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Transcript of IFRS
PwC
IAS 36 Impairment Testsfor Valuation Professionals
May 18, 2009 – NYSSCPA BV Conference
*connectedthinking
PricewaterhouseCoopersDecember 2008IFRS – Impairment Tests under IAS 36
Slide 2
Relevance of IFRS is continouing to increase
U.S. Transition to IFRS only delayed to economic crisisOngoing convergence initiatives between FASB and IASBSubsidiaries of European and many Asian companies already need to provide IFRS reporting to parent companiesIFRS is literally moving closer:
2012 Mexico adopting IFRS2013 Canada adopting IFRS
• IAS 36 Impairment Testing is an area with limited convergence • Subtle differences in terminology and the standard’s
requirement’s proved to create confusion in practice
Section heading goes here
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 3
Agenda
1. Introduction to the Standard2. Carrying Amount and Recoverable Amount 3. Timing4. Cash Generating Units5. Testing Sequence 6. Goodwill Allocation7. Impairment Losses and Reversals8. Questions & Answers
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 4
Long-lived tangible assets
Intangible assets assets with indefinite
useful life
Goodwill
US GAAP
Intangible assetswith definite useful life
SFAS 144
SFAS 142
IAS 36 Impairment Test – Brief Comparison to US GAAP
Introduction
IFRS
IAS 36
IAS 36
IAS 36
Accounting standards set the valuation framework!
Trigger based Test
Annual Impairment Test, as well as Trigger based
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 5
Differences in IFRS and US GAAP
Selected Differences• Value concepts (fair value vs. recoverable amount: higher of fair value less
costs to sell and value in use)• Goodwill impairment test methodology (one-step vs. two-step approach)• Asset impairment test methodology (discounted vs. undiscounted cash
flows)• Reversals of impairment losses obligatory under IFRS (except goodwill);
under US GAAP prohibited• Additional triggering event under IFRS: increase in market interest rates• Minority interest: IFRS grossing up approach; US GAAP fair value of
controlling interests
Introduction
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 6
Recoverable Amount
higher of an asset’s or CGU’sor group of CGUs’
Fair Value less Costs to Sell Value in Use
1) Best evidence: arm´s length transaction less disposal cost
2) Otherwise: market price less cost of disposal (provided active market)
3) Otherwise: best information available to reflect amount an entity could obtain (unforced transaction) (IAS 36.25pp)
“[…] an asset’svalue in use reflects how the market would
price the cash flows that management expects to derive from that asset.” (IAS 36.BC 60)
Carrying Amount vs.
“External (market) value” “Internal value (from use) for the entity”
OverviewProcedure of Impairment Test under IFRS
Carrying Amount and Recoverable Amount
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 7
Carrying Amount for CGUOverview
Net working capital
Allocated share of corporate assets+
Carrying amount of a CGU=
Allocated goodwill* +
The carrying amount of a CGU shall be determined consistent with the way the recoverable amount of the CGU is determined! (IAS 36.75)
Directly attributable assets (tangibles and intangibles)+
- Attributable liabilities where applicable
* The carrying amount of goodwill needs to be grossed up on a 100% basis to include the goodwill attributable to the minority interest. (IAS 36.92). Relevant for goodwill bearing CGUs only.
1 vs.Carrying Amount and Recoverable Amount
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 8
Practice Issue Determination of Carrying Amount of CGU
Issue:Within a CGU there is a non-operating building rented to third parties. Rental payments are not included in the CGU‘s financial projections.
Carrying Amount and Recoverable Amount
Should the carrying amount of the CGU exclude this building?
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 9
Fair Value less Costs to SellValue Concept
2
vs.
Fair Value „The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm‘s length transaction.“
Source: IFRS 3 Appendix A, Similar: SFAS 142. 23; SFAS 144. 22
Hypothetical Buyer
„Willing Buyer – Willing Seller“ Concept
Stand-Alone Valuation
Key Elements:
Valuation Hierarchy
Market-based Measurement
Carrying Amount and Recoverable Amount
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 10
Fair Value less Costs to SellFair Value Hierarchy
2
vs.
“Prices from previous transactions provide empirical evidence for the indicated value of an intangible asset”
Price in a binding sales agreementin an arm’s length transaction
Current bid price,if an active market exists
Value estimate using best information available
to reflect the amount to be obtained from disposal,
considering comparable transactions
Source: IAS 36.25-27
Multiples
DCF
Carrying Amount and Recoverable Amount
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 11
Fair Value less Costs to SellEstimating Costs to Sell
2
vs.Carrying Amount and Recoverable Amount
Practical Advice: For goodwill test typically 1 to 2% of EV applied
Costs of removing the asset (e.g. legal, transaction)
Costs to bring an asset into condition for its sale
Costs, which are already recognised as liabilities
Costs of reorganising a business
• Costs to sell
• No costs to sell
Termination benefits for employees
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 12
3
vs.
Value in UseValue Concept
Value in use „The present value of the future cash flows expected to be derived from the continuing use an asset or CGU and its disposal at the end of its economic useful lifetime.“
Source: IAS 36.31/ A.19
Internal value – consider entity-specific synergies
Excluding cash flows related to;• Restructuring (if not provided for under IAS 37)• Enhancement Capex (Maintenance o.k.)• Financing activities
Key elements:
Independent of entiy’s financing/capital structure
Carrying Amount and Recoverable Amount
Pre-tax notion – exclude tax cash flows
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 13
Value in UseTechnical Issue - Pre-tax vs. Post-tax calculation
• ‘Grossing-up’ or omitting tax-shield of debt sometimes applied by valuation practitioners
• However, pre-tax cost of equity can not be derived from capital market data (e.g. CAPM)
• Discounting post-tax cash flows at post-tax discount rate should lead to the same result as discounting pre-tax cash flows with pre-tax discount rate (IAS 36.BCZ85)
• For disclosure purposes: A two-step iterative calculation process can be used to convert the post-tax discount rate into an implicit pre-tax rate
Section heading goes here
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 14
Value in UseSelected Technical Issues
Deferred taxes• Area is still evolving – treatment might be inconsistent in
practice• Discuss early with client and his auditor to avoid suprises• Food for thought:
- Deferred are not subject to IAS 36 test- DTA related to pre-existing NOLs could be easily excluded
from carrying amount- Ignoring all deferred taxes, especially DTL subsequent to
purchase accounting for non-taxable stock deal might inappropriately trigger impairment
Section heading goes here
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 15
Overview“Frequency” of Impairment Testing
• tested in year of acquisition• thereafter annually Indefinite lived intangibles
Goodwill
Intangibles not yet available for use
• tested in year of acquisition • thereafter annually at the same time every period
• tested annually
Test always to be performed if there is a triggering event!
Timing
Special treatment regarding …
Source: IAS 36.10, IAS 38.108
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 16
OverviewImpairment Indicators (“Triggering Events”)
• Faster decline of market value than expected from normal use
• Negative changes of technological, economic, legal and market environment
• Increase in market interest rates or other market rates of return on investment
• Net assets exceed an entity’s market capitalisation
• Indication of the asset’s obsolescence or physical damage
• Significant strategic or operational changes with an adverse effect on the enterprise (e.g. technology loss of customer, )
• Performance is worse than expected
External Indicators Internal Indicators
Timing
Source: IAS 36.12
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 17
GoodwillImpairment Test
Cash-generating Unit (CGU)
Group of CGUs
OverviewAsset and Goodwill Impairment Test
AssetImpairment Test
Hierarchy Levels for
Impairment Testing
Individual Asset
Cash-generating Unit (CGU)
Group of CGUs
Corporate Assets(IAS 36.102 (b))
“If there is any indication that an asset may be impaired, recoverable amount
shall be estimated for the individual asset.”
“If it is not possible to estimate the recoverable amount of the individual asset, […] determine the recoverable amount of the cash-generating unit to
which an asset belongs.”
Cash Generating Units
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 18
Cash Generating Units
OverviewCGU Structure
Top-down approach
Goodwill “... the lowest level within the entity at which goodwill is monitored for internal management purposes ...”and not be larger than an IFRS 8 operating segment (IAS 36.81)
“A cash-generating unit 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.” (IAS 36.6)
...
Assets
Bottom-up approach
Segment 1
Segment4Division 1 Division 2 Division 3 Region 1
Entity
… … … …Entity’s asset base
BU 3
BU 2
BU 1
Region 2
Region 1
Region 2
Segment 2 Segment 3
Country 2Country 1
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 19
Store 2
OverviewDetermination Goodwill CGU Structure – Example Retailer
Austria Poland
C&C(Metro, Makro)
Store 3
Store 1
Metro Group
Germany
Goodwill Impairment Test on the Level of Group of CGUs
Asset Impairment Test on CGU Level
RealExtra
Kaufhof AdlerMedia MarktSaturn
...
Others
Top-down approach
Bottom-up approach
Cash Generating Units
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 20
Corporate Assets
• Corporate assets are assets that contribute to several cash-generating units (e.g. headquarters, R&D center)
• For corporate assets, it may not be possible to test the assets on an individual basis or test them as part of a single CGU.
• For these assets:1) Test the CGUs excluding the corporate assets2) Identify the smallest group of CGUs to which a portion of
the corporate asset can be allocated reasonably3) Compare the carrying amount of the group of CGUs
including the corporate asset (or portion thereof) to the recoverable amount of the group of units.
Cash Generating Units
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 21
Practice Issue Determination of Carrying Amount of CGU
Issue:Certain corporate assets have been appropriately allocated to a CGU. In the financial projections of the CGU, corporate charges have been reflected. They relate to payments to the ultimate parent company, being the legal owner of the corporate assets.In performing the impairment test, all corporate charges have been excluded to determine VIU and FVLCS.
Cash Generating Units
Is it appropriate to exclude all corporate charges when determiningVIU and FVLCS?
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 22
Valuation Issues
Minority Interests (NCIs)• Carrying amount of goodwill needs to be grossed up to a
100% basis, to include the goodwill attributable to the minority interest. (IAS 36.92)
• Any impairment loss is proportionally allocated between parent company and minorities with the portion attributable to parent being recognised as goodwill impairment loss
Control Premium• Typically not applied in EU for IFRS purposes, since prices on
active markets are of higher priority to other estimates, control premium might be difficult to defend
Cash Generating Units
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 23
Consider in Carrying Amount
VIUdeterminable?
TriggerLevel 1
IntangibleDefinite useful life?
Ready for use?
VIU >Carrying Amount
FVLCTS >Carrying Amount
Impairment
NoImpairment
No Impairment
Test
FVLCTSdeterminable?
Yes
Yes
Yes
Yes
No
Yes
Yes
No
No
No
No
Tier 1 – Individual Asset Tier 3 – Goodwill CGU
No
AnnualIP-Test?
TriggerLevel 3/4
FVLCTS / VIUCGU(s) >
Carrying Amount incl.Goodwill
NoImpairment
Impairment
YesYes
NoYes
Tier 2 – Asset CGU
TriggerLevel 2 ?No
Impairment
NoImpairment
Yes
Yes
NoNo
Assigned to CGU?
Corporate Asset
FVLCTS / VIUCGU >
Carrying Amount
VIUdeterminable?
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 24
Practice IssueCorporate Trade Name
Issue:A corporate trade name accounted for according to IFRS 3/IAS 38 with indefinite life has been considered a corporate asset.The trade name has been allocated to 10 individual CGUs.Due to the indefinite life the trade name is to be tested for impairment on an annual basis.
Cash Generating Units
Do we need to perform an impairment test for all 10 CGUs ?
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 25
OverviewGoodwill Allocation - Acquisition
CGU 2
CGU 1
Entity
CGU 3
CGU n
...
Goodwill
EBIT/EBITDA?
Net Revenue?
Net Income?
… ?
Assets in CGU?
Goodwill Allocation
Detailed analysis of …
Expected synergies
Going-concern element
Approximation by a reasonable
allocation key
If detailed analysis not applicable
Goodwill shall be allocated to each CGU / group of CGUs that are expected to benefit from the synergies (external synergies and going concern element) of the combination! (IAS 36.80)
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 26
OverviewGoodwill Allocation – First Time Adopters
First time adopters electing not to apply IFRS 3 retrospectively have to allocate US GAAP goodwill to CGU and test goodwill for impairment as of the date of transition (IFRS 1 B2 (iii))
CGU 2
CGU 1
Entity
CGU 3
CGU n
...
Goodwill
EBIT/EBITDA?
Net Revenue?
Net Income?
… ?
Assets in CGU?
Goodwill Allocation
Detailed analysis of …
Expected synergies
Going-concern element
Approximation by a reasonable
allocation key
If detailed analysis not applicable
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 27
OverviewTreatment of Impairment Losses
Initial recognition of impairment loss involves:• First any goodwill in CGU is impaired• Any remaining impairment loss is allocated pro-rata to
long-lived assets• No reduction of individual assets below the highest of (a)
the asset’s FVLCS, (b) the asset’s VIU and (c) zero• Reversal of any revaluation reserve, then through P&L• Adjustment of depreciation/ amortisation charge
Impairment Losses and Reversals
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 28
OverviewTreatment of Impairment Losses
Impairment losses reversed:• Only where estimates have changed• Up to carrying amount had no impairment been charged• Accounting for reversal corresponding to accounting for
impairment loss• No reversal of goodwill impairment
Impairment Losses and Reversals
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 29
Financial assets classified as • Subsidiaries• Associates• Joint ventures
Intangible assets, including goodwill
Property, plant and equipment • Inventories (IAS 2)• Assets arising from construction contracts
(IAS 11)• Assets arising from employee benefits
(IAS 19)• Deferred tax assets (IAS 12)• Financial assets within the scope of IAS 39• Investment property measured at fair value
(IAS 40)• Biological assets (IAS 41)• Insurance contracts (IFRS 4) • Non-current assets classified as held for
sale (IFRS 5)
IAS 36 Excluded from scope of IAS 36
Scope of IAS 36
Appendix
Source: IAS 36.2-5
PricewaterhouseCoopersMay 7, 2009IFRS – Impairment Tests under IAS 36
Slide 30
Picture
Presenter
Georg Gollnow
+1 646 471 [email protected]
Appendix
© 2008 PricewaterhouseCoopers L.L.P. PricewaterhouseCoopers refers to the U.S. firm of PricewaterhouseCoopers L.L.P. and other members of the worldwide PricewaterhouseCoopers organization. All rights of use and reproduction reserved. PwC