Psak 48 Reduction In Val Ver171299

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS

SFAS No.

48 INDONESIAN INSTITUTE OF ACCOUNTANTS IMPAIRMENT OF ASSETS

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Paragraphs

Allocation of the Impairment Loss for a Cash-GeneratingUnit 62 - 65 Continued../..

CONTENTS Objective…………………………… 01 Scope…………………………………………………… 02 - 05 Definitions……………………………………………… 05 IDENTIFYING AN ASSET THAT MAY BE IMPAIRED.. 06 - 12 MEASUREMENT OF RECOVERABLE AMOUNT…….. 13 - 16 Net Selling Price……………………………………… … 17 - 21 Value in Use…………………………………………….. 22 Basis for Estimates of Future Cash Flows…………… …. 23 - 27 Composition of Estimates of Future Cash Flows………. 28 - 35 Discount Rate………………………………………… … 36 - 40 RECOGNITION AND MEASUREMENT OF AN IMPAIRMENT LOSS……………………………………… 41 - 45 CASH-GENERATING-UNITS…………………………… 46 - 47 Identification, Recoverable Amount and Carrying Amount of the Cash-Generating-Unit to Which an Asset Belongs……… 48 - 54 Impairment Loss for a Cash-Generating-Unit………………. 55 - 58 Goodwill and other assets…………………………………… 59 - 61

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SUBSEQUENT REVIEW OF ASSETS WHICH DECREASE IN VALUE………………………………………. 66 - 69 Reversal of an Impairment Loss……………………… ….. 70 - 78 DISCLOSURES …………………………………………… ….. 79 - 85 EFFECTIVE DATE………………………………………… …. 86 APPENDICES: A. Illustrative Examples

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STATEMENT OF FINANCIAL ACCOUNTING STANDARD No. 48 REDUCTION IN VALUE OF ASSETS

Standards applicable to these assets already contain specific requirements for recognizing and measuring these assets.

The standards, which have been set in bold italic type, should be read in the context of the background material and implementation guidance in this Standard. Statements of Financial Accounting Standards are not intended to apply to immaterial.

04 The assets regulated in this Standard include financial assets which are included in a subsidiaries, as defined in SFAS No. 4, Consolidated Financial Statements, in associates, as defined in SFAS No. 15, Accounting for Investments in Associates; and in joint ventures, as defined in SFAS No. 12, Financial Reporting of Interests in Jointly Controlled Operations and Assets.;

Objective 01 The objective of this Standard is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. If an enterprise identify that an asset will potentially reduce its value, this standard require the enterprise to determine estimated recoverable amount of the asset. If the estimated recoverable amount is less than its carrying value, An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the enterprise to recognize an impairment loss. The Standard also specifies when an enterprise should reverse an impairment loss and it prescribes certain disclosures for impaired assets.

Definitions 05 The following terms are used in this Standard with the meanings specified: Recoverable amount is the higher of an asset’s net selling price and its value in use. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.

Scope 02 This Standard should be applied in accounting for the impairment of all assets, other than:

Costs of disposal are incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense.

(a)

inventories (see SFAS No. 14, Inventories);

(b)

assets arising from construction contracts (see SFAS No.34, Accounting for Construction Contracts);

(c)

deferred tax assets (see SFAS No. 46, Accounting for Income Taxes); and

Carrying amount is the amount at which an asset is recognized in the balance sheet after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon.

(d)

assets arising from employee benefits (see SFAS No. 24, Accounting for Retirement Benefit Cost).

Depreciation (Amortization) is the systematic allocation of the depreciable amount of an asset over its useful life.

03 This Standard does not apply to inventories, assets arising from construction contracts, deferred tax assets or assets arising from employee benefits because existing Statement of Financial Accounting

Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.

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An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

Useful life is either:

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ACCOUNTING FOR IMPAIRMENT OF ASSETS (c)

(a)

the period of time over which an asset is expected to be used by the enterprise; or

(b)

the number of production or similar units expected to be obtained from the asset by the enterprise.

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market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.

Internal sources of information

A cash-generating-unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.

(d)

evidence is available of obsolescence or physical damage of an asset;

Identifying an Asset that may be Impaired

(e)

significant changes with an adverse effect on the enterprise have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used; and

(f)

evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

06 An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. The reduction of the value of an asset is recognized as loss on the fnancial statement. Paragraphs 7 to 12 describe some indications that an impairment loss may have occurred: if any of those indications is present, an enterprise is required to make a formal estimate of recoverable amount. If no indication of a potential impairment loss is present, this Standard does not require an enterprise to make a formal estimate of recoverable amount. 07 An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset. 08 In assessing whether there is any indication that an asset may be impaired, an enterprise should consider, as a minimum, the following indications: External sources of information (a)

during the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use;

(b)

significant changes with an adverse effect on the enterprise have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the enterprise operates or in the market to which an asset is dedicated; and

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For assets presented at their value in use in the previous year (g)

prior to discount, the actual cash flows are materially lower than the estimated cash flows.

09 The list in paragraph 08 is not exhaustive. An enterprise may identify other indications that an asset may be impaired and these would also require the enterprise to determine the asset’s recoverable amount. 10 When using information sourced externally from the enterprise or from internal sources, the enterprise must consider the reliability of the information. Examples of factors to be considered are whether the enterprise is optimistic when setting targets, how often budgets and estimates are updated and whether budgets and estimates represent a basis for objective and reliable comparisons. 11 Evidence from internal reporting that indicates that an asset may be impaired includes the existence of: (a)

cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are significantly higher than those originally budgeted;

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(b)

actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those budgeted;

selling price or the net cash inflows. Paragraphs 51 to 53 inclusive describe the method of determining the recoverable amount of an asset under such conditions.

(c)

a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing from the asset; or

Net Selling Price

(d)

operating losses or net cash outflows for the asset, when current period figures are aggregated with budgeted figures for the future.

12 The concept of materiality applies in identifying whether the recoverable amount of an asset needs to be estimated. For example, if previous calculations show that an asset’s recoverable amount is significantly greater than its carrying amount, the enterprise need not re-estimate the asset’s recoverable amount if no events have occurred that would eliminate that difference. Measurement of Recoverable Amount 13 It is not always necessary to determine both an asset’s net selling price and its value in use. For example, if either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. If asset’s value in use is not exceed its net selling price materially, asset’s recoverable amount is its net selling price. 14 It may be possible to determine net selling price, even if an asset is not traded in an active market. However, Ssometimes it will not be possible to determine net selling price because there is no basis for making a reliable estimate of the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. In this case, the recoverable amount of the asset may be taken to be its value in use. If an asset is not traded in an active market does not mean that the asset’s net selling price can not be determined. 15 Paragraphs 46 to 54 inclusive describe the method of determining the recoverable amount of an asset which does not generate cash in flows independent of other assets or groups of assets. 16 In some cases the disposal of an asset obligates the buyer to assume certain obligations and the only information available is the net

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17 The best evidence of an asset’s net selling price is a price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset. If there is no binding sale agreement but an asset is traded in an active market, net selling price is the asset’s market price less the costs of disposal. The appropriate market price is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction may provide a basis from which to estimate net selling price, provided that there has not been a significant change in economic circumstances between the transaction date and the date at which the estimate is made. 18 If there is no binding sale agreement or active market for an asset, net selling price is based on the best information available to reflect the amount that an enterprise could obtain, at the balance sheet date, for the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. 19 Costs of disposal are deducted in determining net selling price. Examples of such costs are legal costs, taxes and costs of removing the asset. 20

Costs of disposal exclude:

(a)

expenses already recognized as a liability; and

(b)

restructuring and reorganization expenses.

21 Although an enterprise may have intended to incur restructuring or reorganization costs following an asset's disposal, such restructuring or reorganization costs are not included in costs of disposal. These restructuring or reorganization expenses shall be recognized as a liability only if the recognition is obligatory by certain SFAS. Value in Use 22 Estimating the value in use of an asset involves the following steps:

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(a)

estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and

(b)

applying the appropriate discount rate to these future cash flows.

In some cases, estimates, averages and computational shortcuts may provide a reasonable approximation of the detailed computations illustrated in this Standard for determining net selling price or value in use. Basis for Estimates of Future Cash Flows 23

In measuring value in use:

(a)

cash flow projections should be based on reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the remaining useful life of the asset. Greater weight should be given to external evidence;

(b)

cash flow projections should be based on the most recent financial budgets/forecasts that have been approved by management. Projections based on these budgets/forecasts should cover a maximum period of five years, unless a longer period can be justified; and

(c)

cash flow projections beyond the period covered by the most recent budgets/forecasts should be estimated by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate should not exceed the longterm average growth rate for the products, industries, or country or countries in which the enterprise operates, or for the market in which the asset is used, unless a higher rate can be justified.

24 In establishing assumptions, the enterprise shall consider the economic conditions and trends as of the balance sheet date.

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25 Detailed, explicit and reliable financial budgets/forecasts of future cash flows for periods longer than five years are generally not available. For this reason, management’s estimates of future cash flows are based on the most recent budgets/forecasts for a maximum of five years unless management can demonstrate its ability to accurately estimate cash flow projections over a period longer than five years. If management’s estimates of future cash flows is longer than five years, disclosure requirements follows paragraph 82 and 83. 26 Cash flow projections until the end of an asset’s useful life are estimated by extrapolating the cash flow projections based on the financial budgets/forecasts using a growth rate for subsequent years. This rate is steady or declining, unless an increase in the rate matches objective information about patterns over a product or industry life cycle. If an enterprise can provide strong support for the use of an increasing growth rate, the necessary disclosures are described in paragraphs 82 and 83. 27 The long term growth rate is usually not exceed the long term average growth rate for the products, industries, or country in which the enterprise operates or for the market in which the assets is used. Enterprises will have difficulty in exceeding the average historical growth rate over the long term for the products, industries, or country or countries in which the enterprise operates, or for the market in which the asset is used, because if Where conditions are very favorable, competitors are likely to enter the market and restrict growth. Therefore, enterprises will have difficulty in exceeding the average historical growth rate over the long term for the products, industries, or country or countries in which the enterprise operates, or for the market in which the asset is used. If an enterprise can provide strong support for the use of a growth rate which is higher than the average historical growth rate over the long term, the necessary disclosures are described in paragraphs 82 and 83. Composition of Estimates of Future Cash Flows 28

Estimates of future cash flows should include:

(a)

projections of cash inflows from the continuing use of the asset; projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and that can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and

(b)

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net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.

29 To the extent possible, the estimated cash inflows shall only reflect cash inflows related to initially recognized assets (or the remaining asset, if part of the asset has been used or sold). This is to avoid the inclusion of cash inflows from assets in use originating from internally generated goodwill or from other assets. SFAS No. 19, Intangible Assets, does not allow the recognition of internally generated goodwill. However, if an enterprise's operation is fully integrated and the information is combined, or if the asset has been modified, sometimes its impossible to identify cash inflows related to assets initially recognized. In this case, the future cash inflows generated by an asset in its present condition shall be used, regardless of whether the future cash inflows originate from the initially recognized asset or from improvements or modifications. If the enterprise can no longer identify the cash inflows from initially recognized assets, the enterprise shall determine the recoverable amount not for the asset individually, but for a cash generating-unit (see paragraphs 46 to 61 inclusive). 30 Projections of cash outflows include future overheads that can be attributed directly, or allocated on a reasonable and consistent basis, to the use of the asset. 31 When the carrying amount of an asset does not yet include all the cash outflows to be incurred before it is ready for use or sale, the estimate of future cash outflows includes an estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale. For example, this is the case for a building under construction or for a development project that is not yet completed. 32

The estimated future cash flows do not include:

(a)

cash outflows required to settle an obligation recognized as a debt; cash inflows or outflows originating from financing activities; or receipts or payments of income tax.

(b) (c)

33 To avoid double counting, estimates of future cash flows do not include cash outflows that relate to obligations that have already been recognized as liabilities. In addition, because the time value of money is considered by discounting the estimated future cash flows, these cash flows

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exclude cash inflows or outflows from financing activities. The estimated future cash flows shall reflect consistent assumptions through the determination of the discount rate. The effect of these assumptions cannot be duplicated or omitted. Since the discount rate is determined on a pre-tax basis, future cash flows are also estimated on a pre-tax basis. 34 The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life should be the amount that an enterprise expects to obtain from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal. 35 The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life is determined in a similar way to an asset’s net selling price., Eexcept that, in estimating those net cash flows: (a)

an enterprise uses prices prevailing at the date of the estimate for similar assets that have reached the end of their useful life and that have operated under conditions similar to those in which the asset will be used; and

(b)

those prices are adjusted for the effect of both future price increases due to general inflation and specific future price increases (decreases). However, if estimates of future cash flows from the asset’s continuing use and the discount rate exclude the effect of general inflation, this effect is also excluded from the estimate of net cash flows on disposal.

Discount Rate 36 The discount rate (or rates) should be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the asset. 37 A rate that reflects current market assessments of the time value of money and the risks specific to the asset is the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the enterprise expects to derive from the asset. 38 A discount rate which has been adjusted for risks usually covers the following factors:

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the time value of money; price increases due to the general inflation, if this factor is also considered in estimating future cash flows; and specific risks related to a certain asset by considering the risks of the country, the currency, prices and other risks.

39 The discount rate is independent of the enterprise’s capital structure and the way the enterprise financed the purchase of the asset because the future cash flows expected to arise from an asset do not depend on the way in which the enterprise financed the purchase of the asset. Therefore, an enterprise shall not use a discount rate implicit in the financing of the asset, and shall also disregard discount rates associated with additional financing. If an enterprise cannot determine a specific discount rate, it can use the weighted average cost of capital, without contemplating the effect of tax or financing, of a listed enterprise that has a single asset (or a portfolio of assets) similar in terms of service potential and risks to the asset under review. If such information is unavailable, the weighted average cost of capital calculated using a technique such as the Capital Asset Pricing Model, although not representing an adequate discount rate, represents a useful starting point to determine certain risks inherent in an asset. 40 An enterprise normally uses a single discount rate for the estimate of an asset’s value in use. However, an enterprise uses separate discount rates for different future periods where value in use is sensitive to a difference in risks for different periods or to the term structure of interest rates. Recognition and Measurement of an Impairment Loss 41 If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount. That reduction is an impairment loss. and should be recognized as an expense in the statement of profit and loss immediately. 42 When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an enterprise should recognize a liability if, and only if, that is required by another Statement of Financial Accounting Standard. 43 After the recognition of an impairment loss, the depreciation (amortization) charge for the asset should be adjusted in future periods to

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allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. 44 The recognition of the impairment loss of an asset could also be an indication that the residual value, the remaining period of depreciation (amortization) or the method of depreciation (amortization) of the asset must be reviewed in accordance with other Statements of Financial Accounting Standard in effect for that asset. 45 If an impairment loss is recognized, any related deferred tax assets or liabilities are determined under SFAS 46, Accounting for Income Taxes, by comparing the revised carrying amount of the asset with its tax base. Cash-Generating-Units 46 If there is any indication that an asset may be impaired, Rrecoverable amount should be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an enterprise should determine the recoverable amount of the cashgenerating-unit to which the asset belongs (the asset’s cash-generatingunit). 47 In several cases ans asset does not generate cash inflows from continuing use that are largely independent of those from other assets. In such cases, value in use and, therefore, recoverable amount, can be determined only for the asset’s cash-generating-unit. To measure the impairment loss of a cash generating-unit, an enterprise shall apply the provisions and guidance described in paragraphs 13 to 45 inclusive, and the additional requirements and guidance in paragraphs 48 to 65 inclusive. Identification, Recoverable Amount and Carrying Amount of the CashGenerating-Unit to Which an Asset Belongs 48 An asset’s cash-generating-unit is the smallest group of assets that includes the asset and that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. 49 The carrying amount of a cash-generating-unit includes the carrying amount of only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, to the cash-generatingunit.

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50 The carrying amount of a cash-generating-unit includes the carrying amount of only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, to the cash-generating-unit and that will generate future cash inflows. In certain cases, the carrying value of assets cannot be allocated to the cash generating-unit based on a reasonable and consistent basis, although these assets contribute to the generation of estimated future cash flows from the cash generating-unit; for example goodwill or other assets such as those attributable to a head office. Paragraphs 59 to 61 describe the method of calculating the reduction in value of such assets. 51 The carrying amount of a cash-generating-unit must be determined by deducting the carrying amount of any recognized liability, unless the recoverable amount of the cash-generating-unit cannot be determined without consideration of this liability. 52 Because the carrying amountThe net selling price and value in use of a cash-generating-unit are determined excluding cost, or estimated future cash outflows that relate to assets that are not part of the cash-generating-unit and liabilities that have already been recognized as liabilities, cash-generating-unit is excluding carrying amount of the liabilities.in the financial statements. 53 It may be necessary to consider certain recognized liabilities in order to determine the recoverable amount of a cash-generatingunit. This may occur if the disposal of a cash-generating-unit would require the buyer to take over a liability. In this case, the net selling price (or the estimated cash flow from ultimate disposal) of the cash-generating-unit is the estimated selling price for the assets of the cash-generating-unit and the liability together, less the costs of disposal. In order to perform a meaningful comparison between the carrying amount of the cash-generating-unit and its recoverable amount, the carrying amount of the liability is deducted in determining both the cash-generating-unit’s value in use and its carrying amount. If an organization has not yet recognized the liability in the financial statements, the carrying value of the liability is zero and the carrying value of the cash generating-unit needs no adjustments. 54 If an enterprise has identified all elements required in determining the value of the cash generating-unit, the enterprise shall determine the recoverable amount of such a unit (the higher of the net selling price of the cash generating-unit and its value in use) in accordance with the provisions in paragraphs 13 to 40 inclusive.

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Impairment Loss for a Cash-Generating-Unit 55 An impairment loss should be recognized for a cashgenerating-unit if, and only if, its recoverable amount is less than its carrying amount. 56 If the recoverable amount of an individual asset cannot be determined, the impairment loss is recognized for the asset only if the impairment loss of the related cash-generating-unit is recognized. 57 Consistent with the measurement of the recoverable amount of an asset to calculate its impairment loss, specifically the higher of its net selling price and its value in use, the impairment loss of an asset which is included in a cash generating-unit shall be recognized only if the net selling price of the asset and the recoverable amount of the cash generating-unit asset are lower than their carrying values. 58 If an asset's value in use can be determined independently from other asset's value in use, the cash generating-unit only includes the asset being reviewed. This will be the case if the value in use of an asset to be disposed of can be determined independently from other assets. This is because the value in use of such an asset primarily consists of the estimated net cash flows to be received (or to be paid) on the disposal of the asset. Goodwill and Other Assets 59 In testing a cash-generating-unit for impairment, an enterprise should identify whether goodwill and other assets that relates to this cash-generating-unit is recognized in the financial statements. If this is the case, an enterprise should: (a)

perform a ‘bottom-up’ test, that is, the enterprise should identify whether the carrying amount of goodwill and other assets can be allocated on a reasonable and consistent basis to the cash-generating-unit under review; and then, compare the recoverable amount of the cash-generating-unit under review to its carrying amount (including the carrying amount of allocated goodwill and other assets, if any) and recognize any impairment loss; and

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if, in performing the ‘bottom-up’ test, the enterprise could not allocate the carrying amount of goodwill and other assets on a reasonable and consistent basis to the cash-generating-unit under review, the enterprise should also perform a ‘top-down’ test, that is, the enterprise should identify the smallest cash-generating-unit that includes the cash-generating-unit under review and to which the carrying amount of goodwill and other assets can be allocated on a reasonable and consistent basis (the ‘larger’ cash-generating-unit); and then, compare the recoverable amount of the larger cash-generatingunit to its carrying amount (including the carrying amount of allocated goodwill and other assets) and recognize any impairment loss.

60 Where assets are grouped for recoverability assessments, it is important to include in the cash-generating-unit all assets that generate the relevant stream of cash inflows from continuing use. Otherwise, the cash-generating-unit may appear to be fully recoverable when in fact an impairment loss has occurred. As goodwill and other assets is an asset which cannot be identified directly as an asset producing future economic benefits, it is difficult to identify a cash generating-unit related to goodwill and other assets, unless the cash generating-unit is the same unit purchased at the time goodwill and other assets was recognized. Similarly, it is also difficult to identify other assets, such as assets associated with the head office, with a certain cash generating-unit on a reliable and consistent basis. To ensure that goodwill and other assets will be allocated to the appropriate cash generating-unit, an enterprise shall perform (depending on the condition described in paragraph 59) the “bottom up” test only, or the “bottom-up” and the “top down” tests simultaneously. The application of the “top down” test often means that the enterprise verifies the recoverable amount on an overall basis. 61 If goodwill and other assets can be allocated on a reasonable and consistent basis, an enterprise applies the ‘bottom-up’ test only. If it is not possible to allocate goodwill and other assets on a reasonable and consistent basis, an enterprise applies both the ‘bottom-up’ test and ‘top-down’ test. The ‘bottom-up’ test ensures that an enterprise recognizes any impairment loss that exists for a cash-generating-unit (excluding of goodwill and other assets); the ‘top-down’ test ensures that an enterprise recognizes any subsequent impairment loss , including that exists for goodwill and other assets relates to the cash-generating-unit whichthat have not can been allocated on a reasonable and consistent basis. Whenever

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it is impracticable to allocate goodwill and other assets on a reasonable and consistent basis in the ‘bottom-up’ test, the combination of the ‘bottom-up’ and the ‘top-down’ test ensures that an enterprise recognizes first, any impairment loss that exists for the cash-generating-unit excluding any consideration of goodwill and other assets; and then, any impairment loss that exists for goodwill and other assets. Because an enterprise applies the ‘bottom-up’ test first to all assets that may be impaired, any impairment loss identified for the larger cash-generating-unit in the ‘top-down’ test relates, the impairment loss of an asset is only recognized if the impairment loss of a cash-generating unit is recognized.to goodwill and other assets allocated to the larger unit. Allocation of the Impairment Loss of a Cash Generating-Unit 62 If an impairment loss is recognized for a cashgenerating-unit, it should be allocated to reduce the carrying amount of the assets of the unit in the following order: (a)

first, to goodwill and other assets allocated to the cashgenerating-unit (if any);

(b)

second, to other intangible assets for which there is no market;

(c)

third, to assets with a net selling price lower than the carrying value; and

(d)

lastly, to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset in the unit.

63 The impairment loss of a cash generating-unit shall be allocated in order of priority to the assets which are valued on the most subjective basis. The value of goodwill and other assets allocated to the cash generating-unit shall be reduced before reducing the carrying values of other assets because there are no economic benefits produced from assets which cannot be related to the generation of cash. Similarly, intangible assets which are not traded on an active market also resemble goodwill. Therefore, the carrying value of such assets shall be reduced before the carrying values of other assets are reduced. 64 There is also priority for allocation of an impairment towards assets for which their net selling price is lower than its carrying value.

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65 In allocating an impairment loss under paragraph 61, the carrying amount of an asset should not be reduced below the highest of its net selling price (if determinable), its value in use (if determinable) and zero. The excess of the impairment loss over the amount already allocated to the assets shall be allocated: (a)

first, to the asset for which the net selling price is lower than its carrying value and in proportion to the carrying values; and

(b)

next, to other assets in the cash generating-unit in proportionate to their carrying values.

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market, economic or legal environment in which the enterprise operates or in the market to which the asset is dedicated; (c)

67 An enterprise should assess at each balance sheet date whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the enterprise should estimate the recoverable amount of that asset. 68 In assessing whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist or may have decreased, an enterprise should consider, as a minimum, the following indications: External sources of information (a)

the asset’s market value has increased significantly during the period;

(b)

significant changes with a favorable effect on the enterprise have taken place during the period, or will take place in the near future, in the technological,

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market interest rates or other market rates of return on investments have decreased during the period, and those decreases are likely to affect the discount rate used in calculating the asset’s value in use and increase the asset’s recoverable amount materially;

Internal sources of information (d)

significant changes with a favorable effect on the enterprise have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, the asset is used or is expected to be used;

(e)

evidence is available from internal reporting that indicates that the economic performance of the asset is, or will be, better than expected;

Subsequent review of assets which have been decrease in value 66 Once an enterprise recognizes a loss due to the reduction in value of an asset, the enterprise should make a new estimate of the recoverable amount of the asset during the succeeding years if there are indications that the value of the asset will decrease further, or if there are indications that the impairment loss recognized during the preceding years will be less. To determine whether the value of an asset will decrease further, the enterprise shall implement the provisions in paragraphs 7 and 8.

SFAS No. 46

Assets which were presented at their values in use in prior years (f)

the actual cash flows prior to discounting are materially greater than estimated.

69 Indications of a potential decrease in an impairment loss in paragraph 68 mainly mirror the indications of a potential impairment loss in paragraph 8. Reversal of an Impairment Loss 70 Carrying amount of an asset which its impairment loss has been recognized, should be increased to its recoverable amount An impairment loss recognized for an asset in prior years should be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. An increase in the carrying amount to its recoverable amount is a reversal of impairment loss If this is the case, the carrying amount of the asset should be increased to its recoverable amount and should be recognized as income immediately in the statement of profit and loss.

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71 The increased carrying amount of an asset due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years. 72 A reversal of an impairment loss reflects an increase in the estimated service potential of an asset, either from use or sale, since the date when an enterprise last recognized an impairment loss for that asset. An enterprise is required to identify the change in estimates that causes the increase in estimated service potential. Examples of changes in estimates include an increase in the market price, an increase in the projected cash flows (prior to discounting) or a reduction in the discount rate for the asset (see attachment 1, example 3 for an illustration of the recovery of an impairment loss). 73 An impairment loss is not recoverable if there are no changes in the estimates used to measure the most recent impairment loss. For example, if the recoverable amount is an asset's value in use, if the actual cash flows do not materially differ from the original cash flow estimates (prior to the effect of discounting), and if the discount rate of the asset does not change, the impairment loss is not recoverable; even if the value in use of the asset is greater than its carrying value. This is because the present value of future cash inflows increases as they become closer. However, the service potential of the asset has not increased; the difference between asset’s recoverable amount and its carrying amount is . Therefore, an impairment loss is not reversed just because of the passage of time (sometimes called the ‘unwinding’ of the discount), even if the recoverable amount of the asset becomes higher than its carrying amount. 74 After a reversal of an impairment loss is recognized, the depreciation (amortization) charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. 75 If there is an indication that an impairment loss recognized for an asset may no longer exist or may have decreased, this may indicate that the remaining useful life, the depreciation (amortization) method or the residual value may need to be reviewed and adjusted in accordance with the SFAS applicable to the asset. 76 Any increase in the carrying amount of an asset above the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior

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years is a revaluation. In accounting for such a revaluation, an enterprise applies the SFAS applicable to the asset. 77 As an exception to the requirement in paragraph 70, an impairment loss recognized for goodwill or other intangible assets should not be reversed in a subsequent period, only if unless the impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur; and subsequent external events have occurred that which led the recognition of the impairment loss has reverse. the effect of that event. 78 SFAS No. 19, Intangible Assets, prohibits the recognition of internally generated goodwill or other intangible assets. Any subsequent increase in the recoverable amount of goodwill is likely to be an increase in internally generated goodwill., As a result, the recognized impairment loss of an asset is reversed in subsequent period only if an enterprise can provide strong support that the impairment loss is led by a specific external event and that the event has been reversed. unless the increase relates clearly to the reversal of the effect of a specific external event of an exceptional nature. Disclosures disclose:

79

For each class of assets, the financial statements should

(a)

the amount of impairment losses recognized in the income statement during the period and the line item(s) of the income statement in which those impairment losses are included; and

(b)

the amount of reversals of impairment losses recognized in the income statement during the period and the line item(s) of the income statement in which those impairment losses are reversed.

80 A class of assets is a grouping of assets of similar nature and use in an enterprise’s operations. 81 The information required in paragraph 79 may be presented with other information disclosed for the class of assets. For example, this information may be included in a reconciliation of the carrying amount of property, plant and equipment, at the beginning and end of the period, as required under SFAS 16, Fixed Assets and Other Assets.

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82 If an impairment loss for an individual asset or a cashgenerating-unit is recognized or reversed during the period, and is material to the financial statements of the reporting enterprise as a whole, an enterprise should disclose: (a)

(b)

the type of asset (cash generating-unit), the carrying value and the segment operating the asset (as defined in SFAS No. 5, Reporting Financial Information by Segments); the amount of the impairment loss recognized or reversed of assets (or cash-generating unitss),for the period, and the events and circumstances that led to the recognition or reversal of the impairment loss and the amount of the impairment loss recognized or reversed;

(c)

whether the recoverable amount of the asset (cashgenerating-unit) is its net selling price or its value in use;

(d)

if the recoverable amount is based on the value in use of the asset (cash generating-unit), the following information is disclosed: (i)

if the period exceeds five years, the period used by management to project the future short term cash flows and the reasons for using such a period;

(ii)

the discount rate used to extrapolate management’s short term projections, and the reason for using such a discount rate if the discount rate used is increasing or exceeds the average long term growth rate for products, industry and a country or countries where the enterprise operates or for the market of products produced by the asset or the cash generatingunit; and

(iii) 83

if relevant, the fact that the value in use is significantly higher than the net selling price.

XXX MISSING XXX

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83 If the value in use of an asset (cash-generating-unit) is determined and no impairment loss recognized or reversed during the period for the asset (cash-generating-unit), financial statements should disclose: a) if the period exceeds five years, the period used by management to project the future short term cash flows and the reasons for using such a period; b) the discount rate used to extrapolate management ’s short term projections, and the reason for using such a discount rate if the discount rate used is increasing or exceeds the average long term growth rate for products, industry and a country or countries where the enterprise operates of for the market of products produced by the asset or cash generating-unit; and c) the fact that the carrying value is significantly higher than the net selling price (if relevant). 84 An enterprise is encouraged to disclose key assumptions used to determine the recoverable amount of assets (cash-generating-units) during the period especially if a small change in the assumption can lead to a recognition or a significant impairment loss of the asset (cash generatingunit). 85 If the recoverable amount of an asset is its value in use, at each subsequent reporting date the enterprise must compare the actual un-discounted cash flows for the period to the estimated un-discounted cash flows that were used as the basis for the previous determination of recoverable amount. If the actual cash flows are materially less (greater) than those estimated, the enterprise must re-estimate the previous determination of recoverable amount using the actual cash flows, but considering that all other assumptions remain constant. If the use of the actual cash flows for the prior period results in the recognition or recovery of an impairment loss during those periods, the enterprise must disclose: (a)

the amount of impairment loss which should have been recognized or recovered if the actual cash flows were used to previously determine recoverable amount;

(b)

the amount of each impairment loss which was recognized or recovered during the reporting period; and

(c)

if relevant, the nature of the changes in assumptions with elaboration on why the amounts disclosed relating to (a) and (b) above are different.

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SFAS No. 48

Effective Date 86 This Statement of Financial Accounting Standard becomes effectiveoperative for the reduction in value of assets which is undertakenfinancial statements covering periods beginning on or after January 1, 2000. Earlier application is encouraged. If an enterprise applies this Standard for the financial statements covering periods beginning before January 1, 2000, the enterprise should disclose that fact.

ACCOUNTING FOR IMPAIRMENT OF ASSETS

SFAS No. 46

The appendix is illustrative only and does not form part of the standards. The purpose of the appendix is to illustrate the application of the standards to assist in clarifying their meaning. All the examples in this appendix assume the enterprises concerned have no transactions other than those described. Example 1 - Calculation of Value in Use and Recognition of an Impairment Loss (group of assets) In this example, tax effects are ignored. Background and Calculation of Value in Use At the beginning of year 1, enterprise T acquires enterprise M for Rp. 50,000. M has manufacturing plants in 3 countries. The anticipated useful life of the resulting merged activities is 15 years. Relevant data regarding the acquisition is as follows. Beginning of Yr. 1

Allocation of Fair value of Goodwill(1) purchase identifiable price assets

Activities in Country A

15,000

10,000

5,000

Activities in Country B

10,000

7,500

2,500

Activities in Country C

25,000

17,500

7,500

Total

50,000

35,000

15,000

(1)

Activities in each country are the smallest cash-generating-units to which goodwill can be allocated on a reasonable and consistent basis (allocation based on the purchase price of the activities in each country, as specified in the purchase agreement).

T uses straight-line depreciation and amortization over a 15-year life for the Country A assets and no residual value is anticipated. In the forth year, a new government is elected in Country A. It passes legislation significantly restricting exports of T’s main product. As a result, and for the foreseeable future, T’s production will be cut by 40%.

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SFAS No. 48

ACCOUNTING FOR IMPAIRMENT OF ASSETS

The significant export restriction and the resulting production decrease require T to re-estimate the recoverable amount of the goodwill and net assets of the Country A operations. The cash-generating-unit for the goodwill and the identifiable assets of the Country A operations is the Country A operations, since no independent cash inflows can be identified for individual assets. The net selling price of the Country A cash-generating-unit is not determinable, as it is unlikely that a ready buyer exists for all the assets of that unit. Recognition and Measurement of Impairment Loss To determine the value in use for the Country A cash-generating-unit (see Schedule 1), T : (a)

prepares cash flow forecasts derived from the most recent financial budgets/forecasts for the next five years (for the fifth through the ninth year) approved by management; and

(b)

estimates subsequent cash flows (for the tenth year through the fifteenth year) based on declining growth rates. The growth rate for tenth year is estimated to be 3%. This rate is lower than the average long-term growth rate for the market in Country A.; Tand

(c)

selects a 15% discount rate, which represents a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the Country A cash-generating-unit.

The recoverable amount of the Country A cash-generating-unit is Rp. 6,805: the higher of the net selling price of the Country A cashgenerating-unit (not determinable) and its value in use (Rp 6,805). T compares the recoverable amount of the Country A cashgenerating-unit to its carrying amount (see Schedule 2). T recognizes an impairment loss of Rp 4,195 (Rp. 11,000 less Rp. 6,805) immediately in the income statement. The carrying amount of the goodwill that relates to the Country A operations is eliminated before reducing the carrying amount of other identifiable assets within the Country A cash-generating-unit (see paragraph 62 of SFAS No. 48). Tax effects are accounted for separately in accordance with SFAS No. 46, Accounting for Income Taxes (see Example 2A).

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ACCOUNTING FOR IMPAIRMENT OF ASSETS

SFAS No. 48

Schedule 1. Calculation of the value in use of the Country A cashgenerating-unit at the end of the forth year Year

Longterm growth rates

5 (n=1) 6 7 8 9 10 11 12 13 14 15

3% -2% -6% -15% -25% -67%

Future cash flows

Present value Discounted factor at 15% future cash discount rate(3) flows

230(1) 253(1) 273(1) 290(1) 304(1) 313(2) 307(2) 289(2) 245(2) 184(2) 61(2)

0.86957 0.75614 0.65752 0.57175 0.49718 0.43233 0.37594 0.32690 0.28426 0.24719 0.21494

Value in use

1,000 955 900 830 755 675 575 470 350 226 65 6,805

(1)

Based on management’s best estimate of net cash flow projections (after the 40% cut). Based on an extrapolation from preceding year cash flow using declining growth rates. (3) The present value factor is calculated as k = 1/(1+a) n, where a = discount rate and n = period of discount.

ACCOUNTING FOR IMPAIRMENT OF ASSETS

SFAS No. 46

Example 2 - Deferred Tax Effects of the Recognition of an Impairment Loss 2A - Deferred Tax Effects of the Recognition of an Impairment Loss for a group of asset Use the data for enterprise T as presented in Example 1, with supplementary information as provided in this example. At the end of the forth year, the tax base of the identifiable assets of the Country A cash-generating-unit is Rp. 5,500. Impairment losses are not deductible for tax purposes. The tax rate is 40%. The recognition of an impairment loss on the assets of the Country A cashgenerating-unit reduces the taxable temporary difference related to those assets. The deferred tax liability is reduced accordingly. In accordance with SFAS No. 46, Accounting for Income Taxes, no deferred tax relating to the goodwill was recognized initially. Therefore, the impairment loss relating to the goodwill does not give rise to a deferred tax adjustment.

(2)

End of the forth year

Identifiable Impairment Identifiable assets before loss assets after impairment impairment loss loss

Schedule 2. Calculation and allocation of the impairment loss for the Country A cash-generating-unit at the end of the forth year End of the forth year

Goodwill

Historical cost

Identifiable assets

Total

5,000

10,000

15,000

(1,335)

(2,665)

(4,000)

Carrying amount

3,665

7,335

11,000

Impairment Loss

(3,665)

Accumulated depreciation / amortization (Years 1 -4)

Carrying amount after impairment loss

0

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(530) 6,805

(4,195) 6,805

Carrying amount (Example 1)

7,335

(530)

Tax base

5,500

Taxable temporary difference

1,835

(530)

1,305

Deferred tax liability at 40%

730

(2,100)

520

-

6,805 5,500

In accordance with SFAS No. 46, Accounting for Income Taxes, no deferred tax relating to the goodwill was recognized initially. Therefore, the impairment loss relating to the goodwill does not give rise to a deferred tax adjustment.

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SFAS No. 48

ACCOUNTING FOR IMPAIRMENT OF ASSETS

SFAS No. 46

2B - Recognition of an Impairment Loss Creates a Deferred Tax Asset

Example 3 - Reversal of an Impairment Loss

An enterprise has an asset with a carrying amount of Rp. 5,000. Its recoverable amount is Rp. 3,250. The tax rate is 30% and the tax base of the asset is Rp. 4,000. An impairment losses are not deductible for tax purposes. The effect of the impairment loss is as follows:

Use the data for enterprise T as presented in Example 1, with supplementary information as provided in this example. In this example, tax effects are ignored. Background

Before impairment

Effect of impairment

Carrying amount

5,000

Tax base

4,000

Taxable (deductible) temporary difference

1,000

(1,750)

(750)

300

(525)

(2255)

Deferred tax liability (asset) at 30%

(1,750)

After impairment

-

3,250 4,000

In accordance with SFAS No. 46, Accounting for Income Taxes, the enterprise recognizes the deferred tax asset to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

In the sixth year the government is still in office in Country A, but the business situation is improving. The effects of the export laws on T’s production are proving to be less drastic than initially expected by management. As a result, management estimates that production will increase from 60% to 80%.by 30%. This favorable change requires T to reestimate the recoverable amount of the net assets of the Country A operations (see paragraphs 68 - 69 of SFAS No. 48, Impairment of Assets). The cashgenerating-unit for the net assets of the Country A operations is still the Country A operations. Calculations similar to those in Example 1 show that the recoverable amount of the Country A cash-generating-unit is now Rp. 8,550. Reversal of Impairment Loss T compares the recoverable amount and the net carrying amount of the Country A cash-generating-unit. T increases the carrying amount of the Country A identifiable assets by Rp. 430 (see Schedule 3), i.e. up to the lower of recoverable amount (Rp. 8,550) and the identifiable assets’ depreciated historical cost (Rp. 6,000) (see Schedule 2). This increase is recognized in the statement of profit and loss. The impairment loss on goodwill is not reversed because the external event that led to the recognition of the impairment loss on goodwill has not reversed. The legislation that significantly restricts exports of T’s product is still in place, even though its effect is not as severe as expected.

Schedule 1. Calculation of the carrying amount of the Country A cashgenerating-unit at the end of the sixth year Goodwill

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Identifiable

Total

ACCOUNTING FOR IMPAIRMENT OF ASSETS

SFAS No. 48

SFAS No. 46

Schedule 2. Determination of the depreciated historical cost of the Country A identifiable assets at the end of the sixth year

assets End forth year (Example 1) Historical cost

ACCOUNTING FOR IMPAIRMENT OF ASSETS

5,000

10,000

15,000

End of the sixth year

Accumulated depreciation/ amortization (4 years)

(1,335)

(2,665)

(4,000)

Historical cost

10,000

Impairment loss

(3,665)

(530)

(4,195)

Accumulated depreciation (Rp666 * 6 years)

(3,996)

Carrying amount impairment loss

after 0

6,805

6,805

../.. Schedule 1. Calculation of the carrying amount of the Country A cashgenerating-unit at the end of 20X6 (continued) Goodwill

Identifiable assets

Total

End of the sixth year

Identifiable assets

Depreciated historical cost

6,000

Carrying amount (Schedule 1)

5,570

Difference

430

Schedule 3. Carrying amount of the Country A assets at the end of the sixth year End of the sixth year

Additional depreciation (2 years) (1)

-

(1,235)

(1,235)

Carrying amount

0

5,570

5,570

Recoverable amount

8,550

Excess of recoverable amount over carrying amount

2,980

(1)

After recognition of the impairment loss at the end the forth year, T revised the depreciation charge for the Country A identifiable assets (from Rp. 666 per year to Rp. 618 per year), based on the revised carrying amount and remaining useful life (11 years).

Goodwill

Gross carrying amount

Total

5,000

10,000

5,000

Accumulated amortization

(1,335)

(3,900)

(5,235)

Accumulated impairment loss

(3,665)

(530)

(4,195)

Carrying amount

0

5,570

5,570

Reversal of impairment loss

0

430

430

Carrying amount after reversal of impairment loss

0

6,000

6,000

T increases the carrying amount of the Country A identifiable assets by Rp. 430 (see Schedule 3), i.e. up to the lower of recoverable amount (Rp. 8,550) and the identifiable assets’ depreciated historical cost (Rp. 6,000) (see Schedule 2). This increase is recognized in the statement of profit and loss. The impairment loss on goodwill is not reversed because the external event that led to the recognition of the impairment loss on goodwill has not reversed. The legislation that significantly restricts exports of T’s product is still in place, even though its effect is not as severe as expected.

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Identifiable assets

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