IPSAS 21 is based on IAS 36 Impairment of Assets (2004).
IPSAS 21 Impairment of Non-Cash-Generating Assets describes procedures to ensure that an asset’s carrying amount does not exceed its recoverable amount (i.e. the higher of fair value less costs to sell and value in use). With the exception of intangible assets with an indefinite useful life or intangibles not yet available for use, for which an annual impairment test is required, entities are required to conduct impairment tests when an indication of impairment of an asset exists.
IPSAS 21 was issued in December 2004 and applies to annual periods beginning on or after 1 January 2006.
History of IPSAS 21
Annual periods beginning on or after 1 January 2006.
Refer to IFAC website here
Summary of IPSAS 21 Impairment of Non-Cash-Generating Assets
IPSAS 21 prescribes the procedures to determine if an asset has been impaired and to ensure that the impairment is recognized and when an impairment would be reversed. The standard includes also disclosure requirements.
This standard applies to entities that prepare and present financial statements under the accrual basis of accounting [IPSAS 21.2]. IPSAS 21 applies to all public sector entities other than GBEs [IPSAS 21.3].
Following types of assets are explicitly excluded [IPSAS 21.2]:
• Inventories (IPSAS 12, Inventories);
• Assets arising from construction contracts (IPSAS 11, Construction Contracts);
• Financial assets that are included in the scope of IPSAS 29, Financial Instruments: Recognition and Measurement;
• Investment property that is measured using the fair value model (IPSAS 16, Investment Property);
• Non-cash-generating property, plant, and equipment that is measured at revalued amounts (IPSAS 17, Property, Plant, and Equipment);
• Non-cash-generating intangible assets that are measured at revalued amounts (IPSAS 31, Intangible Assets); and
• Other assets in respect of which accounting requirements for impairment are included in another IPSAS
If cash generating assets are held by the entity the requirements of IPSAS 26 Impairment of Cash-Generating Assets are applicable [IPSAS 21.5].
Key definitions [IPSAS 21.14]
Impairment: a loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset’s future economic benefits or service potential through depreciation.
Cash-generating assets: assets held with the primary objective of generating a commercial return.
Non-cash-generating assets: assets other than cash-generating assets.
Recoverable service amount: the higher of a non-cash-generating asset’s fair value less costs to sell and its value in use.
Value in use of a non-cash-generating asset: is the present value of the asset’s remaining service potential.
Identifying Assets that may be Impaired
A non-cash generating asset is impaired when its carrying amount exceeds its recoverable service amount [IPSAS 21.25].
At each reporting date the entity has to assess that indicators of an asset that might be impaired exist. If such indicators exist, the entity should estimate the recoverable amount of the asset [IPSAS 21.26].
Following types of intangible assets should be investigated for impairment each year, irrespective of indicators of impairment exist or not and their recoverable amounts should be calculated:
• an intangible asset with an indefinite useful life [IPSAS 21.26A]
• an intangible asset not yet available for use [IPSAS 21.26B]
The test should be performed at any time during the reporting period provided that it is performed at the same time each year [IPSAS 21.26A].
Following external and internal indicators of impairment are included in the standard [IPSAS 21.27]:
o Substantial decline in, or (near) cessation of the demand or need for services provided by the asset [IPSAS 21.27 and 21.29(b)]
o Negative changes in the technological, legal, or government policy environment
o physical damage of an asset;
o Asset is idle, or a decline or expected decline in the use of an asset as part of plans to discontinue, restructure or dispose the asset
o decision to halt the construction of the asset before it is complete or in a usable condition
o worse than expected service performance of an asset
The list of indicators in not intended to be exhaustive, other indicators of impairment may exists [IPSAS 21.29].
In case of an indication of impairment of an asset, this may indicate a need to review irrespective of the recognition of an impairment loss [IPSAS 21.34]:
• the remaining useful life
• depreciation or amortization method
• residual value
Determination of the Recoverable Service Amount
The asset is not impaired when the fair value less costs to sell or value in use is higher than the carrying amount. It is not always necessary to calculate both amounts [IPSAS 21.36].
When the fair value less costs to sell cannot be reliably estimated, then the value in use may serve as the recoverable amount [IPSAS 21.37].
When the recoverable amount is not expected to exceed substantially the fair value less cost to sell, the fair value less cost to sell may be used as the recoverable amount (e.g. assets held for disposal, the recoverable amount is fair value less costs to sell) [IPSAS 21.38].
Fair value less costs to sell
Faire value can be derived from different sources:
• active market [IPSAS 21.41]
• binding agreement in arm’s length transaction[IPSAS 21.40]
• prices of recent transactions [IPSAS 21.41]
• best information available [IPSAS 21.42]
Costs to sell (or costs of disposal) are the direct incremental costs only (not existing costs or overhead). Reorganization costs and termination benefits are not direct incremental costs [IPSAS 21.43].
Value in use
Value in use of a non-cash-generating asset is the present value of the asset’s remaining service potential, which should be determined by one of the following methods [IPSAS 21.44]:
• Depreciated replacement cost
• Restoration cost
• Service Units
Under the depreciated replacement cost approach the replacement costs concerns the cost to replace the gross service potential of the asset, which is depreciated to reflect the used condition of the asset. This depreciated replacement cost reflects than the present value of the service potential of the asset [IPSAS 21.45].
The restoration costs concerns the costs that are necessary to bring service potential of the asset to its pre-impairment state. The present value of the asset’s service potential is the current replacement cost for the asset minus the restoration costs [IPSAS 21.48].
Under the service units approach the current present value of the remaining service potential of the asset is determined by reducing the current cost of the remaining service potential of the asset before impairment to conform with the reduced number of service units expected from the asset in its impaired state [IPSAS 21.49].
The nature of the impairment and the available data will in most cases indicate the most appropriate approach for measuring the value in use [IPSAS 21.50].
Recognition of an impairment loss
An impairment loss is recognized:
• whenever the recoverable service amount is below its carrying amount [IPSAS 21.52]
• as an expense in the statement of financial performance / in surplus or deficit [IPSAS 21.54]
A liability should be recognized when the impairment loss exceeds the carrying amount of the asset if this is required by another IPSAS [IPSAS 21.55].
The depreciation for future periods should be adjusted [IPSAS 21.57].
Reversal of an impairment loss
An entity should assess each reporting date whether an earlier recognized impairment loss may have decreased or does no longer exist [IPSAS 21.59]. If such indication exists, the entity should estimate the recoverable amount taking into account external and internal sources of information [IPSAS 21.60].
The reversal of the impairment loss, if there has been a change in the estimates used to determine the asset’s recoverable service potential since the impairment loss was recognized [IPSAS 21.65]. The reversal of the impairment loss will increase the carrying amount which will not exceed the depreciated (or amortized) carrying amount if no impairment loss would have been recognized [IPSAS 21.68].
The reversal of the impairment loss will be recognized in surplus or deficit (statement of financial position) [IPSAS 21.69].
The depreciation for future periods should be adjusted [IPSAS 21.70].
Redesignation of assets
The redesignation of assets between cash-generating assets and non-cash-generating should only occur when there is clear evidence that such a redesignation is appropriate. A redesignation, by itself, does not necessarily trigger an impairment test or a reversal of an impairment loss. Instead, the indication for an impairment test or a reversal of an impairment loss arises from, as a minimum, the listed indications applicable to the asset after redesignation [IPSAS 21.71].
Entity is required to disclose the criteria applied to distinguish following classes of assets [IPSAS 21.72A]:
• cash generating assets
• non-cash-generating assets
Disclosures by class of assets [IPSAS 21.73]:
• impairment losses recognized in surplus or deficit
• impairment losses reversed in surplus or deficit
• line item(s) of the statement of statement of financial performance affected
Disclosure by reported segment [IPSAS 21.76]
• impairment losses recognized
• impairment losses reversed
If an impairment loss (reversal) is individually material the following should be disclosed [IPSAS 21.77]
• events and circumstances resulting in the (reversal) impairment loss
• amount of the loss or reversal
• nature of the asset
• the segment to which the asset belongs
• whether the recoverable service amounts is (i) fair value less cost to sell or (ii) value in use
• when recoverable amounts is fair value less cost to sell: the basis used to determine fair value less disposal cost (active market, recent prices,…)
• if recoverable amount has been determined on the basis of value in use, the approach used to determine the value
When impairment losses recognized (reversed) are material in aggregate (but not individually disclosed as described above) to the financial statements as a whole, disclose [IPSAS 21.78]
• main classes of assets affected
• main events and circumstances resulting in the (reversal) impairment loss
Issuance of IPSAS 21: Impairment of Non-Cash-Generating Assets
1 January 2006
Effective date of IPSAS 21
1 April 2011
Amendment from IPSAS 31 (issued in January 2010)
1 January 2013
Effective date of Improvements to IPSASs 2011 (issued in October 2011)