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TABLE OF CONTENTS CHAPTER I GENERAL PROVISIONS CHAPTER II RECOGNITION OF ASSETS WITH POTENTIAL IMPAIRMENT CHAPTER III MEASUREMENT OF RECOVERABLE AMOUNT OF ASSETS CHAPTER IV DETERMINATION OF LOSSES OF ASSET IMPAIRMENT CHAPTER V RECOGNITION OF ASSET GROUPS AND IMPAIRMENT TREATMENTS CHAPTER VI TREATMENT OF IMPAIRMENT OF BUSINESS REPUTATION CHAPTER VII DISCLOSURE CHAPTER I GENERAL PROVISIONS Article 1. For the purpose of regulating the recognition and measurement of asset impairment, and the disclosure of relevant information, these Standards are formulated in accordance with the Accounting Standards for Enterprises-Basic Standards. Article 2. The term "asset impairment" means that the recoverable amount of an asset is lower than its carrying amount. The asset as mentioned in these standards includes the assets based on a single item and asset groups. The term "asset group" refers to a minimum combination of assets that may be recognized by an enterprise, the flow-in cash generated by which shall be generally independent from those generated by other assets or asset groups. Article 3. The following items shall be governed by other relevant accounting standards: (1) The impairment of inventories shall be governed by the Accounting Standards for Enterprises No. 1-Inventories; (2) The impairment of investment real estates measured through the fair value method shall be governed by the Accounting Standards for Enterprises No. 3-Investment Real Estates; (3) The impairment of consumptive biological assets shall be governed by the Accounting Standards for Enterprises No. 5-Biological Assets; (4) The impairment of assets formed by construction contracts shall be governed by the Accounting Standards for Enterprises No. 15-Construction Contracts; (5) The impairment of Deferred Income Tax Assets shall be governed by the Accounting Standards for Enterprises No. 18-Income Tax; (6) The impairment of the unsecured residue of the lessor in a financial leasing shall be governed by the Accounting Standards for Enterprises No. 21-Leases; (7) The impairment of financial assets regulated by the Accounting Standards No. 22-Recognition and Measurement of Financial Instruments shall be governed by the Accounting Standards No. 22-Recognition and Measurement of Financial Instruments; and (8) The impairment of rights and interests related to unexplored oil and natural gas mining areas shall be governed by the Accounting Standards for Enterprises No. 27-Exploitation of Oil and Natural Gas. CHAPTER II RECOGNITION OF ASSETS WITH POTENTIAL IMPAIRMENT Article 4. An enterprise shall, on the day of balance sheet, make a judgment about whether or not there are any sign of possible asset impairment. No matter whether or not there is any sign of possible impairment, the business reputation formed by merger of enterprises and intangible assets with uncertain useful lives shall be subject to an impairment test every year. Article 5. The following circumstances may constitute a sign of possible asset impairment: (1) The current market price of an asset declines drastically, and the price drop is obviously higher than the expected drop over time or due to the normal use; (2) The economic, technological or legal environment in which the enterprise conducts its business operations, or the market where an asset is situated has or will have any significant change in the current period or in the near future, and thus has or will have an adverse impact on the enterprise; (3) The market interest rate or any other market investment return rate has risen in the current period, and the enterprise' calculation of capitalization rate of the current value of the expected future cash flow of the asset is affected and thus leads to a big fall in the recoverable amount of asset; (4) Any evidence shows that an asset has become obsolete or it has been damaged substantially; (5) An asset has been or will be left unused, or the use of an asset has been or will be terminated, or an asset has been or will be disposed of ahead of schedule; (6) Any evidence in the internal report of the enterprise shows that the economic performances of an asset has been or will be lower than the expected performances, for example, the net cash flow created by an asset or business profit (or loss) realized (incurred) an asset is lower (higher) than the excepted amount, etc.; and (7) Other evidence that indicates that an asset impairment has probably occurred. CHAPTER III MEASUREMENT OF RECOVERABLE AMOUNT OF ASSETS Article 6. If any evidence shows that there is a possible asset impairment, the recoverable amount of the asset shall be estimated. The recoverable amount shall be determined according to the net amount of the fair value of an asset minus the disposal expenses, and the current value of the expected future cash flow of the asset, whichever is higher. The disposal expenses include the relevant legal expenses, relevant taxes, porterage, as well as the direct expenses for bringing the asset into a marketable state. Article 7. If either of the net amount of the fair value of an asset minus the disposal expenses, or the current value of the expected future cash flow of the asset exceeds the carrying amount of the asset, it shows that no asset impairment has occurred, and it does not need to estimate the amount of the other item. Article 8. The net amount of the fair value of an asset minus the disposal expenses shall be determined on the basis of the price as stipulated in the sales agreement in the fair transaction minus the disposal expenses directly attributable to the asset. If there is no sales agreement, but if there is an active market of assets, the net amount of the fair value of an asset minus the disposal expenses shall be determined on the basis of the amount of market price of the asset minus the disposal expenses. Generally the market price of the asset shall be determined on the basis of the offer of the buyer of the asset. If there is no sales agreement and if there is no active market of assets, the net amount of estimated fair value of an asset minus the disposal expenses shall be based on the best available information. The said net amount may be estimated by reference to the latest transaction prices or results of similar assets in the same sector. If an enterprise is still unable to reliably estimate the net amount of the fair value of an asset minus the disposal expenses by following the provisions as described above, it shall regard the current value of the expected future cash flow of the asset as the recoverable amount of the asset. Article 9. The current value of the expected future cash flow of an asset shall, according to the expected future cash flow generated during the continuous use or final disposal of an asset, choose an appropriate capitalization rate to determine the post-capitalization amount. To predict the current value of the future cash flow, the enterprise shall take into full consideration the expected future cash flow, useful life, capitalization rate, and other factors. Article 10. The expected future cash flow of an asset shall include the following items: (1) The inflow of cash generated during the course of the continuous use of the asset; (2) The expected outflow of cash necessary for the realization of the inflow cash generated during the continuous use of the asset (including the outflow of cash for bring the asset to the expected conditions for use). The outflow of cash shall be the outflow cash that is directly attributable to, or that may be distributed to, the asset on a reasonable and consistent basis; (3) At the end of the useful life of an asset, the net cash flow received or paid for the disposal of asset. The cash flow shall, in the process of fair transaction between knowledgeable parties at their own free will, be the amount which an enterprise is expected to obtain from or pay for the disposal of the asset, minus the expected disposal expenses. Article 11. When making an estimate of the future cash flow of an asset, the management of the enterprise shall make a best estimate of the overall economic status of the asset in its remaining useful life in a reasonable and well-grounded manner. The expected future cash flow of an asset shall be based on the latest financial budget or forecast data as well as the stable or regressive growth rates after the year of the aforesaid budget or forecast. If the management can prove that the progressive growth rates are reasonable, the future cash flow of the expected asset may be based on the progressive growth rates. The expected cash flow set forth on the basis of the budget or forecast can cover 5 years at most. If the management level can prove that a longer period is reasonable, it may cover a longer period. When making an estimate of the cash flow after the year of the budget or forecast, the growth rates adopted shall not, unless the enterprise can prove that it is reasonable to adopt higher growth rates, exceed the long-term average growth rate of the products, or the relevant market, or the industrial sector which the enterprise belongs to, or the country or region where the enterprise is located, or the long-term average growth rate of the market where the asset is situated. Article 12. The expected future cash flow of an asset shall be based on the current status of the asset. It shall not include any possible and uncommitted restructuring event or any expected future cash flow related to the asset betterment. The expected future cash flow of an asset shall not include the inflow or outflow generated by the financing activities, nor the cash flow related to the receipt or payment of income tax. If the enterprise has made a commitment of restructuring, when it determines the current value of the future cash flow of assets, the amounts of the expected future cash inflow and outflow shall reflect the expenses that can be saved in the restructuring, other benefits to be brought about by the restructuring, and the estimated amount of the future cash outflow that may result from the restructuring. Generally, the expenses that can be saved in the restructuring and other benefits that could be brought about by the restructuring shall be estimated on the basis of the latest financial budget or forecast data as approved by the management of the enterprise. The amount of future cash outflow that may result from the restructuring shall be estimated according to the expected amount of liabilities incurred due to the restructuring as recognized in accordance with the Accounting Standards for Enterprises No. 13-Contingencies. Article 13. The capitalization rate is the pre-tax interest rate used to reflect the time value of money in the present market and the specific risks of the asset. The capitalization rate is the necessary return rate as required by an enterprise when it purchases or invests in the asset. If an adjustment is made to the specific risks of the asset when an estimate of the future cash flow of an asset is made, it does not need to take into consideration these specific risks when making an estimate of the capitalization rate. If the estimate of the capitalization rate is based on the post-tax factors, it shall be adjusted to the pre-tax capitalization rate. Article 14. If the expected future cash flow of an asset involves any foreign currency, the current value of the asset shall, on the basis of the settlement currency of the future cash flow to be generated by the asset, be calculated at a capitalization rate applicable to this currency, then the current value of the foreign currency shall be translated at the spot exchange rate for the current day when the future cash flow of the asset is calculated. CHAPTER IV DETERMINATION OF LOSSES OF ASSET IMPAIRMENT Article 15. If the measurement result of the recoverable amount indicates that an asset's recoverable amount is lower than its carrying amount, the carrying amount of the asset shall be written down to the recoverable amount, the written-down amount shall be recognized as the loss of asset impairment and be recorded in the profits and losses of the current period, and for which a provision for the asset impairment shall be made accordingly. Article 16. After the loss of asset impairment has been recognized, the depreciation or amortization expenses of the impairment asset shall be adjusted accordingly in the future periods so as to, within the remaining useful life of the asset, systematically amortize the post-adjustment carrying value of the asset (minus the expected net salvage value). Article 17. Once any loss of asset impairment is recognized, it shall not be reversed in the future accounting periods. CHAPTER V RECOGNITION OF ASSET GROUPS AND IMPAIRMENT TREATMENTS Article 18. Where any evidence indicates a possible asset impairment, the enterprise shall, on an individual asset basis, estimate the recoverable amount. If it is difficult for it to do so, it shall determine the recoverable amount of the asset group to which the asset pertains. The recognition of an asset group shall be based on whether the main cash inflow generated by the asset group is independent of those generated by other assets or other asset groups. At the same time, when identifying an asset group, the enterprise shall take into consideration how its management manages the production and business activities (for example, according to the production lines, business varieties or according to the regions or areas), the ways of decision-making relating to the continuous use or disposal of the asset, etc. If there is an active market for the products manufactured by (or other outputs of) a group of several assets, even if some or all of these products (or other outputs) are provided for the internal use, the enterprise shall also recognize this group of assets on the condition that the provisions of the preceding paragraph are satisfied. If the cash inflow of the asset group is affected by the internal transfer price, the future cash flow of the asset group shall be determined on the basis of the best available estimate made by the management of the enterprise for the future price in the fair transaction. Once an asset group is recognized, it shall be kept intact in different accounting periods, and shall not be changed at will. If it is necessary to make any change, the management of the enterprise shall prove that this change is reasonable, and shall make an explanation pursuant to Article 27 of these Standards. Article 19. The basis for the determination of the carrying amount of an asset group shall be the same as that for the determination of the recoverable amount. The carrying amount of an asset group includes the carrying amount that may be directly attributed to or may be reasonably and consistently distributed to the asset group. Generally it should not include the carrying amount of liability that has already been recognized, unless it is unable to determine the recoverable amount of the asset group without considering the amount of liability. The recoverable amount of an asset group shall be determined according to the net amount of the fair value of the asset minus the disposal expenses, and the current value of the expected future cash flow of the asset, whichever is higher. If the purchaser is required to bear a liability (like environment resumption liability, etc.) when an asset group is disposed of, if the amount of liability has been recognized and has been recorded in the carrying amount of the relevant assets, and if the enterprise can only obtain the unitary fair value, including the aforesaid assets and liability, minus the disposal expenses, for the purpose of comparing the carrying amount and recoverable amount of the asset group, the amount of liability that has been recognized shall be deducted from the liability in the determination of the carrying amount of and the current value of expected future cash flow of the asset group. Article 20. The assets of the headquarters of an enterprise include the office buildings, electronic data processing equipment of the enterprise group or its business department. A conspicuous feature of an asset of the headquarters is that it is difficult to generate independent cash inflow if it is separated from other assets or asset group and it is difficult to attribute its carrying amount completely to a certain group. If any evidence reveals any possible impairment of a particular asset of the headquarters, the enterprise shall calculate and determine the recoverable amount of the asset group to which the asset group or the combination of asset groups it pertains, then make a comparison between it and corresponding carrying amount of the asset so as to decide whether it is necessary to confirm the impairment loss. The "combination of asset groups" refers to the minimum combination of asset groups formed by several asset groups, including the asset groups or combination of asset groups, and the proportion of the assets of the headquarters allocated through a reasonable method. Article 21. When an enterprise conducts an impairment test for a certain asset group, it shall first determine all the assets of the headquarters which are related to this asset group, then treat it according to the following circumstances respectively by taking into consideration whether the assets of the headquarters can be apportioned to this asset group on a reasonable and consistent basis: (1) For the proportion of the relevant assets of the headquarters that can be apportioned to this asset group on a reasonable and consistent basis, the enterprise shall apportion the carrying amount of this proportion to this asset group, then make a comparison between the asset's carrying amount (including in the proportion of the carrying amount of the headquarters' assets which have been apportioned to it) and its recoverable amount and treat it in pursuance of Article 22 of these Standards; (2) If it is difficult to apportion some assets of the related assets of the headquarters to this asset group on a reasonable and consistent basis, the enterprise shall take the following steps to treat these assets: First, it shall, without taking into consideration the relevant assets of the headquarters, estimate and compare the asset group's carrying amount with its recoverable amount, and treat it in accordance with Article 22 of these Standards. Second, it shall determine the minimum combination of asset groups formed by several asset groups. This combination of asset groups shall include the asset groups that have been tested, and the proportion of the carrying amount of the headquarters' assets that can be apportioned to this combination on a reasonable and consistent basis. Finally, it shall compare the carrying amount of the combination of asset groups it determines (including the proportion of the headquarters' assets that have been apportioned) with the recoverable amount of the combination, and shall treat it according to Article 22 of these Standards. Article 22. If the recoverable amount of an asset group or combination of asset groups is lower than its carrying amount (if the headquarters' assets and business reputation are apportioned to a certain asset group or combination of asset groups, the carrying amount of the asset group or combination of asset groups shall include the amount of the relevant assets of the headquarters and business reputation that have been apportioned), the enterprise shall recognize the corresponding impairment loss. The amount of the impairment loss shall first offset against the carrying amount of the headquarters' assets and business reputation which are apportioned to the asset group or combination of asset group, then offset it against the carrying amount of other assets in proportion to the weight of other assets in the asset group or combination of asset groups with the business reputation excluded. The above-mentioned offsets against the carrying amount of the assets shall be treated as the impairment loss of the assets (including the business reputation) and shall be recorded in the profits and losses of the current period. The post-offset carrying amount of each asset shall not be lower than the following three, whichever is the highest: the net amount of the fair value of the asset minus the disposal expenses (if determinable), the current value of the expected future cash flow of the asset (if determinable), and zero. The amount of unapportioned impairment losses so incurred shall be apportioned on the basis of the weight of the carrying amount of other assets in the relevant asset group or combination of the asset groups. CHAPTER VI TREATMENT OF IMPAIRMENT OF BUSINESS REPUTATION Article 23. The business reputation formed by merger of enterprises shall be subject to an impairment test at least at the end of each year. The business reputation shall, along with the related asset group or combination of asset group, be subject to the impairment test. The related asset group or combination of asset groups shall be the asset group or combination of asset groups that benefit from the synergy effects of the enterprise merger, and shall not be bigger than the reporting segments as determined under Accounting Standards No. 35-Segment Reporting. Article 24. When an enterprise makes an asset impairment test, it shall, from the purchase day, apportion the carrying amount of the business reputation formed by merger of enterprises to the relevant asset groups through a reasonable method. If it is difficult to do so, it shall apportion it to the relevant combinations of asset groups. The enterprise shall apportion the carrying amount of the business reputation to the relevant asset groups or combinations of asset groups on the basis of the proportion of the fair value of each asset group or combination of asset groups in the total fair value of the relevant asset groups or combinations of asset groups. If the reporting structure is changed due to enterprise restructuring or for any other reason, and if it has affected the structure of one or several asset group(s) or combination(s) of asset groups to which the business reputation has already been apportioned, the enterprise shall, according to the apportion method similar to that as provided for in the preceding paragraph of this Article, re-apportion the business reputation to the affected asset group(s) or combinations of the asset group(s). Article 25. When making an impairment test for the relevant asset groups or combination of asset groups containing business reputation, if any evidence shows that impairment of the asset groups or combinations of asset groups is possible, the enterprise shall first make an impairment test to the asset groups or combinations of asset groups not containing business reputation, calculate the recoverable amount, compare it with the relevant carrying amount and recognize the corresponding impairment loss. Then it shall make an impairment test to the asset groups or combinations of asset groups containing business reputation, compare the carrying amount of these asset groups or combinations of asset groups (including the carrying amount of the business reputation apportioned thereto) with the recoverable amount, if the recoverable amount of the relevant assets or combinations of the asset groups is lower than the carrying amount thereof, it shall recognize the impairment loss of the business reputation, and treat them according to Article 22 of these Standards. CHAPTER VII DISCLOSURE Article 26. An enterprise shall, in its notes, disclose the following information relevant to asset impairment: (1) The amount of impairment loss of each asset recognized in the current period; (2) The accumulative amount of provision for the impairment of each asset; and (3) If the enterprise provides any segment reporting information, it shall disclose the amount of impairment loss recognized by each reporting segment in the current period. Article 27. Where any serious asset impairment losses have been incurred, the enterprise shall, in its notes, disclose the reasons which have caused each of the serious asset impairment losses, and the amount of serious asset impairment losses recognized in the current period: (1) If a serious impairment loss has been incurred on an individual asset, the enterprise shall disclose the nature of this individual asset. If it provides any segment reporting information, it shall also disclose the main reporting segment to which this asset pertains to; (2) If a serious impairment loss has been incurred on an asset group (or combination of asset groups, the same below), it shall disclose: (a) The basic information of the asset group; (b) The amount of impairment loss on each asset of the asset group as recognized in the current period; and (c) If there is any change to the formation of the asset group by comparing with the formation of the asset group in the previous period, the enterprise shall disclose the reasons for the change, as well as the formation of the asset groups in the previous period and the current period. Article 28. With regard to any serious asset impairment, the enterprise shall, in its notes, disclose the method for the determination of the recoverable amount of the asset (or asset group, the same below): (1) If the recoverable amount is determined on the basis of the net amount of the fair value of the asset minus the disposal expenses, the enterprise shall disclose the basis for the estimate of the net amount of the fair value minus the disposal expense; (2) If the recoverable amount is determined on the basis of the expected future cash flow of the asset, the enterprise shall disclose the capitalization rate it adopts for estimating the current value of the asset, as well as the capitalization rate it adopted in the previous period if the recoverable amount of the asset in the previous period was determined on the basis of the expected future cash flow of the asset. Article 29. The information as described in Article 29, Article 26 (1) and (2), and Article 27 (2) (b) shall be disclosed on a category basis. The categories of assets shall be determined by considering whether the nature or functions of the assets in production and business operations are identical or similar. Article 30. If the carrying amount of the business reputation apportioned a particular asset group (or intangible asset with uncertain useful time, the same below) accounts for a large portion of the total carrying amount of the business reputation, the enterprise shall, in its notes, disclose the following information: (1) The carrying amount of the business reputation apportioned to the asset group; (2) The method for the determination of the recoverable amount of the asset group: (a) If the recoverable amount is determined on the basis of the net amount of the fair value of the asset group minus the disposal expenses, the enterprise shall disclose the method for the determination of the net amount of the fair value minus the disposal expenses. If the net amount of the fair value of the asset group minus the disposal expenses is not determined on the basis of the market price, the enterprise shall disclose: (i) The crucial assumptions of the management of the enterprise for the expected future cash flow, and the basis for these assumptions; (ii) Whether or not the values of the crucial assumptions as determined by the management of the enterprise are consistent with the enterprise's historic experiences or its sources of external information; if not, the enterprise shall make an explanation; (b) When the recoverable amount is determined according to the current value of future cash flows as predicted by the asset group, the enterprise shall also disclose: (i) the key assumptions for the enterprise management's predicting the cash flows in the future and the grounds thereof; (ii) when the management of the enterprise determines the values relating to the relevant assumptions, whether they are in consistence with the historical experiences of the enterprise or the sources of external information; if not, the reasons shall be accounted for; (iii) the capitalization rate adopted for the estimate of the current value. Article 31. If the total or partial carrying amount of the business reputation are apportioned to several asset groups, and if the proportion apportioned to each asset group in the total carrying amount of the business reputation is not big, the enterprise shall, in its notes, describe it and offer the aggregate amount of the business reputation apportioned to the above-mentioned asset groups. If the carrying amount of the business reputation is apportioned to the above-mentioned asset groups according to the same crucial assumptions and if the aggregate amount of the business reputation so apportioned accounts for a large proportion of the total carrying amount of the business reputation, the enterprise shall, in its notes, describe it and disclose the following information: (1) The aggregate carrying amount of the business reputation apportioned to the above-mentioned asset groups; (2) The crucial assumptions adopted, and the basis for these assumptions; and (3) Whether or not the values of the crucial assumptions as determined by the management of the enterprise are consistent with the enterprise's historic experiences or its sources of external information; if not, the enterprise shall make an explanation. |
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