Impairment testing under IAS 36, ready before the auditor asks.
VALLARIS™ tests goodwill, intangible assets and other assets for impairment: the cash-generating units, the recoverable amount, the discount rate and the disclosures, under IAS 36 (SFRS(I) 1-36 in Singapore).
What is impairment testing?
Impairment testing checks that an asset, or a cash-generating unit, is not carried above its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. IAS 36 requires an annual test for goodwill and intangible assets with indefinite lives, and a test of other assets whenever there is an indication that they may be impaired.
The moments this work is for.
The annual goodwill test
Goodwill and indefinite-life intangibles must be tested every year, and the auditor will test your test.
A trigger has appeared
Results below plan, a lower share price or a change in the market can each require a test.
Headroom is close
You want the sensitivity disclosures and the discount rate right, with reasoning to match.
The work, and what it delivers.
- CGUs definedThe cash-generating units and the goodwill allocated to each.
- Recoverable amountValue in use or fair value less costs of disposal, whichever the standard requires.
- A discount rateA WACC built from market evidence and documented.
- DisclosuresKey assumptions and sensitivity analysis, ready for the accounts.
Four steps, one adviser.
- ScopeAssets, CGUs and the testing date.
- Cash flowsBudgets and forecasts, tested for reasonableness.
- Discount rateA WACC for each CGU, from market evidence.
- ReportThe test, the headroom and the disclosures, signed.
A named signature behind every number.
Impairment is one of the judgements auditors and regulators test hardest. I build each test so its assumptions can be traced, its discount rate defended and its disclosures read clearly.
Siong Yoong
About VALLARIS™ →
Standing you can check. Each line names the body behind it.
Chartered Valuer and Appraiser
CVA, Institute of Valuers and Appraisers, Singapore (IVAS).
The group that writes the standards
Member since 2018 of the IVAS Standards & Technical Working Group, which writes Singapore’s business valuation standards.
International Valuation Standards Council
Member, Memberships & Standards Recognition Committee, IVSC, the body that publishes the IVS.
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Thirty minutes, confidential, and no fee for the first conversation.
What clients ask about impairment testing.
What is a cash-generating unit?
A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows largely independent of other assets. Goodwill is allocated to the CGUs expected to benefit from the acquisition and tested at that level.
How often must goodwill be tested for impairment?
At least once a year, at the same time each year, and also whenever there is an indication of impairment.
What is the difference between value in use and fair value less costs of disposal?
Value in use is the present value of the cash flows the entity expects from continuing to use the asset. Fair value less costs of disposal is the price a market participant would pay, less the costs of selling. The recoverable amount is the higher of the two.
What discount rate should be used?
A pre-tax rate that reflects the time value of money and the risks of the asset, usually derived from a weighted average cost of capital for the CGU using market evidence.
What are the common indicators of impairment?
Results below budget, a market capitalisation below net assets, adverse market or regulatory changes, higher interest rates, and plans to restructure or dispose of an asset.
Often needed together.
Purchase price allocation
Purchase price allocation (PPA) splits the price paid for an acquired business across its identifiable assets and liabilities at fair value, including intangible assets such as customer relationships, brands and technology.
Business valuation
A business valuation sets what a company is worth, on a stated basis of value and at a stated date.
Financial instrument valuation
Financial instrument valuation measures the fair value of instruments that have no quoted price, such as convertible notes, preference shares, warrants, earn-outs and intercompany loans.