Impairment of plant and CGU testing

Sustained low utilization, losses or cheaper import competition are impairment indicators requiring the plant's carrying amount to be tested against what it can recover through use or sale. Failing to test or testing at too aggregated a level (whole-company CGU) masks losses in weak plants, overstates the asset base and profit, and is a frequent driver of large catch-up impairment charges once energy repricing or import competition finally forces recognition - a wave already seen across regional manufacturing.

What impairment indicators are present (sustained low utilization, losses, energy/input cost spikes, cheaper import competition)? Is the cash-generating unit identified at the right level (e.g. individual plant or line with largely independent cash inflows), not aggregated to mask a weak unit? Are the value-in-use cash flow forecasts based on the most recent board-approved budgets rather than optimistic projections?

1. At each reporting date, screen for impairment indicators: sustained low utilization, operating losses, energy or input cost spikes compressing margins, cheaper import competition, adverse changes in the market or technological environment, or a fall in the market price of comparable plants.
2. If any indicator exists, identify the cash-generating unit (CGU): usually the smallest identifiable group of assets generating cash inflows largely independent of other assets - often an individual plant, production line, or product line, not the whole company.
3. Determine the CGU's carrying amount, including allocated corporate assets and goodwill (if any) on a reasonable and consistent basis.
4. Estimate the recoverable amount as the higher of fair value less costs of disposal and value in use; it is not necessary to determine both if either already exceeds the carrying amount.
5. If the carrying amount exceeds the recoverable amount, recognize an impairment loss, allocating it first to any goodwill within the CGU, then pro rata to the other assets in the CGU (not below their individual recoverable amounts, if determinable).
6. At each subsequent reporting date, assess whether indicators suggest a previously recognized impairment loss (other than goodwill) may have decreased or no longer exists, and reverse the loss (up to the depreciated carrying amount that would have applied had no impairment been recognized) if so.
7. Document the CGU identification logic and keep it consistent period to period unless facts genuinely change (e.g. a reorganization of production lines).

Measurement basis: recoverable amount is the higher of (a) fair value less costs of disposal, based on market participant assumptions, and (b) value in use, the present value of future cash flows expected from the CGU. Included in value-in-use cash flows: cash inflows/outflows from continuing use consistent with the asset's current condition, based on approved budgets/forecasts for a limited explicit period plus a terminal value using a steady or declining growth rate. Excluded: cash flows from future restructurings not yet committed, future capital expenditure that enhances the asset beyond its current condition, and financing/tax cash flows (use pre-tax rates and pre-tax cash flows consistently). Subsequent measurement / remeasurement triggers: retest whenever a new indicator arises (not only annually, unless the CGU includes indefinite-life intangibles or goodwill, which require an annual test); reverse a prior PP&E impairment (never goodwill) if indicators show the recoverable amount has increased, capped at the depreciated carrying amount absent the original impairment.

Impairment losses (and reversals) disclosed by CGU or class of assets, and by line item in the income statement in which they are included; events and circumstances leading to the impairment; whether recoverable amount was based on fair value less costs of disposal or value in use, and the key assumptions (discount rate, growth rates, budget period) used to determine it; sensitivity disclosure where a reasonably possible change in a key assumption would cause the carrying amount to exceed recoverable amount; basis for CGU identification; statement that reversals are permitted for PP&E impairments (unlike goodwill, which is never reversed).

• Testing the whole company (or a broad division) as a single CGU to let cash flows from strong plants mask impairment in weak ones, when independent cash-generating units actually exist at the plant or line level
• building cash flow forecasts that assume an unsupported recovery in volumes or margins with no corresponding management actions or capital investment approved
• using a discount rate that is not pre-tax and market-participant consistent, or that does not reflect asset-specific risk
• failing to test for impairment despite clear indicators (e.g. two consecutive years of losses) because management believes the downturn is temporary
• omitting to consider reversal of a prior impairment when utilization and pricing genuinely recover.