IN11 The previous version of IAS 36 required goodwill acquired in a business combination to be tested for impairment as part of impairment testing the cash-generating unit(s) to which it related. It employed a 'bottom-up/top-down' approach under which the goodwill was, in effect, tested for impairment by allocating its carrying amount to each cash-generating unit or smallest group of cash-generating units to which a portion of that carrying amount could be allocated on a reasonable and consistent basis. The Standard similarly requires goodwill acquired in a business combination to be tested for impairment as part of impairment testing the cash-generating unit(s) to which it relates. However, the Standard clarifies that:
(a) the goodwill should, from the acquisition date, be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the business combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
(b) each unit or group of units to which the goodwill is allocated should:
(i) represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and
(ii) not be larger than a segment based on either the entity's primary or the entity's secondary reporting format determined in accordance with IAS 14 Segment Reporting.

IN10 The Standard carries forward from the previous version of IAS 36 the requirement that if an active market exists for the output produced by an asset or a group of assets, that asset or group of assets should be identified as a cash-generating unit, even if some or all of the output is used internally. However, the previous version of IAS 36 required that, in such circumstances, management's best estimate of future market prices for the output should be used in estimating the future cash flows used to determine the unit's value in use. It also required that when an entity was estimating future cash flows to determine the value in use of cash-generating units using the output, management's best estimate of future market prices for the output should be used. The Standard requires that if the cash inflows generated by any asset or cash-generating unit are affected by internal transfer pricing, an entity should use management's best estimate of future price(s) that could be achieved in arm's length transactions in estimating:
(a) the future cash inflows used to determine the asset's or cash-generating unit's value in use; and
(b) the future cash outflows used to determine the value in use of other assets or cash-generating units affected by the internal transfer pricing.
Allocating goodwill to cash-generating units

IN9 Additional guidance on using present value techniques in measuring an asset's value in use is included in Appendix A of the Standard. In addition, the guidance in the previous version of IAS 36 on estimating the discount rate when an asset-specific rate is not directly available from the market has been relocated to Appendix A.
Identifying the cash-generating unit to which an asset belongs

IN8 The previous version of IAS 36 required the cash flow projections used to measure value in use to be based on the most recent financial budgets/ forecasts approved by management. The Standard carries forward this requirement, but clarifies that the cash flow projections exclude any estimated cash inflows or outflows expected to arise from:
(a) future restructurings to which the entity is not yet committed; or
(b) improving or enhancing the asset's performance.

IN7 The Standard carries forward from the previous version of IAS 36 the requirement for the cash flow projections used to measure value in use to be based on reasonable and supportable assumptions that represent management's best estimate of the economic conditions that will exist over the remaining useful life of the asset. However, the Standard clarifies that management:
(a) should assess the reasonableness of the assumptions on which its current cash flow projections are based by examining the causes of differences between past cash flow projections and actual cash flows.
(b) should ensure that the assumptions on which its current cash flow projections are based are consistent with past actual outcomes, provided the effects of subsequent events or circumstances that did not exist when those actual cash flows were generated make this appropriate.

IN6 The Standard clarifies that the following elements should be reflected in the calculation of an asset's value in use:
(a) an estimate of the future cash flows the entity expects to derive from the asset;
(b) expectations about possible variations in the amount or timing of those future cash flows;
(c) the time value of money, represented by the current market risk-free rate of interest;
(d) the price for bearing the uncertainty inherent in the asset; and
(e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.
The Standard also clarifies that the second, fourth and fifth of these elements can be reflected either as adjustments to the future cash flows or adjustments to the discount rate.

Summary of main changes
Frequency of impairment testing
IN5 The previous version of IAS 36 required the recoverable amount of an asset to be measured whenever there is an indication that the asset may be impaired. This requirement is included in the Standard. However, the Standard also requires:
(a) the recoverable amount of an intangible asset with an indefinite useful life to be measured annually, irrespective of whether there is any indication that it may be impaired. The most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period, provided specified criteria are met.
(b) the recoverable amount of an intangible asset not yet available for use to be measured annually, irrespective of whether there is any indication that it may be impaired.
(c) goodwill acquired in a business combination to be tested for impairment annually.
Measuring value in use

Introduction
IN1 International Accounting Standard 36 Impairment of Assets (IAS 36) replaces IAS 36 Impairment of Assets (issued in 1998), and should be applied:
(a) on acquisition to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004.
(b) to all other assets, for annual periods beginning on or after 31 March 2004.
Earlier application is encouraged.
Reasons for revising IAS 36
IN2 The International Accounting Standards Board developed this revised IAS 36 as part of its project on business combinations. The project's objective is to improve the quality of, and seek international convergence on, the accounting for business combinations and the subsequent accounting for goodwill and intangible assets acquired in business combinations.
IN3 The project has two phases. The first phase resulted in the Board issuing simultaneously IFRS 3 Business Combinations and revised versions of IAS 36 and IAS 38 Intangible Assets. The Board's deliberations during the first phase of the project focused primarily on the following issues:
(a) the method of accounting for business combinations;
(b) the initial measurement of the identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination;
(c) the recognition of provisions for terminating or reducing the activities of an acquiree;
(d) the treatment of any excess of the acquirer's interest in the fair values of identifiable net assets acquired in a business combination over the cost of the combination; and
(e) the accounting for goodwill and intangible assets acquired in a business combination.
IN4 Therefore, the Board's intention while revising IAS 36 was to reflect only those changes related to its decisions in the Business Combinations project, and not to reconsider all of the requirements in IAS 36. The changes that have been made in the Standard are primarily concerned with the impairment test for goodwill.