuring and future costs.

Recognizing and measuring an impairment loss — IAS 36.58–.64

IAS 36.6 defines impairment loss as the amount by which the carrying amount of an asset or CGU exceeds its recoverable amount. This could result in a liability being recognized where the loss is greater than the carrying amount, but only if recognition is required by another standard (e.g., if a constructive obligation, as defined by IAS 37, arose as a result of the asset being impaired). The impairment loss is recognized in net income, unless the asset is revalued in accordance with another standard (e.g., using the revaluation method according to IAS 16, in which case a decrease in an asset’s carrying value would be booked to other comprehensive income to the extent that a credit balance exists relating to prior revaluations).

CGUs and goodwill — IAS 36.65-.108

As noted above, the recoverable amount is estimated for an individual asset. Where this is not possible, the recoverable amount is estimated for the CGU to which the asset belongs. Guidance is given for situations where it is not possible to determine the recoverable amount of an individual asset (IAS 36.67). Guidance is also given on how to determine a CGU and to which CGU an asset belongs (IAS 36.68–.71). It may be necessary to consider some recognized liabilities when determining the recoverable amount of a CGU (IAS 36.78). Consistency from period to period in determining the CGU is required unless a change is justifiable. The stan-dard provides a number of examples. These will be referred to in the Analysis section below. IFRS Illustrative Example 1 deals with identification of CGUs, including a retail store chain, a manufacturing plant, a single-product entity, magazine titles and a rental building.



CGUs and goodwill — IAS 36.65-.108

Goodwill must be allocated at the acquisition date (i.e., the date of a business combination) to a CGU or group of CGUs, depending on certain criteria. Goodwill is tested for impairment at this level by comparing the CGU or group’s carrying amount (including allocated goodwill) with the recoverable amount. Depreciation (amortization) calculations and policies for indi-vidual assets within a CGU (i.e., useful life, residual value and/or depreciation method) may have to be revisited even if no impairment is recognized in a CGU (IAS 36.17 and 107). Guid-ance is given regarding disposals of operations within a CGU (IAS 36.86) and reorganizations (IAS 36.87).

Different CGUs may be tested for impairment at different times, provided the timing is consis-tent from year to year. Relief is given regarding detailed calculations of recoverable amounts where certain conditions are met (IAS 36.99). Guidance is given for allocating corporate assets to CGUs (IAS 36.100–.103). IFRS Illustrative Example 8 deals with corporate assets. Where impairment exists, the impairment loss is allocated first to goodwill and then to the other assets in the unit on a pro rata basis (IAS 36.104). There is a limit on how much of the loss can be allocated to each asset (IAS 36.105). Any remaining loss after the allocation would only be recognized as a liability if such recognition is required by another IFRS (IAS 36.108). IFRS Illustrative Example 3 deals with recognition and measurement of related deferred-tax effects.

Reversing an impairment loss — IAS 36.109–.125

At the end of each reporting period, the entity must determine whether the impairment still exists. An impairment loss is reversed if there has been a (favourable) change in the estimates used to determine the recoverable amount of the asset or CGU. Guidance is given in IAS 36.111 and .112 regarding sources of evidence and how to allocate a reversal to the assets of a CGU. Goodwill impairments are not reversed. IFRS Illustrative Example 4 deals with impairment loss reversals.

Disclosure — IAS 36.126–.137

Disclosure requirements for impaired assets are significant and include information about estimates used. IFRS Illustrative Example 9 deals with disclosures. The disclosures required by IFRS 13 are not required for assets for which the recoverable amount is fair value less costs of disposal in accordance with IAS 36 (IFRS 13.07). General disclosure requirements under IAS 1 must also be met, including those related to significant judgments and sources of estimation uncertainty.

Using present value techniques to measure VIU — IAS 36 Appendix A

Appendix A to IAS 36 notes the components of present value measurements and discusses the traditional and expected cash flow approaches to estimate present value.

Impairment testing CGUs with goodwill and non-controlling interests — IAS 36 Appendix C

Appendix C to IAS 36 discusses accounting where non-controlling interests (NCI) exist. IFRS Illustrative Example 7 deals with CGUs and goodwill where there are NCIs.

Analysis of Relevant IssuesThis section expands on certain areas of greater complexity and/or areas requiring significant judgment.


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Identifying an Asset That May Be Impaired

Indicators of Impairment[IAS 36.12-.14]

IAS 36 provides guidance on external and internal sources of information that may provide evidence as to indicators of impairment. This is an area of signifi-cant judgment. Illustration 1 summarizes some indicators from IAS 36. Note that this is not meant to be a comprehensive list.

ILLUSTRATION 1 — SOME INDICATORS OF IMPAIRMENT AS NOTED IN IAS 36

Internal sources of information External sources of information

• obsolescence or physical damage• asset becoming idle• plans to discontinue, dispose of or

restructure operations• decline in economic performance of an

asset• reassessing the useful life of an intangible

asset as finite rather than indefinite• actual cash flows or operating perfor-

mance that are significantly different from those originally budgeted

• other as noted in IAS 36

• certain declines in an asset’s value• changes in technological, market, eco-

nomic or legal environment• certain increases in market interest or

other rates of return that are likely to affect the discount rate used in calculat-ing VIU

• carrying amount of the net assets of the entity exceeds its market capitalization

• other as noted in IAS 36

The following examples look at two scenarios for possible indicators of impairment.

APPLICATION EXAMPLE

Internal indicators of impairment related to performance

E xa mpleMachinery Inc., a highly profitable manufacturer of commercial machinery, has acquired a manufacturing facility that produces component parts used in the production of its machines. Management has determined the facility to be a CGU. The component parts produced are used only internally as part of the manufacturing of Machinery Inc.’s machines; they are not sold externally (even though there is an active market for the facility’s output). Management acquired the facility in hopes of developing component parts for its manu-facturing process that would be cheaper than those of its existing suppli-ers. Management hoped that this cost efficiency would increase Machinery Inc.’s market share, revenues and profitability. Unfortunately, the expected increases did not materialize due to other unanticipated market factors.

The fact that the facility is performing below management’s projections indicates that the CGU may be impaired. The fact that the company is profitable as a whole does not mean that the CGU is not impaired. Man-agement acquired the facility based on expected results that have not yet been realized. The facility should, therefore, be tested for impairment. Other assets and CGUs should be tested for impairment when there are indicators of impairment.


APPLICATION EXAMPLE

Internal indicators of impairment — adverse change of use — idle asset

E xa mpleProducer Co. uses Machine J to manufacture Product A; however, Machine J has recently been idle due to a change in consumer needs.

In this case, management should review Machine J for impairment because the change in the extent to which Machine J is used has had a negative impact on the cash flows directly attributable to it. If a change in the way an asset is used has an adverse effect on the entity, that is an indicator of impairment.

The following extract represents an excerpt from the financial statements of Nexen Inc. showing indicators of impairment. The decrease in gas prices and increase in future abandonment charges are external indicators.

EXTRACT 1 — EXCERPT FROM NEXEN INC. 2012 FINANCIAL STATEMENTS

NOTE 5B — INDICATORS OF IMPAIRMENT

23

(B) IMPAIRMENT In the fourth quarter of 2012, lower estimated future North American natural gas prices and increases in future abandonment costs resulted in a $237 million non-cash impairment charge for natural gas properties in North America. These assets are included in our Conventional North America segment.

DD&A expense for 2011 includes non-cash impairment charges of $322 million for our oil and gas properties in our Conventional North America segment. Canadian natural gas assets were impaired $234 million in the second half of 2011 due to lower estimated future natural gas prices and performance-related negative reserve revisions. In the fourth quarter of 2011, lower estimated future natural gas prices and higher estimated future abandonment costs resulted in an $88 million impairment of mature Gulf of Mexico properties.

The properties were written down to the higher amount of value-in-use and estimated fair value less costs to sell. We estimated fair value based on discounted future net cash flows using estimated future prices, a discount rate of 9% and management’s estimate of future production, capital and operating expenditures.

(C) ASSET DERECOGNITIONS Nexen’s original strategy for future oil sands development was to build duplicates of the existing Long Lake SAGD facilities and upgrader. In 2011, we revised our strategy to focus on smaller, phased, SAGD-only projects. As a result, previously capitalized design and engineering costs of $253 million on the future phases were expensed in 2011.

6. GOODWILL

(A) CARRYING AMOUNT OF GOODWILL Goodwill As at December 31, 2010 286 Effect of Changes in Exchange Rate 7 Dispositions (2) As at December 31, 2011 291 Effect of Changes in Exchange Rate (6) As at December 31, 2012 285

December 31 December 31 2012 2011 UK Conventional 277 284 Corporate and Other 8 7 Total 285 291

(B) IMPAIRMENT TESTING OF GOODWILL Goodwill is attributable to our UK Conventional and Corporate and Other segments which have been allocated for impairment testing purposes to the cash-generating units that reflect the lowest level at which goodwill is attributable.

UK Conventional The recoverable amount of the UK group was based on cash flow projections discounted at a rate of 9%. The significant assumptions used in the cash flow projections are:

Commodity prices: these assumptions are based on estimated market-based future prices, the global supply-demand balance for each commodity, other macroeconomic factors, historical trends and variability.

Discount rates: the rates used in the calculation are based on an industry-specific discount rate, adjusted to take into consideration country and project risks specific to the cash-generating unit.

The following extract represents an excerpt from the financial statements of Suncor Energy Inc. showing indicators of impairment. The political unrest is an external indicator, but the decision to suspend operations is an internal indicator.

EXTRACT 2 — EXCERPT FROM SUNCOR ENERGY INC. 2012 FINANCIAL STATEMENTS

NOTE 9 — INDICATORS OF IMPAIRMENT

7. OTHER INCOME

Other Income consists of the following:

($ millions) 2012 2011

Energy trading activitiesChange in fair value of contracts 246 301Unrealized losses on inventory valuation (13) (19)

Risk management activities 1 (22)Investment and interest income 80 141Renewable energy grants 59 64Other 35 (12)

408 453

8. OPERATING, SELLING AND GENERAL

Operating, Selling and General expense consists of the following:

($ millions) 2012 2011

Contract services 4 069 4 107Employee benefit costs (1) 2 697 2 062Materials 725 882Energy 613 712Equipment rentals and leases 330 363Travel, marketing and other 514 298

8 948 8 424

(1) The company incurred $3.2 billion of employee benefit costs for the year ended December 31, 2012 (2011 – $2.5 billion), of which$2.7 billion (2011 – $2.1 billion) was recorded as employee benefits in Operating, Selling and General expense. Employee benefits expenseincludes salaries, benefits and share-based compensation.

9. ASSET IMPAIRMENT

Oil Sands

During the fourth quarter of 2012, the company recognized after-tax impairment charges of $1.487 billion related to the

Voyageur upgrader project in its Oil Sands business. As a result of the challenging economic outlook for the Voyageur upgrader

project, an impairment test was performed at December 31, 2012, using a fair value less cost to sell methodology. The company

used an expected future cash flow approach, with a risk-adjusted discount rate of 10% to perform the calculation. As at

December 31, 2012, the company’s carrying value for assets relating to the Voyageur upgrader project was approximately

$345 million.

The impairment charges were recorded as part of Depreciation, Depletion, Amortization and Impairment expense.

Syria

In December 2011, the company declared force majeure under its contractual obligations, suspended its operations and ceased

recording production due to political unrest and international sanctions affecting that country. An impairment test was

performed at that time, which determined that the assets were not impaired.

As there had been no resolution of the political situation at the end of the second quarter of 2012, another impairment test

was performed on the company’s Syrian assets. As a result, the company recognized after-tax impairment charges and write-

downs of $694 million. The impairment losses were recorded as part of Depreciation, Depletion, Amortization and Impairment

expense and charged against Property, Plant and Equipment ($604 million) and other current assets ($23 million). The company

also wrote off the remainder of its Syrian receivables ($67 million). A write-down of receivables of $64 million was previously

recorded at December 31, 2011.

During the fourth quarter of 2012, the company received $300 million of risk mitigation proceeds related to its Syrian

operations. The proceeds are subject to a provisional repayment should the company resume operations in Syria and therefore,

have been recorded as a non-current provision at December 31, 2012.

After receipt of the risk mitigation proceeds, an impairment test was performed at December 31, 2012, using a value-in-use

methodology. The company used an expected cash flow approach based on 2011 year-end reserves data updated for the

SUNCOR ENERGY INC. ANNUAL REPORT102 2012


June 2013

company’s best estimate of price realizations and remaining reserves, with three scenarios representing i) resumption of

operations in one year, ii) resumption of operations in five years, and iii) total loss. The two scenarios where the company

resumes operations incorporated repayment of the risk mitigation proceeds in accordance with the terms of the agreement.

These scenarios were equally weighted based on the company’s best estimates, and present valued using a risk-adjusted discount

rate of 19%. Based on this assessment, the company recognized an impairment reversal of $177 million related to Syrian assets

in its Exploration and Production business.

The impairment reversal of $177 million was recorded in the fourth quarter of 2012 as part of Depreciation, Depletion,

Amortization and Impairment expense. A 2% change in discount rates and a 5% change in pricing assumptions would each

have an impact on after-tax earnings of approximately $20 million.

The resulting carrying value of the company’s Property, Plant, and Equipment in Syria, net of the risk mitigation provision, at

December 31, 2012 was approximately $130 million.

Libya

In the second quarter of 2011, the company recognized after-tax impairment charges of $514 million related to Libyan assets in

its Exploration and Production business. At that time, production had been shut in due to political violence in Libya. The

impairment losses were recorded as part of Depreciation, Depletion, Amortization and Impairment expense, and charged against

Property, Plant and Equipment ($259 million), Exploration and Evaluation assets ($211 million), and Inventories ($44 million).

During the fourth quarter of 2011, the company reversed $11 million of the impairment charge that related to crude oil

inventories. The reversal was the result of lifting certain political sanctions, and the joint venture partner confirming the existence

of previously written off crude oil.

Production payments resumed in January 2012 with production in all major fields restarted in the first quarter of 2012. As a

result, a valuation assessment was performed. The company used an expected cash flow approach based on 2012 year-end

reserves data with a risk-adjusted discount rate of 17% to reflect uncertainty related to continued political unrest in the region,

current production levels and the timing and success of future exploration drilling commitments. No reversal of impairment was

recorded at December 31, 2012. A 2% change in discount rates would impact after-tax earnings by approximately $90 million

while a 5% change in pricing assumptions would impact after-tax earnings by approximately $70 million.

The carrying value of Suncor’s net assets in Libya as at December 31, 2012, net of asset impairment and write-offs, was

approximately $650 million.

Other

During the fourth quarter of 2012, the company recognized an after-tax impairment charge of $65 million related primarily to

certain East Coast Canada exploration and evaluation assets as well as natural gas Arctic land leases in the Exploration and

Production business as a result of future development uncertainty. In addition, the company also recognized an after-tax

impairment charge of $63 million related to CGUs in the Exploration and Production business due to a decline in price forecasts.

The recoverable amount was determined using a fair value less cost to sell methodology, with the expected cash flow approach

based on 2012 year-end reserves data and a risk-adjusted discount rate of 10%. A 2% increase in discount rates would

decrease after-tax earnings by approximately $90 million while a 5% decrease in pricing assumptions would decrease after-tax

earnings by approximately $30 million.

During the fourth quarter of 2011, the company recognized a charge of $100 million to reflect the write-down of certain

natural gas CGUs in the Exploration and Production business to reflect the recoverable amount based on discounted cash flows.



Measuring Recoverable Amount[IAS 36.18, .19]

Illustration 2 shows the basic steps for measuring the recoverable amount.

ILLUSTRATION 2 — DECISION TREE — RECOVERABLE AMOUNT

Carryingvalue

Fair value less costsof disposal

Value in use

Compared with

Recoverable amount

Higher of


Recall that it may not be necessary to calculate both the VIU and the FVLCD where either the VIU or FVLCD exceeds the carrying amount.

The following extracts represent excerpts from the financial statements of Royal Bank of Canada and Pizza Pizza Royalty Corp. showing whether VIU or FVLCD were used in measuring the recoverable amount.

EXTRACT 3 — EXCERPT FROM ROYAL BANK OF CANADA 2012 FINANCIAL

STATEMENTS

NOTE 11 — CALCULATION OF RECOVERABLE AMOUNT

(Millions of Canadian dollars) Land BuildingsComputer

equipment

Furniture,fixtures

and otherequipment

Leaseholdimprovements

Work inprocess Total

CostBalance at November 1, 2010 $ 216 $ 934 $ 1,954 $ 1,467 $ 1,641 $ 293 $ 6,505Assets from discontinued operations (105) (269) (38) (154) (81) (12) (659)Additions (1) 6 40 77 56 34 612 825Acquisitions through business combinations – – – – – – –Transfers from work in process 1 66 95 53 156 (371) –Disposals – (5) (34) (54) (23) – (116)Foreign exchange translation (2) 7 (20) (17) (24) (1) (57)Other – 28 (219) 2 (19) 11 (197)

Balance at October 31, 2011 $ 116 $ 801 $ 1,815 $ 1,353 $ 1,684 $ 532 $ 6,301

Accumulated depreciationBalance at November 1, 2010 $ – $ 498 $ 1,511 $ 993 $ 1,002 $ – $ 4,004Assets from discontinued operations – (108) (31) (111) (46) – (296)Depreciation – 18 165 76 128 – 387Impairment loss (reversal) – – – – – – –Disposals – (3) (34) (49) (20) – (106)Foreign exchange translation – 3 (11) (5) (12) – (25)Other – 19 (168) 3 (7) – (153)

Balance at October 31, 2011 $ – $ 427 $ 1,432 $ 907 $ 1,045 $ – $ 3,811

Net carrying amount at October 31, 2011 $ 116 $ 374 $ 383 $ 446 $ 639 $ 532 $ 2,490

(1) At October 31, 2012, we had total contractual commitments of $96 million to acquire premises and equipment (October 31, 2011 – $154 million; November 1, 2010 – $72 million).

Note 11 Goodwill and other intangibles

GoodwillThe following table presents changes in the carrying amount of goodwill by CGU for the years ended October 31, 2012 and 2011.

(Millions of Canadian dollars)Canadian

BankingCaribbean

Banking

CanadianWealth

ManagementGlobal AssetManagement

U.S. WealthManagement

InternationalWealth

Management InsuranceInvestorServices

Investor &Treasury

Services (1)Capital

Markets Total

At November 1, 2010 $ 1,931 $ 1,492 $ 545 $ 765 $ 528 $ 119 $ 126 $ 146 $ – $ 901 $ 6,553Acquisitions 11 – – 1,099 – – – – – 2 1,112Currency translations – (41) (3) 17 (12) (1) (8) (2) – (16) (66)Other changes 11 – – – – – – – – – 11At October 31, 2011 $ 1,953 $ 1,451 $ 542 $ 1,881 $ 516 $ 118 $ 118 $ 144 $ – $ 887 $ 7,610Acquisitions – – – – – 8 – – – – 8Transfers – – – – – – – – 52 (52) –Impairment losses (2) – – – – – – – (142) – – (142)Currency translations – – – 8 1 – – (2) – 2 9Other changes (2) – 1 – – 1 – – – – –At October 31, 2012 $ 1,951 $ 1,451 $ 543 $ 1,889 $ 517 $ 127 $ 118 $ – $ 52 $ 837 $ 7,485

(1) Effective October 31, 2012, Investor & Treasury Services is a newly created CGU that includes our former Investor Services CGU and certain related businesses that were part of our CapitalMarkets CGU. The transfer of goodwill was based on the relative fair value of the transferred businesses. See Note 30 for further details on our business segments.

(2) During the second quarter of 2012, we recorded an impairment loss of $142 million in our Investor Services CGU related to our acquisition of the remaining 50% interest in RBC Dexia. SeeNote 12 for further details.

Key inputs and assumptionsWe perform our annual impairment test by comparing the carrying amount of each CGU to its recoverable amount. The recoverable amount of aCGU is represented by its value in use, except in circumstances where the carrying amount of a CGU exceeds its value in use. In such cases, wedetermine the CGU’s fair value less costs to sell and its recoverable amount is the greater of its value in use and fair value less costs to sell.

In our annual impairment tests performed as at August 1, 2012 and August 1, 2011 and our goodwill impairment test performed ontransition to IFRS as at November 1, 2010, the recoverable amounts of our CGUs were based on value in use, except for Caribbean Banking as atAugust 1, 2012 and 2011, which was based on fair value less costs to sell.

We calculate value in use using the discounted cash flow (DCF) method that projects future cash flows, which are discounted to their present value. Future cash flows are based on financial plans agreed by management for a five-year period, estimated based on forecast results, business initiatives, planned capital investments and returns to shareholders. Cash flow projections beyond the initial five-year period are assumed to increase at a constant rate using a nominal long-term growth rate (terminal growth rate).

The estimation of value in use involves significant judgment in the determination of inputs to the model and is most sensitive to changes infuture cash flows, discount rates and terminal growth rates applied to cash flows beyond the forecast period. These key inputs and assumptionsused to determine the recoverable amount of each CGU using value in use were tested for sensitivity by applying a reasonably possible changeto those assumptions. The discount rates were increased by 1%, terminal growth rates were decreased by 0.5%, and future cash flows werereduced by 10%. As at August 1, 2012, no change in an individual key input or assumption as described, would result in a CGU’s carrying valueexceeding its recoverable amount.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2012 145

EXTRACT 4 — EXCERPT FROM PIZZA PIZZA ROYALTY CORP. 2012 FINANCIAL

STATEMENTS

NOTE 4 — CALCULATION OF RECOVERABLE AMOUNT

Pizza Pizza Royalty Corp. Notes to the Consolidated Financial Statements For the years ended December 31, 2012 and 2011 (Expressed in thousands of Canadian dollars except number of shares and per share amounts)

12

Annually, on January 1 (the Adjustment Date), the Royalty Pool is adjusted to include the forecasted system sales from new Pizza Pizza restaurants opened on or before December 31 of the prior year, less system sales from any Pizza Pizza restaurants that have been permanently closed during the year. Similarly, on the Adjustment Date, the Royalty Pool is adjusted to include the forecasted system sales from new Pizza 73 restaurants opened on or before September 1 of the prior year, less any Pizza 73 restaurants permanently closed during the calendar year.

In return for adding net additional royalty revenue, PPL receives the right to indirectly acquire additional shares of the Company through an adjustment to the Class B and Class D Exchange Multiplier (see note 7).

As a result of adding new restaurants to the Royalty Pool, as described in note 7, the Rights and Marks increased by $111 for the year ended December 31, 2012 (December 31, 2011 – $921), resulting in a corresponding increase in exchangeable units.

Impairment test of the Rights and Marks

The Company performed impairment tests for both the Pizza Pizza and Pizza 73 Rights and Marks at December, 31, 2012 and December 31, 2011 in accordance with the accounting policy as described in note 2. The recoverable amount of each cash generating unit (CGU) was determined based on value-in-use calculations. These calculations used cash flow projections based on financial budgets approved by management covering a one year period and extrapolated for five years. Cash flows beyond the one year period are extrapolated using the estimated growth rates stated below.

The key assumptions used for the value-in-use calculation at December 31, 2012 were as follows:

Growth ratePre-tax

discount ratePizza Pizza CGU 3.5% 11.6%Pizza 73 CGU 3.5% 12.8%

The key assumptions used for the value-in-use calculation at December 31, 2011 were as follows:

Growth ratePre-tax

discount ratePizza Pizza CGU 3.5% 11.6%Pizza 73 CGU 3.5% 12.8%

The impairment tests performed resulted in no impairment of the Rights and Marks at December 31, 2012 or 2011.

5. Trade and Other Payables

December 31, 2012

$

December 31, 2011

$

Accruals 174 70Other payables 291 273Total trade and other payables 465 343


June 2013

APPLICATION STATISTIC

Survey of Selected Accounting Policies of Junior Oil and Gas Entities — January 2013

StatisticsThis survey of selected junior oil and gas company financial statements showed that, where an impairment loss or reversal existed, in calculat-ing recoverable amount, 65% used FVLCD, 17% used VIU and 17% did not disclose.

In practice, it is not uncommon for FVLCD to result in a higher recoverable amount than VIU because a FVLCD calculation is typically less limiting than VIU, supporting the inclusion of factors a market participant may take into consideration such as possible reserves or future internal synergies (e.g., uncommitted restructurings).

The publication is available online at www.cica.ca/ifrs

Determining Recoverable Amount at the Level of the Individual Asset or CGU[IAS 36.19 and 22]

The recoverable amount is determined at the individual asset level unless the asset does not generate cash inflows that are largely independent of those of other assets or groups of assets. Notwithstanding this, according to IAS 36.22, impairment may still be tested at the level of the individual asset if either:• the asset’s FVLCD is greater than its carrying amount (as mentioned ear-

lier — in which case, the asset is not impaired); or• the asset’s VIU can be estimated to be close to its FVLCD (e.g., the values

essentially do not differ) and FVLCD can be determined.

When it is not possible to isolate an asset’s cash inflows, and its recoverable amount cannot be determined through either of the above-mentioned alter-natives, impairment is tested at the level of that asset’s CGU. The example in IAS 36.107 looks at this issue.

APPLICATION EXAMPLE

IAS 36.107 — Impairment testing at individual asset level

E xa mpleThe following example is provided in IAS 36 to illustrate a situation where the impairment test is done at the individual asset level because the asset’s VIU is close to its FVLCD. Assumption 2 in the example illustrates this.

A machine has suffered physical damage but is still working, although not as well as before it was damaged. The machine’s fair value less costs of disposal is less than its carrying amount. The machine does not generate independent cash inflows. The smallest identifiable group of assets that includes the machine and generates cash inflows that are largely indepen-dent of the cash inflows from other assets is the production line to which the machine belongs. The recoverable amount of the production line shows that the production line taken as a whole is not impaired.


APPLICATION EXAMPLE

IAS 36.107 — Impairment testing at individual asset level

Assumption 1: budgets/forecasts approved by management reflect no com-mitment of management to replace the machine.

The recoverable amount of the machine alone cannot be estimated because the machine’s value in use:1. may differ from its fair value less costs of disposal; and2. can be determined only for the cash-generating unit to which the

machine belongs (the production line).

The production line is not impaired. Therefore, no impairment loss is rec-ognised for the machine. Nevertheless, the entity may need to reassess the depreciation period or the depreciation method for the machine. Perhaps a shorter depreciation period or a faster depreciation method is required to reflect the expected remaining useful life of the machine or the pattern in which economic benefits are expected to be consumed by the entity.

Assumption 2: budgets/forecasts approved by management reflect a com-mitment of management to replace the machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal are esti-mated to be negligible.

The machine’s value in use can be estimated to be close to its fair value less costs of disposal. Therefore, the recoverable amount of the machine can be determined and no consideration is given to the cash-generating unit to which the machine belongs (ie the production line). Because the machine’s fair value less costs of disposal is less than its carrying amount, an impair-ment loss is recognised for the machine.

The identification of a CGU involves significant judgment in terms of the level of asset aggregation. The following should be kept in mind when applying the definition of a CGU:• The smallest identifiable group of assets that generates cash inflows is a

matter of fact.• The determination of what “largely independent” means is a matter of

judgment.• The sole determinant of a CGU is the cash inflows.• Practically, this means that entities will have to identify CGUs by looking at

the smallest group of assets. This group of assets constitutes a CGU unless its cash inflows depend on other assets.


June 2013

Examples of a CGU may include:• an individual retail store or hotel, which would usually generate cash inflows

that are largely independent of the others in a group even though they might share common services such as marketing and finance;

• a factory with a single production line where there is an external market for the product at an intermediate stage; and

• a service route provided by a transport business where the assets deployed to each route, as well as the route’s cash flows, can be separately identified.

Illustration 3 summarizes the level of impairment testing under IFRSs. It has been assumed that it may be better to start testing by trying to determine FVLCD as a first step. If FVLCD can be determined and it exceeds the carrying amount, or certain other conditions apply, it may not be necessary to calcu-late VIU. Having said that, you could also start by trying to measure VIU first, although this may be more difficult since it is necessary to determine cash flows.

ILLUSTRATION 3 — LEVEL OF IMPAIRMENT TESTING

[IAS 36.19-.22]

Does the FVLCD exceed carrying

amount?Not impaired

Can the asset’s VIU be estimated to be close to its FVLCD?

The asset’s recov-erable value is not determinable and impairment is as-sessed at the level

of the CGU.

Does the asset gen-erate cash fl ows that

are largely inde-pendent of those

from other assets or groups of assets?

The asset’s recover-able amount is de-terminable and im-

pairment is assessed at the level of the individual asset.

Is FVLCDmeasurable?

YES YES

YES

YESNO

NO

NO

NO

Extract 5 represents an excerpt from the 2012 financial statements of Metro Inc. showing the level at which the assets were tested for impairment.


EXTRACT 5 — EXCERPT FROM METRO INC. 2012 FINANCIAL STATEMENTS

NOTE 16 — CALCULATION OF RECOVERABLE AMOUNTNotes to consolidated financial statementsSeptember 29, 2012 and September 24, 2011(Millions of dollars, unless otherwise indicated)

- 85 -

Intangible assets with indefinite useful lives were as follows:

Banners Private labels Loyalty programs Total

Balance as at September 26, 2010 53.3 33.1 22.1 108.5Transfers 1.4 1.4

Balance as at September 24, 2011 53.3 33.1 23.5 109.9Acquisitions through business

combinations (note 6) 57.0 6.4 63.4

Balance as at September 29, 2012 110.3 39.5 23.5 173.3

Net additions of intangible assets excluded from the consolidated statement of cash flows amounted to $6.5 in 2012 ($11.0 in 2011).

For impairment testing, the carrying amount of certain private labels was allocated to the unique operating segment. The recoverable amount was determined based on its value in use which was calculated using pre-tax cash flow forecasts from the management-approved budgets. The forecasts reflected past experience. A pre-tax discount rate of 14.4% was used without considering a growth rate.

Impairment testing of loyalty programs was conducted at the level of the asset itself. The recoverable amount was determined based on its fair value less costs to sell, which was calculated using the capitalized excess EBIT method. The estimated EBIT directly allocated to the programs, after deduction of the return on contributory assets, was based on historical data reflecting past experience. The earnings multiple used was 6.9 considering a growth rate of 2.0% corresponding to the consumer price index.

Impairment testing of banners and certain private labels were conducted at the level of the asset itself. The recoverable amount was determined based on its fair value less costs to sell, which was calculated using the royalty-free licence method. The estimated royalty rate was based on information from external sources and historical data reflecting past experience. For the banners, the earnings multiples used were 7.5 et 10.0 considering growth rates of 2.0% and 3.0% corresponding to the consumer price index and banners' growth. For certain private labels, the earnings multiple used was 11.1 considering a growth rate of 3.0% corresponding to the consumer price index and the growth of these private labels.

No reasonably possible change of any of the previously mentioned key assumptions would result in a carrying amount higher than the recoverable amount.

Relief for Determination of Recoverable Amount — Certain Intangible Assets and Goodwill[IAS 36.15, .24, .99]

Because the requirement to test certain intangible assets and goodwill for impairment annually may be onerous, relief has been provided for the determi-nation of the recoverable amount. IAS 36.15 provides some general guidance for indefinite-lived intangibles assets, intangible assets not yet available for use and goodwill by noting that the recoverable amount might not need to be estimated, for instance where:• the previous estimate of recoverable amount exceeds carrying amount by

a significant amount; and• no events have occurred which would eliminate that difference.

IAS 36.24 and .99 give more explicit guidance for indefinite-lived intangible assets and goodwill.


June 2013

Illustration 4 shows a decision tree that helps determine whether a prior mea-sure of recoverable amount for an indefinite-lived intangible asset and/or goodwill may be used in impairment testing.

ILLUSTRATION 4 — RELIEF REGARDING CALCULATION OF RECOVERABLE AMOUNT

FOR INDEFINITE-LIVED INTANGIBLES AND GOODWILL

Intangible assets — indefi nite life and/or

goodwill

Where intangible asset and/orgoodwill tested for impairment

as part of a CGU

Where intangible asset tested forimpairment at individual asset level

Most recent calculation of recov-erable amount exceeds carrying

amount by a substantial margin and there is only a remote chance that the current recoverable amount would be less than the carrying

amount?[IAS 36.24]

YES

Use most recent calculation of recov-

erable amount

Must calculate new recoverable amount

Use most recent calculation of recov-

erable amount

NO YES

Most recent calculation of recov-erable amount exceeds carrying

amount by a substantial margin and there is only a remote chance that the current recoverable amount would be less than the carrying

amount and the assets and liabilities of the CGU have not changed

signifi cantly?[IAS 36.24 and .99]

Extract 6 represents an excerpt from the 2012 Air Canada financial statement showing an instance whereby the company utilized the prior-year calculation of recoverable amount in the current-year impairment test.


EXTRACT 6 — EXCERPT FROM AIR CANADA 2012 NOTES TO FINANCIAL

STATEMENTS

NOTE 5 — RELIEF FROM CALCULATING RECOVERABLE AMOUNT

2012 Consolidated Financial Statements and Notes

22

For the annual 2012 impairment review, the most recent calculations from the preceding period were carried forward as the calculation of the recoverable amount exceeded the carrying amount by a substantial margin, the assets and liabilities making up the CGU had not changed significantly and no events had occurred or circumstances had changed which would indicate that the likelihood of the recoverable asset not exceeding the carrying value was remote.

Key assumptions used for the value in use calculations in fiscal 2011 were as follows:

2011

Pre-tax discount rate 15.6%

Long-term growth rate 2.5%

Jet fuel price range per barrel $125 – $135

The recoverable amount of both cash-generating units based on value in use exceeded their respective carrying values by approximately $1,400. If the discount rate were increased by 380 basis points, the excess of recoverable amount over carrying value would be reduced to nil.

FVLCD[IAS 36.6, .20, .21, .28, .53A]

Fair value is the price that would be received to sell an asset (or paid to trans-fer a liability) in an orderly transaction between market participants at the measurement date (IAS 36.06). Fair value reflects assumptions that market participants would make when pricing an asset. The fair value of an asset is determined in accordance with IFRS 13. If there is no active market for the asset being valued, the entity must calculate the fair value using a valuation technique. The entity should select the technique (e.g., discounted cash flows) that is most appropriate for the asset being valued. For instance, it might make sense to value an operating hotel using a discounted cash flow method. More than one model may be used. In the case of the hotel previously mentioned, the entity may choose to value the hotel by looking at market-comparable prices for similar hotels in the geographical area. Maximum use of externally observable inputs is optimal and the fair value hierarchy should be used to classify inputs. An entity is not required to provide the disclosures required by IFRS 13.

In accordance with IFRS 13, fair value measurement considers utilization of the asset at its highest and best use (i.e., the use that would provide maximum economic benefit to a market participant).

Costs of disposal are incremental costs directly attributable to the disposal of an asset, such as legal costs and similar transaction fees, costs of removing the asset and direct incremental costs to bring an asset into condition for its sale (excluding finance costs and income tax expense).


June 2013

If it is not possible to measure FVLCD because there is no basis for making a reliable estimate of the price to sell the asset in an orderly transaction, the entity would use VIU to determine the recoverable amount.

VIU[IAS 36.6, .20, .21, .30– 57, .69, .70, .A15–.A21]

VIU is the present value of the future cash flows expected to be derived from an asset or CGU (IAS 36.6). VIU reflects factors specific to an entity (e.g., value from asset grouping, synergies between assets, legal rights or restrictions, tax benefits or burdens). It is therefore different from a fair value measure, which is a market-based measure calculated according to IFRS 13. Some of the differ-ences are highlighted in Illustration 5.

ILLUSTRATION 5 — THE DIFFERENCE BETWEEN FVLCD AND VIU

FVLCD [IFRS 13]

VIU [IAS 36.53A]

• measured in accordance with IFRS 13 guidance

• includes only those factors that a market participant would include in valuing the asset (market participant perspective)

• may be measured using market prices or a valuation technique used for estimating market prices

• considers highest and best use of a non-financial asset (which may be different from actual use by the entity, although the entity’s current use of a non-financial asset may be assumed to be the highest and best use unless there is evidence to the contrary)

• measured in accordance with IAS 36 guidance

• includes those factors that an entity would include in valuing the asset (entity-specific)

• examples of factors include: o additional value derived from a group

of assets o synergies between the asset being

measured and other entity-owned assets

o legal rights or restrictions relating to the asset that are specific to the entity

VIU requires the discounting of future cash flows to be derived from the asset’s continuing use and from its ultimate disposal. Judgment is required to make realistic estimates of future cash flows and to determine appropriate discount rates to calculate the present value of those future cash flows.

Estimates of future cash flows must be based on reasonable and support-able assumptions that represent management’s best estimate of the range of economic conditions that will exist over the asset’s remaining useful life. Greater weight must be given to external evidence. Management must assess the reasonableness of its assumptions by examining the causes of differences between past cash flow projections and actual cash flows.


As a starting point, estimates of future cash flows are based on the most recent financial budgets/forecasts approved by management. There is a rebut-table presumption that it is not possible to make detailed, explicit and reli-able financial budgets/forecasts of future cash flows for periods longer than five years. Therefore, projections based on budgets/forecasts must cover a maximum period of five years, unless management can demonstrate its abil-ity (based on past experience) to forecast cash flows accurately over a longer period. Projections beyond the period covered by the most recent budgets/forecasts are estimated by extrapolating the projections based on the bud-gets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate must not exceed the long-term average growth rate for the products, industries, country or countries in which the entity operates, or for the market in which the assets are used, unless a higher rate can be justified.

A chart showing items to be included in, and excluded from, cash flows is shown in Illustration 6.

ILLUSTRATION 6 — CALCULATING VIU — CASH FLOWS

Items to include in cash flows [IAS 36.39-.42, .47, .49, .52, .53]

Items to exclude from cash flows [IAS 36.43-.45, .48, .50]

• general inflation where this is not included in the discount rate

• projections of cash inflows from continu-ing use of the asset

• projections of cash outflows that are necessarily incurred to generate the above cash inflows and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset

• projections for cash outflows include: o those for day-to-day servicing of the

asset o those for future overheads that can

be attributed directly, or allocated on a reasonable and consistent basis, to the use of the asset

o those expected to be incurred before an asset is ready for use or sale

• net cash flows to be received or paid for the disposal of the asset at the end of its useful life

• net cash flows relating to a restructuring where the entity has committed to the restructuring, as defined by IAS 36.46

• cash flows from assets that generate cash flows that are largely independent of the asset under review

• cash outflows related to obligations recognized as liabilities (e.g., payables, pensions or provisions)

• future cash outflows or related cost sav-ings or benefits expected to arise from a future restructuring to which an entity has not committed

• future cash outflows that will improve or enhance the performance of the asset, or the related cash inflows that are expected to arise from such outflows

• cash inflows or outflows from financing activities

• income tax receipts or payments


June 2013

The following insight looks at the issue of what to include in cash flows. Note the date of the NIFRIC. Even though some of the NIFRICs are older, they may still provide some insight into how the standards are interpreted by the stan-dard setters.

APPLICATION INSIGHTS

Calculation of value in use

Source NIFRIC

Meeting Date November 2010

Insight

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Calculation of value in use

The Committee received a request for clarification on whether esti-mated future cash flows expected to arise from dividends, that are calculated using dividend discount models (DDMs), are an appropriate cash flow projection when determin-ing the calculation of value in use of a cash generating unit (CGU) in accordance with paragraph 33 of IAS 36.

The Committee noted that para-graphs 30 – 57 and paragraphs 74 – 79 of IAS 36 provide guidance on the principles to be applied in calcuating value in use of a CGU. The Committee observed that cal-culations using a DDM which values shares at the discounted value of future dividend payments, may be appropriate when calculating value in use of a single asset, for example when an entity applies IAS 36 in determining whether an investment is impaired in the separate financial statements of an entity. The Com-mittee understands that some DDMs may focus on future cash flows that are expected to be available for distribution to shareholders, rather than future cash flows from divi-dends. Such a DDM could be used to calculate value in use of a CGU in consolidated financial statements, if it is consistent with the principles and requirements in IAS 36.

The committee noted that the cur-rent principles in IAS 36 relating to the calculation of value in use of a CGU are sufficient and that any guidance that it could provide would be in the nature of application guid-ance. Consequently, the Committee decided not to add the issue to its agenda.

Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at www.ifrs.org/.


The example in IAS 36.78 looks at the calculation of cash flows for the VIU measurement where there are restoration costs.

APPLICATION EXAMPLE

IAS 36.78 — Calculation of cash flows where restoration costs exist

E xa mpleThe following example is provided in IAS 36.78 to illustrate calculation of cash flows where restoration costs exist.

A company operates a mine in a country where legislation requires that the owner must restore the site on completion of its mining operations. The cost of restoration includes the replacement of the overburden, which must be removed before mining operations commence. A provision for the costs to replace the overburden was recognised as soon as the overburden was removed. The amount provided was recognised as part of the cost of the mine and is being depreciated over the mine’s useful life. The carrying amount of the provision for restoration costs is CU500, which is equal to the present value of the restoration costs.

The entity is testing the mine for impairment. The cash-generating unit for the mine is the mine as a whole. The entity has received various offers to buy the mine at a price of around CU800. This price reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs for the mine are negligible. The value in use of the mine is approximately CU1,200, excluding restoration costs. The carrying amount of the mine is CU1,000.

The cash-generating unit’s fair value less costs of disposal is CU800. This amount considers 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 CU700 (CU1,200 less CU500). The carrying amount of the cash-generating unit is CU500, which is the carrying amount of the mine (CU1,000) less the carrying amount of the provision for restoration costs (CU500). Therefore, the recov-erable amount of the cash-generating unit exceeds its carrying amount.

This calculation must reflect the following elements, either as adjustments to the future cash flows or as adjustments to the discount rate:• expectations about possible variations in the amount or timing of future

cash flows;• the premium for bearing the uncertainty inherent in the asset; and• other factors that market participants would reflect in pricing the future

cash flows.

The discount rate used must be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted. This represents the return investors would require if they were to choose an investment that would generate cash flows of the same amounts, timing and risk profile as those the entity expects from the asset. The discount rate is, therefore, inde-pendent of the way the asset is financed.


June 2013

When an asset-specific rate is not directly available from the market, an entity uses surrogates to estimate the discount rate. As a starting point in making such an estimate, the entity might take into account the following rates:• the entity’s weighted average cost of capital (WACC) determined using

techniques such as the Capital Asset Pricing Model;• the entity’s incremental borrowing rate; and• other market borrowing rates.

However, these rates must be adjusted:• to reflect the way the market would assess the specific risks associated with

the asset’s estimated cash flows; and• to exclude risks irrelevant to the asset’s estimated cash flows or for which

the estimated cash flows have been adjusted.

Where these rates are after-tax rates, they may be used as inputs to determine the discount rate but must be adjusted to a pre-tax amount. IAS 36.A15-A21 and IAS 36.BCZ85-BCZ89 expand on income tax considerations as they relate to discount rates.

EXTRACT 7 — EXCERPT FROM CORBY DISTILLERIES LIMITED 2012 NOTES TO

FINANCIAL STATEMENTS

NOTE 12 — INPUTS USED TO DETERMINE DISCOUNT RATES

Corby Distilleries limiteD | AnnuAl report 2012 63

notes to the consolidated financial stateMents

12. iMPairMentin accordance with the Company’s accounting policies, the Company tests goodwill and indefinite-lived intangibles (trademarks and licences) for impairment on an annual basis. the carrying value of goodwill and indefinite-lived intangibles at June 30, 2012, along with the data and assumptions applied to the Cash Generating units (“CGus”) of the Case Goods segment are as follows:

Carrying Carrying Value terminal

Value trademarks Discount Growth Goodwill and licences rate rate

Case Goods segment $ 3,278 $ 11,801 7.8% to 11.5% 2% to 3%

the Company’s Commissions segment has no goodwill or indefinite-lived intangibles.

For purposes of impairment testing, goodwill and intangibles with an indefinite life (trademarks and licences) were allocated to the group of CGus which represent the lowest level within the group at which the goodwill is monitored for internal management purposes.

During the financial year ended June 30, 2012, the Company performed impairment testing on goodwill and indefinite-lived intangible assets in accordance with its accounting policy and identified no impairment.

the discount rate used for these calculations is a pre-tax rate which corresponds to the weighted average cost of capital. Different discount rates were used to allow for risks specific to certain markets or geographical areas in calculating cash flows. Assumptions made in terms of future changes in sales and of terminal values are reasonable and in accordance with market data available for each of the CGus. Additional impairment tests are applied where events or specific circumstances suggest that a potential impairment exists.

A 50 basis point (“bp”) increase in the discount rates would result in no impairment to goodwill or the indefinite- lived intangibles. A 50bp decrease in the terminal growth rate would result in no impairment to goodwill or indefinite-lived intangibles.

13. accounts PayaBle and accrued liaBilitiesJune 30, June 30, July 1,

2012 2011 2010

trade payables and accruals $ 16,584 $ 13,375 $ 12,554 Due to related parties 5,816 6,117 5,731

$ 22,400 $ 19,492 $ 18,285

14. Provisionsprovisions include the provisions for uncertain tax risks and pensions and other long-term employee benefits. see note 15for details of changes in provision for pensions for the year ended June 30, 2011. provision for uncertain tax risk isincluded in “income and other taxes payable,” in the amount of $1,000 at June 30, 2012 (at June 30, 2011 and July 1,2010 – $1,000). there was no activity in this balance during the course of the year.

15. Provision for Pensionsthe Company has two defined benefit pension plans for executives and salaried employees, two supplementaryexecutive retirement plans for retired and current senior executives of the Company, and a post-retirement benefit plancovering retiree life insurance, health care and dental care. benefits under these plans are based on years of service andcompensation levels. the latest valuations completed for these plans are dated December 31, 2010. the next requiredvaluations must be completed with an effective date no later than December 31, 2013.

employees hired after July 1, 2010 are no longer offered enrolment into the Company’s defined benefit pension plans. thepost-retirement benefit plan has been closed to new enrolment effective January 1, 2010. instead, the Company providesthese employees a defined contribution pension plan. to become eligible, most employees must first accrue one year ofservice before joining the new plan. For the year ended June 30, 2012, the Company recognized contributions of $63 asexpense (2011 – $nil, as the plan had no active participants at June 30, 2011).


When the cash flows of an individual asset or CGU are in a foreign currency, VIU is calculated as follows:• The future cash flows are estimated in that foreign currency.• The present value is obtained by discounting the cash flows denominated in

the foreign currency using a discount rate that takes into account relevant local economic data. This will yield the VIU in the foreign currency.

• The VIU in the foreign currency is translated to the entity’s functional currency using the spot exchange rate at the date of the valuation.

The following extracts showcase excerpts from several sets of financial state-ments for various companies showing the calculation of VIU and FVLCD.

EXTRACT 8 — EXCERPT FROM AIR CANADA 2012 FINANCIAL STATEMENTS

NOTE 5 — CALCULATING VIU

2012 Consolidated Financial Statements and Notes

21

5. INTANGIBLE ASSETS

International route rights

and slots

Marketing based trade

names

Contract and customer

based

Technology based

(internally developed)

Total

Year ended December 31, 2011

At January 1, 2011 $ 97 $ 87 $ 16 $ 117 $ 317

Additions – – – 30 30

Amortization – – (4) (31) (35)

At December 31, 2011 $ 97 $ 87 $ 12 $ 116 $ 312

At December 31, 2011

Cost $ 97 $ 87 $ 20 $ 298 $ 502

Accumulated amortization – – (8) (182) (190)

$ 97 $ 87 $ 12 $ 116 $ 312

Year ended December 31, 2012

At January 1, 2012 $ 97 $ 87 $ 12 $ 116 $ 312

Additions – 1 – 35 36

Amortization – – (5) (29) (34)

At December 31, 2012 $ 97 $ 88 $ 7 $ 122 $ 314

At December 31, 2012

Cost $ 97 $ 88 $ 20 $ 333 $ 538

Accumulated amortization – – (13) (211) (224)

$ 97 $ 88 $ 7 $ 122 $ 314

Certain international route rights and slots are pledged as security for senior secured notes as described in Note 8(b).

An annual impairment review is conducted on all intangible assets that have an indefinite life. International route rights and slots and marketing based trade names are considered to have an indefinite life. The impairment review is carried out at the level of a cash-generating unit. On this basis, an impairment review was performed at the North American and international fleet levels for aircraft and related assets supporting the operating fleet. A summary of the allocation of the indefinite lived intangible assets to the cash-generating units is presented below.

2012 2011

North American 41 41

International 144 143

$ 185 $ 184

The recoverable amount of the cash-generating units has been measured based on its value in use, using a discounted cash flow model. Cash flow projections are based on the annual business plan approved by the Board of Directors of Air Canada. In addition, management-developed projections are made covering a three-year period. These cash flows are management’s best estimate of future events taking into account past experience and future economic assumptions, such as the forward curves for crude-oil and the exchange rates. Cash flows beyond the three-year period are projected to increase consistent with the long-term growth assumption of the airline considering various factors such as industry growth assumptions. The pre-tax discount rate applied to the cash flow projections is derived from the Corporation’s weighted average cost of capital adjusted for taxes.

EXTRACT 9 — EXCERPT FROM ASTRAL MEDIA INC. 2012 FINANCIAL STATEMENTS

NOTE 8 — CALCULATING VIU

- 28 - ASTRAL MEDIA INC. Notes to consolidated Financial Statements for the years ended August 31, 2012 and 2011

The recoverable amount of the Company’s CGUs has been determined based on a value in use calculation using cash flow projections derived from the three-year plans approved by the Company’s Board of Directors in August 2012, 2011 and 2010 respectively and the following significant assumptions:

August 31, 2012 Pre-tax

discount rate rangeExpected growth rate

beyond the three-year period

Television 12.0% – 12.3% 1.3% to 1.8% Radio 10.4% – 10.9% 2.0% to 3.0% Out-of-Home 12.0% – 12.2% 3.0%





September 1, 2010 Pre-tax




In order to prepare its financial budgets, the Company has used significant assumptions related to each CGU. For the Television segment, significant assumptions include the subscriber level and penetration rate of its network, the Company’s audience and advertising market shares, the programming costs, salary increases and its targeted earnings before interest, taxes, depreciation and amortization margin (“EBITDA margin”). For the Radio segment, significant assumptions include the audience and advertising market shares, on-air programming costs and salary increases, and the Radio segment targeted EBITDA margin. Finally, for the Out-of-Home segment, significant assumptions include the occupancy rates, the advertising market share, the rent expense, salary increases and the targeted EBITDA margin. The targeted EBITDA margin in the three business segments is based on past experience and management’s expectation of business development.

The discount rate used by the Company is a pre-tax rate derived from the overall cost of capital of the Company adjusted for each segment based on the segment’s own specific risks including current market assessment of time value of money and other risks not considered in the segment’s individual future free cash flows. The expected growth rate beyond the three-year period is based on management’s expectations of the future growth of each CGU’s cash flows and on the expected long-term average growth rate for the markets in which it operates.


June 2013


NOTE 8 — CALCULATING VIU (continued)


The recoverable amount of the Company’s CGUs has been determined based on a value in use calculation using cash flow projections derived from the three-year plans approved by the Company’s Board of Directors in August 2012, 2011 and 2010 respectively and the following significant assumptions:









September 1, 2010 Pre-tax




In order to prepare its financial budgets, the Company has used significant assumptions related to each CGU. For the Television segment, significant assumptions include the subscriber level and penetration rate of its network, the Company’s audience and advertising market shares, the programming costs, salary increases and its targeted earnings before interest, taxes, depreciation and amortization margin (“EBITDA margin”). For the Radio segment, significant assumptions include the audience and advertising market shares, on-air programming costs and salary increases, and the Radio segment targeted EBITDA margin. Finally, for the Out-of-Home segment, significant assumptions include the occupancy rates, the advertising market share, the rent expense, salary increases and the targeted EBITDA margin. The targeted EBITDA margin in the three business segments is based on past experience and management’s expectation of business development.

The discount rate used by the Company is a pre-tax rate derived from the overall cost of capital of the Company adjusted for each segment based on the segment’s own specific risks including current market assessment of time value of money and other risks not considered in the segment’s individual future free cash flows. The expected growth rate beyond the three-year period is based on management’s expectations of the future growth of each CGU’s cash flows and on the expected long-term average growth rate for the markets in which it operates.

EXTRACT 10 — EXCERPT FROM SUNCOR ENERGY INC. 2012 FINANCIAL

STATEMENTS

NOTE 9 — CALCULATING FVLCD

company’s best estimate of price realizations and remaining reserves, with three scenarios representing i) resumption of

operations in one year, ii) resumption of operations in five years, and iii) total loss. The two scenarios where the company

resumes operations incorporated repayment of the risk mitigation proceeds in accordance with the terms of the agreement.

These scenarios were equally weighted based on the company’s best estimates, and present valued using a risk-adjusted discount

rate of 19%. Based on this assessment, the company recognized an impairment reversal of $177 million related to Syrian assets

in its Exploration and Production business.

The impairment reversal of $177 million was recorded in the fourth quarter of 2012 as part of Depreciation, Depletion,

Amortization and Impairment expense. A 2% change in discount rates and a 5% change in pricing assumptions would each

have an impact on after-tax earnings of approximately $20 million.

The resulting carrying value of the company’s Property, Plant, and Equipment in Syria, net of the risk mitigation provision, at

December 31, 2012 was approximately $130 million.

Libya

In the second quarter of 2011, the company recognized after-tax impairment charges of $514 million related to Libyan assets in

its Exploration and Production business. At that time, production had been shut in due to political violence in Libya. The

impairment losses were recorded as part of Depreciation, Depletion, Amortization and Impairment expense, and charged against

Property, Plant and Equipment ($259 million), Exploration and Evaluation assets ($211 million), and Inventories ($44 million).

During the fourth quarter of 2011, the company reversed $11 million of the impairment charge that related to crude oil

inventories. The reversal was the result of lifting certain political sanctions, and the joint venture partner confirming the existence

of previously written off crude oil.

Production payments resumed in January 2012 with production in all major fields restarted in the first quarter of 2012. As a

result, a valuation assessment was performed. The company used an expected cash flow approach based on 2012 year-end

reserves data with a risk-adjusted discount rate of 17% to reflect uncertainty related to continued political unrest in the region,

current production levels and the timing and success of future exploration drilling commitments. No reversal of impairment was

recorded at December 31, 2012. A 2% change in discount rates would impact after-tax earnings by approximately $90 million

while a 5% change in pricing assumptions would impact after-tax earnings by approximately $70 million.

The carrying value of Suncor’s net assets in Libya as at December 31, 2012, net of asset impairment and write-offs, was

approximately $650 million.

Other

During the fourth quarter of 2012, the company recognized an after-tax impairment charge of $65 million related primarily to

certain East Coast Canada exploration and evaluation assets as well as natural gas Arctic land leases in the Exploration and

Production business as a result of future development uncertainty. In addition, the company also recognized an after-tax

impairment charge of $63 million related to CGUs in the Exploration and Production business due to a decline in price forecasts.

The recoverable amount was determined using a fair value less cost to sell methodology, with the expected cash flow approach

based on 2012 year-end reserves data and a risk-adjusted discount rate of 10%. A 2% increase in discount rates would

decrease after-tax earnings by approximately $90 million while a 5% decrease in pricing assumptions would decrease after-tax

earnings by approximately $30 million.

During the fourth quarter of 2011, the company recognized a charge of $100 million to reflect the write-down of certain

natural gas CGUs in the Exploration and Production business to reflect the recoverable amount based on discounted cash flows.



APPLICATION EXAMPLES

IAS 36 Illustrative Examples 5 and 6

E xa mpleIAS 36 illustrative examples 5 and 6 provide comprehensive examples for the calculation of VIU and the other material discussed to this point. Specifi-cally, the examples consider the issue of restructuring costs (committed and not yet committed) and future costs expected to be incurred to enhance an asset’s performance.


CGUs and Goodwill

Identifying an Asset’s CGU[IAS 36.66-.73]

Recall that where the recoverable amount cannot be determined for an individ-ual asset, the entity must identify a CGU to which the individual asset belongs for impairment testing.

“A cash-generating unit is the smallest identifiable group of assets that gener-ates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.” (IAS 36.6)

Cash inflows represent cash and cash equivalents received from external par-ties. In determining 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 monitors the entity’s operations (e.g., 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.

The following insight looks at the issue of identifying a CGU and emphasizes the importance of assessing cash inflows.


Identifying cash-generating units in the retail industry

Source NIFRIC

Meeting Date March 2007

Insight

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Identifying cash-generating units in the retail industry

The IFRIC was asked to develop an Interpretation on whether a cash-generating unit (CGU) could com-bine more than one individual store location. The submitter developed possible considerations including shared infrastructures, marketing and pricing policies, and human resources.

The IFRIC noted that IAS 36 para-graph 6 (and supporting guidance in paragraph 68) requires identification of CGUs on the basis of independent cash inflows rather than independent net cash flows and so outflows such as shared infrastructure and market-ing costs are not considered.

The IFRIC took the view that developing guidance beyond that already given in IAS 36 on whether cash inflows are largely independent would be more in the nature of application guidance and therefore decided not to take this item on to its agenda.

Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at www.ifrs.org/.


June 2013

Where the output produced by an asset or group of assets results in limited or no cash inflows from external parties, for example, because some or all of the output is used internally (e.g., in vertically integrated operations), impairment is tested at:• the level of the individual asset where an active market exists for the output

produced by that asset; and• the level of the CGU when an active market exists for the output produced

by a group of assets.

If the cash inflows generated through internal consumption are affected by internal transfer pricing, management uses its best estimate of future prices that could be achieved in arm’s-length transactions instead of internal transfer prices.

IAS 36.67 gives an example where the recoverable amount of a private railway in a mining operation cannot be determined because it does not generate cash inflows that are largely independent.

APPLICATION EXAMPLE

IAS 36.67

E xa mpleThe following example is provided in IAS 36.67 to illustrate a situation whereby the recoverable amount of a railway cannot be determined.

A mining entity owns a private railway to support its mining activities. The private railway 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 mine.

It is not possible to estimate the recoverable amount of the private railway because its value in use cannot be determined and is probably different from scrap value. Therefore, the entity estimates the recoverable amount of the cash-generating unit to which the private railway belongs, ie the mine as a whole.

IAS 36.68 gives an example that looks at separate bus routes in a bus com-pany and focuses on how management makes decisions about continuing or disposing of the bus routes.


APPLICATION EXAMPLE

IAS 36.68

E xa mpleThe following example is provided in IAS 36.68 to illustrate the determina-tion of the lowest level of identifiable cash flows.

A bus company provides services under contract with a municipality that requires 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.

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 gener-ated by the five routes together. The cash-generating unit for each route is the bus company as a whole.

APPLICATION EXAMPLE

IAS 36 Illustrative Example 1

E xa mpleIAS 36 Illustrative Example 1 looks at identification of a CGU for several dif-ferent types of businesses (e.g., retail, publishing, manufacturing) and assets including a retail store chain, a manufacturing plant, which sells its products to another production facility within the same entity, a single-product entity, magazine titles and a building that is partially rented out.

Carrying Amount[IAS 36.6, .76, .78]

A CGU’s carrying amount includes the carrying amount of only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, to that CGU and will generate future cash inflows used in determining the CGU’s recoverable amount. For example, the CGU’s carrying amount may include the carrying amount of allocated corporate assets and/or goodwill.

The CGU’s carrying amount does not include the carrying amount of any rec-ognized liabilities, unless the CGU’s recoverable amount cannot be determined without consideration of these liabilities (e.g., if the disposal of a CGU would require the buyer to assume the liability).

APPLICATION EXAMPLE

IAS 36.78

E xa mpleIAS 36.78 provides an example that illustrates how to consider a restoration liability in determining recoverable amount.


June 2013

Goodwill[IAS 36.72, .80, .81, .85-.88, .98]

For the purpose of impairment testing, goodwill (from the acquisition date of a business combination) is allocated to each CGU or group of CGUs expected to benefit from the synergies of the business combination. Each CGU or group of CGUs to which goodwill is allocated must represent the lowest level within the entity at which goodwill is monitored for internal management purposes and must not be larger than an operating segment (as defined in IFRS 8) before aggregation.

Extract 11 provides an excerpt from Rona Inc, 2012 financial statements which looks at CGU groupings.

EXTRACT 11 — EXCERPT FROM RONA INC. 2012 FINANCIAL STATEMENTS

NOTE 14 — CGU GROUPINGS

RONA inc.Notes to Consolidated Financial Statementsas at December 30, 2012 and December 25, 2011(in thousands of Canadian dollars)

RONA inc. 24

14. Goodwill

2012As at December 30

2011As at December 25

Balance, beginning of year $ 426,968 $ 529,094Acquisition through business combinations (Note 9) 1,212 16,777Impairment – (117,000)Adjustment related to the purchase price allocation of an acquisition – (1,903)Balance, end of year $ 428,180 $ 426,968

For the purpose of the annual impairment testing, goodwill is allocated to the following CGU groups, which are the groups of units expected to benefit from the synergies of the business combinations:

2012 2011As at December 30 As at December 25

Corporate and franchised stores $ 187,692 $ 187,056Commercial and professional stores 130,416 130,416Distribution 110,072 109,496Goodwill allocation $ 428,180 $ 426,968

The Corporation performed its annual test for goodwill impairment as at December 30, 2012. The carrying amounts of the CGU groups have been determined using the value in use. To determine value in use, five-year cash flow forecasts were prepared using the budget and strategic plan approved by the Board of Directors. Cash flow forecasts for periods beyond that of the budget and strategic plan were prepared using a stable growth rate for future periods, not exceeding the rate of long term average growth of the Corporation’s sectors of activity. These forecasts were based on historical data and future trends expected by the Corporation.

For the impairment test carried out as at December 30, 2012, management’s key assumptions were average annual increases in same-store sales of 1.3% (average of 2.25% as at December 25, 2011) for the first five years and thereafter at 2.25% (2.25% as at December 25, 2011).

The Corporation’s valuation model also takes account of working capital and capital investments to maintain the condition of the assets of each CGU group.

Forecasted cash flows are discounted using pre-tax rates ranging from 11.8% to 11.9% (11.8% to 11.9% in 2011) which reflect current market assessments of the time value of money and the risks specific to the asset.

The fair value of each CGU group was higher than its carrying amount. The most sensitive assumptions used in the impairment testing model include forecasted organic growth in sales and gross margins, weighted average cost of capital and the anticipated degree of attainment of returns from business transformation initiatives. Failure to meet certain of those assumptions could have an impact on the estimated recoverable values of the Corporation’s CGU groups.

When a CGU to which goodwill has been allocated is tested for impairment, there may be an indication that an asset within the CGU containing the good-will is impaired. In such circumstances, the entity tests the asset for impairment first and recognizes any impairment loss for that asset before testing the CGU containing the goodwill for impairment.


Similarly, where it is not possible to allocate goodwill to specific CGUs, good-will may be allocated to a group of CGUs. In this case, where there is an indica-tion of impairment at the specific CGU level, the entity tests the specific CGU for impairment first, before testing the group of CGUs for impairment. This is assessed by comparing the carrying value of the specific CGU (excluding goodwill) with its recoverable amount (IAS 36.81 and .88).

The IFRS Discussion Group discussed the issue whereby the impairment test did not reflect the economic substance that the goodwill no longer had value in management’s opinion.


Testing goodwill for impairment

Source IFRS Discussion Group Report

Meeting Date June 1, 2010

Insight

The following insights were obtained from a publicly available IFRS Discus-sion Group report.

IAS 36 Impairment of Assets sets out requirements for identifying cash-generating units (CGUs) and recognizing impairment losses for CGUs and goodwill. The Group discussed the difficulties some Canadian companies are having in applying the requirements to test goodwill for impairment under IAS 36 after an acquired business has been integrated into existing opera-tions. Specifically, the issue was how to apply the standard when an impair-ment test does not reflect the economic substance that, in management’s opinion, the acquired goodwill no longer has value. The Group discussed the challenges in applying IAS 36 to certain situations.

The Group does not expect diversity in practice, and therefore, recom-mended that this issue not be brought to the attention of the IFRS Interpre-tations Committee.

Written reports and audio webcasts of the Group’s discussion for each agenda topic are avail-able online at www.frascanada.ca.

IAS 36 does not require a CGU to be a business; therefore, a CGU may be identified at a level lower than an operating segment.

Extract 12 provides an excerpt from the 2012 financial statements of Astral Media Inc. showing a CGU at a lower level than the operating segment to which the goodwill has been allocated.


June 2013


NOTE 8 — CGU AT LOWER LEVEL THAN OPERATING SEGMENT


7. FINANCIAL EXPENSES(in thousands) 2012 2011 Interest expense on long-term debt $ 8,364 $ 9,582 Interest expense related to swap agreements, net 1,131 7,724 Imputed interest, net 1,509 1.638 Financial components of retirement plans’ expense, net 734 783 Other interest expense and financing costs, net 2,460 1,010

$ 14,198 $ 20,737

Net imputed interest expense disclosed in the above table is calculated on long-term financial assets and liabilities recorded atamortized costs, and on provisions.

8. IMPAIRMENT OF NON-FINANCIAL ASSETS

Goodwill acquired through business combinations and indefinite-life intangible assets consisting primarily of broadcast licenceshave been allocated to CGUs or to a group of CGUs, which for disclosure purposes have been aggregated under the following captions: Pay television, Specialty television, Radio Québec, Radio Ontario, Radio other provinces and Out-of-Home. However, for impairment test purposes, assets have been allocated to lower levels than the ones disclosed. The Television segment has been segregated into five CGUs which correspond to the Company’s service offerings. Broadcast licences and property, plant and equipment of the Radio segment have been allocated to nine CGUs which correspond to the geographical areas where the Company generates independent cash inflows; however the goodwill related to the Radio segment was not allocated to any specific CGUs but instead tested at the segment level. Out-of-Home’s goodwill impairment test was also performed at the segment level.

For impairment test purposes, the carrying value of broadcast licences has been allocated as follows:

August 31, 2012

August 31, 2011

September 1, 2010 (in thousands)

Allocated to: Pay television $ 131,499 $ 131,499 $ 131,499 Specialty television 431,895 431,895 431,895 Radio Québec 455,473 426,310 426,132 Radio Ontario 290,118 335,437 302,768 Radio Other provinces 322,322 314,644 369,655

$ 1,631,307 $ 1,639,785 $ 1,661,949

For impairment test purposes, the carrying value of goodwill has been allocated as follows:

August 31, 2012

August 31, 2011

September 1, 2010 (in thousands)

Allocated to: Specialty television $ 29,776 $ 29,776 $ 29,776 Radio 2,473 – –Out-of-Home 86,240 86,240 86,240

$ 118,489 $ 116,016 $ 116,016

According to IAS 36.86, if goodwill has been allocated to a CGU and an opera-tion within that CGU is disposed of, the goodwill associated with that operation is:• included in the carrying amount of the operation when determining the gain

or loss on disposal; and• measured based on the relative values of the operation disposed of and the

portion of the CGU retained, unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of.

IAS 36.86 includes an example that looks at how to deal with goodwill where part of a CGU is sold.


APPLICATION EXAMPLE

IAS 36.86 — Goodwill and dispositions

E xa mpleThe following example is provided in IAS 36.86 to illustrate how to deal with allocated goodwill where there is a disposition.

An entity sells for CU100 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 CU300.

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 por-tion of the unit retained. Therefore, 25 per cent of the goodwill allocated to the cash-generating unit is included in the carrying amount of the operation that is sold.

The composition of CGUs should remain consistent from period to period (IAS 36.72). Any changes must be justified. Justification for changes in the composition of CGUs includes, for example, a modification of the production or distribution channels subsequent to an acquisition, or a reorganization or restructuring of the entity.

When an entity reorganizes its reporting structure in a way that changes the composition of one or more CGUs to which goodwill has been allocated, goodwill is reallocated to the CGUs affected using a relative value approach, unless another method more accurately reflects the goodwill associated with the reorganized CGUs.

IAS 36.87 looks at an example whereby goodwill must be reallocated in a reorganization.

APPLICATION EXAMPLE

IAS 36.87 — Goodwill and reorganizations

E xa mpleThe following example is provided in IAS 36.87 to illustrate how to reallocate goodwill where there is a reorganization.

Goodwill had previously been allocated to cash-generating unit A. The good-will 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.

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.


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Finally, under IFRS 3.45 and IAS 36.85, where an entity is only able to allocate provisional amounts to goodwill and to CGUs or groups of CGUs, the entity must still test for impairment at the lowest level possible.


Impairment test of provisional goodwill acquired during the current period

Source IFRS Discussion Group

Meeting Date January 12, 2012

Insight

The following insights were obtained from a publicly available IFRS Discus-sion Group report.

IFRS 3 Business Combinations and IAS 36 Impairment of Assets give an entity time (no longer than 12 months) to determine the fair value of net assets acquired in a business combination and allocate goodwill in the manner required by paragraph 80 of IAS 36. If the entity is able to allocate provisional goodwill in accordance with paragraph 80 of IAS 36, then it must do so. In that case, the entity tests the provisional goodwill for impairment in accordance with IAS 36.

Paragraph 85 of IAS 36 recognizes that, when the fair values of the identifi-able assets acquired and the liabilities assumed are determined only provi-sionally at the end of the current period, it “might also not be possible to complete the allocation of goodwill.”

The issue considered by the Group was whether impairment testing of provisional goodwill is required when it is not possible for the entity to complete the initial allocation of the provisional goodwill to cash-generating units (CGUs) or groups of CGUs in the manner required by paragraph 80 of IAS 36.

Fact Pattern:

Entity A:• is in the restaurant business and operates a number of different branded

corporate and franchise restaurants;• completes its annual impairment test for goodwill from previous acquisi-

tions on December 31;• acquires Entity B on June 1, 2011 to broaden its brand within Canada;• has not completed the acquisition accounting by December 31, 2011 (its

financial year end) because the valuation of certain identifiable assets acquired is still in progress; and

• determines that indicators of goodwill impairment exist because the traf-fic in all of Entity A’s restaurants, including those acquired from Entity B, has declined severely because of an economic recession.

View A — Not required to test for impairment

No impairment test is required when it is not possible to allocate provisional goodwill to CGUs or groups of CGUs, regardless of whether indicators of impairment are present.

View B — Required to test for impairment when there are indicators of impair-ment using another form of test

When an entity is not able to allocate goodwill to the CGUs reliably but there are indicators of impairment, the entity should perform an impairment test at the lowest level possible, even if that requires testing at the level of the entity.



Impairment test of provisional goodwill acquired during the current period

The Group’s Discussion:

Group members observed that there was little or no support for View A. Group members noted that, in accordance with principles of IAS 36, an entity should perform an impairment test at the lowest level possible, even if that requires testing at the level of the entity. The Group concluded that the issue should not be brought to the attention of the IFRS Interpretations Committee because significantly divergent interpretations are not expected to emerge in practice.

Written reports and audio webcasts of the Group’s discussion for each agenda topic are avail-able online at www.frascanada.ca.

Corporate Assets[IAS 36.100, .102]

Corporate assets include group or divisional assets that support the activi-ties of several CGUs but do not generate cash inflows independently of other assets or groups of assets. Examples of corporate assets include buildings that house an entity’s headquarters or divisions, electronic data processing equip-ment or a research centre.

In testing a CGU for impairment, an entity identifies all the corporate assets related to that CGU. If a portion of the carrying amount of a corporate asset:• can be allocated on a reasonable and consistent basis to that CGU, the

entity tests the carrying amount of that CGU (which includes the portion of the carrying amount of the corporate asset allocated to that CGU) for impairment and recognizes any impairment loss;

• cannot be allocated on a reasonable and consistent basis to that CGU, the entity:

o tests the carrying amount of that CGU (which excludes the corporate asset) for impairment and recognizes any impairment loss; and

o performs the following: — identifies the smallest group of CGUs that includes the CGU under

review and to which a portion of the carrying amount of the corpo-rate asset can be allocated on a reasonable and consistent basis; and

— tests the carrying amount of that group of CGUs (which includes the portion of the carrying amount of the corporate asset allocated to that group of CGUs) for impairment and recognizes any impair-ment loss.


June 2013

The following excerpt from the financial statements of Maple Leaf Foods Inc. 2012 financial statements shows their policy regarding treatment of corporate assets.

EXTRACT 13 — EXCERPT FROM MAPLE LEAF FOODS INC. 2012 FINANCIAL

STATEMENTS

NOTE 3 — CORPORATE ASSETS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AR 2012 MAPLE LEAF FOODS INC. 51

commercial stock and to replace parent stock nearing the end of its productive cycle. Commercial stock is held for thepurposes of further processing or eventual sale, at which point it becomes inventory. The fair value of commercial stockis determined based on market prices of livestock of similar age, breed, and generic merit less costs to sell the assets,including estimated costs necessary to transport the assets to market. Where reliable market prices of parent stock arenot available, it is valued at cost less accumulated depreciation and any accumulated impairment losses. No active liquidmarket exists for parent stock as they are rarely sold. Hog parent stock is depreciated on a straight-line basis over threeyears, whereas poultry parent stock is depreciated on a straight-line basis over six to eight months.

Biological assets are transferred into inventory at fair value less costs to sell at the point of delivery.

(i) Impairment or Disposal of Long-lived Assets

The Company reviews long-lived assets or asset groups held and used including property and equipment and intangibleassets subject to amortization, for recoverability whenever events or changes in circumstances indicate that theircarrying amount may not be recoverable. Asset groups referred to as CGUs include an allocation of corporate assetsand are reviewed at their lowest level for which identifiable cash inflows are largely independent of cash inflows of otherassets or groups of assets. The recoverable amount is the greater of its value in use and its fair value less cost to sell.

Value in use is based on estimates of discounted future cash flows expected to be recovered from a CGU through itsuse. Management develops its cash flow projections based on past performance and its expectations of future marketand business developments. Once calculated, the estimated future pre-tax cash flows are discounted to their presentvalue using a pre-tax discount rate that reflects current market assessments of the time value of money and the risksspecific to the asset.

Fair value less cost to sell is the amount obtainable from the sale of an asset or CGU in an arm’s length transactionbetween knowledgeable, willing parties, less the costs of disposal. Costs of disposal are incremental costs directlyattributable to the disposal of an asset or CGU, excluding finance costs and income tax expense.

An impairment loss is recognized in the consolidated statements of earnings when the carrying amount of any asset orits CGU exceeds its estimated recoverable amount. Impairment losses recognized in respect of CGUs are allocated firstto reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of theother assets in the CGU on a pro-rata basis.

Impairment losses related to long-lived assets recognized in prior periods are assessed at each reporting date for anyindications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change inthe estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that theasset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciationand amortization, if no previous impairment loss had been recognized.

Long-lived assets are classified as held for sale, and are separately presented in the consolidated balance sheets, whencertain criteria are met and the sale is expected to be completed within one year. Any liabilities directly associated withsuch assets, are also separately presented in the consolidated balance sheets. These assets and liabilities, or disposalgroups, are subsequently measured at the lower of their carrying amount or fair value less costs to sell. Non-currentassets classified as held for sale are no longer depreciated. Any further gains or losses not previously recognized at thedate that long-lived assets are classified as held for sale, shall be recognized in earnings at the date of sale.

(j) Property and Equipment

Property and equipment with the exception of land are recorded at cost less accumulated depreciation and any netaccumulated impairment losses. Land is carried at cost and not depreciated. For qualifying assets, cost includes interestcapitalized during the construction or development period. Construction-in-process assets are capitalized duringconstruction and depreciation commences when the asset is available for use. Depreciation related to assets used inproduction is recorded in inventory and cost of goods sold, depreciation related to non-production assets is recordedthrough selling, general and administrative expense, and calculated on a straight-line basis, after taking into accountresidual values, over the following expected useful lives of the assets:

Buildings, including other components 15-40 yearsMachinery and equipment 3-10 years

APPLICATION EXAMPLE


E xa mpleIAS 36 Illustrative Example 8 considers the allocation of corporate assets in conducting impairment testing.

Impairment Loss for a CGU[IAS 36.58 — .64, .104, .105, .108]

An impairment loss for a CGU is allocated:• first, to reduce the carrying amount of any goodwill allocated to the CGU;

and• then, to the other assets of the CGU pro rata on the basis of the carrying

amount of each asset in the CGU.

These reductions in the carrying amounts of assets in the CGU are treated as impairment losses on individual assets.

The carrying amount of any asset in the CGU must not be reduced below the highest of its FVLCD, its VIU or zero. The amount of the impairment loss that would otherwise have been allocated to the asset is allocated pro rata to the other assets of the CGU.

A liability is recognized for any remaining amount of an impairment loss for an individual asset or CGU if required by another IFRSs (e.g., in accordance with IAS 37 or the definition of a liability in the Conceptual Framework for Financial Reporting).


The impairment loss on an individual asset is presented in profit or loss within operating income. Any impairment loss taken on an individual asset that has been revalued in accordance with another standard (e.g., IAS 16) is treated first as a revaluation decrease.

After the recognition of an impairment loss, the depreciation (amortization) charge for the asset is 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.

APPLICATION EXAMPLES

IAS 36 Illustrative Examples 2 and 3

E xa mpleIAS 36 Illustrative Example 2 looks at the calculation of VIU and recognition of an impairment loss.

Deferred taxes are determined based on the difference between the revised carrying amount and the tax bases. IAS 36 Illustrative Example 3 deals with deferred taxes. The material builds on data presented in IAS 36 Illustrative Example 2.

Illustration 7 summarizes the approach for recognizing and presenting impair-ment losses under IAS 36.

ILLUSTRATION 7 — RECOGNITION AND PRESENTATION OF IMPAIRMENT LOSSES

Level of impairment testing

When Where

Individual asset • when the carrying amount exceeds the recoverable amount

• cost model: through profit or loss

• revaluation model: first as a decrease of any existing revaluation surplus (as described in IAS 16.40)

CGU • when the carrying amount exceeds the recoverable amount

• first to reduce goodwill (if any) then pro rata to the other assets

• the impairment loss goes through profit or loss or is treated as a revaluation decrease (if the revalua-tion model is applied)


June 2013

Interim Financial Reporting[IAS 34.28, IFRIC 10.03, .07, .08]

IAS 34 requires that an entity apply the same accounting policies in its interim financial statements as in its annual financial statements. The frequency of an entity’s reporting (annual or quarterly) should not affect the measurement of its annual results (i.e., interim measurements should be on a year-to-date basis). This may be interpreted as permitting an impairment loss (even on goodwill) recognized in one quarter to be reversed in the next quarter if conditions have changed. The net effect would be the same had the impairment assessment been made only at the year-end. IFRIC 10 was issued to clarify that an entity is prohibited from reversing an impairment loss on goodwill or an investment in either an equity instrument or a financial asset carried at cost recognized in a previous interim period. For the discussion of reversals, see the next section.

Reversing an Impairment Loss[IAS 36.110–.112, .124, .125]

An entity has to assess, at the end of each reporting period, whether there are any indicators to suggest that an impairment loss recognized in prior periods for an asset (other than goodwill) may have decreased or may no longer exist. When such indicators exist, the recoverable amount of that asset must be esti-mated. As a minimum, an entity would consider external and internal indicators that mirror those of a potential impairment loss. Illustration 8 lists some indica-tors of impairment reversal.

ILLUSTRATION 8 — INDICATORS OF IMPAIRMENT REVERSAL AS NOTED IN IAS 36

Internal sources of information External sources of information

• significant changes in the extent or man-ner to which the asset is used or will be used (with a favourable effect)

• evidence showing the asset’s economic performance is or will be better than expected

• observable indications of a significant increase in the asset’s market value

• significant positive changes in the technological, market, economic or legal environment

• decreases in market interest or other market rates of returns that will affect the discount rates used in measuring VIU

It is important to note that an impairment loss recognized for goodwill cannot be reversed in a subsequent period. This prohibition is based on the prem-ise that any increase in the recoverable amount is likely to be an increase in


internally generated goodwill, rather than a reversal of the impairment loss recognized for the acquired goodwill. The prohibition is consistent with IAS 38, which prohibits the recognition of internally generated goodwill.

Recognition, Measurement and Presentation of Impairment Loss Reversals[IAS 36.114–.117, .119, .122, .123]

An impairment loss recognized in prior periods for an individual asset (other than goodwill) or CGU is reversed when there has been an increase in the recoverable amount (i.e., reflecting an increase in the estimated service poten-tial of that individual asset or CGU, either from use or from sale) since the last impairment loss was recognized.

The recoverable amount of an individual asset or CGU may become greater than its carrying amount simply from the passage of time (i.e., the unwinding of the discount). In such cases, an impairment loss is not reversed since the service potential of the individual asset or CGU has not increased.

When an impairment loss for an individual asset (other than goodwill) is reversed, the carrying amount of that individual asset is increased to its recov-erable amount. The increased carrying amount must not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the individual asset in prior years. This requires additional calculations of an individual asset’s carrying amount prior to the recognition of the impairment loss (net of amortization or depre-ciation) so that the amount of any impairment loss reversal can be determined.

A reversal of an impairment loss for a CGU is allocated to the CGU’s assets (except for goodwill) on a pro rata basis with the carrying amounts of those assets. These increases in carrying amounts are treated as reversals of impair-ment losses for individual assets.

The carrying amount of any asset in the CGU must not be increased above the lower of:• its recoverable amount; or• the carrying amount that would have been determined (net of amortization

or depreciation) had no impairment loss been recognized for the asset in prior periods.

The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset must be allocated pro rata to the other assets of the CGU (except for goodwill).


June 2013

A reversal of an impairment loss for an individual asset (other than goodwill) is presented in profit or loss. Any reversal of an impairment loss for an individual asset revalued in accordance with another standard (e.g., IAS 16) is treated as a revaluation increase.

APPLICATION EXAMPLE


E xa mpleIAS 36 Illustrative Example 4 deals with reversals. This Illustrative Example builds on IAS 36 Illustrative Example 2.

Extract 14 provides an excerpt from the 2012 financial statements of Astral Media Inc. showing an impairment reversal.


NOTE 8 — REVERSAL OF IMPAIRMENT LOSS


In the fourth quarter of Fiscal 2012, the Company tested its CGUs for impairment and concluded that no provision for impairment was required for the Television and Out-of-Home segments for the year ended August 31, 2012. However, for the Radio segment, the Company reversed prior years’ impairment charges related to certain Radio’s CGUs as the Company concluded that events and circumstances which led to the previous years’ impairment charges no longer exist. Furthermore, for the Atlantic, Southern Ontario and Winnipeg CGUs, the Company concluded that an impairment charge on broadcast licences was required due to lower cash flows following audience and advertising market share decreases. Therefore, during the fourth quarter of Fiscal 2012, the Company recorded a reversal of prior years’ impairment charges on broadcast licences of $41.8 million ($35.4 million, net of deferred tax expense) and an impairment charge of $62.9 million ($51.4 million, net of deferred tax recovery), resulting in a net impairment charge of $21.1 million ($16.0 million, net of deferred tax recovery).

The recoverable amounts of the Radio CGUs, which equal their respective carrying value, is influenced by the pre-tax discount rate and the expected growth rate beyond the three-year period assumptions. Therefore, a change of 0.5% of the pre-tax discount rate or of the expected growth rate beyond the three-year period would result in the following additional net impairmentcharge, or net reversal of prior years’ impairment charges, recorded in the fourth quarter of Fiscal 2012:

(in thousands) Increase Decrease

Pre-tax discount rate $ (76,993) $ 55,886 Expected growth rate beyond the three-year period $ 49,848 $ (71,659)

For the Television and Out-of-Home segments, no reasonably possible change in a key assumption would result in an impairment charge.

During the fourth quarter of Fiscal 2011, the Company tested its CGUs for impairment. The tests were performed using the above mentioned assumptions. For certain Radio CGUs, the Company reversed prior years’ impairment charges on broadcast licences based on the Company’s conclusion that the events and circumstances which led to the previous years’ impairment charges no longer exist. However, for some CGUs located in Western Canada, the Company concluded that, following decreases in its audience and advertising market share, an impairment charge on broadcast licences was required. Consequently, in the fourth quarter of Fiscal 2011, the Company recorded a reversal of prior years’ impairment charges of $47.2 million ($38.3 million, net of deferred tax expense) and an impairment charge of $69.4 million ($56.2 million, net of deferred tax recovery), resulting in a net impairment charge of $22.2 million ($17.9 million, net of deferred tax recovery).

As required under IFRS 1 (see Note 2), the Company tested its CGUs for impairment on the Transition Date. The tests were performed using the above assumptions. Consequently, upon transition to IFRS, the Company recorded, through opening retained earnings, a reversal of prior years’ impairment charges related to Radio CGUs of $232.7 million ($188.3 million, net of deferred tax expense) and, for two Radio CGUs located in Eastern Canada, an impairment charge of $19.1 million ($16.5 million, net of deferred tax recovery) was recorded. Also, the impairment test conclusion required that Radio’s goodwill be completely written-off. Therefore, on the Transition Date, the Company recorded an impairment charge of $240.9 million ($204.2 million, net of deferred tax recovery) through opening retained earnings to reduce the Radio goodwill’s carrying value to nil as at September 1, 2010.

9. INCOME TAXES

On June 20, 2012, the Ontario government repealed the previously enacted reductions in the general corporate income tax rate scheduled to take effect in 2012 and 2013. Consequently, the Ontario general corporate income tax rate will remain at 11.5%. As a result, the Company was required to re-measure its deferred tax assets and liabilities using the newly enacted Ontario general corporate income tax rate, over which the Company has no control, taking into account the tax rate expected to apply tothe period when the related deferred tax assets are realized or liabilities are settled. For the year ended August 31, 2012, thisresulted in a non-cash deferred tax expense of $2.3 million.

Disclosure[IAS 36.126 — .137]

Disclosures are significant. Specific disclosures are required by IAS 36 as they relate to impairments. More general disclosure requirements under IAS 1 must also be met as they relate to impairments. These include accounting policies, significant judgments made in applying accounting policies and sources of estimation uncertainty. There is some overlap between IAS 36 and IAS 1.

The following chart briefly highlights some of the disclosures relating to impair-ment, including the changes resulting from the narrow-scope amendments issued in May 2013. Except as noted in the chart, there is no requirement to present the disclosures required under IFRS 13.


ILLUSTRATION 9 — TYPES OF DISCLOSURES REQUIRED BY IAS 36

Type Disclosure

General disclosures for each class of assets

• impairment losses recognized in net income and other comprehensive income

• reversals recognized in net income and other comprehen-sive income

Disclosures where an entity reports segmented information

• impairment losses recognized in net income and other comprehensive income

• reversals recognized in net income and other comprehen-sive income

Disclosures where an impair-ment loss has been recog-nized or reversed during the period for an individual asset (including goodwill) or a CGU

• events and circumstances leading to recognition• amount of loss/reversal• nature of individual assets and the reportable segment

to which it belongs, if the entity reports segmented information

• description of CGU, amount of loss/reversal and a description of the way assets are aggregated (if this has changed)

• whether recoverable amount is FVLCD or VIU: o if FVLCD is used:

— the level of the fair value hierarchy — for fair value measurements within levels 2 and

3, a description of the valuation technique and, if changed, the reasons for the change in valuation technique

— for fair value measurements within levels 2 and 3, key assumptions made and discount rate if a pres-ent value technique is used

o if VIU is used — the discount rate• where losses are not material, additional information

Any unallocated goodwill and reasons that the goodwill has not been allocated

Estimates used to measure recoverable amounts of CGUs containing goodwill or intangible assets with indefi-nite lives — for each CGU/group of CGUs

• carrying amount of goodwill• carrying amounts of intangible assets with indefinite lives• recoverable amount and basis on which it is measured

(FVLCD or VIU): o if VIU:

— key management assumptions, including those to which the recoverable amount is most sensitive

— description of approach — period over which cash flows have been projected — growth rate and justification — discount rate

o if FVLCD: — valuation technique — key management assumptions including those to

which the recoverable amount is most sensitive — description of approach — level of the fair value hierarchy under IFRS 13 — where there has been a change in valuation tech-

nique and the reasons for making it — if FVLCD is measured using discounted cash flow

projections — the projection period, growth rate and discount rates used

o additional information if a reasonable possible change in key assumptions would cause the carrying amount to exceed the recoverable amount


June 2013

Type Disclosure

Where the carrying amount of goodwill or intangible assets with indefinite lives is allocated across multiple CGUs

• additional information

APPLICATION RESOURCES

Disclosure Checklist

ResourcesTo ensure compliance with IAS 36, the use of a disclosure checklist is recommended.

CPA Canada has numerous IFRS presentation and disclosure checklists avail-able for download at www.cica.ca/ifrs.

IAS 1.117 requires that the entity disclose a summary of significant accounting policies. This is especially important where there are accounting policy choices.

Extract 15 is an excerpt of an accounting policy note for Sherritt International Corporation as it relates to impairments.

EXTRACT 15 — EXCERPT FROM SHERRITT INTERNATIONAL CORPORATION 2012


NOTE 2.13 — ACCOUNTING POLICY NOTE AS IT RELATES TO IMPAIRMENTSConsolidated financial statements

16 Sherritt International Corporation

2.13 Impairment of non-financial assetsThe Corporation assesses the carrying amount of non-financial assets including property, plant and equipment and intangible

assets at each reporting date to determine whether there is any indication of impairment. Internal factors, such as budgets and

forecasts, as well as external factors, such as expected future prices, costs and other market factors are also monitored to

determine if indications of impairment exist. The Corporation tests goodwill for impairment annually.

An impairment loss is the amount equal to the excess of the carrying amount over the recoverable amount. The recoverable

amount is the higher of value in use (being the net present value of expected pre-tax future cash flows of the relevant asset) and

fair value less costs to sell the asset(s). The best evidence of fair value is a quoted price in an active market or a binding sale

agreement for the same or similar asset(s). Where neither exists, fair value is based on the best information available to estimate

the amount the Corporation could obtain from the sale of the asset(s) in an arm’s length transaction. This is often accomplished

by using a discounted cash flow technique.

Impairment is assessed at the cash-generating unit (CGU) level. A CGU is the smallest identifiable group of assets that generates

cash inflows largely independent of the cash inflows from other assets or group of assets. The assets of the corporate head office

are allocated on a reasonable and consistent basis to CGUs or groups of CGUs. The carrying amounts of assets of the corporate

head office that have not been allocated to a CGU are compared to their recoverable amounts to determine if there is any

impairment loss.

For CGUs with goodwill associated with them, an impairment loss is allocated first to any goodwill and then pro-rata to other

assets within that group.

If, after the Corporation has previously recognized an impairment loss, circumstances indicate that the fair value of the impaired

assets is greater than the carrying amount, the Corporation reverses the impairment loss by the amount the revised fair value

exceeds its carrying amount, to a maximum of the previous impairment loss. In no case shall the revised carrying amount exceed

the original carrying amount, after depreciation or amortization, that would have been determined if no impairment loss had

been recognized. An impairment loss or a reversal of an impairment loss is recognized in cost of sales, or administrative

expense, depending on the nature of the asset. Impairment of goodwill is not reversed.

Exploration and evaluation expenditures at Oil and Gas

Upon determination of proven and probable reserves, the related E&E assets attributable to those reserves are tested for

impairment prior to being transferred to property, plant and equipment. Capitalized E&E costs are reviewed and evaluated for

impairment at each reporting date for events or changes in circumstances that indicate the carrying amount may not be

recoverable from future cash flows of the property.

Goodwill

Goodwill recognized on acquisition of a business is typically allocated to the CGUs of the acquired business for the purpose of

impairment testing. However, allocation of goodwill is based on the lowest level at which management monitors it (not exceeding

the level of an operating segment). The Corporation allocated the goodwill arising from the acquisition of PMRL to Coal’s Prairie

Operations. Recoverable amount for the purposes of impairment testing is based on fair value less cost to sell, where fair value is

estimated based on an estimate of discounted future cash flows. The Corporation has elected to perform its annual impairment

test as at October 1 each fiscal year.

2.14 Impairment of financial assetsAt each reporting date, the Corporation assesses whether there is any objective evidence that a financial asset or a group of

financial assets is impaired. Financial assets include advances, loans receivable, investments and the investment in an associate.

A financial asset or a group of financial assets is impaired if there is objective evidence that the estimated future cash flows of

the financial asset or the group of financial assets have been negatively impacted. Evidence of impairment may include

indications that debtors are experiencing financial difficulty, default or delinquency in interest or principal payments, or other

observable data which indicates that there is a measurable decrease in the estimated future cash flows.

Impairment of advances, loans receivable and investments

If an impairment loss has occurred, the loss is measured as the difference between the asset’s carrying amount and the present

value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value

of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a financial asset has a

variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.


EXTRACT 15 — EXCERPT FROM SHERRITT INTERNATIONAL CORPORATION 2012


NOTE 2.13 — ACCOUNTING POLICY NOTE AS IT RELATES TO IMPAIRMENTS

(continued)

Consolidated financial statements

16 Sherritt International Corporation

2.13 Impairment of non-financial assetsThe Corporation assesses the carrying amount of non-financial assets including property, plant and equipment and intangible

assets at each reporting date to determine whether there is any indication of impairment. Internal factors, such as budgets and

forecasts, as well as external factors, such as expected future prices, costs and other market factors are also monitored to

determine if indications of impairment exist. The Corporation tests goodwill for impairment annually.

An impairment loss is the amount equal to the excess of the carrying amount over the recoverable amount. The recoverable

amount is the higher of value in use (being the net present value of expected pre-tax future cash flows of the relevant asset) and

fair value less costs to sell the asset(s). The best evidence of fair value is a quoted price in an active market or a binding sale

agreement for the same or similar asset(s). Where neither exists, fair value is based on the best information available to estimate

the amount the Corporation could obtain from the sale of the asset(s) in an arm’s length transaction. This is often accomplished

by using a discounted cash flow technique.

Impairment is assessed at the cash-generating unit (CGU) level. A CGU is the smallest identifiable group of assets that generates

cash inflows largely independent of the cash inflows from other assets or group of assets. The assets of the corporate head office

are allocated on a reasonable and consistent basis to CGUs or groups of CGUs. The carrying amounts of assets of the corporate

head office that have not been allocated to a CGU are compared to their recoverable amounts to determine if there is any

impairment loss.

For CGUs with goodwill associated with them, an impairment loss is allocated first to any goodwill and then pro-rata to other

assets within that group.

If, after the Corporation has previously recognized an impairment loss, circumstances indicate that the fair value of the impaired

assets is greater than the carrying amount, the Corporation reverses the impairment loss by the amount the revised fair value

exceeds its carrying amount, to a maximum of the previous impairment loss. In no case shall the revised carrying amount exceed

the original carrying amount, after depreciation or amortization, that would have been determined if no impairment loss had

been recognized. An impairment loss or a reversal of an impairment loss is recognized in cost of sales, or administrative

expense, depending on the nature of the asset. Impairment of goodwill is not reversed.

Exploration and evaluation expenditures at Oil and Gas

Upon determination of proven and probable reserves, the related E&E assets attributable to those reserves are tested for

impairment prior to being transferred to property, plant and equipment. Capitalized E&E costs are reviewed and evaluated for

impairment at each reporting date for events or changes in circumstances that indicate the carrying amount may not be

recoverable from future cash flows of the property.

Goodwill

Goodwill recognized on acquisition of a business is typically allocated to the CGUs of the acquired business for the purpose of

impairment testing. However, allocation of goodwill is based on the lowest level at which management monitors it (not exceeding

the level of an operating segment). The Corporation allocated the goodwill arising from the acquisition of PMRL to Coal’s Prairie

Operations. Recoverable amount for the purposes of impairment testing is based on fair value less cost to sell, where fair value is

estimated based on an estimate of discounted future cash flows. The Corporation has elected to perform its annual impairment

test as at October 1 each fiscal year.

2.14 Impairment of financial assetsAt each reporting date, the Corporation assesses whether there is any objective evidence that a financial asset or a group of

financial assets is impaired. Financial assets include advances, loans receivable, investments and the investment in an associate.

A financial asset or a group of financial assets is impaired if there is objective evidence that the estimated future cash flows of

the financial asset or the group of financial assets have been negatively impacted. Evidence of impairment may include

indications that debtors are experiencing financial difficulty, default or delinquency in interest or principal payments, or other

observable data which indicates that there is a measurable decrease in the estimated future cash flows.

Impairment of advances, loans receivable and investments

If an impairment loss has occurred, the loss is measured as the difference between the asset’s carrying amount and the present

value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value

of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a financial asset has a

variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

IAS 1.122 requires significant judgments in applying accounting policies to be disclosed in the summary of significant accounting policy or other note. IAS 1.125 requires disclosures about sources of estimation uncertainty.

EXTRACT 16 — EXCERPT FROM BOMBARDIER INC. 2012 FINANCIAL STATEMENTS

NOTE 4 — CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS AS THEY RELATE

TO IMPAIRMENT REGARDING AEROSPACE PROGRAM TOOLING

151

Sensitivity analysis A 1% increase in the estimated future costs to complete all ongoing production contracts accounted for using the percentage-of-completion method would have decreased BT’s gross margin for fiscal year 2012 by approximately $75 million. Aerospace program tooling – Aerospace program tooling amortization and the calculation of recoverable amounts used in impairment testing require estimates of the expected number of aircraft to be delivered under each program. Such estimates are reviewed in detail as part of the budget and strategic plan process. Management exercises judgment to identify independent cash inflows and allocate aerospace program tooling to CGUs by family of aircraft. The recoverable amount of a group of assets is based on the higher of fair value less costs to sell and value in use, generally determined using a discounted cash flow model. Other key estimates used to determine the recoverable amount include the discount rate and the expected future cash flows over the remaining life of the programs as determined in the budget and strategic plan for each family of aircraft. Sensitivity analysis The following analyses are presented in isolation from one another, i.e. all other estimates left unchanged: An increase of 100-basis points in the discount rate used to perform the impairment test would not have resulted in an impairment charge in fiscal year 2012. A 10% decrease in the expected future net cash inflow for all programs, evenly distributed over future periods, would not have resulted in an impairment charge in fiscal year 2012. Goodwill – The recoverable amount of the BT operating segment, the group of CGUs to which goodwill is allocated, is based on the higher of fair value less costs to sell and value in use. During the fourth quarter of fiscal year 2012, the Corporation completed an impairment test and no impairment was identified. The recoverable amount was calculated based on fair value less costs to sell using a discounted cash flow model. The estimated future cash flows are based on the budget and strategic plan for the first three years and a constant growth rate of 1% is applied to derive estimated cash flows beyond the initial three-year period. For purpose of this test, management used a 15-year period to project future cash flows. The post-tax discount rate is also a key estimate in the discounted cash flow model and is based on a representative weighted average cost of capital. The post-tax discount rate used to calculate the recoverable amount in fiscal year 2012 was 6.8%. A 100-basis points change in the post-tax discount rate would not have resulted in an impairment charge in fiscal year 2012. Valuation of deferred income tax assets – To determine the extent to which deferred income tax assets can be recognized, management estimates the amount of probable future taxable profits that will be available against which deductible temporary differences and unused tax losses can be utilized. Such estimates are made as part of the budget and strategic plan by tax jurisdiction on an undiscounted basis and are reviewed on a quarterly basis. Management exercises judgment to determine the extent to which realization of future taxable benefits is probable, considering factors such as the number of years to include in the forecast period, the history of taxable profits and availability of tax strategies. Credit and residual value guarantees – The Corporation uses an internal valuation model based on stochastic simulations to estimate the amounts expected to be paid under credit and residual value guarantees. The value is calculated using estimates of fair values of aircraft, current market assumptions for interest rates, published credit ratings when available, default probabilities from rating agencies and the likelihood that the residual value guarantee will be called upon at the expiry of the financing arrangement. The fair value of aircraft is estimated using aircraft residual value curves adjusted to reflect the specific factors of the current aircraft market. The Corporation also uses internal assumptions to determine the credit risk of customers without published credit ratings. The estimates are reviewed on a quarterly basis. The Corporation’s main exposures to changes in value of credit and residual value guarantees are related to the residual value curves of the underlying aircraft and interest rates.

As noted earlier, under IAS 36, information is required to be disclosed regard-ing estimates used to measure recoverable amounts of CGUs, including where VIU or FVLCD is calculated — key assumptions to which the recover-able amount is most sensitive. IAS 1 also requires more detailed disclosures of sources of estimation uncertainty. IAS 1.129, provides an example of the types of disclosures required by IAS 1.125, including the nature of the related assets and liabilities and their carrying amounts as well as the following:• nature of the assumption or other estimation uncertainty;• sensitivity of the carrying amounts of the related assets/liabilities to the

above;• expected resolution of the uncertainty and range of reasonably possible

outcomes; and• explanation of changes made to past assumptions concerning these assets/

liabilities.


June 2013

EXTRACT 17 — EXCERPT FROM BOMBARDIER INC. 2012 FINANCIAL STATEMENTS

NOTE 4 — SENSITIVITY DISCLOSURES AS THEY RELATE TO AEROSPACE PROGRAM

TOOLING

151

Sensitivity analysis A 1% increase in the estimated future costs to complete all ongoing production contracts accounted for using the percentage-of-completion method would have decreased BT’s gross margin for fiscal year 2012 by approximately $75 million. Aerospace program tooling – Aerospace program tooling amortization and the calculation of recoverable amounts used in impairment testing require estimates of the expected number of aircraft to be delivered under each program. Such estimates are reviewed in detail as part of the budget and strategic plan process. Management exercises judgment to identify independent cash inflows and allocate aerospace program tooling to CGUs by family of aircraft. The recoverable amount of a group of assets is based on the higher of fair value less costs to sell and value in use, generally determined using a discounted cash flow model. Other key estimates used to determine the recoverable amount include the discount rate and the expected future cash flows over the remaining life of the programs as determined in the budget and strategic plan for each family of aircraft. Sensitivity analysis The following analyses are presented in isolation from one another, i.e. all other estimates left unchanged: An increase of 100-basis points in the discount rate used to perform the impairment test would not have resulted in an impairment charge in fiscal year 2012. A 10% decrease in the expected future net cash inflow for all programs, evenly distributed over future periods, would not have resulted in an impairment charge in fiscal year 2012. Goodwill – The recoverable amount of the BT operating segment, the group of CGUs to which goodwill is allocated, is based on the higher of fair value less costs to sell and value in use. During the fourth quarter of fiscal year 2012, the Corporation completed an impairment test and no impairment was identified. The recoverable amount was calculated based on fair value less costs to sell using a discounted cash flow model. The estimated future cash flows are based on the budget and strategic plan for the first three years and a constant growth rate of 1% is applied to derive estimated cash flows beyond the initial three-year period. For purpose of this test, management used a 15-year period to project future cash flows. The post-tax discount rate is also a key estimate in the discounted cash flow model and is based on a representative weighted average cost of capital. The post-tax discount rate used to calculate the recoverable amount in fiscal year 2012 was 6.8%. A 100-basis points change in the post-tax discount rate would not have resulted in an impairment charge in fiscal year 2012. Valuation of deferred income tax assets – To determine the extent to which deferred income tax assets can be recognized, management estimates the amount of probable future taxable profits that will be available against which deductible temporary differences and unused tax losses can be utilized. Such estimates are made as part of the budget and strategic plan by tax jurisdiction on an undiscounted basis and are reviewed on a quarterly basis. Management exercises judgment to determine the extent to which realization of future taxable benefits is probable, considering factors such as the number of years to include in the forecast period, the history of taxable profits and availability of tax strategies. Credit and residual value guarantees – The Corporation uses an internal valuation model based on stochastic simulations to estimate the amounts expected to be paid under credit and residual value guarantees. The value is calculated using estimates of fair values of aircraft, current market assumptions for interest rates, published credit ratings when available, default probabilities from rating agencies and the likelihood that the residual value guarantee will be called upon at the expiry of the financing arrangement. The fair value of aircraft is estimated using aircraft residual value curves adjusted to reflect the specific factors of the current aircraft market. The Corporation also uses internal assumptions to determine the credit risk of customers without published credit ratings. The estimates are reviewed on a quarterly basis. The Corporation’s main exposures to changes in value of credit and residual value guarantees are related to the residual value curves of the underlying aircraft and interest rates.

APPLICATION EXAMPLE


E xa mpleIAS 36 Illustrative Example 9 provides an example of disclosures about CGUs with goodwill or intangible assets with indefinite useful lives.

Using Present Value Techniques to Measure VIU[IAS 36.A1–.A21]

IAS 36 Appendix A is an integral part of IAS 36 and provides detailed guid-ance on present value techniques. Specifically, it discusses two approaches to computing present value:1. Traditional approach2. Expected cash flow approach

Illustration 10 highlights some differences between the two approaches.

ILLUSTRATION 10 — TWO APPROACHES TO COMPUTING PRESENT VALUE

Traditional approachExpected cash flow approach

Discount rate used • single discount rate com-mensurate with riskiness of cash flows

• often a risk-free rate• may be adjusted for

systemic risks, which are not reflected in the cash flows

Cash flows • single set of estimated cash flows = single most likely cash flow scenario

• consider multiple scenar-ios regarding expected cash flows

• adjust for probability• riskiness of cash flows

reflected in the cash flow estimates


Traditional approachExpected cash flow approach

When to use • where there exists comparable assets in the marketplace (needed to estimate a risk-adjusted discount rate)

• where contractual cash flows represent a single set of cash flow scenarios (e.g., bond principal and interest payments)

• where it may be too dif-ficult to determine a risk-adjusted discount rate

• where multiple cash flow scenarios exist (e.g., in estimating future restora-tion costs)

Potential issues • difficult to calculate the discount rate commen-surate with risk in cases where comparable assets are not observable in the marketplace (e.g., older non-financial assets)

• difficult to assess prob-abilities and estimate possible cash flow scenarios

Impairment Testing CGUs with Goodwill and NCIs[IAS 36 .C6, .C7]

IFRS 3 allows a parent entity the choice of measuring, in its consolidated finan-cial statements, non-controlling interest (NCI) at fair value or as its proportion-ate interest of an acquired subsidiary’s net identifiable assets.

No matter how a parent entity chooses to measure NCI, an impairment loss is allocated as follows:• When a subsidiary (or part of a subsidiary) with NCI is itself a CGU, the

impairment loss is allocated between the parent and NCI on the same basis as that on which profit or loss is allocated.

• When a subsidiary (or a part of a subsidiary) with NCI is part of a larger CGU, the impairment loss is allocated by taking the following steps:

Step Requirements

1 Divide the CGU into:• parts that have NCI; and• parts that do not have NCI.

2 For the portion of the impairment that relates to goodwill in the CGU, allocate the impairment loss to the above-mentioned parts of the CGU based on the relative carrying values of the goodwill of the parts before the impairment.


June 2013

Step Requirements

3 For the portion of the impairment that relates to identifiable assets in the CGU, allocate the impairment loss to the above-mentioned parts of the CGU based on the relative carrying values of the net identifiable assets of the parts before the impairment.

Then, allocate any such impairment to the assets of the parts of each unit pro rata based on the carrying amount of each asset in the part.

4 Once all the above steps have been completed, for the parts that have NCI, the impairment loss is allocated between the parent and NCI on the same basis as that on which profit or loss is allocated.

NCIs Measured as Proportionate Interest[IAS 36 .C4, .C8]

When an entity chooses to measure NCI as its proportionate interest in the net identifiable assets of a subsidiary at the acquisition date, an additional step has to be performed in the allocation of goodwill before a CGU can be tested for impairment.

Goodwill attributable to NCI is included in the recoverable amount of the related CGU but is not recognized in the parent’s consolidated financial state-ments. As a result, an entity must gross up the carrying amount of goodwill allocated to the CGU to include the goodwill attributable to the NCI. This adjusted carrying amount is then compared with the CGU’s recoverable amount to determine whether the CGU is impaired.

When an impairment loss on goodwill is attributable to an NCI, that impair-ment is not recognized as a goodwill impairment loss. Only the impairment loss relating to the goodwill allocated to the parent is recognized as a goodwill impairment loss.

APPLICATION EXAMPLE


E xa mpleIAS 36 Illustrative Example 7 provides an example considering impairment testing of cash-generating units with goodwill and NCI.


Accounting Policy ChoicesIn the absence of an IFRS that specifically applies to a transaction, other event or condition, management must use its judgment in developing and applying an accounting policy that results in relevant and reliable information. In certain cases, an IFRS explicitly offers accounting policy choices.

For example, IAS 36 requires an accounting policy choice for deciding when certain assets (i.e., indefinite-lived intangible assets, intangible assets not available for use and goodwill) are tested for impairment. For these assets, the entity must test for impairment at least annually regardless of whether indica-tors of impairment exist. The entity may choose to do the impairment testing at any point during the year, as long as it is done at the same time every year.

Significant Judgments and EstimatesThe following chart summarizes some possible significant judgments and sources of estimation uncertainty required by IAS 36. This is not meant to be an exhaustive list and other judgments and/or estimates most certainly exist within IAS 36.

ILLUSTRATION 11 — SOME SIGNIFICANT JUDGMENTS AND SOURCES OF ESTIMA-

TION UNCERTAINTY UNDER IAS 36

Judgments Sources of estimation uncertainty

• whether indicators of impairment exist or no longer exist (IAS 36.9 and .110)

• which factors to consider as indicators of impairment (IAS 36.12-.14 and .111)

• when to test for annual impairment for indefinite-lived intangible assets, intan-gible assets not yet available for use and goodwill (IAS 36.10)

• whether recoverable amount needs to be estimated in above-noted calculation (IAS 36.15, .24 and .99)

• whether to reassess remaining useful life, depreciation method or residual value, even if no impairment loss is recognized (IAS 36.17 and .63)

• in determining recoverable amount, whether the VIU materially exceeds FVLCD (IAS 36.21)

• whether an asset generates largely inde-pendent cash flows (IAS 36.22)

• in calculating VIU — whether to adjust for uncertainty and risk in the estimates of cash flows or in the discount rate (IAS 36.32)

• to which CGU an asset belongs (IAS 36.66)

• in calculating VIU — cash flows and dis-count rates (IAS 36.33-.57)

• in calculating FVLCD — market values (which may also include cash flows and discount rates) (IAS 36.28 and .29 and IFRS 13)


June 2013

Judgments Sources of estimation uncertainty

• identification of CGUs (i.e., whether an asset generates largely independent cash inflows ) (IAS 36.68 and .69)

• whether an active market exists for the output produced (IAS 36.70 and .71)

• determining the carrying amount of a CGU (IAS 36.74-.79)

• how to allocate goodwill to CGUs (IAS 36.80 and .81)

• how to allocate corporate assets to CGUs (IAS 36.102)

• how much detail to provide in the note disclosures


APPENDIX A — Acronyms Used

AcSB Accounting Standards Board

CGU Cash-generating unit

FVLCD Fair value less costs of disposal

IDG IFRS Discussion Group

IFRIC IFRS Interpretations Committee

NCI Non-controlling interest

NIFRIC Non-IFRS Interpretations Committee abstract

VIU Value in use

WACC Weighted average cost of capital

Documents

Guide to International Financial Reporting Standards in …/media/site/r2-docs/guide to... · Guide to International Financial Reporting Standards in Canada IAS 36 Impairment of Assets