IAS 36 — Recoverable amount and carrying amount of a cash-generating unit

Date recorded:

New issue — Recoverable amount and carrying amount of a cash-generating unit (CGU)

The Interpretations Committee received a request to clarify the application of paragraph 78 of IAS 36, which sets out the requirements when it is necessary to consider recognised liabilities to determine the recoverable amount of a CGU. 

The submitter stated that the approach in paragraph 78 for making a CGU’s carrying amount comparable with its recoverable amount (by deducting the carrying amount of the liability from both the CGU’s carrying amount and from its value in use (VIU)), produced a null result, and believed that this could not be the intention of the Standard.  The submitter also asserted that it did not seem to be appropriate to deduct the carrying amount of the liability from the VIU of the CGU because the approach used to measure the present value of a liability was different from the approach used to measure the present value of a CGU’s VIU.  The submitter proposed an alternative approach.

Staff recommendation

The staff disagreed with the submitter, because they believed that the approach in paragraph 78 was intentional and was the consequence of applying IAS 36’s approach for assessing impairment.  The staff observed that when a CGU’s fair value less costs of disposal (FVLCD) considered a recognised liability, paragraph 78 required adjusting both the CGU’s carrying amount and its VIU by the carrying amount of the liability in order to make those measures comparable with the FVLCD.  However, when an entity used the VIU as its recoverable amount, the entity did not need to make an adjustment to the CGU’s carrying amount and to its VIU similar to the one required by paragraph 78, because the carrying amount of the CGU would already be comparable to the VIU of the CGU.  The staff further noted that the approach in paragraph 78 provided a relatively straightforward and cost-effective method to perform a meaningful comparison of the measures involved in impairment testing.

The staff therefore recommended that the issue was not taken onto the Interpretations Committee’s agenda and proposed wording for a tentative agenda decision.  The Interpretations Committee was asked whether they agreed with the conclusion of the staff, and with the wording in the tentative agenda decision.

Interpretations Committee discussion and decision

There was general agreement amongst the Committee members who spoke that the application of paragraph 78 was found to be difficult in practice, and that differing views existed as to how it should be applied and what should be done to address the mismatch.  It was observed that although this was an issue that may not affect all industries, for the industries it did affect (i.e. the extractive industries where decommissioning liabilities are significant) it was a significant issue.

The IASB Technical Manager noted that the feedback received from accounting firms on the outreach performed indicated that they had encountered diversity in practice regarding not only application of paragraph 78, but also other aspects of IAS 36; many of which were related to how and whether to include deferred taxes when applying the guidance in paragraph 78.  The feedback also indicated that amending paragraph 78 would not resolve all issues, and that the Interpretations Committee should refer the issue to the IASB who should carry out a broader review of IAS 36. Several Committee members agreed that this was something that should be dealt with by the IASB rather than the Interpretations Committee.

One Committee member observed that there were situations in practice where the liability determined in accordance with IAS 37 was deducted from the carrying value of the CGU and the recoverable amount was then determined by including the cash outflows in the estimate of cash flows, which was then discounted by a different discount rate, and noted that accordingly, the impact of the mismatch could be significant.  The Committee member further noted that this issue also arose with deferred taxes in situations where the entity could not sell the assets without the associated tax obligation.  The Committee member did not believe this was an issue that could be dealt with simply through an agenda decision.

Another Committee member suggested that if the IASB did carry out a broader project on IAS 36, the issue around deferred taxes and the gross up of goodwill and intangible assets acquired in a business combination should be included in the scope of the project.

Twelve of the fourteen Committee members voted to move forward with the proposed agenda decision.  One of the Committee members who objected had highlighted earlier in the discussion the fact that the impact of the mismatch could be significant, and suggested adding wording to the agenda decision to emphasise the need for people to ensure they were comparing apples with apples when performing an impairment test.

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