Impairment of fixed assets and goodwill - FRS 11
FRS 11 - in force for year ends after 22 December 1998
This is a ground breaking standard that sets out almost universal requirements (and complex methods) for reviewing the carrying value of fixed assets generally and goodwill in particular. In essence:
- an impairment review is required when dictated by another Standard (such as FRS 10 in respect of indefinite life assets) and whenever "events or circumstances indicate that the carrying amount of the fixed asset or goodwill may not be recoverable";
- an impairment review requires the forecasting of all future cash flows relating to the asset, that these be discounted to net present value and that any excess of the carrying value over this net present value is written off;
- if circumstances change sufficiently, impairments may be reversed;
- impairment reviews are carried out for the smallest identifiable "income generating unit" for example a newly acquired subsidiary, or a self accounting division. Any impairment overall is then allocated between the assets in the unit;
- there are extensive disclosure and anti avoidance rules as well as techniques for dealing with businesses that are acquired and then integrated with existing units.
Exemptions to FRS 11 are given only in respect of certain assets (such as investment properties) with their own valuation rules and small companies adopting the so called FRSSE (Financial Reporting Standard for Smaller Entities).
The techniques of the impairment review will come naturally to large companies and professional advisers used to using discounted cash flow techniques to value businesses (although a cold towel will often be essential headwear) but represent a potentially substantial burden on many smaller businesses.
This website is intended for general guidance only. No responsibility for loss occasioned to any person acting as a result of any material in this publication can be accepted.
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