IFRS IAS 36
IAS - 36: IMPAIRMENT OF ASSETS
§ SCOPE
This Standard shall be applied in accounting for impairment of all assets, except:
a) Inventories (IAS 2)
b) Contract assets and assets arising from costs to obtain or fulfil a contract (IFRS15)
c) Deferred tax assets (IAS 12)
d) Assets arising from employee benefits (IAS 19)
e) Biological assets (IAS 41)
f) Deferred acquisition costs and intangible assets arising from insurance contracts (IFRS 17)
g) Non-current assets (or disposal groups) classified as held for sale (IFRS 5)
h) Financial Assets (IFRS 9)
§ DEFINITIONS
a) Impairment loss: The amount by which the carrying amount of an asset or a cash-
generating unit exceeds its recoverable amount.
IMPAIRMENT CARRYING RECOVERABLE
LOSS AMOUNT AMOUNT
b) Recoverable amount: Higher of an asset’s fair value less cost of disposal and its value in
use.
c) Cash-generating unit: It is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets.
d) Corporate assets: Assets other than goodwill that contribute to the future cash flows of
both the cash-generating unit under review and other cash-generating units.
§ INDICATIONS OF IMPAIRMENT
1. External Indicators
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a) Significant decline in market value of an asset as a result of the passage of time or normal
use.
b) Adverse effect on entity because of significant changes in technological, market,
economic, legal environment.
c) Increase in interest rates or return of investments causing decline in recoverable amount.
d) Carrying amount of net assets is more than its market capitalisation.
2. Internal Indicators
a) Evidence is available of obsolescence or physical damage of an asset.
b) Adverse effect on entity because of significant changes in use of asset or expected use of
asset. E.g., asset becoming idle, plans to discontinue or restructure operation, plans to dispose
an asset, reassessment of useful life of an asset.
c) Economic performance of an asset is worse than expected.
3. Investment in subsidiary, joint venture or associate
a) Carrying amount of investment in separate financials is more than the carrying amount of
investee’s net assets (including goodwill) in the consolidated financials.
b) Dividend is more than total comprehensive income of the investee.
§ REQUIREMENT FOR ANNUAL IMPAIRMENT TEST
Irrespective of whether there is any indication of impairment, an entity is required to test
following items for impairment at least annually:
a) intangible asset with an indefinite useful life;
b) intangible asset not yet available for use (under development); and
c) goodwill acquired in a business combination for impairment.
§ ACCOUNTING TREATMENT
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1. Recording the Impairment loss
Impairment loss a/c Dr.
To Asset/ Provision for Impairment loss a/c
2. Transferring Impairment loss
a) Generally:
Profit and loss a/c Dr.
To Impairment loss a/c
b) If the asset had been revalued upward earlier:
Revaluation reserve a/c Dr. (upto the balance available in revaluation reserve a/c)
Profit and loss a/c Dr. (Balance, if any)
To Impairment loss a/c
3. In case Impairment loss > Carrying amount
(Very rarely would this situation arise, but if it does)
Impairment loss a/c Dr.
To Asset a/c
To Provision for liability a/c
§ CASH GENERATING UNIT
If there is any indication that an asset may be impaired, the recoverable 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 cash-generating
unit to which the asset belongs (the asset's cash-generating unit).
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• As recoverable amount of individual assets in a cash
Step 1 generating unit is difficult/impossible to calculate,
recoverable amount is calculated for the entire cash
generating unit.
• Impairment loss also is calculated for the entire unit
Step 2 (Total carrying amount of CGU – Recoverable
amount of CGU)
Step 3 • The impairment loss is distributed among each asset in
the unit in the ratio of their carrying amounts.
Note: It must be noted that the revised carrying amount (i.e., after reducing the
impairment loss) of each asset in the CGU does not go below its fair value or value in use
(whichever available)
§ GOODWILL
Goodwill does not generate cash flows independently from other assets or groups of assets and,
therefore, the recoverable amount of goodwill as an individual asset cannot be determined. As
a consequence, if there is an indication that goodwill may be impaired, recoverable amount is
determined for the cash-generating unit to which goodwill belongs. This amount is then
compared to the carrying amount of this cash generating unit and any impairment loss is
recognised.
Whenever a cash-generating unit is tested for impairment, an enterprise considers any goodwill
that is associated with the future cash flows to be generated by the cash generating unit.
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Step 1 • Allocate goodwill to CGU on the reasonable
basis
Step 2 • Calculate revised carrying amount (RCA) of
CGU along with goodwill
Step 3 • Compare with recoverable amount (RA)
• If RCA < RA; no impairment loss
Step 4
• If RCA > RA; Impairment loss = RCA – RA
• Allocate impairment loss to goodwill first and
Step 5 if any balance is left, allocate to CGU in the
ratio of their carrying amounts
Note: It must be noted that the revised carrying amount (i.e., after reducing the
impairment loss) of each asset in the CGU does not go below its fair value or value in use
(whichever available).
§ CORPORATE ASSETS
Corporate assets include group or divisional assets such as the building of a headquarters or a
division of the enterprise, EDP equipment or a research centre. Key characteristics of corporate
assets are that they do not generate cash inflows independently from other assets or groups of
assets and their carrying amount cannot be fully attributed to the cash-generating unit under
review.
Because corporate assets do not generate separate cash inflows, the recoverable amount of an
individual corporate asset cannot be determined unless management has decided to dispose off
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the asset. As a consequence, if there is an indication that a corporate asset may be impaired,
recoverable amount is determined for the cash generating unit to which the corporate asset
belongs, compared to the carrying amount of this cash-generating unit and any impairment loss
is recognised.
All steps same as goodwill except Step 5: Allocation of Impairment loss:
Allocate Impairment loss to corporate assets and CGU in the ratio of their carrying
amounts.
§ REVERSAL OF IMPAIRMENT LOSS
1. Reversal of impairment loss of individual assets
Subsequently due to increase in the recoverable amount, the impairment loss charged earlier
can be reversed.
The amount of reversal cannot exceed the following: (in other words, Lower of:)
a) Impairment loss charged earlier
b) Amount of reversal
c) Difference between actual carrying amount and carrying amount if impairment loss had not
been charged
2. Reversal of impairment loss of CGU
The reversal amount will be allocated to each asset of the CGU in the ratio of their carrying
amounts.
The amount of reversal is Lower of:
a) Impairment loss charged earlier
b) Amount of reversal
c) Difference between actual carrying amount and carrying amount if impairment loss had not
been charged
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Note: It must be noted that the revised carrying amount (i.e., after reversal of the
impairment loss) of each asset in the CGU does not exceed its fair value or value in use
(whichever available)
3. Reversal of impairment loss of goodwill
An impairment loss recognised for goodwill should not be reversed in a subsequent period
unless:
(a) The impairment loss was caused by a specific external event of an exceptional nature that
is not expected to recur; and
(b) Subsequent external events have occurred that reverse the effect of that event.
4. Reversal of impairment loss of corporate assets
The reversal amount will be allocated to corporate assets and each asset of the CGU in the ratio
of their carrying amounts.
The amount of reversal is Lower of:
a) Impairment loss charged earlier
b) Amount of reversal
c) Difference between actual carrying amount and carrying amount if impairment loss had not
been charged
Note: It must be noted that the revised carrying amount (i.e., after reversal of the
impairment loss) of each asset in the CGU does not exceed its fair value or value in use
(whichever available)
§ DISCLOSURES
For each class of assets, the financial statements should disclose:
(a) the amount of impairment losses recognised in the statement of profit and loss during the
period;
(b) the amount of reversals of impairment losses recognised in the statement of profit and loss
during the period;
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(c) the amount of impairment losses recognised directly against revaluation surplus during
tine period; and
(d) the amounts of reversal of impairment losses recognised directly in revaluation surplus
during the period.
An enterprise that applies Segment Reporting, should disclose the following for each reportable
segment based on an enterprise's primary format:
(a) the amount of impairment losses recognised in the statement of profit and loss and directly
against revaluation surplus during the period; and
(b) the amount of reversals of impairment losses recognised in the statement of profit and loss
and directly in revaluation surplus during the period.
If an impairment loss for an individual asset or a cash-generating unit is recognised or reversed
during the period and is material to the financial statements of the reporting enterprise as a
whole, an enterprise should disclose:
(a) the events and circumstances that led to the recognition or reversal of the impairment loss;
(b) the amount of the impairment loss recognised or reversed;
(c) for an individual asset:
(i) the nature of the asset; and
(ii) the reportable segment to which the asset belongs, based on the enterprise's primary
format.
(d) for a cash - generating unit:
(i) a description of the cash - generating unit
(ii) the amount of the impairment loss recognised or reversed by class of assets and by
reportable segment based on the enterprises primary format
(iii) if the aggregation of assets for identifying the cash - generating unit has changed since
the previous estimate of the cash - generating units recoverable amount (if any), the
enterprise should describe the current and former way of aggregating assets and the
reasons for changing the way the cash - generating unit is identified;
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(e) whether the recoverable amount of the asset (cash - generating unit) is its net selling price
or its value in use;
(f) if recoverable amount is net selling price, the basis used to determine net selling price
(such as whether selling price was determined by reference to an active market or in some
other way); and
(g) if recoverable amount is value in use, the discount rate(s) used in the current estimate and
previous estimate (if any) of value in use.
If impairment losses recognised (reversed) during the period are material in aggregate to the
financial statements of the reporting enterprise as a whole, an enterprise should disclose a brief
description of the following:
(a) the main classes of assets affected by impairment losses (reversals of impairment losses);
(b) the main events and circumstances that led to the recognition (reversal) of these
impairment losses.
QUESTIONS
1. AB Ltd is having a plant carrying amount of which is $200 lakhs on 31-3-2009. Its Balance
useful life is 5 years and residual value at the end of 5 years is $10 lakhs. Estimated future
cash flow from using the plant in next 5 years are:
For the year ended on Estimated cash
flow (in lakhs)
31-3-2010 100
31-3-2011 60
31-3-2012 60
31-3-2013 40
31-3-2014 40
Calculate "value in use" for plant if the discount rate is 25 % and also calculate the
recoverable amount if fair value of plant on 31-3-2009 is $120 lakhs.
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2. CD Ltd. acquired plant on 1-4-2002 for $100 lakhs having 10 years useful life. It provides
depreciation on straight-line basis with nil residual value. On 1-4-2007, CD Ltd. revalued
the plant at $58 lakhs against its book value of $50 lakhs and credited $8 lakhs to
revaluation reserve.
On 31-3-2009 the plant was impaired and its recoverable amount on this date was $28
lakhs. Calculate the impairment loss and how this loss should be treated in accounts.
3. XY Ltd. acquired a machine for $6,400,000 on 30-11-2005. The machine has five-years
life with $1,000,000 salvage value and was depreciated using straight-line method.
On 31-3-2008 a test for impairment reveals the following:
a) Present value of future cash flow 27,00,000
b) Fair value 30,08,000
c) Salvage value estimated Nil
Assuming loss for impairment is recognized for the year 31-3-2008. What should be the
depreciation expenses for the year ended 31-3-2009?
4. MN Ltd. gives the following estimates of cash flows relating to fixed asset on 31-3-2009.
The discount rate is 15%.
Year Cash flow (in lakhs)
2009-10 4,000
2010-11 6,000
2011-12 6,000
2012-13 8,000
2013-14 4,000
Residual value at the 1,000
end of 2014
Fixed Asset purchased on 1-4-2006 for $40,000 lakhs. Useful life 8 years. Residual value
is estimated at $1,000 lakhs at the end of 8 years. Net selling price is estimated of $20,000
lakhs.
Calculate:
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a) Impairment loss to be recognized for the year ended 31-3-2009.
b) Depreciation charge for 2009-10.
5. ABC Corporation acquired LMNS business on 31.03.2007 for $2,500 lakhs. The details
of acquisition are as under:
Fair value of identifiable asset 2,000 lakhs, Goodwill (to be amortised in 5 years) 500 lakhs
The anticipated useful life of acquired assets is 8 years. ABC uses straight-line method of
depreciation and no residual values is anticipated. On 31-3-2009 ABC Corporation
estimated the significant decline in production due to changed Government policies.
The fair value of identifiable asset is not determinable. The cash flow forecast based on
recent financial budget for next 6 years after considering changed Govt. policies are as
follows, incremental financing cost is 10% which represent current market assessment of
the time value of money.
Year Cash flow (in lakhs)
2009-10 350
2010-11 350
2011-12 350
2012-13 250
2013-14 250
2014-15 250
The acquired business is a cash-generating unit. Find out impairment loss, if any.
6. Earth Infra Ltd has two cash-generating units, A and B. There is no goodwill within the
units’ carrying values. The carrying values of the CGUs are CGU A for $20 million and
CGU B for $30 million. The company has an office building which it is using as an office
headquarter and has not been included in the above values and can be allocated to the units
on the basis of their carrying values. The office building has a carrying value of $10
million. The recoverable amounts are based on value-in-use of $18 million for CGU A and
$38 million for CGU B.
Determine whether the carrying values of CGU A and B are impaired.
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7. On April 1, 2011, Vanessa Ltd. acquired 100% of Sam Ltd. for $400,000. The fair value
of the net identifiable assets of Sam Ltd. was $320,000. Sam Ltd. is in coal mining
business. On 31 March 2013, the government has cancelled licenses given to it in few
states.
As a result, Sam Ltd.’s revenue is estimated to reduce by 30%. The adverse change in
market-place and regulatory conditions is an indicator of impairment. As a result, Vanessa
Ltd. has to estimate the recoverable amount of goodwill and net assets of Sam Ltd. on 31
March 2013.
Vanessa Ltd. uses straight line depreciation. The useful life of Sam Ltd.’s assets is
estimated to be 20 years with no residual value. No independent cashflows can be
identified to any individual assets. So the entire operation of Sam Ltd. is to be treated as a
CGU. Due to the regulatory entangle it is not possible to determine the selling price of
Sam Ltd. as a CGU. Its value in use is estimated at $212,000 by the management.
Suppose by March 31, 2015 the government reinstates the licenses of Sam Ltd. The
management expects a favourable change in net cash flows. This is an indicator that an
impairment loss may have reversed. The recoverable amount of Sam Ltd.’s net assets is
re-estimated. The value in use is expected to be $304,000 and net selling price is expected
to be $290,000.
Discuss the accounting treatment.
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