IPSAS 26 — Impairment of Cash-Generating Assets
Scope of IPSAS 26
IPSAS 26 applies to cash-generating assets. These are assets held mainly to generate commercial return.
A public entity may hold some assets for public service and other assets to earn cash inflows. For example, a public hospital may have a free service wing and a fee-charging private wing. The free service wing is normally non-cash-generating, while the fee-charging wing may be cash-generating if it is held mainly to earn a commercial return.
The first question is always: is the asset held mainly for public service or mainly to generate cash returns?
If the asset is mainly for public service, IPSAS 21 applies. If the asset is mainly to earn commercial return, IPSAS 26 applies.
The Big Picture
IPSAS 26 focuses on recoverability through cash flows or sale.
For a cash-generating asset, the recoverable amount is the higher of:
| Measure | Meaning |
|---|---|
| Fair value less costs to sell | What the asset can be sold for today, after deducting selling costs |
| Value in use | Present value of future cash flows from using and disposing of the asset |
If the carrying amount is higher than the recoverable amount, the asset is impaired.
Impairment loss = Carrying amount − Recoverable amount
Cash-Generating Assets
A cash-generating asset is mainly held to earn a commercial return.
Examples include:
| Asset | Why IPSAS 26 may apply |
|---|---|
| Toll road | Users pay charges and the asset is expected to generate cash returns |
| Fee-charging hospital wing | Services are charged to recover commercial returns |
| Commercial water treatment plant | Users pay tariffs and the plant generates cash inflows |
| Rental facility held by a public entity | Income is earned through rentals |
| Public entity business unit | Operates with a commercial return objective |
The existence of cash receipts alone is not enough. The main purpose of holding the asset must be considered.
When to Test for Impairment
A public entity tests a cash-generating asset for impairment when there is an indication that the asset may be impaired.
Common indicators include:
| Indicator | Example |
|---|---|
| Decline in market value | The asset could now be sold for much less than expected |
| Adverse market change | Demand for the paid service has fallen |
| Higher discount rates | Future cash flows are worth less today |
| Physical damage | The asset is damaged and cannot operate efficiently |
| Worse financial performance | Revenue or cash inflows are lower than expected |
| Legal or regulatory change | A price cap reduces future cash collections |
The key issue is whether the asset can still recover its carrying amount through sale or future cash flows.
Recoverable Amount
Recoverable amount is the higher of:
- Fair value less costs to sell; and
- Value in use.
Fair value less costs to sell is a current market-based amount.
Value in use is based on future cash flows. These cash flows are discounted to present value.
Value in Use
For IPSAS 26, value in use is a cash-flow calculation.
The steps are:
- Estimate future cash inflows from using the asset.
- Deduct cash outflows needed to generate those inflows.
- Include disposal proceeds at the end of the asset’s useful life, where relevant.
- Discount the net cash flows to present value.
- Compare the value in use with fair value less costs to sell.
- Use the higher amount as recoverable amount.
This is the main difference from IPSAS 21. IPSAS 21 measures service potential. IPSAS 26 measures cash recovery.
Example 1: Fee-Charging Treatment Plant
A state water utility operates a treatment plant that charges users. At year-end, the plant is tested for impairment.
| Item | CU |
|---|---|
| Carrying amount | 12,000,000 |
| Fair value less costs to sell | 9,000,000 |
| Value in use | 10,500,000 |
Step 1: Higher of Two Amounts
| Item | CU |
|---|---|
| Fair value less costs to sell | 9,000,000 |
| Value in use | 10,500,000 |
| Recoverable amount | 10,500,000 |
Step 2: Impairment Loss
| Item | CU |
|---|---|
| Carrying amount | 12,000,000 |
| Recoverable amount | (10,500,000) |
| Impairment loss | 1,500,000 |
Journal Entry
Dr Impairment loss — surplus or deficit CU1,500,000
Cr Accumulated impairment / asset CU1,500,000
The plant is cash-generating because users pay for the service and the asset is held to recover cash returns. The carrying amount is higher than the recoverable amount, so impairment is recognised.
Example 2: Toll Plaza — Value in Use
A national roads agency operates a toll plaza. The plaza is expected to generate net cash inflows of CU3,000,000 per year for 3 years. At the end of year 3, it will be disposed of for CU2,000,000. The discount rate is 10%.
Assume the carrying amount is CU9,600,000 and fair value less costs to sell today is CU8,500,000.
Step 1: Calculate Value in Use
| Cash flow | Discount factor | Present value CU |
|---|---|---|
| Year 1: 3,000,000 | 0.909 | 2,727,000 |
| Year 2: 3,000,000 | 0.826 | 2,478,000 |
| Year 3: 3,000,000 | 0.751 | 2,253,000 |
| Residual value: 2,000,000 | 0.751 | 1,502,000 |
| Value in use | 8,960,000 |
Step 2: Higher of Two Amounts
| Item | CU |
|---|---|
| Value in use | 8,960,000 |
| Fair value less costs to sell | 8,500,000 |
| Recoverable amount | 8,960,000 |
Step 3: Impairment Loss
| Item | CU |
|---|---|
| Carrying amount | 9,600,000 |
| Recoverable amount | (8,960,000) |
| Impairment loss | 640,000 |
Journal Entry
Dr Impairment loss — surplus or deficit CU640,000
Cr Accumulated impairment / asset CU640,000
The CU2,000,000 disposal value is not the same as fair value less costs to sell today. It is a future cash flow at the end of year 3, so it is discounted and included in value in use. Fair value less costs to sell is a separate current amount.
The carrying amount is needed before impairment can be calculated. Without the carrying amount, only value in use and recoverable amount can be determined.
Cash-Generating Units
Sometimes an individual asset does not generate independent cash inflows. In that case, the asset is tested as part of the smallest group of assets that generates cash inflows independently.
This group is called a cash-generating unit.
The question to ask is: can this asset generate cash on its own?
If yes, test the asset individually.
If no, test the cash-generating unit that includes the asset.
Example 3: Damaged Holding Tank
A water purification plant has a holding tank. The tank is damaged and works less effectively. However, the tank does not earn cash by itself. Customers pay for water from the whole plant, not from the tank separately. The whole plant is the smallest group that generates cash. The plant as a whole is not impaired.
Should the Tank Be Impaired Alone?
No.
| Question | Answer |
|---|---|
| Does the tank generate cash alone? | No |
| What is the cash-generating unit? | The whole water purification plant |
| Is the plant impaired? | No |
| Is an impairment loss recognised for the tank alone? | No |
| What should be reviewed? | Useful life, depreciation method or remaining useful life |
The tank has no independent cash inflows. The recoverable amount of the tank alone cannot be determined because its value in use is linked to the plant. Since the plant as a whole is not impaired, no impairment loss is recognised for the tank alone.
However, the damage may still affect depreciation. The entity should review whether the tank’s useful life, depreciation method or residual value needs to change.
Impairment Loss for a Cash-Generating Unit
Where the cash-generating unit is impaired, the impairment loss is allocated to the assets in the unit.
The order is:
- First, reduce goodwill allocated to the unit.
- Then allocate the remaining loss to the other assets on a pro-rata basis.
- Do not reduce an asset below the highest of its own fair value less costs to sell, value in use, and zero.
Goodwill in a Cash-Generating Unit
Goodwill does not generate cash flows independently. It is tested together with the cash-generating unit that benefits from it.
When a cash-generating unit is impaired, goodwill absorbs the impairment loss first.
Example 4: Goodwill in a Cash-Generating Unit
A cash-generating unit has a carrying amount of CU1,000. This includes goodwill of CU200. The recoverable amount of the cash-generating unit is CU800.
Step 1: Impairment Loss
| Item | CU |
|---|---|
| Carrying amount of CGU | 1,000 |
| Recoverable amount | (800) |
| Impairment loss | 200 |
Step 2: Allocation
| Item | CU |
|---|---|
| Impairment loss | 200 |
| Allocate first to goodwill | (200) |
| Goodwill remaining | Nil |
Goodwill is not tested alone because it does not generate cash independently. It is tested with the cash-generating unit. The impairment loss is allocated first to goodwill. If the loss is greater than goodwill, the balance is allocated to the other assets in the unit.
Reversal of Impairment
An impairment loss may be reversed when the estimates used to determine recoverable amount improve.
Examples include:
| Earlier impairment cause | Possible reversal trigger |
|---|---|
| Traffic reduced | Traffic improves |
| Tariffs reduced | Tariffs are revised upward |
| Demand collapsed | Demand returns |
| Operating costs increased | Costs reduce |
| Discount rate increased | Discount rate reduces |
The reversal cannot increase the asset above the carrying amount that would have existed if no impairment had been recognised.
Goodwill impairment is not reversed.
Example 5: Reversal of Impairment
A toll plaza had previously been written down to CU8,000,000. Later, traffic improves and the recoverable amount rises to CU11,000,000. If no impairment had ever been recognised, the carrying amount today would have been CU9,500,000.
Step 1: Apply the Cap
| Item | CU |
|---|---|
| Current carrying amount | 8,000,000 |
| Recoverable amount now | 11,000,000 |
| Carrying amount if no impairment had been recognised | 9,500,000 |
| Maximum carrying amount after reversal | 9,500,000 |
Step 2: Reversal
| Item | CU |
|---|---|
| Maximum allowed carrying amount | 9,500,000 |
| Current carrying amount | (8,000,000) |
| Reversal of impairment | 1,500,000 |
Journal Entry
Dr Asset — toll plaza CU1,500,000
Cr Reversal of impairment — surplus or deficit CU1,500,000
The asset is not written back up to CU11,000,000. The cap is CU9,500,000 because that is the carrying amount the asset would have had if no impairment had been recognised.
Recognition of Impairment Loss
When impairment is recognised, the asset or cash-generating unit is written down to its recoverable amount.
The impairment loss is normally recognised in surplus or deficit.
Journal Entry
Dr Impairment loss — surplus or deficit
Cr Accumulated impairment / asset
For a cash-generating unit, the loss is allocated first to goodwill, then to other assets in the unit.
When IPSAS 44 Takes Over
IPSAS 26 continues to apply where the asset is being recovered through use and cash inflows.
If the public entity has committed to sell the asset, the asset is available for immediate sale, and the sale is highly probable, IPSAS 44 takes over.
Under IPSAS 44, the asset is measured at the lower of:
- Carrying amount; and
- Fair value less costs to sell.
Depreciation stops from the date the asset is classified as held for sale.
Held-for-Sale Example
A public entity has a building with a carrying amount of CU50,000,000. Management has committed to sell it, it is available for immediate sale, and the sale is highly probable. Fair value is CU46,000,000 and costs to sell are CU2,000,000.
| Item | CU |
|---|---|
| Carrying amount | 50,000,000 |
| Fair value | 46,000,000 |
| Less costs to sell | (2,000,000) |
| Fair value less costs to sell | 44,000,000 |
| Measurement under held for sale | 44,000,000 |
| Loss recognised | 6,000,000 |
Journal Entry
Dr Loss on classification as held for sale CU6,000,000
Cr Asset held for sale CU6,000,000
Held for sale is not used just because management is thinking about selling the asset. There must be a real plan, the asset must be available for immediate sale, and the sale must be highly probable.
Chapter Summary
| Area | IPSAS 26 treatment |
|---|---|
| Type of asset | Cash-generating asset |
| Main purpose | Commercial return |
| Main question | How much cash can be recovered? |
| Recoverable amount | Higher of fair value less costs to sell and value in use |
| Value in use | Present value of future cash flows |
| Individual asset test | Used where the asset generates independent cash inflows |
| Cash-generating unit | Used where the asset cannot be tested alone |
| Goodwill | Tested with the CGU and reduced first |
| Impairment loss | Carrying amount less recoverable amount |
| Reversal | Allowed, but capped |
| Goodwill reversal | Not allowed |
| Held for sale | Move to IPSAS 44 if criteria are met |
Application Question
A public entity operates a fee-charging training centre. The centre has a carrying amount of CU20,000,000. Fair value less costs to sell is CU17,000,000. The present value of future cash flows from the centre is CU18,500,000.
The recoverable amount is CU18,500,000 because it is higher than fair value less costs to sell. The carrying amount is CU20,000,000. Therefore, the impairment loss is CU1,500,000.
Journal Entry
Dr Impairment loss — surplus or deficit CU1,500,000
Cr Accumulated impairment / asset CU1,500,000
Key Lines to Remember
IPSAS 26 asks how much cash the asset can still recover.
Recoverable amount is the higher of fair value less costs to sell and value in use.
Value in use is the present value of future cash flows.
If the asset cannot generate independent cash inflows, test the cash-generating unit.
Goodwill is tested with the cash-generating unit and absorbs impairment first.
Goodwill impairment is not reversed.
If the asset qualifies as held for sale, IPSAS 44 takes over.
