IPSAS 26 is based on IAS 36 Impairment of Assets (2004).
IPSAS 26 Impairment of 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 26 was issued in February 2008 and applies to annual periods beginning on or after 1 April 2009.
History of IPSAS 26
Annual periods beginning on or after 1 April 2009.
Refer to IFAC website here
Summary of IPSAS 26 Impairment of Cash-Generating Assets
IPSAS 26 prescribes the procedures to determine if an cash-generating 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 26.2]. IPSAS 26 applies to all public sector entities other than GBEs [IPSAS 26.3].
Following types of assets are explicitly excluded [IPSAS 26.2]:
• 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);
• Cash-generating property, plant, and equipment that is measured at revalued amounts (IPSAS 17, Property, Plant, and Equipment);
• Deferred tax assets (relevant national or international standard)
• Assets arising from employee benefits (IPSAS 25. Employee Benefits)
• Cash-generating intangible assets that are measured at revalued amounts (IPSAS 31, Intangible Assets)
• Goodwill (relevant international or national accounting standard)
• Biological assets measured at fair value less costs to sell (see IPSAS 27, Agriculture)
• Insurance contract assets (relevant international or national accounting standard)
• Non-current assets (or disposal groups) classified as held for sale (relevant international or national accounting standard)
• Other cash-generating assets in respect of which accounting requirements for impairment are included in another IPSAS
If non-cash generating assets are held by the entity the requirements of IPSAS 21 Impairment of Non-Cash-Generating Assets are applicable [IPSAS 26.5].
Key definitions [IPSAS 26.13]
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 [IPSAS 21.14]
Cash-generating assets: assets held with the primary objective of generating a commercial return [IPSAS 21.14]
Cash-generating unit: the smallest identifiable group of assets held with the primary objective of generating a commercial return that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.
Non-cash-generating assets: assets other than cash-generating assets [IPSAS 21.14]
Recoverable amount: the higher of a cash-generating asset’s or a cash generating unit’s fair value less costs to sell and its value in use.
Value in use of a cash-generating asset: the present value of the estimated future cash flows expected to be derived from the continuing use of an asset and from its disposal at the end of its useful life.
Identifying Assets that may be Impaired
A non-cash generating asset is impaired when its carrying amount exceeds its recoverable service amount [IPSAS 26.21].
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 26.22].
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 [IPSAS 26.23]:
• an intangible asset with an indefinite useful life
• an intangible asset not yet available for use
When some criteria are met, the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that intangible asset in the current period [IPSAS 26.37].
The test should be performed at any time during the reporting period provided that it is performed at the same time each year [IPSAS 26.23].
Following external and internal indicators of impairment are included in the standard [IPSAS 26.25]:
o Decline in market value declines
o Negative changes in the technological, market, economic, legal policy environment
o increases in market interest rates
o Obsolescence or 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 26.26].
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 26.30]:
• the remaining useful life
• depreciation or amortization method
• residual value
Determination of the Recoverable 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 26.32].
When the fair value less costs to sell cannot be reliably estimated, then the value in use may serve as the recoverable amount [IPSAS 26.33].
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 26.34].
Fair value less costs to sell
Faire value can be derived from different sources:
• binding agreement in arm’s length transaction[IPSAS 26.38]
• active market [IPSAS 26.39]
• prices of recent transactions [IPSAS 26.39]
• best information available [IPSAS 26.40]
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 26.41].
Value in use
The calculation of value in use must reflect following elements [IPSAS 26.43]:
• an estimate of the future cash flows the entity expects to derive from the asset
• expectations about possible variations in the amount or timing of those future cash flows
• the time value of money, represented by the current market risk-free rate of interest
• the price for bearing the uncertainty inherent in the asset
• other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset
Cash flow projections should be based on [IPSAS 26.46]:
• reasonable and supportable assumptions
• the most recent budgets and forecasts
• extrapolation for periods beyond budgets and forecasts
IPSAS 26 presumes that budgets and forecasts beyond five years are usually not available (or not reliable). Cash flow projections for periods beyond five years can be used to the extent that management is confident that these are reliable and can proof its ability, based on past experience, to forecast financial data over longer periods [IPSAS 26.48].
Estimates of future cash flows should include [IPSAS 26.52]:
• Projections of cash inflows from the continuing use of the asset
• Projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and
• Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
Cash flow estimates should be based on the asset’s current condition – future restructurings to which the entity is not committed and expenditures to improve or enhance the asset's performance should not be anticipated [IPSAS 26.57]
Estimates of cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or payments [IPSAS 26.63].
In measuring value in use, the discount rate used should be the pre-tax rate that reflects [IPSAS 26.68]:
• current market assessments of the time value of money
• the risks specific to the asset
The discount rate should not reflect risks for which estimates of future cash flows have been adjusted and should equal the rate of return that investors would require if they were to choose an investment that would generate cash flows with equivalent characteristics to those expected from the asset [IPSAS 26.69].
In case an asset-specific rate is not available, a surrogate should be used [IPSAS 26.70]. This surrogate rate should reflect the time value of money over the asset's life as well as illiquidity, the price for bearing the risk inherent in the asset, etc. The following would normally be considered [IPSAS 26 AG17]:
• the entity's own weighted average cost of capital
• the entity's incremental borrowing rate
• other market borrowing rates
Recognition of an impairment loss – Individual assets
An impairment loss is recognized:
• whenever the recoverable amount is below its carrying amount [IPSAS 26.72]
• as an expense in the statement of financial performance / in surplus or deficit [IPSAS 26.73]
A liability should be recognized when the impairment loss exceeds the carrying amount of the asset if this is required by another IPSAS [IPSAS 26.74].
The depreciation for future periods should be adjusted [IPSAS 26.75].
Recognition of an impairment loss - Cash-generating units (CGU)
The recoverable amount should be determined for an individual asset. Only if it is not possible to determine the recoverable amount of an individual asset (fair value less costs of disposal and value in use), the recoverable amount for the asset's cash-generating unit (CGU) should be determined [IPSAS 26.77].
A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets [IPSAS 26.13].
An impairment loss is recognized when the recoverable amount of the unit is below its carrying amount as an expense in the statement of financial performance / in surplus or deficit [IPSAS 26.91].
The impairment loss is allocated on a pro rata basis to reduce the carrying amount of the assets of the CGU [IPSAS 26.91].
The carrying amount of an asset should not be reduced below the highest of [IPSAS 26.92]
• its fair value less costs of disposal (if determinable)
• its value in use ((if determinable)
Further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units).
When a non-cash-generation asset is included the cash generating unit, appropriate adjustments and allocation of carrying amount to the non-cash-asset should be made prior to the estimation of the recoverable amount of the cash generating unit [IPSAS 26.93].
A liability should be recognized when the impairment loss exceeds the carrying amount of the unit if this is required by another IPSAS [IPSAS 26.97].
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 26.99]. If such indication exists, the entity should estimate the recoverable amount taking into account external and internal sources of information [IPSAS 26.100].
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 26.103].
Individual asset – reversal of impairment:
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 26.106].
The reversal of the impairment loss will be recognized in surplus or deficit (statement of financial position) [IPSAS 26.108].
The depreciation for future periods should be adjusted [IPSAS 26.109].
Cash generating Unit – reversal of impairment:
For a CGU, the reversal of the impairment loss shall be allocated to the individual assets of the unit pro rata with their carrying amounts [IPSAS 26.110]
The carrying amount of the individual assets will not exceed their recoverable amount or the depreciated (or amortized) carrying amount if no impairment loss would have been recognized, whichever is lower [IPSAS 26.111].
The reversal of the impairment loss will be recognized in surplus or deficit (statement of financial position) [IPSAS 26.110].
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 26.112].
Entity is required to disclose the criteria applied to distinguish following classes of assets [IPSAS 26.114]:
• cash generating assets
• non-cash-generating assets
Disclosures by class of assets [IPSAS 26.115]:
• 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 26.119]
• impairment losses recognized
• impairment losses reversed
If an impairment loss (reversal) is individually material the following should be disclosed [IPSAS 26.120]
• events and circumstances resulting in the (reversal) impairment loss
• amount of the loss or reversal
• for an individual asset:
o nature of the asset
o the segment to which the asset belongs
• cash generating unit
o description of the CGU
o amount of impairment loss (reversal) by class of assets and segment
o if the method for aggregating assets to a CGU has changed, a description of the change and the current and previous method
• 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 discount rate and previous estimate of the value in use
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 26.121]
• main classes of assets affected
• main events and circumstances resulting in the (reversal) impairment loss
Further specific disclosures are required with regard to estimates used to measure recoverable amounts of cash generating units containing intangible assets with indefinite useful lives [IPSAS 26.123 -125].
IPSAS 26: Impairment of Cash- Generating Assets was issued
Effective date of IPSAS 26
1 January 2011
Effective date of Improvements to IPSASs (issued in January 2010)
1 April 2011
Amendment from IPSAS 31 (issued in January 2010)