BCZ 105 IAS 36 relies on an 'economic' criterion for the recognition of an impairment loss-an impairment loss is recognised whenever the recoverable amount of an asset is below its carrying amount. This criterion was already used in many International Accounting Standards before IAS 36, such as IAS 9 Research and Development Costs, IAS 22 Business Combinations, and IAS 16 Property, Plant and Equipment.
BCZ 106 IASC considered that an 'economic' criterion is the best criterion to give information which is useful to users in assessing future cash flows to be generated by the enterprise as a whole. In estimating the time value of money and the risks specific to an asset in determining whether the asset is impaired, factors, such as the probability or permanence of the impairment loss, are subsumed in the measurement.
BCZ 107 The majority of commentators on E55 supported IASC's view that an impairment loss should be recognised based on an 'economic' criterion.
Revalued assets: recognition in the income statement versus directly in equity
BCZ 108 IAS 36 requires that an impairment loss on a revalued asset should be recognised as an expense in the income statement immediately, except that it should be recognised directly in equity to the extent that it reverses a previous revaluation on the same asset.
BCZ 109 Some argue that, when there is a clear reduction in the service potential (for example, physical damage) of a revalued asset, the impairment loss should be recognised in the income statement.

Probability criterion based on IAS 10 (reformatted 1994)
BCZ 103 IAS 10 required the amount of a contingent loss to be recognised as an expense and a liability if:
(a) it was probable that future events will confirm that, after taking into account any related probable recovery, an asset had been impaired or a liability incurred at the balance sheet date; and
(b) a reasonable estimate of the amount of the resulting loss could be made.
BCZ 104 IASC rejected the view that an impairment loss should be recognised based on the requirements in IAS 10 because:
(a) the requirements in IAS 10 were not sufficiently detailed and would have made a 'probability' criterion difficult to apply.
(b) those requirements would have introduced another unnecessary layer of probability. Indeed, as mentioned above, probability factors are already encompassed in estimates of value in use and in requiring that recoverable amount should be the higher of net selling price and value in use.
Recognition based on an 'economic' criterion

BCZ 102 IASC considered the arguments listed above but rejected this approach because:
(a) when it identifies that an asset may be impaired, a rational enterprise will make an investment decision. Therefore, it is relevant to consider the time value of money and the risks specific to an asset in determining whether an asset is impaired. This is particularly true if an asset has a long useful life.
(b) IAS 36 does not require an enterprise to estimate the recoverable amount of each [depreciable] asset every year but only if there is an indication that an asset may be materially impaired. An asset that is depreciated (amortised) in an appropriate manner is unlikely to become materially impaired unless events or changes in circumstances cause a sudden reduction in the estimate of recoverable amount.
(c) probability factors are already encompassed in the determination of value in use, in projecting future cash flows and in requiring that recoverable amount should be the higher of net selling price and value in use.
(d) if there is an unfavourable change in the assumptions used to determine recoverable amount, users are better served if they are informed about this change in assumptions on a timely basis.

BCZ 101 Those who support using the sum of undiscounted future cash flows (without allocation of interest costs) as a recognition trigger argue that:
(a) using a recognition trigger based on undiscounted amounts is consistent with the historical cost framework.
(b) it avoids recognising temporary impairment losses and creating potentially volatile earnings that may mislead users of financial statements.
(c) net selling price* and value in use are difficult to substantiate- a price for the disposal of an asset or an appropriate discount rate is difficult to estimate.
(d) it is a higher threshold for recognising impairment losses. It should be relatively easy to conclude that the sum of undiscounted future cash flows will equal or exceed the carrying amount of an asset without incurring the cost of allocating projected cash flows to specific future periods.
This view was supported by a minority of commentators on E55 Impairment of Assets.
* In IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, issued by the IASB in 2004, the term, 'net selling price' was replaced in IAS 36 by 'fair value less costs to sell'.

BCZ 99 Some national standard-setters use the 'probability' criterion as a basis for recognition of an impairment loss and require, as a practical approach to implementing that criterion, that an impairment loss should be recognised only if the sum of the future cash flows from an asset (undiscounted and without allocation of interest costs) is less than the carrying amount of the asset. An impairment loss, when recognised, is measured as the difference between the carrying amount of the asset and its recoverable amount measured at fair value (based on quoted market prices or, if no quoted market prices exist, estimated considering prices for similar assets and the results of valuation techniques, such as the sum of cash flows discounted to their present value, option-pricing models, matrix pricing, optionadjusted spread models and fundamental analysis).
BCZ 100 One of the characteristics of this approach is that the bases for recognition and measurement of an impairment loss are different. For example, even if the fair value of an asset is lower than its carrying amount, no impairment loss will be recognised if the sum of undiscounted cash flows (without allocation of interest costs) is greater than the asset's carrying amount. This might occur, especially if an asset has a long useful life.

BCZ 97 IASC decided to reject the 'permanent' criterion because:
(a) it is difficult to identify whether an impairment loss is permanent. There is a risk that, by using this criterion, recognition of an impairment loss may be delayed.
(b) this criterion is at odds with the basic concept that an asset is a resource that will generate future economic benefits. Cost-based accrual accounting cannot reflect events without reference to future expectations. If the events that led to a decrease in recoverable amount have already taken place, the carrying amount should be reduced accordingly.
Recognition based on a 'probability' criterion
BCZ 98 Some argue that an impairment loss should be recognised only if it is considered probable that the carrying amount of an asset cannot be fully recovered. Proponents of a 'probability' criterion are divided between:
(a) those who support the use of a recognition trigger based on the sum of the future cash flows (undiscounted and without allocation of interest costs) as a practical approach to implementing the 'probability' criterion; and
(b) those who support reflecting the requirements in IAS 10 (reformatted 1994) Contingencies and Events Occurring After the Balance Sheet Date.*
* The requirements relating to contingencies in the 1994 version of IAS 10 were replaced in 1998 with the requirements in IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Sum of undiscounted future cash flows (without interest costs)

Recognition of an impairment loss
(paragraphs 58-64)
BCZ 95 IAS 36 requires that an impairment loss should be recognised whenever the recoverable amount of an asset is below its carrying amount. IASC considered various criteria for recognising an impairment loss in the financial statements:
(a) recognition if it is considered that the impairment loss is permanent ('permanent criterion');
(b) recognition if it is considered probable that an asset is impaired, ie if it is probable that an enterprise will not recover the carrying amount of the asset ('probability criterion'); and
(c) immediate recognition whenever recoverable amount is below the carrying amount ('economic criterion').
Recognition based on a 'permanent' criterion
BCZ 96 Supporters of the 'permanent' criterion argue that:
(a) this criterion avoids the recognition of temporary decreases in the recoverable amount of an asset.
(b) the recognition of an impairment loss refers to future operations; it is contrary to the historical cost system to account for future events. Also, depreciation (amortisation) will reflect these future losses over the expected remaining useful life of the asset.
This view was supported by only a few commentators on E55 Impairment of Assets.

BC 92 In considering this issue, the Board observed that the definition of value in use in the previous version of IAS 36 and the associated requirements on measuring value in use were not sufficiently precise to give a definitive answer to the question of what tax attribute an entity should reflect in value in use. For example, although IAS 36 specified discounting pre-tax cash flows at a pre-tax discount rate- with the pre-tax discount rate being the post-tax discount rate adjusted to reflect the specific amount and timing of the future tax cash flows-it did not specify which tax effects the pre-tax rate should include. Arguments could be mounted for various approaches.
BC 93 The Board decided that any decision to amend the requirement in the previous version of IAS 36 for pre-tax cash flows to be discounted at a pre-tax discount rate should be made only after the Board has resolved the issue of what tax attribute should be reflected in value in use. The Board decided that it should not try to resolve this latter issue as part of the Business Combinations project-decisions on the treatment of tax in value in use calculations should be made only as part of its conceptual project on measurement. Therefore, the Board concluded it should not amend as part of the current revision of IAS 36 the requirement to use pre-tax cash flows and pre-tax discount rates when measuring value in use.
BC 94 However, the Board observed that, conceptually, discounting post-tax cash flows at a post-tax discount rate and discounting pre-tax cash flows at a pre-tax discount rate should give the same result, as long as the pre-tax discount rate is the post-tax discount rate adjusted to reflect the specific amount and timing of the future tax cash flows. The pre-tax discount rate is generally not the post-tax discount rate grossed up by a standard rate of tax.

BCZ 89 IASC acknowledged the conceptual merit of such adjustments but concluded that they would add unnecessary complexity. Therefore, IAS 36 neither requires nor permits such adjustments.
Comments by field visit participants and respondents to the December 2002 Exposure Draft
BC 90 In revising IAS 36, the Board considered the requirement in the previous version of IAS 36 for:
(a) income tax receipts and payments to be excluded from the estimates of future cash flows used to measure value in use; and
(b) the discount rate used to measure value in use to be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted.
BC 91 The Board had not considered these requirements when developing the Exposure Draft. However, some field visit participants and respondents to the Exposure Draft stated that using pre-tax cash flows and pre-tax discount rates would be a significant implementation issue for entities. This is because typically an entity's accounting and strategic decision-making systems are fully integrated and use post-tax cash flows and post-tax discount rates to arrive at present value measures.

Interaction with IAS 12
BCZ 86 IAS 36 requires that recoverable amount should be based on present value calculations, whereas under IAS 12 an enterprise determines deferred tax assets and liabilities by comparing the carrying amount of an asset (a present value if the carrying amount is based on recoverable amount) with its tax base (an undiscounted amount).
BCZ 87 One way to eliminate this inconsistency would be to measure deferred tax assets and liabilities on a discounted basis. In developing the revised version of IAS 12 (approved in 1996), there was not enough support to require that deferred tax assets and liabilities should be measured on a discounted basis. IASC believed there was still not consensus to support such a change in existing practice. Therefore, IAS 36 requires an enterprise to measure the tax effects of temporary differences using the principles set out in IAS 12.
BCZ 88 IAS 12 does not permit an enterprise to recognise certain deferred tax liabilities and assets. In such cases, some believe that the value in use of an asset, or a cash-generating unit, should be adjusted to reflect the tax consequences of recovering its pre-tax value in use. For example, if the tax rate is 25 per cent, an enterprise must receive pre-tax cash flows with a present value of 400 in order to recover a carrying amount of 300.