Example 7 – Impairment Testing Cash-generating Units with Goodwill and Minority Interests
In this example, tax effects are ignored.
Background
IE62 Entity X acquires an 80 per cent ownership interest in Entity Y for CU1,600 on 1 January 20X3. At that date, Y's identifiable net assets have a fair value of CU1,500. Y has no contingent liabilities. Therefore, X recognises in its consolidated financial statements:
(a) goodwill of CU400, being the difference between the cost of the business combination of CU1,600 and X's 80 per cent interest in Y's identifiable net assets;
(b) Y's identifiable net assets at their fair value of CU1,500; and
(c) a minority interest of CU300, being the 20 per cent interest in Y's identifiable net assets held by parties outside X.
IE63 The assets of Y together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Therefore Y is a cash-generating unit. Because this cash-generating unit includes goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there is an indication that it may be impaired (see paragraph 90 of IAS 36).
IE64 At the end of 20X3, X determines that the recoverable amount of cash-generating unit Y is CU1,000. X uses straight-line depreciation over a 10-year life for Y's identifiable assets and anticipates no residual value.

* The value in use of the machine exceeds what its carrying amount would have been at depreciated historical cost. Therefore, the reversal is limited to an amount that does not result in the carrying amount of the machine exceeding depreciated historical cost.
Schedule 5. Summary of the carrying amount of the machine
Year    Depreciated historical cost CU    Recoverable amount CU    Adjusted depreciation charge CU    Impairment loss CU    Carrying amount after impairment CU
20X0    150,000    121,128    0    (28,872)    121,128
20X1    135,000    nc    (12,113)    0    109,015
20X2    120,000    nc    (12,113)    0    96,902
20X3    105,000    nc    (12,113)    0    84,789
20X4    90,000    (12,113)            
enhancement    25,000        -        
     115,000    122,072    (12,113)    17,324    115,000
20X5    95,833    nc    (19,167)    0    95,833

IE61 The machine's recoverable amount (ie value in use) is higher than the machine's carrying amount and depreciated historical cost (see Schedule 4). Therefore, K reverses the impairment loss recognised for the machine at the end of 20X0 so that the machine is carried at depreciated historical cost.
Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X4
     Machine CU
Carrying amount at the end of 20X0 (Schedule 2)    121,128
End of 20X4    
Depreciation charge (20X1 to 20X4 - Schedule 5)    (48,452 )
Costs to enhance the asset's performance    25,000
Carrying amount before reversal    97,676
Recoverable amount (Schedule 3)    122,072
Reversal of the impairment loss    17,324
Carrying amount after reversal    115,000
Carrying amount: depreciated historical cost (Schedule 5)    115,000 *

IE60 The costs to enhance the machine's performance are incurred.
Therefore, in determining the machine's value in use, the future benefits expected from enhancing the machine's performance are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. As a consequence, in accordance with paragraphs 110 and 111 of IAS 36, the recoverable amount of the machine is recalculated at the end of 20X4.
Schedule 3. Calculation of the machine's value in use at the end of 20X4
Year    Future cash flows* CU    Discounted at 14% CU
20X5    30,321    26,597
20X6    32,750    25,200
20X7    31,721    21,411
20X8    31,950    18,917
20X9    33,100    17,191
20X10    27,999    12,756
Value in use        122,072
* Includes estimated benefits expected from enhancing the machine's performance reflected in management budgets.

IE58 The machine's recoverable amount (value in use) is less than its carrying amount. Therefore, F recognises an impairment loss for the machine.
Schedule 2. Calculation of the impairment loss at the end of 20X0
     Machine CU
Carrying amount before impairment loss    150,000
Recoverable amount (Schedule 1)    121,128
Impairment loss    (28,872)
Carrying amount after impairment loss    121,128
IE59 No event occurs that requires the machine's recoverable amount to be re-estimated. Therefore, no calculation of recoverable amount is required to be performed.
At the End of 20X4

IE54 At the end of 20X4, costs to enhance the machine's performance are incurred. The machine's estimated future cash flows reflected in the most recent management approved budgets are given in paragraph IE60 and a current discount rate is the same as at the end of 20X0.
At the End of 20X0
Schedule 1. Calculation of the machine's value in use at the end of 20X0
Year    Future cash flows CU    Discounted at 14% CU
20X1    22,165*    19,443
20X2    21,450*    16,505
20X3    20,550*    13,871
20X4    24,725*†    14,639
20X5    25,325*§    13,153
20X6    24,825*§    11,310
20X7    24,123*§    9,640
20X8    25,533*§    8,951
20X9    24,234*§    7,452
20X10    22,850*§    6,164
Value in use        121,128
* Includes estimated costs necessary to maintain the level of economic benefit expected to arise from the machine in its current condition.

† Excludes estimated costs to enhance the machine's performance reflected in management budgets.

§ Excludes estimated benefits expected from enhancing the machine's performance reflected in management budgets.

Example 6 - Treatment of Future Costs
In this example, tax effects are ignored.
Background
IE54 At the end of 20X0, entity F tests a machine for impairment. The machine is a cash-generating unit. It is carried at depreciated historical cost and its carrying amount is CU150,000. It has an estimated remaining useful life of 10 years.
IE54 The machine's recoverable amount (ie higher of value in use and fair value less costs to sell) is determined on the basis of a value in use calculation. Value in use is calculated using a pre-tax discount rate of 14 per cent.
IE54 Management approved budgets reflect:
(a) estimated costs necessary to maintain the level of economic benefit expected to arise from the machine in its current condition; and
(b) that in 20X4, costs of CU25,000 will be incurred to enhance the machine's performance by increasing its productive capacity.

At the End of 20X3
IE53 There is a cash outflow of CU100 when the restructuring costs are paid. Even though a cash outflow has taken place, there is no change in the estimated future cash flows used to determine value in use at the end of 20X2. Therefore, the plant's recoverable amount is not calculated at the end of 20X3.
Schedule 5. Summary of the carrying amount of the plant
End of year    Depreciated historical cost CU    Recoverable amount CU    Adjusted depreciation charge CU    Impairment loss CU    Carrying amount after impairment CU
20X0    3,000    2,051    0    (949)    2,051
20X1    2,700    nc    (205)    0    1,846
20X2    2,400    2,162    (205)    521    2,162
20X3    2,100    nc    (270)    0    1,892

IE52 The plant's recoverable amount (value in use) is higher than its carrying amount (see Schedule 4). Therefore, K reverses the impairment loss recognised for the plant at the end of 20X0.
Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X2
     Plant CU
Carrying amount at the end of 20X0 (Schedule 2)    2,051
End of 20X2    
Depreciation charge (for 20X1 and 20X2-Schedule 5)    (410)
Carrying amount before reversal    1,641
Recoverable amount (Schedule 3)    2,162
Reversal of the impairment loss    521
Carrying amount after reversal    2,162
Carrying amount: depreciated historical cost (Schedule 5)    2,400*
* The reversal does not result in the carrying amount of the plant exceeding what its carrying amount would have been at depreciated historical cost. Therefore, the full reversal of the impairment loss is recognised.

IE51 The entity is now committed to the restructuring. Therefore, in determining the plant's value in use, the benefits expected from the restructuring are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. In accordance with paragraphs 110 and 111 of IAS 36, the recoverable amount of the plant is re-determined at the end of 20X2.
Schedule 3. Calculation of the plant's value in use at the end of 20X2
Year    Future cash flows CU    Discounted at 14% CU
20X3    420*    368
20X4    570†    439
20X5    380†    256
20X6    450†    266
20X7    510†    265
20X8    510†    232
20X9    480†    192
20X10    410†    144
Value in use        2,162
* Excludes estimated restructuring costs because a liability has already been recognised.

† Includes estimated benefits expected from the restructuring reflected in management budgets.