Statements of Financial Accounting Standards No. 35

	Statements of Financial Accounting Standards In Taiwan

SFAS No. 35 Impairment of Assets

Status

Revised by the Financial Accounting Standards Committee In Taiwan on 22 December 2005

Summary

The purpose of this Statement is to establish accounting standards for the recognition

and reversal of asset impairment.

An enterprise should evaluate whether or not there are indications that an asset

may be impaired on the balance sheet date. If there are indications, the enterprise

should estimate the recoverable amount for the asset. Regardless of whether there are

indications for goodwill to be impaired, an enterprise should follow the rules specified in

this Statement to perform impairment test for the goodwill annually.

Measuring the recoverable amount of an asset

Recoverable amount is the greater of an asset’s net fair value or value in use. The

net fair value is the obtainable amount from the sale in an arm’s length transaction

between two willing and knowledgeable parties, after the deduction of any disposal

costs. The value in use is the present value of the expected future cash flows

generated by an asset.

The recoverable amount should be determined for an individual asset. But if an

individual asset cannot generate the cash flows that are largely independent of those

cash flows from other assets or asset groups, its recoverable amount should be

determined through the cash-generating unit to which the asset belongs.

A cash-generating unit is defined as the smallest identifiable asset group that can

generate cash inflows that are largely independent of those cash inflows from other

individual assets or other asset groups.

An enterprise should make the following ingredients reflected in the calculation of an

asset’s value in use:

(a)The estimates of expected future cash flows generated by the asset;

(b)The expectation for possible variations on the amount and timing of the afore-

mentioned future cash flows;

(c)The time value of money, for which can be presented by the current market

risk-free rate;

(d)The price for bearing the inherent uncertainty of the asset; and

(e)other ingredients. For example, if the asset is not liquid, then market

participants will reflect such facts into the estimates for the enterprise’s

expected future cash flows generated by the asset.

Recognition and measurement of impairment loss

If an asset’s recoverable amount is lower than its carrying amount, an enterprise

should recognize the differences as impairment loss. If an asset’s recoverable amount is

not lower than its carrying amount, the carrying amount should not be reduced.

If an asset has not been revalued in accordance with the laws, its impairment loss

should be recognized as a loss in the income statement. If an asset has been revalued in

accordance with the laws, its impairment loss should first be used to reduce the

unrealized appreciation of revaluation under the stockholders’ equity. Only when there is

any remaining balance left, can it be recognized as a loss in the income statement.

Cash-generating units and goodwill

If there are indications that an individual asset may be impaired, an enterprise should

estimate its recoverable amount. If the recoverable amount of the asset cannot be

estimated, the recoverable amount of the cash-generating unit to which the asset

belongs should be estimated. The identification of the cash-generating unit to which the

same asset or types of assets belong should be made on a consistent basis for each

period, unless the circumstances have clearly changed.

To conduct impairment test, an enterprise should allocate the goodwill obtained from

business merger to a cash-generating unit, starting from the date of merger. The cash-

generating unit is the smallest cash-generating unit group to which goodwill can be

allocated on a reasonable and consistent basis. Only when a cash-generating unit is the

smallest cash-generating unit for which the management monitors the investment returns

of the assets including the goodwill, can it be regarded as allocable on a reasonable and

consistent basis to the cash-generating unit.

If goodwill is related to a cash-generating unit but cannot be allocated to the unit on

a reasonable and consistent basis, and if there are indications that the unit may be

impaired, the carrying amount of the unit without goodwill should be compared with its

recoverable amount in order to conduct impairment test for the unit. Any impairment loss

should be recognized.

As an enterprise examines the impairment of a cash-generating unit, it should identify

all the corporate assets that are related to the cash-generating unit. The allocation of

the corporate assets to the cash-generating unit should be in a way similar to the

allocation of goodwill.

Impairment loss for a cash-generating unit

If the recoverable amount of a cash-generating unit (the smallest group of cash-

generating units with allocated goodwill and corporate assets) is smaller than its carrying

amount, impairment loss should be immediately recognized for the cash-generating unit.

The impairment loss should be allocated to reduce the carrying amounts of the assets

within the cash-generating unit in the following order.

(a)First, reduce the carrying amount of the goodwill allocated to the cash-

generating unit; and,

(b)Then, any remaining impairment loss should be allocated pro rata on the basis

of the carrying amounts of the assets (including the allocated corporate

assets) within the cash-generating unit.

The afore-mentioned reduction in carrying amount should be treated as impairment

loss for individual assets and should be recognized as impairment loss. However, the

carrying amount of an individual asset should be reduced to the maximum of the following

amounts:

(a)the net fair value (if determinable);

(b)the value in use (if determinable); or

(c)zero.

The impairment loss not yet allocated to the asset due to the afore-mentioned

limitation should then be allocated pro rata to the other assets within the cash-

generating unit.

Reversing an impairment loss

An enterprise should evaluate whether there are evidences on the balance sheet

date that the impairment loss of an asset in prior years may no longer exist or has been

reduced. If there are such evidences, it should estimate the recoverable amount of the

asset. The accumulated impairment loss of an asset (other than goodwill) recognized in

prior years should be reversed if, later on, the estimate of the asset’s recoverable

amount later has changed so as to increase the recoverable amount. Then, the asset’s

carrying amount should be increased to its recoverable amount; however, the

recoverable amount should not exceed the carrying amount that would have been after

the deduction of depreciation or amortization if it had not been impaired.

A reversal of an impairment loss for a cash-generating unit should be allocated pro

rate on the basis of the carrying amounts of individual assets (other than goodwill) within

the cash-generating unit. The increase in carrying amounts should be treated as a

reversal of impairment loss for individual assets.

Recognized impairment loss for goodwill should not be reversed.

This Statement also specifies disclosures about asset impairment.


	Effective date

This Statement becomes effective for financial statements for the fiscal year ending

on and after December 31, 2005. Earlier adoption is allowed. However, the asset

impairment loss that was prior to this Statement’s effective date and did not follow the

principles stated in this Statement should not be restated retroactively.

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