10.3.2: Accounting for Impairment

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The usual situation when applying an impairment test would be to make the assessments on an asset-by-asset basis. However, in some circumstances, it may be impossible to determine the impairment of an individual asset. Some assets may have a value in use only when used in combination with other assets. Consider, for example, a petrochemical-processing plant. The plant is engineered with many customized components that work together to process and produce a final product. If any part of the plant were removed, the process could not be completed. In this case, the cash flows derived from the use of the group of assets are considered a single economic event. The cash flows from an individual asset component within the group cannot be determined separately. In these cases, IAS 36 allows the impairment test to be performed at the level of the cash-generating unit, rather than at the individual asset level.

IAS 36 defines a cash-generating unit as "the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets" (International Accounting Standards, n.d., 36.68). The definition of cash-generating units should be applied consistently from year to year. Obviously, significant judgment is required in making these determinations.

The impairment test is applied the same way to cash-generating units as with individual assets. The only difference is that any resulting impairment loss is allocated on a pro-rata basis to the individual assets within the cash-generating unit, based on the relative carrying amounts of those assets within the group. However, in this process, no individual asset should be reduced below the greater of its recoverable amount or zero.

Consider the following example. A petrochemical-processing plant is composed of a number of different assets, including the following:

	Cost ($)	Accumulated	Carrying
		Depreciation ($)	Amount ($)
Pumps, tanks, and drums	390,000	210,000	180,000
Reactors	1,100,000	650,000	450,000
Pipes and fittings	275,000	155,000	120,000
Distillation column	850,000	465,000	385,000
	2,615,000	1,480,000	1,135,000

Management considers this plant to be a cash-generating unit. Due to recent declines in commodity prices, management believes the plant may be impaired. After some investigation, management determines that the distillation column could be sold for net proceeds of $435,000. All the other assets, however, are integrated into the plant structure and could not be sold separately. As well, due to local regulations, the plant cannot be sold in its entirety. Management has projected that by operating the plant for the next three years, cash flows of $1,200,000 could be generated. The present value of these cash flows is $950,000.

Impairment here is determined by comparing the carrying amount of $1,135,000 with the recoverable amount of $950,000. The value in use is the appropriate measure here, as the fair value less costs to sell of $435,000 is lower. In this case, there is an impairment of $185,000 (). None of the impairment should be allocated to the distillation column, as the carrying value of $385,000 is already less than the recoverable amount of $435,000. For the remaining components, we cannot determine the recoverable amount, so the impairment loss will be allocated to these assets on a pro-rata basis.

	Carrying	Proportion	Impairment
	Amount ($)		Loss ($)
Pumps, tanks, and drums	180,000	180/750	44,400
Reactors	450,000	450/750	111,000
Pipes and fittings	120,000	120/750	29,600
	750,000		185,000

The journal entry would record separate accumulated-impairment loss amounts for each of the above components.

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