Property and Impairment

Revaluation model:

• Accounting policy choice applied on a class-by-class basis (e.g., all land, all buildings, all machinery — not selectively within a class)
• Carrying amount after revaluation = fair value at the date of revaluation less subsequent accumulated depreciation and impairment
• Frequency: Revaluations must be made with sufficient regularity that the carrying amount does not differ materially from fair value at the reporting date. For volatile items (e.g., some land): annually. For stable items: every 3-5 years may be sufficient.
• Two methods to handle accumulated depreciation on revaluation: (a) elimination method (write off accumulated depreciation against gross carrying amount, then revalue), (b) proportional restatement (restate both cost and accumulated depreciation proportionately)

Revaluation surplus (upward revaluation):

• Credited to OCI and accumulated in a revaluation surplus reserve (equity)
• UNLESS reversing a previous revaluation DEFICIT (decrease) recognised in P/L — to that extent, credit to P/L
• Deferred tax on the revaluation is recognised in OCI (backwards tracing) — reduces the net revaluation surplus

Revaluation deficit (downward revaluation):

• Debited to P/L
• UNLESS there is a previous revaluation SURPLUS for the same asset in equity — to that extent, debit to OCI (reducing the revaluation surplus)

Realisation of revaluation surplus: May be transferred from revaluation surplus to retained earnings (within equity — NEVER through P/L) as the asset is used (difference between depreciation based on revalued amount and depreciation based on original cost) or on disposal. This is optional but common.

Componentisation: Each part of an item of PPE with a cost that is significant in relation to the total cost of the item, and which has a different useful life or depreciation method, must be depreciated separately. Example: An aircraft's airframe (25 years), engines (10 years), and interior fit-out (5 years) are depreciated as separate components.

IAS 23 Borrowing Costs:

• Qualifying asset: An asset that necessarily takes a substantial period of time to get ready for its intended use or sale (typically 12+ months). Examples: self-constructed properties, major IT systems in development, complex manufacturing plants, inventories requiring long maturing processes (e.g., whisky).
• Borrowing costs directly attributable to acquisition, construction, or production of a qualifying asset must be CAPITALISED as part of the asset's cost
• Other borrowing costs are expensed in P/L as incurred
• Specific borrowing: if funds are borrowed specifically for a qualifying asset — capitalise actual borrowing costs incurred less any investment income on temporary investment of those borrowings
• General borrowing: if funds from general borrowings are used — apply a capitalisation rate (weighted average of the entity's borrowing costs, excluding specific borrowings for other qualifying assets) to the expenditures on the asset
• Capitalisation commences when: expenditures are being incurred, borrowing costs are being incurred, and activities to prepare the asset are underway. Suspend during extended periods when active development is interrupted. Cease when substantially all activities are complete.

Research and development:

The six IAS 38.57 development criteria (all must be met):

1. Technical feasibility of completing the intangible asset
2. Intention to complete and use or sell
3. Ability to use or sell
4. How the asset will generate probable future economic benefits (existence of a market or, if for internal use, the usefulness of the asset)
5. Availability of adequate technical, financial and other resources to complete the development and to use or sell the asset
6. Ability to measure reliably the expenditure attributable to the intangible asset during development

Mnemonic: PIRATE — Probable future economic benefits, Intention to complete, Resources available, Ability to use/sell, Technical feasibility, Expenditure measurable reliably.

Internally generated intangibles: Specifically PROHIBITED from recognition:

• Internally generated goodwill
• Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance — because expenditure cannot be distinguished from the cost of developing the business as a whole

Subsequent measurement models:

• Cost model: Cost less accumulated amortisation and accumulated impairment. Most common.
• Revaluation model: Only permitted if fair value can be determined by reference to an active market (homogeneous items, willing buyers/sellers readily available, prices publicly available). In practice, this is RARE for intangible assets because most are unique. Active markets may exist for: production quotas, fishing licences, taxi licences in some jurisdictions. Active markets do NOT typically exist for: brands, patents, newspaper mastheads.

Useful life — finite vs indefinite:

• Finite useful life: Amortised over the useful life. Typically straight-line unless another pattern better reflects consumption of economic benefits.
• Indefinite useful life: No foreseeable limit to the period over which the asset is expected to generate net cash inflows. NOT amortised. Instead, tested for impairment ANNUALLY (and whenever indicators arise). Examples: some brands and trademarks that can be renewed indefinitely at low cost. "Indefinite" does NOT mean "infinite".

Investment property: Property (land or a building — or part of a building — or both) held to earn rental income or for capital appreciation or both, rather than for: (a) use in the production/supply of goods/services or administrative purposes (→ IAS 16), or (b) sale in the ordinary course of business (→ IAS 2 inventories).

Examples: Land held for long-term capital appreciation; building leased out under an operating lease to a third party; property being constructed for future use as investment property (also falls under IAS 40).

NOT investment property: Owner-occupied property (IAS 16); property held for sale in ordinary course of business (IAS 2); property leased under a finance lease by the lessor (different rules); property being constructed for a third party (IFRS 15).

Mixed-use property: If a property is partly owner-occupied and partly held as investment property, and the portions can be sold separately (or leased separately under a finance lease), account for the portions separately. If they cannot be separately sold, the property is investment property only if the owner-occupied portion is insignificant.

Measurement after recognition — two models (accounting policy choice):

Consistency requirement: Once a model is chosen, the entity must apply it to all its investment property (not a mix). A change from fair value to cost is unlikely to be allowed (would be unusual and needs to represent a more reliable presentation).

Transfers: Accounted for only when there is a change in use:

• Owner-occupied → Investment property (fair value model): Revalue to fair value at the date of transfer under IAS 16 revaluation (any increase goes through OCI/revaluation surplus; then start IAS 40 treatment)
• Inventory → Investment property (fair value model): Any difference between carrying amount and fair value at transfer date goes to P/L
• Investment property → Owner-occupied (IAS 16) or Inventory (IAS 2): Deemed cost for the subsequent standard = fair value at the date of change

IAS 36 ensures that assets are not carried at more than their recoverable amount. Applies to most non-financial assets (PPE, intangible assets, investments in subsidiaries/associates/JVs in separate accounts, ROU assets). Does NOT apply to: inventories (IAS 2), financial assets (IFRS 9), investment property at fair value (IAS 40), biological assets at fair value (IAS 41), assets held for sale (IFRS 5 for measurement).

When to test for impairment:

• Whenever there are indicators of impairment (assessed at each reporting date). Indicators:
  • External: significant decline in market value, adverse changes in technological/economic/legal environment, increases in market interest rates, net assets exceeding market capitalisation
  • Internal: obsolescence or physical damage, significant changes in asset use (idle, restructuring), evidence that performance is worse than expected
• Annually (regardless of indicators) for: goodwill, intangible assets with indefinite useful life, and intangible assets not yet available for use

Recoverable amount:

Recoverable amount = HIGHER of:

• Fair value less costs of disposal (FVLCD): The price that would be received in an orderly transaction (IFRS 13 fair value), less direct costs to sell
• Value in use (VIU): The present value of future cash flows expected to be derived from the asset through continued use and eventual disposal. Discount rate = pre-tax rate reflecting current market assessments of the time value of money and risks specific to the asset. Cash flows should be based on reasonable and supportable assumptions (typically 5-year explicit forecast, then steady-state assumptions).

If either FVLCD or VIU exceeds the carrying amount, there is NO impairment and the calculation stops (no need to compute both).

Impairment loss = Carrying amount − Recoverable amount. Recognised in P/L (or OCI if the asset was previously revalued, to the extent of the revaluation surplus).

Cash-generating units (CGUs):

• Often impairment testing is impossible for an individual asset because it does not generate independent cash flows. In that case, test the smallest identifiable group of assets that generates largely independent cash inflows (CGU)
• Examples: a retail store (not an individual shelf); a branch office; a production line that is the smallest source of independent cash flows

Goodwill impairment testing:

1. Goodwill is allocated to CGUs (or groups of CGUs) expected to benefit from the synergies of the business combination that gave rise to the goodwill
2. Each CGU (or group of CGUs) with allocated goodwill is tested annually (and whenever indicators arise)
3. Compare the carrying amount of the CGU (including allocated goodwill) to the CGU's recoverable amount
4. If the carrying amount exceeds recoverable amount → impairment loss. Allocation order:
   1. First, reduce the carrying amount of any goodwill allocated to the CGU
   2. Then, allocate any remaining loss to the other assets of the CGU pro rata on the basis of their carrying amounts
   3. No individual asset should be reduced below its own recoverable amount (if determinable), or zero

Reversal of impairment losses:

• At each reporting date, assess whether impairments of prior periods may no longer exist or may have decreased. If yes — reassess recoverable amount
• Reversal limited to the carrying amount that would have existed (net of depreciation/amortisation) had the original impairment not occurred
• Reversals recognised in P/L (or OCI for revalued assets)
• IMPORTANT: Impairment losses on goodwill CANNOT be reversed — under any circumstances. Once goodwill is impaired, the write-down is permanent.

IFRS 5 classification — Held for sale:

A non-current asset (or disposal group) is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. All of the following conditions must be met:

1. The asset is available for immediate sale in its present condition
2. The sale is highly probable:
   • Management has committed to a plan to sell
   • An active programme to locate a buyer and complete the plan is initiated
   • The asset is being actively marketed at a reasonable price relative to its current fair value
   • The sale is expected to qualify for recognition as a completed sale within one year from classification
   • Actions to complete the plan indicate it is unlikely to be significantly changed or withdrawn

Measurement of held-for-sale assets:

• Measured at the LOWER of:
  • Carrying amount (immediately before classification as held for sale), and
  • Fair value less costs to sell
• Depreciation ceases once the asset is classified as held for sale
• Any initial write-down to fair value less costs to sell → impairment loss in P/L
• Subsequent changes in fair value less costs to sell → gain/loss in P/L (gains limited to cumulative impairment losses previously recognised)
• Presented separately from other assets on the balance sheet (usually as a line within current assets, or sometimes a separate section)

Discontinued operations:

A component of an entity that has either been disposed of or is classified as held for sale AND:

• Represents a separate major line of business or geographical area of operations, OR
• Is part of a single coordinated plan to dispose of a separate major line of business or geographical area, OR
• Is a subsidiary acquired exclusively with a view to resale

Presentation of discontinued operations in P/L:

• A single amount in P/L comprising: post-tax profit/loss of the discontinued operation + post-tax gain/loss on measurement to fair value less costs to sell (or on disposal)
• Detailed breakdown in the notes (or on the face — revenue, expenses, tax, gain/loss on remeasurement/disposal)
• Prior periods restated to show the discontinued operation separately
• Continuing operations presented alongside, so users can see the ongoing business's performance

Change of plans — asset no longer held for sale: Measure at the LOWER of:

• The carrying amount BEFORE classification as held for sale, adjusted for any depreciation/amortisation/revaluations that would have been recognised, AND
• Recoverable amount at the date of the subsequent decision not to sell