IAS 36 Impairment of Assets

Submitted by – Mukesh Thakur

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What is impairment

Impairment is diminution in the value of assets otherwise than by depreciation

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Objective of the standard

To state the carrying amount of the assets at no more than its recoverable amount.

Implications

The standard has deep impact on capital intensive industries that capitalize its assets more than the current requirement like steel factories, fibre and glasses, textiles etc.

This standard does also have adverse impact on poor performing industries.

However, there will be no impact on service industries and good performing industries.

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Scope

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Impairment of Asset

An entity should assess at end of each reporting period whether there is any indication that an asset may be impaired.

If any indication exists, the entity will estimate the recoverable amount of the asset.

However, the following assets will be tested annually even if no indicator of impairment exists

In case of intangible assets having indefinite life,

intangible asset not yet available for use and

Goodwill

Annual impairment tests for these assets can be performed at any time during the financial year provided that the testing is performed at the same time in subsequent periods.

Different assets may be tested at different times of the year.

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Impairment Test

If the recoverable amount of asset is less than its carrying amount

The asset is impaired.

The asset’s carrying amount will be reduced to recoverable amount.

Impairment Loss will be Debited and assets will be credited.

Should an impairment test be performed at interim balance sheet date?

Yes at each reporting date including interim balance sheet dates an entity is required to assess whether there is any indication that assets may be impaired.

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Example

Case 1 Rs. Case 2 Rs.

Cost 1000 Cost 1000

Accumulated Depreciation 400 Accumulated Depreciation 400

Carrying Amount 600 Carrying Amount 600

Recoverable Amount 900 Recoverable Amount 400

The Asset is not impaired The asset is impaired

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Recoverable Amount

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Impairment of Revalued Assets

IAS 16 states, where entity chooses revaluation model, the revalued amount of its property, plant and equipment should not differ materially from fair value.

Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s length transaction.

IAS 36 states that an entity should reduce the carrying amount of its assets to recoverable amount.

Recoverable amount is higher of fair value less costs of disposal and asset’s value in use.

Hence, whether impairment test of revalued asset is required depends on the basis of determining fair value.

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Impairment of Revalued Assets

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Indicators

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External indicators

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Example

Fact

A branch of a business in southern gurgaon located close to a chemical factory, was largely destroyed in an explosion. The insurance assessors are examining the damage and management is confident that the full cost of rebuild plus compensation for the loss of profit will be received.

Is the asset impaired? Given that it will be replaced.

Solution

Yes, the asset is impaired as it has been destroyed. The replacement will be a new asset. The costs of construction are capitalised when it is built. Insurance proceed for the rebuilding costs will be credited to income. The impairment loss is charged in current period.

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Determining Net selling price

Net Selling Price (or NRV) is

Fair Value (-) cost of disposal

Evidence of Fair Value

Binding sale agreement

Market price in active market

Best information available

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Value in use

Present value of estimated cash flows expected to arise from

Continuing use of the assets and

Disposal at the end of its useful life.

Estimates of future cash flow should include

Cash inflows from continuing use of the asset

Cash outflows that

Are necessarily incurred to generate cash inflows and

Can be directly attributable or allocated on a reasonable basis to assets.

Net cash flows for the disposal of asset at the end of its useful life.

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Value in Use - Projection of Cash flow

Projection of cash flows should not include

Cash inflows and outflows from financing activities;

Income tax receipts and payments

(since these are not considered in determining discount rate)

Estimated future cash flow should not include cash flows that are expected to arise from

A future restructuring to which the entity is not yet committed or

Improving or enhancing assets performance

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Value in Use - Projection of Cash flow

Based on

management’s best estimate of economic conditions over the remaining useful life of asset;

most recent financial budgets or forecasts approved by management.

These projections should cover a maximum period of five years unless a longer period is justified.

Cash flows in foreign currency

Estimate cash flow in original currency

Discount the same using appropriate discount rate

Convert the present value using spot rate at the time of calculation of value in use.

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Discount Rate

Discount rate should be Current market assessment of the time value of money and the risks specific to the asset

independent of capital structure and financing of asset

pre-tax rate of interest

When asset-specific rate not available

capital asset pricing model, incremental borrowing rate, other market borrowing rates

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Impairment Recognition and Treatment

Recoverable amount < Carrying amount

Reduce carrying amount upto recoverable amount.

Impairment loss Profit and Loss A/C

In case of revalued assets under IAS 16 impairment loss will be treated as revaluation decrease.

If Impairment Loss > carrying amount Recognize liability if required by another standard.

Depreciation will be charged on revised carrying amount.

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DetermineDetermineRecoverable Recoverable

AmountAmount

Assess Assess Impairment Impairment conditionsconditions

ImpairmentImpairmentConditionCondition

Exists?Exists?

IdentifyIdentifyAssets/CGUAssets/CGU

Carrying AmountCarrying Amount

>>Recoverable Amount?Recoverable Amount?

No No impairment impairment

ReviewReview

Binding SaleBinding SaleAgreementAgreement

Value in useValue in useNet Selling PriveNet Selling Prive

NONO

Higher ofHigher of

Active MarketActive Market Best EstimateBest Estimate

Cash FlowCash Flow Discount RateDiscount Rate

YESYES

No No impairment impairment

ProvisionProvision

Follow up with Annual Follow up with Annual Impairment ReviewImpairment Review

NONO

YESYES

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Example

Cost 1,000

Accumulated depreciation 400

Carrying amount 600

Net selling price 200

Value in use 100

Recoverable amount 200

Impairment loss 400

Revised carrying amount 200

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Cash Generating Unit

After impairment test, recoverable amount should be calculated for individual asset.

If it is not possible to estimate recoverable amount of individual, estimate recoverable amount of Cash Generating Unit (CGU) to which the asset belongs.

CGU is smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows of other assets or group of assets.

Example

East India Minerals P. Limited owns a private railway line to support its mining activities. The private railway could only be sold for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from other assets of mine.

Recoverable amount of CGU i.e. mine as a whole will be estimated.

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Cash Generating Unit

Allocate of Impairment Loss to assets in following order

Goodwill allocated to the CGU

Other assets on pro-rata basis

Carrying amount of any asset will not be less than the highest of

Its Net selling price

Its value in use and

Zero

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Impairment of Goodwill

Goodwill acquired in business combination should be allocated, from the acquisition date to each of the acquirer's CGU that is expected to benefit from the synergies of the combination.

Even if assets and liabilities of the aquiree are assigned to those units or group of units to which the goodwill is so allocated.

Such allocated unit should

Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes and

Not be larger than an operating segment as per IFRS 8.

If initial allocation is not completed before the end of financial year in which business combination took place, it will be completed within one annual period from the acquisition date.

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Impairment of Goodwill

Where financial statement includes goodwill in relation to CGU the entity should

Perform ‘Bottom up Approach’ i.e.

Identify if goodwill can be allocated to the CGU and

Compare recoverable with carrying (including goodwill) and recognize impairment loss.

If carrying amount of goodwill cannot be allocated on a reasonable and consistent basis, then also perform ‘Top down Approach’ i.e.

Identify smallest CGU on which goodwill can be allocated and

Compare recoverable amount of larger CGU to its carrying amount (including goodwill) and recognize Impairment loss.

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Example

X Ltd. has 3 units A, B and C. Goodwill appearing in books is Rs. 40 millions and cannot be identified and allocated to any unit.

Rs. Crores

Determine impairment required.

Assets A B C X Ltd.

Carrying Amount 150 100 35 285

Recoverable Amount 115 105 40 260

Goodwill 40

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Solution

Bottom up for A Rs. CroresCarrying Amount 150Recoverable Amount 115Impairment Loss (35)

Top Down

This 30 Crores will be adjusted with Carrying amount of Goodwill of Rs. 40 Crores. Total Impairment Loss = 35 + 30 = 65 Crores.

A B C GW X

Carrying Amount 150 100 35 40 325

Impairment Loss in Bottom up test 35 - - - (35)

Carrying amount after Bottom up 115 100 35 40 290

Recoverable Amount 260

Impairment Loss (290-260) 30

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Example

X Ltd. has 3 units A, B and C. Goodwill appearing in books is Rs. 40 millions and can be identified and allocated to A and B.

Rs. Crores

Determine impairment required.

Assets A B C X Ltd.

Carrying Amount 150 100 35 285

Recoverable Amount 115 105 40 260

Goodwill 40

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Solution

Bottom up for A Rs. Crores

Carrying Amount 150

Recoverable Amount 115

Impairment Loss (35)

Top Down for A & B

Carrying Amount (115 + 100 + 40) 255

Recoverable Amount (260 – 40) 220

Impairment Loss (35)

This Rs. 35 crores will be adjusted from goodwill of Rs. 40 crores. Remaining goodwill of Rs. 5 crores will be carried forward. Total impairment loss = 70 Crores.

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Corporate Assets

Assets other than goodwill that contribute to the future cash flows of CGU under review and other CGU e.g. Building of Headquarter, EDP equipment etc.

Same treatment as goodwill.

If carrying amount of the corporate asset can be allocated to CGU, apply bottom up Approach.

If carrying amount of the corporate asset cannot be allocated to the CGU, apply both bottom up and top down test.

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Reversal of Impairment Loss

Impairment loss recognised in prior years should be reversed if there is indication that such losses does not exists any long.

Reversal amount should be limited to earlier impairment losses recognised as per IAS 36.

Indicators

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Accounting Treatment of Reversal of impairment Loss

Goodwill – Impairment Loss will not be reversed.

Revalued Assets – Reversal will be treated as revaluation increase under IAS 16.

Other Assets – Reversal will be recognised in Profit and Loss Account immediately.

Further depreciation will be charged on revised carrying amount.

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Disclosures

1. Impairment Losses/reversals recognised in

Profit and loss account and Equity directly.

2. Line items in the income statement in which impairment losses and reversals have been recognised.

3. Where the entity applies Segment Reporting as per ‘IFRS 8’ For each reportable segment

The amount of impairment losses/reversals recognised in Profit and Loss Account Equity directly

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Disclosures

4. For each material impairment loss recognised/reversed

The events and circumstances that led to recognition of impairment loss or reversals.

The amount of Impairment Loss recognised or reversed.

For each individual asset

The nature of the asset and

The segment to which the asset belongs

For each CGU

A description of CGU

The segment to which CGU belongs

Change in the composition of CGU, if any with reasons.

The fact that recoverable amount of asset is its fair value less cost of sales (NSP) or its value in use.

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Disclosures

If recoverable amount is NSP, the basis used to determine NSP.

If recoverable amount is Value in use, the discount rate used in current estimate and previous estimate of value in use.

5. For aggregate of Impairment Losses/reversal not covered in 4 above

The main classes of assets affected by impairment losses/ reversals.

The main events and circumstances that led to the recognition of impairment losses and reversals of impairment losses.

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Comparison with Indian GAAP

IAS 36 AS 28

Timing of impairment review

At each reporting date, an entity should assess whether any indication exists that an asset may be impaired. If any such condition exists, the entity should estimated Recoverable Amount.

In case of Goodwill, intangible assets with indefinite useful life, intangible assets not yet available for use and goodwill will be tested even if no indication exists.

At each Balance Sheet date, an entity should assess whether any indication exists that an asset may be impaired. If any such condition exists, the entity should estimated Recoverable Amount.

In case of intangible assets with amortization period more than 10 years and intangible assets not yet available for use will be tested even if no indication exists.

Recoverable Amount is higher of Fair Value less cost to sale and value in use.

Similar with different terminology. Recoverable Amount is higher of Net Selling Price and value in use.

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IAS 36 AS 28

Reversal of Impairment Loss

Reversal of impairment loss on goodwill is not permitted.

Impairment loss on goodwill should not be reversed unless:-Impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur and-Subsequent external event have occurred that reverse the effect of that event.

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Thank you