IFRS 36

Definition

IFRS 36 is an International Financial Reporting Standard that sets out the rules for the impairment of assets, particularly focusing on goodwill. It establishes the framework for testing whether an asset's carrying amount exceeds its recoverable amount, ensuring that financial statements reflect the true value of assets. This standard is essential in maintaining transparency and accuracy in financial reporting, especially when it comes to assessing the value of goodwill after a business combination.

5 Must Know Facts For Your Next Test

1. IFRS 36 requires that goodwill be tested for impairment at least annually, regardless of whether there are indicators of impairment.
2. The standard mandates a two-step approach for impairment testing: first, comparing the carrying amount of cash-generating units (CGUs) with their recoverable amounts.
3. If the recoverable amount is less than the carrying amount, an impairment loss must be recognized, which reduces the carrying amount of goodwill.
4. The recoverable amount is determined by either using the fair value less costs to sell or the value in use calculations, whichever is higher.
5. Entities must provide detailed disclosures in their financial statements about their impairment testing methods and results to enhance transparency.

Review Questions

• How does IFRS 36 outline the process for testing goodwill for impairment?
  • IFRS 36 outlines a systematic two-step process for testing goodwill for impairment. The first step involves comparing the carrying amount of cash-generating units (CGUs) with their recoverable amounts. If the recoverable amount is lower than the carrying amount, this indicates impairment, and an impairment loss must be recognized, reducing the goodwill's carrying value accordingly.
• Discuss the significance of determining the recoverable amount in the context of IFRS 36 and how it influences financial reporting.
  • Determining the recoverable amount is crucial under IFRS 36 as it directly affects whether an asset, particularly goodwill, is impaired. The recoverable amount can be defined as the higher of fair value less costs to sell and value in use. Accurate assessment ensures that financial statements provide a true representation of an entity's financial position, allowing stakeholders to make informed decisions based on reliable data.
• Evaluate how compliance with IFRS 36 can impact investor perceptions and market behavior regarding companies with significant goodwill on their balance sheets.
  • Compliance with IFRS 36 can significantly affect investor perceptions and market behavior by enhancing transparency and trust in financial reporting. When companies rigorously apply this standard and demonstrate diligence in their impairment testing processes, it signals to investors that management is proactive in safeguarding asset values. Conversely, failure to comply or inadequate disclosure may lead to skepticism about a company’s financial health, potentially impacting stock prices and investor confidence negatively.

Related terms

Goodwill: An intangible asset that arises when a buyer acquires an existing business, representing the excess of purchase price over the fair value of identifiable net assets.

Recoverable Amount: The higher of an asset's fair value less costs to sell and its value in use, used to determine if an asset is impaired.

Impairment Testing:

The process of determining whether an asset's carrying value exceeds its recoverable amount, which may necessitate a write-down.