IAS 36: Impairment of Assets

About

  • The principles of IAS 36 are based on the qualitative characteristics in The Conceptual Framework.
  • IAS 36 covers Impairment losses and disclosures for
  • IAS 36 aims to ensure that an entity does not carry assets in its financial statement at values greater than their recoverable amounts.
  • IAS 36 does not apply to certain assets such as

If an asset is carried at a value greater than its recoverable amount, an Impairment loss should be recognized.

investments in subsidiaries

joint ventures

Tangible and Intangible assets

associates

construction contracts

deferred tax assets

inventories

More About IAS 36

  • Impairment of Assets Definitions:
  • Costs of disposal:
  • Value in use:
  • Fair value:
  • Carrying amount:
  • Recoverable amount:
  • Fair value differs from value in use
  • Impairment Loss:

the difference between the Carrying Amount and Recoverable Amount of an asset

Higher of Fair Value Less Costs of Disposal and Value in Use

Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Direct Incremental Costs attributable to the Disposal of the asset

Present value of Future Cash Flows expected to be derived from an asset

Amount at which an asset is recognised in the statement of financial position after deducting any accumulated depreciation or amortisation and accumulated impairment losses thereon

  • Former is a reflection of assumptions made by market participants, while the latter reflects entity-specific factors
  • Impairment Tests:

An entity must assess at the end of each reporting period whether there are indications of impairment and calculate recoverable amounts of particular assets if material

An entity must also annually test intangible assets with indefinite useful life, intangible assets not yet available for use, and goodwill acquired in a business combination for impairment

IAS 36 provides indicators of likely impairment but doesn't mandate an annual assessment of all assets

Materiality doesn't play a role in compulsory impairment tests, but it will play a role in assessing normal indications of impairment

  • Indicators of Impairment:

Entity should consider at minimum the following indicators in assessing whether assets are likely to be impaired:

Obsolescence or physical damage

Legal or economic changes

Changes in market conditions

Negative operating results

Internal factors

Measurement of recoverable Amount and Recognition of Impairment Loss

When an Asset is Impaired, the Carrying Amount must be written down to its Recoverable Amount.

An Impairment Loss is recognized in the profit or loss section of the statement of profit or loss and other comprehensive income, or through other comprehensive income in the statement of profit or loss and other comprehensive income.

Recoverable amount is the Higher of an Asset's Fair Value Less Costs to Sell and its Value in Use.

⭐The Impairment Loss can be offset against the Revaluation Surplus relating to the asset.

An asset is Impaired when its Carrying Amount is Higher than its Recoverable Amount.

Fair Value LESS Costs of disposal

  • Fair Value less Costs of Disposal is the amount received from selling an asset minus the direct incremental costs directly attributable to the disposal of the asset.
  • Costs of disposal to bring the asset into a condition for sale include
  • Fair value is the price received or paid to transfer an asset or liability in an orderly transaction between market participants at the measurement date.

If an Asset is held for Disposal, the Recoverable Amount is deemed to be the fair value less costs of disposal.

transaction taxes

cost of removing the asset

stamp duty

direct incremental costs

legal costs

Calculation of value in use

Value in use involves Estimating Future Cash Flows and Applying an Appropriate Discount Rate.

  • Cash flow projections must be based on reasonable and supportable assumptions approved by management.
  • Cash flow projections must cover a maximum of 5 years and exclude estimated future cash inflows or outflows from future restructurings or from improving or enhancing the performance of the asset.

⭐Will be given in exam

⭐Will be given in exam

Recognition and Measurement of an Impairment Loss

  • Impairment losses on assets accounted for on the Revaluation Model are treated as decreases in the revaluation surplus through the other comprehensive income section.
  • If the Impairment loss Exceeds the Revaluation Surplus, the excess is recognized as an expense in profit or loss.
  • Impairment loss on an asset (other than goodwill) is recognized immediately in profit or loss if the asset is Accounted for on the Cost Model.
  • Impairment loss on one revalued asset cannot be adjusted against the revaluation surplus of another revalued asset.
  • Depreciation charge of the impaired asset shall be adjusted for future periods over its remaining useful life.

Measuring recoverable amount for an intangible asset with an indefinite useful life

  • The most recent recoverable amount calculation should have resulted in a recoverable amount that exceeded the current carrying amount of the asset by a wide margin.
  • An analysis of the circumstances surrounding the most recent recoverable amount calculation should support the likelihood that the current recoverable amount is still valid.
  • Some assets, like intangible assets with indefinite useful lives, must be tested for impairment annually.

IAS 36 allows entities to use the most recent calculation of an asset's recoverable amount from a preceding period to test for impairment in the current period under certain conditions.

Reversal of an Impairment Loss

About

  • The objective is to look for indications that these impairments may have reversed wholly or partially.
  • The entity should calculate recoverable amounts of the particular assets where there are indications that the impairment losses may have reversed, provided the impact thereof is material.
  • Recoverable amounts are calculated only on assets where there are indications that impairment losses may have reversed.
  • Entities must assess at the end of each reporting period if earlier impairment losses recognised for assets, other than goodwill, may have decreased or no longer exist.
  • Indications that the Impairment losses may have reversed include those similar to those indicating original impairment but in reverse.

External Sources of Information:

Internal Sources of Information:

Positive changes in technology, market, economic or legal environment

Decrease in market interest rates affecting discount rate used in calculating asset's value in use

Observable indications of significant increase in asset value

Positive changes in asset usage or expected usage

Internal reporting showing better than expected economic performance of asset

  • Not all previously impaired assets require recoverable amounts to be calculated automatically.

Reversal of an Impairment

Impairment loss is reversed only to the extent that it does not exceed the carrying amount that would have been determined for the asset if there had been no impairment loss.

An increase in the carrying amount of the asset above the carrying amount that would have been calculated with no previous impairment loss must be treated as a revaluation.

Examples of changes in estimates that cause an increase in service potential include changes in recoverable amount, future cash flows, and components of fair value.

The reversal of an impairment loss is immediately recognized in the profit or loss section of the statement of profit or loss and other comprehensive income if the asset is accounted for according to the cost model.

Reversal of impairment losses reflects that estimated service potential of the asset has increased due to a change in circumstances.

Only recognized if there has been a change in estimates used to calculate the recoverable amount since the previous impairment loss was recognized.

If the asset is accounted for according to the revaluation model, the reversal of the impairment loss is treated as an increase in the revaluation surplus through other comprehensive income.

If a part of the impairment loss of a revalued asset was recognized as an expense in prior periods, the reversal is first recognized as income until all prior recognized impairment losses have been reversed, after which the remainder is shown as an increase in the revaluation surplus.

Disclosure

In Statement of profit or loss and other comprehensive income:

In Notes to financial statements:

Amount of impairment losses recognized and reversed during the period, and their line item(s)

Additional information if impairment loss on an individual asset is material

If impairment losses (reversals) not material to financial statements:

Encouraged to disclose assumptions used to determine recoverable amount

Brief description of main classes of assets affected and events/circumstances that led to recognition (reversal)

Amount and nature of the asset

Recoverable amount (fair value less costs of disposal or value in use)

Description of events and circumstances that led to the recognition or reversal of impairment loss

Basis and discount rates used in estimating recoverable amount