IAS 36
IMPAIRMENT OF ASSETS
Objectives
The objective of this standard is to
ensure that assets are not carried in the
financial statements at more than their
recoverable amounts. IAS 36 applies to
all tangible and intangible assets except
those covered by other standards. IAS 36
requires entities to determine the
recoverable amount of an asset only if
there are some indications that the asset
might be impaired.
SCOPE
This Standard shall be applied in accounting for the impairment
of the following assets:
Land
Buildings
Machinery and Equipment
Investment Properties carried at cost
Intangible Assets
Goodwill
Investment in subsidiaries, associates and joint ventures
Asset carried at revalued amount under IAS 16 and IAS 38
SCOPE
This Standard shall not be applied for the following:
Inventories (see IAS 2 Inventories)
Contract assets and assets arising from costs to obtain or fulfil a contract that
are recognized in accordance with IFRS 15 Revenue from Contracts with
Customer.
Deferred tax assets (see IAS 12 Income Taxes)
Assets arising from employee benefits (see IAS 19 Employee Benefits)
Investment property that is measured at fair value (see IAS 40 Investment
Property)
Financial assets that are within the scope of IFRS 9 Financial Instruments.
Non-current assets (or disposal groups) classified as held for sale in accordance
with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
Biological assets related to agricultural activity within the scope of IAS 41
Agriculture that are measured at fair value less costs to sell.
DEFINITION OF
TERMS
Impairment: This is the amount by which the
carrying amount (NBV) of an asset exceeds its
recoverable value. That is, the excess of the
carrying value of an asset over its recoverable
value.
Carrying Amount: This is the value or amount that
assets and liabilities are recognized (i.e. carried)
in the statement of financial position.
Recoverable Value: This is the amount that an
entity will recover or realize from its assets either
from immediate sales or from continuing use. It is
defined as the higher of value in use and fair
value less costs to sell (i.e the higher of the two
values)
DEFINITION OF
TERMS
Value in use of an asset: This is the present value of
estimated future cash flows expected to be derived from
the use of an asset or a cash generating unit.
Fair Value: This is the price that would be received to sell
an asset or paid to transfer (or settle) a liability in an
orderly transaction between market participants at the
measurement date.
Fair value less costs to sell: This is the estimated amount
that will be realized from the sale of an asset less its
disposal costs or selling costs (i.e. the net selling price or
net realizable value of the asset).
Cash Generating Unit: A cash generating unit is the
smallest group of assets that generates cash inflows that
are largely dependent of the cash inflows from other
assets or groups of asset.
Impairment of Assets
An asset is impaired if its recoverable
amount is below the value currently shown
on the statement of financial position – The
asset’s current carrying amount.
Recoverable amount is taken as the
higher of :
Fair value less cost to sell(net
realisable value) and
Value in use.
Measurement of Recoverable Amount
* Measurement of Fair value less cost to sell
The measurement may be by way of:
A binding Sale Agreement
The current market price less cost of disposal
(Where an active market exists.)
* Measurement of value in use
Value in use is determined by estimating future
cash inflows and outflows to be derived from the
use of the asset and its ultimate disposal and
applying a suitable discount rate to these cash
flows.
Note: Cashflow relating to financing activities or
income taxes should not be included.
Recognition of Impairment Loss
If the recoverable amount of an asset is
lower than the carrying amount, the
carrying amount should be reduced by the
difference (i.e impairment loss) which
should be charged as an expenses in profit
or loss.
DR – Profit or loss(Impairment Loss)
CR- Asset(SOFP)
However, an impairment loss on a
revalued asset is recognized in other
comprehensive income(OCI) to the extent
that the impaired loss does not exceed the
amount in the revaluation surplus for that
same asset. Such an impairment loss on a
revalued asset reduces the revaluation
surplus for that asset.
Annual
Impairment
Review
Where there is no indication of impairment
then no further action need be taken.
An exception to this rule is:
Goodwill acquired in a business
combination.
An intangible asset with an indefinite
useful life.
An intangible asset not yet available for
use
An asset purchased with a view to resell.
Indications of
Impairment
IAS 36 requires that at each reporting date,
an entity must assess whether there are
indications of impairment. Indications that
impairment might have happened can come
from external or internal sources.
External Sources of Information:
Unexpected decreases in an asset’s
market value.
Significant adverse changes have taken
place in the technological, market,
economic or legal environment.
Increased interest rates have decreased
an asset’s recoverable amount.
The entity’s net assets are measured at
more than its market capitalization.
Indications of
Impairment
IAS 36 requires that at each reporting date,
an entity must assess whether there are
indications of impairment. Indications that
impairment might have happened can come
from external or internal sources.
Internal Sources of information:
Evidence of obsolescence or damage.
There is a reduction in the asset’s
expected remaining useful life.
Evidence that the economic performance
of an asset has been or will be worse than
expected.
There is a material reduction in usage of
an asset.
A Cash Generating Unit is the smallest identifiable
group of assets that generates cash inflows that are
largely independent of the cash inflows from other
assets or group of assets.
Cash
Identification of an asset’s cash generating unit
Generating involves judgement. Hence, if the recoverable amount
Unit
cannot be determined for an individual asset, the
entity identifies the lowest aggregation of assets that
generate largely independent cashflows.
Allocation of an
Impairment loss for
a CGU
Impairment loss must be recognized if
the recoverable amount of a CGU is less
than it’s carrying amount. This loss shall
be allocated to reduce the carrying
amount of the assets of the unit(group
of units) in the following order:
First, to any Goodwill which has been
allocated to the CGU.
Next, to the other assets of the CGU,
in proportion to their carrying
amounts.
Note: No impairment loss must be
charged to monetary assets.
Disclosure Requirements
The disclosure requirement of IAS 36 were amended in May
2013 are as follows:
An entity shall disclose the following for each class of
assets:
The amount of impairment losses recognized in profit or
loss during the period and the line item(s) of the
statement of comprehensive income in which those
impairment losses are included.
The amount of reversals of impairment losses recognized
in profit or loss during the period and the line item(s) of
the statement of comprehensive income in which those
impairment losses are reversed.
The amount of impairment losses on revalued assets
recognized in other comprehensive income during the
period.
The number of reversals of impairment losses on
revalued assets recognized in other comprehensive
income during the period.
Disclosure Requirements Contd.
An entity shall disclose the following for an individual asset
(including goodwill) or a cash-generating unit, for which an
impairment loss has been recognized or reversed during
the period:
The events that led to the recognition of the impairment
loss or reversal.
The amount of the impairment loss or reversal.
The nature of the impaired asset or a description of the
impaired CGU.
Whether the recoverable amount of the asset or CGU is its
fair value less cost of disposal or its value in use.
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