In accordance with the "Basic Standards for Enterprise Accounting," the Ministry of Finance issued CAS No. 8 — Impairment of Assets on 2006/2/15, effective as of 2007/1/1.
1. Overview of Guidelines
Asset impairment occurs when an asset's recoverable amount is less than its carrying amount. For the purpose of this standard, assets include individual assets and cash-generating units unless otherwise specified.
Asset Group Definition
Asset group refers to the smallest identifiable combination of assets within an enterprise, whose cash inflows are substantially independent of those from other assets or asset groups.
II. Identification of Assets That May Be Impaired
Enterprises shall assess at the balance sheet date whether there is any indication that an asset may be impaired.
Signs of impairment
- • Significant decline in the asset's current market price
- • Significant changes in the economic, technological, or legal environment affecting the enterprise
- • The market interest rate or other market investment returns have increased during the current period
- • There is evidence that the asset is obsolete or has been physically damaged.
- • Assets are idle, discontinued, or planned for early disposal.
- • Evidence from internal reports indicates that the asset's economic performance has fallen below expectations.
Goodwill arising from business combinations and intangible assets with indefinite useful lives must be tested for impairment annually, regardless of whether there is any indication of impairment.
III. Measurement of Recoverable Amount of Assets
The recoverable amount shall be determined as the higher of an asset's fair value less costs of disposal and its value in use.
Net fair value less costs to sell
Determined based on the price in a sales agreement under fair value transactions, less directly attributable disposal costs.
Present value of estimated future cash flows
Discount expected future cash flows, including those from continued use and final disposal of the asset, using an appropriate discount rate.
IV. Determination of Asset Impairment Losses
Confirm Principles
If the recoverable amount is lower than the asset's carrying amount, reduce the carrying amount to the recoverable amount. Recognize the reduction as an impairment loss in current earnings and record a corresponding allowance for impairment.
Cannot revert
Once recognized, impairment losses on assets shall not be reversed in subsequent accounting periods.
5. Handling of Goodwill Impairment
Goodwill arising from business combinations shall be tested for impairment at least annually. The impairment test for goodwill shall be performed in conjunction with the related cash-generating unit or group of cash-generating units.
Impairment Test Steps
- First, perform an impairment test on the asset group or combination of asset groups excluding goodwill.
- Perform impairment testing on asset groups or combinations of asset groups that include goodwill.
- Compare the carrying amount of the relevant asset group or group of asset groups with their recoverable amount.
- If the recoverable amount is lower than the carrying value, recognize an impairment loss on goodwill.
Regulatory Document Attachment
Accounting Standards for Business Enterprises No. 8 — Impairment of Assets (PDF)