the fiscal stimulus, liquidity provision and financial support from the state or international organisations, including the potential effects of the withdrawal thereof. IFRS® 9, Financial Instruments, is the result of work undertaken by the International Accounting Standards Board (the Board) in conjunction with the Financial Accounting Standards Board (FASB) in the US.It was last revised in October 2017. For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance. the nature, severity and duration of measures taken to contain or delay the spread of COVID-19; how long it could take for business operations and economic activity to return to normal; the expected trajectory of the recovery (i.e. One CPE credit will be given to U.S. participants who meet the eligibility requirements. any lasting impact on the economy or the sector. This course is part of the IFRS Certificate Program — a comprehensive, integrated curriculum that will give you the foundational training, knowledge, and practical guidance in international accounting standards necessary in today's global business environment.. As noted in IAS 34, when an event or transaction is significant to an understanding of the changes in an entity's financial position or performance since the last annual reporting period, as may be the case with material impairment losses recognised in an interim period, the company’s  interim financial report should provide an explanation of and an update to the relevant information included in the financial statements of the last annual reporting period. • Allowance for expected credit losses. entities in preparing their financial statements app lying IFRS Standards for periods ending on or after 31 December 2019. Using Q&As and examples, this guide explains in depth the impairment models for goodwill, indefinite-lived intangible assets and long-lived assets. non-financial assets are recoverable. Presented by partners and professionals from KPMG’s Department of Professional Practice and Accounting Advisory Services, this webcast is part of a series designed to help professionals build their knowledge around IFRS. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Impairment losses are examples of events and transactions that require disclosure under IAS 34 if they are significant. IFRS 9 mandatory for use since January 01, 2018, was intended to eliminate the shortcomings of then applicable IAS 39, simplify the logic of classification of financial instruments, increase the reliability of information about impairment of financial assets. Explore challenges and top-of-mind concerns of business leaders today. Under IFRS, an impairment loss is recognized if the carrying amount exceeds the recoverable amount of the asset. However, a decrease in the risk-free rate following a decrease in the yield on government bonds may not translate into declines in a company’s discount rate due to possible increases in credit and/or other risk premiums. Significant assumptions, such as forecast sales volumes, prices, gross margins, changes in working capital, foreign exchange rates and discount rates will need to be reassessed and updated as appropriate due to the significant changes in economic and market conditions. You will not receive KPMG subscription messages until you agree to the new policy. Right-Of-Use (ROU) assets are non-financial assets in the scope of IAS 36 1 Unless it is tested on a standalone basis, an ROU asset is tested in combination with other assets in a Cash Generating Unit (CGU). Trigger for impairment testing. Making the estimate could be challenging given the degree of uncertainty about: The discount rate used to discount the forecast cash flows under both VIU and FVLCD may be significantly affected by COVID-19 due to the increase in uncertainty and risks. This might require explanation that management’s forecasts may be more optimistic than market indications. Companies in extractive industries may also have been significantly affected by decreases in commodity prices and companies in countries that are economically dependent on these commodities may also be exposed to a greater risk of adverse economic impacts. Under the expected cash flow approach, uncertainty about future cash flows is reflected in different probability-weighted cash flow projections, rather than in the discount rate. [IAS 1.129(b)], Interim condensed reports IAS 34 Interim Financial Reporting requires disclosure of the nature and amount of changes in estimates. Please note that your account has not been verified - unverified account will be deleted 48 hours after initial registration. In a recent statement ESMA3, the European regulator, emphasised the need for transparent and meaningful disclosures related to impairment testing. Could we be saying goodbye to pre-tax measures? It is imperative for companies to assess the external environment and look for the indicators below to decide when to impair assets. This 60-minute live IFRS webcast provides an overview of the impairment model under IAS 36 and consideration of each of the steps in the IFRS impairment test. Due to the high degree of uncertainty and resulting challenges in forecasting cash flows, it could be helpful to base those forecasts on external sources such as economic projections by respected central banks and other international organisations if available. When a triggering event has occurred, management needs to determine the recoverable amount (the higher of VIU and FVLCD1) of an asset or cash-generating unit (CGU), which usually requires management to forecast future cash flows. You will not continue to receive KPMG subscriptions until you accept the changes. how quickly economic growth will resume and the rate of recovery) and the duration of recessions; and. retail and industrial properties – may be considerably affected by COVID-19. Furthermore, IAS 1 Presentation of Financial Statements requires disclosure of the key assumptions that a company makes about the future and other major sources of estimation uncertainty at the reporting date that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year. Certain sectors have been significantly impacted – e.g. Two approaches can be used to project cash flows: Given the high degree of uncertainty, it may be helpful to consider using an expected cash flow approach as opposed to the traditional approach. Irrespective of any indicator of impairment, IAS 36 requires goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use to be tested for impairment at least annually. Management should also consider disclosing how uncertainty was factored into the impairment test. An impairment loss recognised for goodwill is not reversed in subsequent periods, even if it was recognised in an interim period of the same financial year. Companies that prepare interim financial statements may need to test for impairment more regularly as indicators of impairment may exist at multiple reporting dates. [IAS 36.2, 4]. Impairment losses need to be recognized when the asset’s Book Value > asset’s Recoverable amount.Where Asset’s Recoverable Amount = higher of (Fair value – Selling costs) OR value in use.The value in use is calculated by discounting future cash flows expected from the continued use of the asset. projections of central banks and other international organisations about the duration and severity of the impact of COVID-19; supply of and demand for the CGU’s products or services; the impact of restrictions on transport, travel and quarantines; the impact of exchange rates and commodity prices; and. KPMG does not provide legal advice. Non-financial assets include goodwill, property, plant and equipment, leased assets under operating lease for a lessor and under finance lease for a lessee. Similar considerations would also apply for companies that lease assets (e.g. [IAS 1.125, 129, 36.134(d)–(f)], Because the uncertainty associated with management’s assumptions about the future is likely to be significant, it is important that management develops robust disclosures to help users understand the sensitivity of recoverable amount estimates to significant changes in key assumptions affected by COVID-19. IAS 36 — Recoverable amount disclosures for non-financial assets Background The IASB, as a consequential amendment to IFRS 13 Fair Value Measurement , modified some of the disclosure requirements in IAS 36 Impairment of Assets regarding measurement of the … To cushion the economic and financial market impacts, governments in certain regions and international organisations have committed to fiscal stimulus, liquidity provisions and financial support. This self-study course addresses requirements of IAS 36, Impairment of Assets, including the following: Connect with us via webcast, podcast, or in person at industry events. Under US GAAP, an asset‘s carrying amount is considered not recoverable when it exceeds the undiscounted expected future cash flows. 1. Here we offer our latest thinking and top-of-mind resources. The KPMG IFRS Institute is pleased to announce a webcast on Thursday, October 8, Refresh on Impairment of non-financial assets. Any entity could have significant changes to its financial reporting as the result of this standard. Otherwise, the effect of some factors will be double counted. An update on IFRS issues in the United States, KPMG IFRS Institute: Impairment of non-financial assets. trade with countries significantly affected by COVID-19. Find out how KPMG's expertise can help you and your company. Practical guide to Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 for interest rate benchmark (IBOR) reform The IASB has issued amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 that address issues arising during the reform of benchmark interest rates including the replacement of one benchmark rate with an alternative one. The expected cash flow approach inherently requires a more explicit consideration of the wider than normal range of possible future outcomes. Improving business performance, turning risk and compliance into opportunities, developing strategies and enhancing value are at the core of what we do for leading organizations. ASPE - IFRS: A Comparison | Impairment of Non-Financial Assets 2 When testing an asset for impairment, ASPE requires the asset to be grouped with other assets and liabilities to form an “asset group” based on the lowest level for which identifiable net cash flows are independent of other cash flows.IFRS requires grouping by “cash generating unit” (“CGU”). Impairment of non-financial assets (IAS 36 Impairment of Assets) The impairment requirements in IAS 36 apply to the following types of assets: Goodwill; Intangible assets; Property, plant and equipment; Right-of-use assets; Associates and joint ventures accounted for using the equity method; Investment properties measured using the cost model Consider enhancing sensitivity disclosures and disclosures about the key assumptions and major sources of estimation uncertainty in the interim and annual reports. This article focuses on the accounting requirements relating to financial assets and financial liabilities only. The annual test is required in addition to any impairment tests performed as a result of a triggering event. IFRS 9 Financial Instruments, published in July 2014, is the new financial instruments standard which replaced IAS 39 Financial Instruments: Recognition and Measurement, and is effective for annual periods beginning on or after 1 January 2018. [IAS 36.A1, A16, A18], The risk-free rate is generally based on the yield on government bonds that have the same or similar duration as the cash flows of the asset or CGU. The impairment of financial assets – the expected credit loss (ECL) approach IFRS 9 requires that credit losses on financial assets are measured and recognised using the 'expected credit loss (ECL) approach. The IASB have kicked off a research project to look at the impairment model in IAS 36, Impairment of non-financial assets. Estimating future cash flows could be particularly challenging for many companies due to the increase in economic uncertainty. If the asset‘s carrying amount is considered not recoverable, … Our privacy policy has been updated since the last time you logged in. Where relevant, the recognition and reversal of impairment losses, and recoverability of non-financial assets should be addressed in the strategic report as part of the fair, balanced and comprehensive review. IAS 36 applies to a variety of non-financial assets including property, plant and equipment, right-of-use assets, intangible assets and goodwill, investment properties measured at cost and investments in associates and joint ventures 2. For some entities, such as non- financial corporates, the assessment may be relatively simple as their financial assets may be limited to trade IAS 36 applies to a variety of non-financial assets including property, plant and equipment, right-of-use assets, intangible assets and goodwill, investment properties measured at cost and investments in associates and joint ventures2. Click anywhere on the bar, to resend verification email. IFRS 16 may impact both the CGU’s carrying amount and the way the recoverable amount of the CGU is measured. © 2020 KPMG IFRG Limited, a UK company, limited by guarantee. Interim reporting Entities are required to disclose significant changes from the previous year (see IAS 34 15–16A), for example, in relation to: • impairment of non-financial assets; • impairment of financial assets … Observation Entities will need to assess their business models for holding financial assets. IAS 36 also requires sensitivity disclosures if a reasonably possible change in a key assumption would cause a CGU's carrying amount to exceed its recoverable amount. [IAS 28.40-42], 3 European Securities and Markets Authority, References to ‘Insights’ mean our publication Insights into IFRS. Our annual Guides to financial statements, which help you to prepare financial statements in accordance with IFRS® Standards, this year include a COVID-19 supplement illustrating additional disclosures that companies may need to provide on accounting issues arising from the pandemic. It does not address management or risk reporting that without a ... • Impairment of non- financial assets (including goodwill). 1 VIU: value in use; FVLCD: fair value less costs of disposal. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. [IFRS 13.B26, IAS 36.A7, Insights 3.10.220], Whichever approach a company adopts, the rate used to discount cash flows should not reflect adjustments for factors that have been incorporated into the estimated cash flows and vice versa. That is certain to be the case for those with long-term loans, equity investments, or any non- vanilla financial assets. Impairment of Financial Assets (IFRS 9) Last updated: 8 May 2020 IFRS 9 requires recognition of impairment losses on a forward-looking basis, which means that impairment loss is recognised before the occurrence of any credit event. As a result, the likelihood that a triggering event has occurred in 2020 and therefore that an impairment test is required has increased significantly. Resource centre on the financial reporting impacts of coronavirus. If recent events have changed a company’s usage or retention strategy for any of its property, plant and equipment, then management should review whether the useful life and residual value of these assets, and the depreciation method applied to them, remains appropriate. KPMG International entities provide no services to clients. Budgets and cash flow forecasts prepared by management generally serve as the starting point for the discounted cash flows used in calculating the recoverable amount. Since the last time you logged in our privacy statement has been updated. Any such changes are accounted for prospectively as a change in accounting estimate. This can be ascertained by the physical verification of the asset such as the look and calculation of output or productivity of the assets in a given period. These impairment losses are referred to … Member firms of the KPMG network of independent firms are affiliated with KPMG International. An impairment loss is recognised immediately in profit or loss (or in comprehensive income if it is a revaluation decrease under IAS 16 or IAS 38). Have non-financial assets become impaired – e.g. Given below are just of the some of the indicators relevant for impairment: Tenants that have been forced to suspend operations may not be able to pay rent in the near term or may ask to renegotiate a lower rent. For more detail about our structure please visit https://home.kpmg/governance. Credit losses are the difference between the present value (PV) of all contractual cashflows and the PV of expected future cash flows. Disclosures about the key assumptions made by management are highly relevant, because describing how management determines their values gives investors and other users additional information to assess the reliability of impairment testing and compare management’soutlook with their own. [IAS 36.A4–A14], the impact of measures taken to contain COVID-19 on the company’s business; and. If there is an indication of impairment, then the impairment test follows the principles of IAS 36. All rights reserved. For example, it may be appropriate to disclose management’s views about the degree of uncertainty associated with the macroeconomic outlook (such as the severity and duration of the impact that COVID-19 is expected to have on the company’s business). [IAS 36.55–56]. Cash flows used in determining FVLCD should be updated to reflect the assumptions that market participants would use based on market conditions and information available at the reporting date. All rights reserved. [IAS 36.9–10, 12]. All rights reserved. whether net assets exceed market capitalisation. Companies will need to understand the terms and status of these provisions and consider what impact they might have on their cash flow projections. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. These measures have significantly affected economic activity and sentiment, disrupting the business operations of companies worldwide – particularly those that: The rapid deterioration in the economic environment and the increase in uncertainty in the macroeconomic and business outlook have triggered high volatility in stock markets worldwide accompanied by significant fluctuations in certain foreign exchange rates and commodity prices. travel, tourism, entertainment, retail, insurance and education. It’s all exciting with Iain Selfridge, UK Partner in the latest episode of PwC IFRS Talks This review may also be required after testing a CGU or an asset for impairment. COVID-19 might have a significant impact on the risk-free rate and on entity-specific risk premiums (e.g. Annual reports In the context of impairment testing of goodwill and indefinite-lived intangible assets, IAS 36 requires disclosure of the key assumptions used to determine the recoverable amount. As a result of the issue of IFRS 9, IAS 36 is amended to: Exclude financial instruments accounted for in accordance with IFRS 9, rather than IAS 39. [IFRS 13.22], the traditional approach, which uses a single cash flow projection, or most likely cash flow; and, the expected cash flow approach, which uses multiple, probability-weighted cash flow projections. © 2020 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The KPMG IFRS Institute is pleased to announce a webcast on Thursday, October 8, Refresh on Impairment of non-financial assets. IAS 36 Impairment of Assets requires a company to assess at the end of each reporting period whether there is any indication of impairment (or an indication that a previously recognised impairment loss has reversed). A single roadmap to testing nonfinancial assets for impairment – helping you to compare and contrast the different models: Join us for upcoming webcast events. [IAS 36.4, 9, 33, IFRS 13.2]. Ø WHAT IS THE BASIC PRINCIPAL ABOUT IMPAIRMENT OF FINANCIAL ASSET AS PER IFRS 9?. Read IFRS 9 Financial Instruments amendments to other IFRSs (Appendix C) KPMG International provides no client services. With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an … Director Advisory, Accounting Advisory Services, KPMG US, Managing Director, Dept. In particular, assess: Consider whether budgets and cash flow projections reflect the following to the extent applicable to the company, based on information available at the reporting date: Consider whether discount rates used in recent valuations have been updated to reflect the risk environment at the reporting date. IAS 36 - Impairment of non-financial assets – Expanding on the top 5 tips for impairment testing INT2015-08 Publication date: 02 Mar 2015 This economic environment could lead to revised budgets and forecasts with an expectation of lower cash flows from existing non-financial assets. © 2020 Copyright owned by one or more of the KPMG International entities. To achieve this, management will need to apply significant judgement. For more information, see our web article on ESMA’s enforcement priorities for 2020. Given the uncertain macroeconomic outlook, with scenarios ranging from a relatively quick rebound in economic activity and strong long-term growth, through to a muted recovery or recession followed by slow long-term growth, estimation uncertainty will be significantly higher than normal and there will probably be a wider range of reasonably possible cash flow projections. Greater weight is given to external evidence. What is impairment?? Impairment occurs when the carrying amount of asset (net book value=cost of item less accumulated depreciation) is more than the recoverable amount. financing risk, country risk and forecasting risk) used in determining the appropriate discount rate to discount future cash flows. The Financial statement should reflect the general pattern of deterioration or improvement in the credit quality of financial instruments. Due to the increase in the level of uncertainty, a higher number of key assumptions may need to be disclosed – e.g. Tune in to KPMG Advisory podcasts to hear perspectives on today's business issues. Under VIU, the cash flow projections should be based on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset or CGU. Disclosures related to impairment testing are likely to be a focus area for regulators. For more information, see our article on fair value measurement. • Valuation of inventories. Certain types of investment properties (and right-of-use assets arising from leased real estate) – e.g. Please take a moment to review these changes. The scale of reasonably possible changes in the key assumptions may be larger than usual. when significant changes have taken place during the period (or will take place in the near future) in the market or in the economic environment in which the company operates and these changes will have an adverse effect on the company; and, when the carrying amount of the company’s net assets is higher than its market capitalisation. This webcast also highlights some of the key differences between IFRS and US GAAP related to impairment of non-financial assets. IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. IFRS 9 requires entities to base their measurement of expected credit losses on reasonable and supportable information that is available without undue cost or effort. have been hit by a fall in demand for their products or services, or by restrictions imposed by the state; are dependent on supply chains or have production facilities in countries significantly affected by COVID-19; and/or. PPE, intangible assets and goodwill? Financial assets within the scope of IFRS 9 : X: IFRS 9: Financial assets classified as subsidiaries (as defined by IFRS 10), associates (as defined by IAS 28), and joint ventures (as defined in IFRS 11) accounted for under the cost method for purposes of preparing the parent’s separate financial … Delivering KPMG's guidance, publications and insights on the application of IFRS in the United States. Archived recordings can be accessed anytime. of Professional Practice, KPMG US. To thrive in today's marketplace, one must never stop learning. Impairment of Non-Financial Assets . The recoverable amount of an asset is defined as “the higher of the asset’s fair value minus costs of disposal and its value in use.” The value in use is a discounted measure of expected future cash flows. Under IFRS, IAS 36 is the primary source of guidance on the impairment of tangible assets. 11. if and when a return to pre-crisis cash flow levels is assumed. [IAS 36.33(a)], Under FVLCD, the estimates and assumptions used are from the perspective of market participants. IAS 36 Impairment of Assets IFRS 13 Fair Value Measurement IFRIC 10 Interim Financial Reporting and Impairment IAS 16 Property, Plant and Equipment IAS 38 Intangible Assets IAS 41 Agriculture IFRS 3 Business Combinations IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 8 Operating Segments IFRS 9 Financial Instruments Considering the approach to projecting cash flows. KPMG refers to the global organization or to one or more of the member firms of KPMG International Limited (“KPMG International”), each of which is a separate legal entity. This new standard brings about major changes to the classification and measurement of an entity’s financial assets and the … Impairment of Non-Financial Assets In this publication we will examine the key differences between Accounting Standards for Private Enterprises (ASPE) and International Financial Reporting Standards (IFRS) in regards to asset impairment. What’s the future of value in use…. IAS 36 provides relevant disclosures to be considered in this regard. Corporate strategy insights for your industry, Explore Corporate strategy insights for your industry, Financial Services Regulatory Insights Center, Explore Financial Services Regulatory Insights Center, Explore Risk, Regulatory and Compliance Insights, Explore Corporate Strategy and Mergers & Acquisitions, Customer service transformation & technology. Refer to IFRS 9 for the impairment of financial assets not within the scope of IAS 36. When deriving the discount rate to use in your test, management may consider the company’s weighted average cost of capital, the company’s incremental borrowing rate, and other market borrowing rates that may … Our multi-disciplinary approach and deep, practical industry knowledge, skills and capabilities help our clients meet challenges and respond to opportunities. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities. [IAS 16.61, Insights 3.10.350.30]. [Insights 3.10.300.120]. We want to make sure you're kept up to date. Many offer CPE credit. The purpose of this course is to familiarise you with the guidance in IAS 36, Impairment of Assets, on testing an asset for impairment, recognising and measuring the amount of an impairment loss, if any, as well as determining when it's appropriate for an entity to reverse an impairment loss. Find out what KPMG can do for your business. aircraft and shipping vessels) to the transport sector. [IAS 34.15B(b), 15C, 16A(d)]. The discount rate should reflect the impact of changes in interest rates and the risk environment at the reporting date. The major points covered under this regulation are: 1. 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