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03 November 2010

EFRAG comments on the IFRS Interpretations Committee's tentative agenda decision on IAS 36 Impairment of Assets


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EFRAG has issued its comment letter on the Interpretations Committee's tentative rejection decision on IAS 36 Impairment of Assets - Calculation of Value in Use.


The EFRAG comments on the IFRS Interpretations Committee’s (‘the Interpretations Committee’) tentative decision not to proceed with the agenda item on a request for guidance to clarify whether an entity can use a dividend discount model (DDM) when calculating value in use (VIU) for the purpose of performing an impairment test under IAS 36 Impairment of Assets in the consolidated financial statements of a parent entity. The issue relates to a situation when a subsidiary of the parent entity operates in the financial sector and is considered to be a separate cash-generating unit (CGU).

The EFRAG addresses wordings for rejection published by the Interpretations Committee by exception, i.e. when European constituents express concern that they are expected to have a significant and undesirable effect in practice and EFRAG would share that concern after proper assessment of the wording for rejection. Such circumstances have just arisen with the Interpretation Committee issuing its tentative wording for rejection on the application of dividend discount models.

The rejection notice in respect to the issue specifies that ‘calculations using DDMs would rarely be appropriate when calculating value in use of a CGU in consolidated financial statements.’ The Interpretations Committee supported its tentative conclusion by explaining that it believes that the cash flows used to calculate value in use of a CGU in the consolidated financial statements may be different to the cash flows used to calculate value in use of an investment in the separate financial statements. It added that for example, the cash flows associated with liabilities are usually excluded from the value in use of a CGU. It concluded that the current principles in IAS 36 relating to the calculation of the VIU of CGU are clear.

In EFRAG’s view, it is inappropriate for the Interpretations Committee to create, what appears to be, a rebuttable presumption in the wording for rejection by stating that ‘using DDMs would rarely be appropriate’. The wording for rejection risks prohibiting in practice the use of a particular approach in IAS 36, even in those cases when the approach could be applied in a manner that is consistent with the principles in paragraphs 30 to 57 of IAS 36 for the calculation of VIU.

Therefore, the EFRAG recommends that the Interpretations Committee remove the reference to ‘rarely be appropriate’ from the wording for rejection, as proposed in Appendix A of Staff Paper 7 for the November 2010 Interpretations Committee meeting. In addition, the EFRAG recommends that the Interpretations Committee amend the wording for rejection to clarify that a DDM can be used, provided this is consistent with the requirements under IAS 36.

Full paper


© EFRAG - European Financial Reporting Advisory Group

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