Asset Impairment: A Study on MFRS136 and Denko Industrial Corporation Berhad

This report discusses the standard MFRS136 related to asset impairment and how Denko Industrial Corporation Berhad, a Malaysian investment holding company, complies with the disclosure requirements. It also covers recognition and measurement of impairment losses. The report includes a description of the company, MFRS136 items of disclosure, disclosure compliance and format of the company, and recognition and measurement. The report concludes with a summary and references.

RUNNING HEAD: ACCOUNTING
asset impairment

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Contents
Introduction...........................................................................................................................................2
Description of the Company..................................................................................................................2
MFRS136 items of disclosure...............................................................................................................3
Disclosure compliance and format of the company...............................................................................5
Recognition and measurement...............................................................................................................9
Summary.............................................................................................................................................12
Conclusion...........................................................................................................................................13
References...........................................................................................................................................14

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Introduction
This report contains detail information about the standard MFRS136 which is related to
impairment of assets. It also shows the manner in which the impairment is been disclosed and
presented in the annual report of the selected company that operates in Malaysia. The
company is Denko Industrial which is listed on Bursa Malaysia and is an investment holding
company. The later part of the report discusses the requirements of disclosure and the format
followed by Denko for reporting its impairment exercise. In addition to that, the recognition
and measurement of MFRS136 is also discussed. All the findings of the report are then
presented in nutshell under the head summary, followed by the conclusion. The discussion
made in the report is been summarized in the last part of the report and is presented in a
concise manner.
Description of the Company
Denko Industrial Corporation Berhad is an investment holding company which operates in
the country named Malaysia. It was incorporated in 1989 under the name Ecodynamic (M)
Sdn Bhd. Later on it change the name to Denko Industrial and in 1990, it was transformed
into a public listed company and get listed on Second Board of Kuala Lumpur Stock
Exchange- Bursa Malaysia in 1991, the year when the history of expansion began for Denko
(Denko. 2018).
The segments of the company include snack food, plastic and moulding and others. Snack
food segment is involved in the trading of food stuff and consumer goods. The section
operates as a wholesaler and trader provide consumable food items across the country.
Another segment named as plastic and moulding is engaged in manufacturing or designing of
plastic moulded elements and products. These components are later sold in both domestic and
international markets (Reuters. 2018). The other divisions of the company deals with the

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investment holding. Denko also provides management services to its customer and operates
in countries other than Malaysia, popularly known as United States of America, Asia –
Pacific and Europe. There are many subsidiaries of the company that are engaged in
providing food stuff and plastic parts. Winsheng Plastic Industry Sdn. Bhd., PT. Winsheng
Plastic and Tooling Industry and Lean Teik Soon Sdn. Bhd are the subsidiaries involved in
the manufacturing of plastic components and tooling fabrication along with the selling of
consumable goods (Bloomberg. 2018).
The key products of the firm are vacuum foams, packing materials, lease property, plastic
raw materials and pipes, garments made up of polyester, cotton and many other fabrics. It
also produces various types of chemicals and semi-finished products. Talking about the
financial highlights, the revenue of Denko has increased to RM 102 million in 2017 as
compare to the previous year. However, despite of an upsurge in sales, the company has
reported a net loss amounted to RM 11,289 thousands in year 2017 as compare to the profit
made prior to that (Bloomberg. 2018). This has eventually resulted in the deduction of
shareholders’ funds from RM 56 million to RM 45 million. In addition to that, the EPS of the
company was negative due to the loss and the amount of total assets has also reduced in 2017.
Overall, it can be said that Denko needs to improve its performance in order to enjoy growth
and success. As the company is publically listed on Bursa Malaysia, it is traded with a ticker
of DICM.KL (Reuters. 2018).
MFRS136 items of disclosure
Malaysian Accounting Standards Board (MASB) developed and introduced a framework
which consists of certain standards which are required to be followed by every Malaysian
company listed on Bursa Malaysia. The framework is named as the Malaysian Financial
Reporting Standards (MFRS). Adopting such framework is considered as a significant
milestone in the capital market as it enables the companies to fully comply their financial

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statements with the International Financial Reporting Standards (Lhaopadchan, 2010). From
the pool of guidelines, there is one standard named as MFRS136 which basically deals with
asset impairment. According to this standard, an asset is been impaired by the company when
its carrying amount is irrecoverable from its continuous use or sale. The entity is required to
report the impaired asset, if any. It has to compare the recoverable amount of that asset with
its carrying amount in order to determine the value of impairment (Reinstein and Lander,
2004).
The MFRS 136 states the recognition, disclosure and measurement for the impairment of
assets covered by MFRS 116 and 117 along with the PPE. In addition to that, intangible
assets covered in the standard MFRS 138 and goodwill (Devalle and Rizzato, 2017). The
items of disclosure requirements under MFRS136 that are represented in the annual report of
Denko Industrial Corporation are:
1. The amount of impairment losses is required to be disclosed which is documented in
the income statement of the company in its annual report.
2. Reversal of impairment loss is also recognized in the income statement of during the
period.
3. Another requirement is to recognize the nature of asset along with the amount of
impairment loss.
4. Disclosing the circumstances and situations that resulted in reversal and recognition
of loss on impairment.
5. Disclosure of the basis on which the net selling price, discount rate used and value in
use is determined (Ernst and Young. 2010).
The above items are the disclosure requirements of the Malaysian standards MFRS 136 and
all of them are been properly presented in the annual report of Denko for the year 2017. The

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company has reported impairment loss on trade and other receivables, property, plant and
equipment and on investment in subsidiaries (Abuaddous, Hanefah and Laili, 2014). In
addition to this the amount is been recognized in the statement of comprehensive income and
also if in future the value reduces will result in reversal of the previous loss shown in the
statement. Also while reporting the same, Denko has disclose about the nature of asset,
whether financial or non-financial. In investment in subsidiaries, the loss amount is equal to
RM 22,110,594 in 2017 and in 2016 it was RM 15,468,660. In PP&E, the loss amounted to
RM 4,168,596 and the reversal of loss on trade receivables was RM 176,418 was reported in
the financial year 2017. The total impairment of assets was amounted to RM 4.2 million in
2017 (Denko. 2017).
Disclosure compliance and format of the company
The accounting policies of Denko are in proper compliance with all the requirements and
provisions of international Financial Reporting Standards (IFRS), Malaysian Financial
Reporting Standards (MFRS) and the Companies Act 2016 applicable in Malaysia. The
company has applied various Malaysian standards for reporting their financial information.
Out of them, MFRS 136 is been applied for impairment of assets and MFRS 107 is applied
for disclosure initiative. Provided below is the sample of how Denko has disclosed the
impairment of assets.

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Above are the abstracts from the annual report of Denko Company and the sample showing
the format in which, the firm has represented or disclosed the information about the asset
impairment. Denko Industrial discloses all the information about impairment under the
section notes to financial statements. It contains the reasons identified for impairment, assets
that got impaired and their evaluation. According to the disclosure compliance, company is

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required to assess the factors that indicates the chances of impairment and should report the
same in its annual reports. Following indications are there as prescribed by the standard,
which requires impairment.
External sources
1. The decrease in the market value of the asset during a specific period is more than the
estimated reduction due to normal usage.
2. When market capitalization of an asset is more than its carrying amount.
3. The significant changes affecting the legal, technological, economic environment and
market, to which a particular asset is associated.
Internal sources
1. Availability of evidence related to the damage or obsolescence of a physical asset.
2. The presence of the evidence that the asset’s economic performance will get worse
than its current performance in the near future.
3. When the recoverable amount is higher than value in use and fair value net of selling
expenses.
4. Changes in the operational plans or strategy of the organization such as discontinuing
an operation or disposing an asset.
All the above indications do call for asset impairment and are required to be disclosed by the
companies in their annual report. Denko Industrial discloses the assets impaired by it during
the financial year 2017. It also shows the reasons for doing in the same in the section named
as impairment. Apart from the indications, the loss on impairment recognized by Denko is
also explained in the above abstracts of the company. The above listed five items of
disclosure are been clearly disclosed in the annual report of Denko Industrial for the year

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2017. Apart from the items, the reasons for recognizing the impairment losses is also clearly
represented in the report of the company.
The above abstract discloses the impairment of property, plant and equipment done by
Denko. It shows the area of focus and the reason for focusing the same. It has followed
certain procedures to figure out the amount of value-in-use and details of budgets. In addition
to that, the impairment losses on PPE, receivables and investment in subsidiaries are clearly
shown in the cash flow statement. Moreover, all the calculation performed in relation to
impairment is been clearly disclosed in notes to financial statements.
Recognition and measurement
The requirements for recognizing and measuring the amount of impairment are stated out in
MFRS 136 which is been applicable by the companies for impairment of assets. According to
the standard, a tangible asset having a long life is impaired when the entity is not able to
recover or recoup the carrying amount of that asset neither through selling it nor by using it.
Companies are required to review the indicators related to the assets on annual basis in order

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to know about the probability or chances of impairment (Rahman and Mohamed, 2018). This
is how the entities recognize the assets which are required to be impaired. The above
discussed internal and external sources of indications are been kept in mind during the
process of review. In case if any of the indications is present, then the company is required to
figure out the estimate of recoverable amount. Also the assessment of each asset is required at
the end of each reporting period. In case of intangible assets, their ability to generate future
economic benefits is highly subject to the uncertainty. In that case, the standard allow the
entities to conduct an impairment test on an annual basis (Che Azmi and English, 2016)
Apart from the above discussed internal and external sources, the indication by which
company can recognize impairment for the investment in subsidiary is by recognizing the
amount of dividend received from that investment with the following evidence:
 Investments’ carrying amount in separate financial statements is more than the
carrying amount in the consolidated financial statements of net assets; or
 The amount of dividend is more than the total comprehensive income of the
subsidiary company, in the period when the dividend is declared (IFRS. 2017).
Talking about impairment loss of individual asset, it is recognized in the income statement of
the company only when the recoverable value is less than the carrying amount. The entity
must immediately recognize the loss in income statement. However, previously if the asset is
evaluated and there is a credit balance of the same in the revaluation account, then the
amount of loss on impairment must be taken to revaluation amount (Lobo, et. al., 2017).
After recognition, the same is been calculated by subtracting the recoverable amount of the
asset from its carrying amount. The recoverable amount of the asset is higher of the
following:
 Value-in-use.

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 Net selling price
Value in use is calculated by aggregating the present values of the cash flows that are
estimated by making a continuous use of asset or from its disposal. NSP is equal to the
amount at which the particular asset is been sold in the market. The asset’s value carried out
by the balance sheet of the firm is known as the carrying amount. However, the value of
impaired loss can be reversed in the cases where the recoverable amount is more than the
carrying amount (Schwarzbichler, Steiner and Turnheim, 2018). The reversal amount must be
recognized in the statement of financial performance of the company. However, if the loss on
impairment is already charged to revaluation account, then such reversal income should also
be recognized in the revaluation reserves by writing back the loss which was earlier
recognized. In addition to that, after the reversal, the amount of depreciation and amortization
should be readjusted for the future periods (Shaari, Cao and Donnelly, 2017). According to
the standard, the guidelines for measurement and recognition of impairment loss of individual
asset is same for cash generating units also. It prescribes the manner in which the carrying
amount of CGUs can be identified and the loss of impairment can be allocated between the
assets of unit.
Above discussion shows the standards of recognizing and measuring the impairment value of
the assets. It shows how companies calculate the amount of impairment losses, recoverable
figure and carrying amount of an asset which is to be impaired. Denko Industrial has
considered all the requirements of measurement and recognition of impairment as prescribed
by MFRS 136 in its annual report.
Summary
From the above discussion, following are the key points which explains the whole
information discussed above in a nutshell.

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 Malaysian companies operating their business in Malaysia are required to comply
with all the requirements of the Malaysian standard named as MFRS 136 –
Impairment of assets for the purpose of getting their assets impaired.
 All the items of disclosure, measurement and recognition must be properly presented
in the annual report of the companies.
 Denko Industrial Corporation is the one which has applied MFRS 136 in its financial
reporting and has followed all the requirements of the standard.
 The company operates through various segments which are related to making and
moulding plastic materials, offering snack food and one segment operates as an
investment holding company.
 The key products of the company are packing materials, vacuum foams, garments
made up of cotton and other fibres.
 Denko properly presents all the items of disclosure in its recent annual report. It
shows all the information in its notes to financial statements.
 The amount of impairment losses and the circumstances that causes impairment are
disclosed in the annual report.
 Recognition and measurement requirements of MFRS 136 are discussed above.
 The loss on impairment is measured only when the assets’ recoverable amount is less
than its carrying amount.
 Higher of value in use and net selling price determines the recoverable amount of the
asset.
 Carrying value means the figure at which the asset is been carried out in the balance
sheet of the company.
 Overall, it is very important for Denko to comply with all the requirements of MFRS
136.

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Conclusion
The above report concludes that it is very much necessary for the Malaysian companies to
follow all the guidelines and requirements described by the standard which is applicable for
impairment of assets. The amount of impairment loss and other values must be calculated as
per MFRS 136 and should be disclosed in the annual report of the company. The treatment of
the same must also be presented.
References
Abuaddous, M., Hanefah, M.M. and Laili, N.H., (2014) Accounting standards, goodwill
impairment and earnings management in Malaysia. International Journal of Economics and
Finance, 6(12), p.201.

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Bloomberg. (2018). Denko Industrial Corporation Bhd. [Online]. Available at:
https://www.bloomberg.com/quote/DEN:MK [Accessed 16 July 2018].
Che Azmi, A. and English, L.M., (2016) IFRS Disclosure Compliance in Malaysia: Insights
from a Small‐sample Analytical Study. Australian Accounting Review, 26(4), pp.390-414.
Denko. (2017). Denko industrial corporation Berhad Annual Report. [Online]. Available at:
http://www.denko.com.my/data/cms/images/1502779902_denko%20annual%20report
%202017.pdf [Accessed 16 July 2018].
Denko. (2018). Corporate History. [Online]. Available at:
http://www.denko.com.my/usr/pagesub.aspx?pgid=29 [Accessed 16 July 2018].
Devalle, A. and Rizzato, F., (2017) IFRS 3, IAS 36 and disclosure: The determinants of the
quality of disclosure. GSTF Journal on Business Review (GBR), 2(4).
Ernst and Young. (2010). Impairment accounting – the basics of IAS 36 Impairment of
Assets. [Online]. Available at:
http://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36
_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed 16 July
2018].
IFRS. (2017). IAS 36 Impairment of Assets. [Online]. Available at:
http://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets [Accessed
16 July 2018].
Lhaopadchan, S. (2010). Fair value accounting and intangible assets: Goodwill impairment
and managerial choice. Journal of Financial Regulation and Compliance, 18(2), 120-130.

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Lobo, G.J., Paugam, L., Zhang, D. and Casta, J.F., (2017) The effect of joint auditor pair
composition on audit quality: Evidence from impairment tests. Contemporary Accounting
Research, 34(1), pp.118-153.
Rahman, A.A. and Mohamed, A.S., (2018) Investigating the Early Implementation of MFRS
136 Disclosure among Top 50 Firms in Malaysia. Asian Journal of Accounting and
Governance, 8, pp.59-76.
Reinstein, A., & Lander, G. H. (2004). Implementing the impairment of assets requirements
of SFAS No. 144: An empirical analysis. Managerial Auditing Journal, 19(3), 400-411.
Reuters. (2018). Denko Industrial Corporation Bhd (DICM.KL). [Online]. Available at:
https://www.reuters.com/finance/stocks/companyProfile/DICM.KL [Accessed 16 July 2018].
Schwarzbichler, M., Steiner, C. and Turnheim, D., (2018) Impairment of Assets (Fixed
Assets and Goodwill). In Financial Steering (pp. 343-370). Springer, Cham.
Shaari, H., Cao, T. and Donnelly, R., (2017) Reversals of impairment charges under IAS 36:
evidence from Malaysia. International Journal of Disclosure and Governance, 14(3), pp.224-
240.