Proposed Amendments to IAS 36 and IAS 38

146 Pages·2002·1.48 MB·English

Exposure Draft of Proposed

AMENDMENTS TO

IAS 36

IMPAIRMENT OF ASSETS

IAS 38

INTANGIBLE ASSETS

Comments to be received by 4 April 2003
This Exposure Draft together with ED 3 Business Combinations is published by the
International Accounting Standards Board (IASB) for comment only. The
recommendations in the draft may be modified in the light of the comments received
before being issued in the form of amended International Accounting Standards.
Comments on this Exposure Draft and on ED 3 and its accompanying documents
(see separate booklets) should be submitted in writing so as to be received by
4 April 2003.
All replies will be put on the public record unless confidentiality is requested by
the commentator. If commentators respond by fax or email, it would be helpful if they
could also send a hard copy of their response by post. Comments should preferably
be sent by email to: [email protected] or addressed to:
Annette Kimmitt
Senior Project Manager
International Accounting Standards Board
30 Cannon Street, London EC4M 6XH, United Kingdom
Fax: [phone]
Copyright © 2002 International Accounting Standards Committee Foundation
ISBN for this part: 1-904230-10-5
ISBN for complete publication (four parts): 1-904230-06-7
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PROPOSED AMENDMENTS IASS 36 & 38 DECEMBER 2002 CONTENTS

Contents
Page
Introduction 5
Proposed Amendments to IAS 36 Impairment of Assets 9
Invitation to Comment 10
Summary of Main Changes 14
Contents 20
Standard 23
Appendices:
A Illustrative Examples 79
B Using Present Value Techniques in Measuring
the Value in Use of an Asset 121
C Basis for Conclusions 128
D Amendments to IAS 36 proposed in the May 2002
Exposure Draft Improvements to International Accounting Standards 163
E Alternative views on ED 3 Business Combinations and
associated proposed amendments to IAS 36 and IAS 38 164
Proposed Amendments to IAS 38 Intangible Assets 165
Invitation to Comment 166
Summary of Main Changes 168
Contents 172
Standard 175
Appendices:
A Assessing the Useful Lives of Intangible Assets 228
B Basis for Conclusions 233
C Amendments to IAS 38 proposed in the May 2002 Exposure Draft
Improvements to International Accounting Standards and the
November 2002 Exposure Draft 2 Share-based Payment 256
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PROPOSED AMENDMENTS IASS 36 & 38 DECEMBER 2002 EXPOSURE DRAFT OF REVISED IAS 36

Introduction
D Alternative views on ED 3 Business Combinations and
1. This Exposure Draft has been issued by the International Accounting
associated proposed amendments to IAS 36 and IAS 38 258
Standards Board as part of its project on business combinations. The
Consequential Amendments 259 Board announced in July 2001 that it would undertake the project as
part of its initial agenda. The project’s objective is to improve the
quality of, and seek international convergence on, the accounting for
business combinations and the subsequent accounting for goodwill and
intangible assets acquired in business combinations.

2. The project has two phases. The first phase has resulted in the Board
publishing simultaneously this Exposure Draft, which proposes changes
to IAS 36 Impairment of Assets and IAS 38 Intangible Assets, and ED 3,
an Exposure Draft of a proposed International Financial Reporting
Standard Business Combinations. The Board’s deliberations during the
first phase of the project focused primarily on the following issues:

(a) the method of accounting for business combinations;

(b) the initial measurement of the identifiable assets acquired and
liabilities and contingent liabilities assumed in a business
combination;

(c) the recognition of provisions for terminating or reducing the
activities of an acquiree;

(d) the treatment of any excess of the acquirer’s interest in the fair
values of identifiable net assets acquired in a business combination
over the cost of the combination; and

(e) the accounting for goodwill and intangible assets acquired in a
business combination.

3. Therefore, the Board’s intention while developing this Exposure Draft
was to reflect only those changes related to its decisions in the Business
Combinations project, and not to reconsider all of the requirements in
IAS 36 and IAS 38. The changes proposed to IAS 36 are primarily
concerned with the impairment test for goodwill. The changes proposed
to IAS 38 are primarily concerned with clarifying the notion of
‘identifiability’ as it relates to intangible assets, the useful life and
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PROPOSED AMENDMENTS IASS 36 & 38 DECEMBER 2002 INTRODUCTION

amortisation of intangible assets, and the accounting for in-process • A summary of main changes. This section summarises the Board’s
research and development projects acquired in business combinations. proposals for changes to the Standard. Minor matters and editorial
changes are not mentioned.
4. The second phase of the Business Combinations project will include
consideration of: • The revised text presented as a marked-up copy of the full text of
the Standard. The amendments to IAS 36 and IAS 38 proposed in
(a) issues arising in respect of the application of the purchase method; the May 2002 Exposure Draft Improvements to International
Accounting Standards and the November 2002 Exposure Draft 2
(b) the accounting for business combinations in which separate entities Share-based Payment also are presented as marked-up text.
or operations of entities are brought together to form a joint
venture, including possible applications for ‘fresh start’ accounting; • A basis for conclusions. This section presents the basis for the
and Board’s conclusions on major issues.

(c) the accounting for business combinations involving entities under • A summary of the consequential amendments to the Standard
common control. proposed in the May 2002 Exposure Draft Improvements to
International Accounting Standards and the November 2002
Exposure Draft 2 Share-based Payment.
Invitation to comment
• Alternative views. This section presents the views of Board
5. The Board invites comments on all the changes proposed in the
members who voted against the publication of the Exposure Draft.
Exposure Draft, and would particularly welcome answers to the
Those Board members concluded that the proposed revised text for
questions set out in the ‘Invitation to Comment’ at the front of each
the Standard, taken as a whole, should not be published in its
proposed revised Standard. As noted above, the Board is not
present form. The IASB does not allow partial dissents. Board
considering changes to all of the requirements in IAS 36 and IAS 38 at
members’ views (including the views of Board members who
this time. Therefore, the Board is not requesting comments on aspects
supported the publication of the Exposure Draft of the Standard)
of these Standards not proposed for change.
may change as a result of comments received in the exposure

process. Alternative views are not attributed to individual Board
6. Comments should be submitted in writing so as to be received no later
members.
than 4 April 2003. Until the revised Standards become effective, the
requirements of the current versions of IAS 36 and IAS 38 remain in
8. Consequential amendments to other Standards and SIC Interpretations
force. are presented at the end of the Exposure Draft.

Presentation of the document Style

7. This Exposure Draft presents for each of the proposed revised 9. The Board decided that the Business Combinations project should result
Standards: in a revised IAS 36 and a revised IAS 38. Therefore, the style changes
the Board has agreed to make for new Standards—International
• An invitation to comment. Questions have been limited to the main Financial Reporting Standards (IFRSs)—have not been reflected in the
issues, but the Board would also welcome comments on other revised text. These changes are set out in the Preface to International
changes proposed. Financial Reporting Standards (issued in May 2002).

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PROPOSED AMENDMENTS IASS 36 & 38 DECEMBER 2002 INTRODUCTION

10. However, this document does reflect the Board’s decision to change
certain terminology in existing Standards. Accordingly, the word ‘shall’
is used instead of ‘should’ and ‘entity’ is used instead of ‘enterprise’.

By replacing ‘should’ with ‘shall’, the Board does not intend to change
the requirements in the Standards, but to clarify that it interprets
‘should’ as meaning ‘shall’. By replacing ‘enterprise’ with ‘entity’, a
more neutral term, the Board intends to reflect its objective that

Standards should be used by all profit-oriented entities preparing
general purpose financial statements.
PROPOSED AMENDMENTS TO

IAS 36
IMPAIRMENT OF ASSETS

[Note: For the purpose of this Exposure Draft, the new text is underlined and
the deleted text is struck through. The amendments to IAS 36 proposed
in the May 2002 Exposure Draft Improvements to International
Accounting Standards are also presented in this manner as marked-up

text.]

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PROPOSED AMENDMENTS IASS 36 & 38 DECEMBER 2002 EXPOSURE DRAFT OF REVISED IAS 36
Invitation to Comment (IAS 36) (b) should the assumptions on which cash flow projections are based take
into account both past actual cash flows and management’s past ability to

forecast cash flows accurately (see proposed paragraph 27(a)(ii) and
The Board would particularly welcome answers to the questions set out below.
paragraphs C66 and C67 of the Basis for Conclusions)? If not, why not?
Comments are most helpful if they indicate the specific paragraph or group of

paragraphs to which they relate, contain a clear rationale and, where
(c) is the additional guidance in proposed Appendix B to [draft] IAS 36 on
applicable, provide a suggestion for alternative wording.
using present value techniques in measuring an asset’s value in use

appropriate? If not, why not? Is it sufficient? If not, what should be

added?
Question 1 – Frequency of impairment tests

Question 4 – Allocating goodwill to cash-generating units
Are the proposals relating to the frequency of impairment testing intangible

assets with indefinite useful lives and acquired goodwill appropriate (see
The Exposure Draft proposes that for the purpose of impairment testing,
proposed paragraphs 8 and 8A and paragraphs C6, C7 and C41 of the Basis
acquired goodwill should be allocated to one or more cash-generating units.
for Conclusions)? If not, how often should such assets be tested for

impairment, and why?
(a) Should the allocation of goodwill to one or more cash-generating units

result in the goodwill being tested for impairment at a level that is
Question 2 – Intangible assets with indefinite useful lives
consistent with the lowest level at which management monitors the return

on the investment in that goodwill, provided such monitoring is
The Exposure Draft proposes that the recoverable amount of an intangible
conducted at or below the segment level based on an entity’s primary
asset with an indefinite useful life should be measured, and impairment losses
reporting format (see proposed paragraphs 73-77 and paragraphs C18-
(and reversals of impairment losses) for such assets accounted for, in
C20 of the Basis for Conclusions)? If not, at what level should the
accordance with the requirements in IAS 36 for assets other than goodwill (see
goodwill be tested for impairment, and why?
paragraphs C10-C11 of the Basis for Conclusions).

(b) If an entity disposes of an operation within a cash-generating unit to
Is this appropriate? If not, how should the recoverable amount be measured,
which goodwill has been allocated, should the goodwill associated with
and impairment losses (and reversals of impairment losses) be accounted for?
that operation be included in the carrying amount of the operation when

determining the gain or loss on disposal (see proposed paragraph 81 and
Question 3 – Measuring value in use
paragraphs C21-C23 of the Basis for Conclusions)? If not, why not? If

so, should the amount of the goodwill be measured on the basis of the
The Exposure Draft proposes additional guidance on measuring the value in
relative values of the operation disposed of and the portion of the unit
use of an asset. Is this additional guidance appropriate? In particular:
retained or on some other basis?

(a) should an asset’s value in use reflect the elements listed in proposed
(c) If an entity reorganises its reporting structure in a manner that changes
paragraph 25A? If not, which elements should be excluded or should
the composition of one or more cash-generating units to which goodwill
any additional elements be included? Also, should an entity be permitted
has been allocated, should the goodwill be reallocated to the units
to reflect those elements either as adjustments to the future cash flows or
affected using a relative value approach (see proposed paragraph 82 and
adjustments to the discount rate (see proposed paragraph 26A and
paragraphs C24 and C25 of the Basis for Conclusions)? If not, what
paragraphs C66 and C67 of the Basis for Conclusions)? If not, which
approach should be used?
approach should be required?
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Question 5 – Determining whether goodwill is impaired Question 7 – Estimates used to measure recoverable amounts of cash-
generating units containing goodwill or intangible assets with indefinite
The Exposure Draft proposes: useful lives

(a) that the recoverable amount of a cash-generating unit to which goodwill The Exposure Draft proposes requiring a variety of information to be disclosed
has been allocated should be measured as the higher of the unit’s value in for each segment, based on an entity’s primary reporting format, that includes
use and net selling price (see proposed paragraphs 5 (definition of within its carrying amount goodwill or intangible assets with indefinite useful
recoverable amount) and 85 and paragraph C17 of the Basis for lives (see proposed paragraph 134 and paragraphs C69-C82 of the Basis for
Conclusions). Conclusions).

Is this appropriate? If not, how should the recoverable amount of the (a) Should an entity be required to disclose each of the items in proposed
unit be measured? paragraph 134? If not, which items should be removed from the
disclosure requirements, and why?
(b) the use of a screening mechanism for identifying potential goodwill
impairments, whereby goodwill allocated to a cash-generating unit would (b) Should the information to be disclosed under proposed paragraph 134 be
be identified as potentially impaired only when the carrying amount of disclosed separately for a cash-generating unit within a segment when
the unit exceeds its recoverable amount (see proposed paragraph 85 and one or more of the criteria in proposed paragraph 137 are satisfied? If
paragraphs C42-C51 of the Basis for Conclusions). not, why not?

Is this an appropriate method for identifying potential goodwill
impairments? If not, what other method should be used?

(c) that if an entity identifies goodwill allocated to a cash-generating unit as
potentially impaired, the amount of any impairment loss for that goodwill
should be measured as the excess of the goodwill’s carrying amount over
its implied value measured in accordance with proposed paragraph 86
(see proposed paragraphs 85 and 86 and paragraphs C28-C40 of the
Basis for Conclusions).

Is this an appropriate method for measuring impairment losses for
goodwill? If not, what method should be used, and why?

Question 6 – Reversals of impairment losses for goodwill

The Exposure Draft proposes that reversals of impairment losses recognised
for goodwill should be prohibited (see proposed paragraph 123 and paragraphs
C62-C65 of the Basis for Conclusions).

Is this appropriate? If not, what are the circumstances in which reversals of
impairment losses for goodwill should be recognised?
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Summary of Main Changes (IAS 36) o other factors, such as illiquidity, that market participants would reflect
in pricing the future cash flows the entity expects to derive from the

asset.
Frequency of impairment testing

The Exposure Draft also proposes clarifying that the second, fourth and
• IAS 36 requires the recoverable amount of an asset to be measured
fifth of these elements can be reflected either as adjustments to the future
whenever there is an indication that the asset may be impaired. The
cash flows or adjustments to the discount rate.
Exposure Draft proposes:

• IAS 36 requires cash flow projections used to measure value in use to be
o that the recoverable amount of an intangible asset with an indefinite
based on reasonable and supportable assumptions that represent
useful life should also be measured at the end of each annual
management’s best estimate of the set of economic conditions that will
reporting period, irrespective of whether there is any indication that it
exist over the remaining useful life of the asset. The Exposure Draft
may be impaired. However, the most recent detailed calculation of
proposes requiring those assumptions also to take into account both past
recoverable amount made in a preceding reporting period may be
actual cash flows and management’s past ability to forecast cash flows
used in the impairment test for that asset in the current period,
accurately.
provided specified criteria are met.

• Additional guidance on using present value techniques in measuring an
o to relocate from IAS 38 Intangible Assets the requirement for the
asset’s value in use has been included in proposed Appendix B to [draft]
recoverable amount of an intangible asset not yet available for use to
IAS 36. In addition, the guidance in IAS 36 on estimating the discount
also be measured at the end of each annual reporting period,
rate when an asset-specific rate is not directly available from the market
irrespective of whether there is any indication that it may be impaired.
has been relocated to Appendix B.

o that goodwill acquired in a business combination should be tested for
Allocating goodwill to cash-generating units
impairment annually and whenever there is any indication that it may

be impaired.
• IAS 36 requires goodwill to be tested for impairment as part of

impairment testing the cash-generating units to which it relates. It
Measuring value in use
employs a ‘bottom-up/top-down’ approach under which the goodwill is

in effect tested for impairment by allocating its carrying amount to each
• The Exposure Draft proposes clarifying that the following elements
of the smallest cash-generating units to which a portion of that carrying
should be reflected in the calculation of an asset’s value in use:
amount can be allocated on a reasonable and consistent basis.

Consistently with IAS 36, the Exposure Draft proposes that:
o an estimate of the future cash flows the entity expects to derive from

the asset.
o goodwill should be tested for impairment as part of impairment

testing the cash-generating units to which it relates.
o expectations about possible variations in the amount and/or timing of

those future cash flows.
o the carrying amount of goodwill should be allocated to each of the

smallest cash-generating units to which a portion of that carrying
o the time value of money, represented by the current market risk-free
amount can be allocated on a reasonable and consistent basis.
rate of interest.

o the price for bearing the uncertainty inherent in the asset.
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However, the Exposure Draft proposes additional guidance clarifying for goodwill to be measured as the excess of the carrying amount of
that a portion of the carrying amount of goodwill should be regarded as goodwill over its implied value.
capable of being allocated to a cash-generating unit on a reasonable and
consistent basis only when that cash-generating unit represents the lowest • The Exposure Draft proposes that the implied value of goodwill should
level at which management monitors the return on investment in assets be measured a s the excess of:
that include the goodwill. That cash-generating unit cannot be larger
than a segment based on the entity’s primary reporting format determined o the recoverable amount of the cash-generating unit to which the
in accordance with IAS 14 Segment Reporting. goodwill has been allocated, over

• The Exposure Draft proposes clarifying that if the initial allocation of o the net fair value of the identifiable assets, liabilities and contingent
goodwill acquired in a business combination cannot be completed before liabilities the entity would recognise if it acquired that cash-
the end of the annual reporting period in which the business combination generating unit in a business combination on the date of the
occurs, that initial allocation should be completed before the end of the impairment test. However, an entity should exclude from this net fair
first annual reporting period beginning after the acquisition date. value calculation any identifiable asset that was acquired in a business
combination but not recognised separately from goodwill at the
• The Exposure Draft proposes that when an entity disposes of an acquisition date.
operation within a cash-generating unit to which goodwill has been
allocated, the goodwill associated with that operation should be:
Timing of impairment tests for goodwill

o included in the carrying amount of the operation when determining
• The Exposure Draft proposes that:
the gain or loss on disposal; and

o the annual impairment test for a cash-generating unit to which
o measured on the basis of the relative values of the operation disposed
goodwill has been allocated may be performed any time during an
of and the portion of the cash-generating unit retained.
annual reporting period, provided the test is performed at the same
• The Exposure Draft proposes that when an entity reorganises its time every year.

reporting structure in a manner that changes the composition of cash-
o different cash-generating units may be tested for impairment at
generating units to which goodwill has been allocated, the goodwill
should be reallocated to the units affected using a relative value approach different times.
similar to that used when an entity disposes of an operation within a
However, if some of the goodwill allocated to a cash-generating unit was
cash-generating unit.
acquired in a business combination during the current annual reporting
Measuring impairment losses for goodwill period, the Exposure Draft proposes requiring that unit to be tested for
impairment before the end of the current period.
• If the carrying amount of a cash-generating unit to which goodwill has
been allocated exceeds its recoverable amount, IAS 36 requires the • The Exposure Draft proposes that the most recent detailed calculation
excess to be recognised as an impairment loss for goodwill. Any excess made in a preceding reporting period of the recoverable amount of a
remaining after the carrying amount of goodwill has been reduced to zero cash-generating unit to which goodwill has been allocated may be used in
is then recognised by being allocated to the other assets of the unit pro the impairment test for that unit in the current period, provided specified
rata with the carrying amount of each asset in the unit. The Exposure criteria are met.
Draft proposes amending this approach by requiring the impairment loss
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