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IAS 36: Impairment of Assets - Coggle Diagram
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
investments in subsidiaries
joint ventures
Tangible and Intangible assets
associates
IAS 36 aims
to ensure that an entity does not carry assets
in its financial statement at values
greater than their recoverable amounts.
If an asset
is carried at a value greater than its recoverable amount
, an
Impairment loss
should be
recognized
.
IAS 36 does not
apply to certain assets such as
construction contracts
deferred tax assets
inventories
More About IAS 36
Impairment of Assets Definitions:
Costs of disposal:
Direct
Incremental Costs
attributable to the
Disposal of the asset
Value in use:
P
resent value of Future Cash Flows
expected to be derived from an asset
Fair value:
Price received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
Carrying amount:
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
Recoverable amount:
Higher
of
Fair Value Less Costs of Disposal
and
Value in Use
Fair value differs from value in use
Former is a reflection of assumption
s made by market participants, while the
latter reflects entity-specific factors
Impairment Loss:
the
difference between
the
Carrying Amount
and
Recoverable Amount
of an asset
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
.
:star:
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
transaction taxes
cost of removing the asset
stamp duty
direct incremental costs
legal costs
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
.
:star:
Will be given in exam
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.
:star:
Will be given in exam
Recognition and Measurement of an Impairment Loss
Impairment losses
on assets accounted for on the
Revaluation Mode
l 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 i
mpairments 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.
R
ecoverable 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:
P
ositive 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
Internal Sources of Information:
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 amoun
t 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:
Amount of impairment losses recognized
and
reversed
during the period, and their line item(s)
In Notes to financial statements:
Additional information if
impairment loss on an individual asset is material
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
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)