Wednesday, June 29, 2022

IAS 36 Impairment of Assets


 What is impairment of assets??


AS 36 Impairment of Assets seeks to ensure that an entity’s assets are not carried at more than their recoverable amount.

Recoverable amount means- higher of fair value less costs of disposal and value in use.

With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a ‘cash-generating unit’ where an asset does not generate cash inflows that are largely independent of those from other assets.

Date of Reissue : IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004, and for all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004.

 Purpose/ Objective of IAS 36:

To ensure that assets are carried at not more than their recoverable amount, and to define how recoverable amount is determined.

Key definition:

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses

Recoverable amount: the higher of an asset’s fair value less costs of disposal* (sometimes called net selling price) and its value in use.

Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (see IFRS 13 Fair Value Measurement) i.e an exit price.

Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit

IAS 36 applies to all assets except: [IAS 36.2]

  • inventories  – IAS 2
  • assets arising from construction contracts – IAS 11
  • deferred tax assets – IAS 12
  • assets arising from employee benefits – IAS 19
  • financial assets- IFRS9
  • investment property carried at fair value – IAS 40
  • agricultural assets carried at fair value -IAS 41
  • insurance contract assets -IFRS17
  • non-current assets held for sale- IAS 5

IAS 36 applies to –

  • land
  • buildings
  • machinery and equipment
  • investment property carried at cost
  • intangible assets
  • goodwill
  • investments in subsidiaries, associates, and joint ventures carried at cost
  • assets carried at revalued amounts under IAS 16 and IAS 38

Indications of impairment [IAS 36.12]

External sources:

  • market value declines
  • negative changes in technology, markets, economy, or laws
  • increases in market interest rates
  • net assets of the company higher than market capitalisation

Internal sources:

  • obsolescence or physical damage
  • asset is idle, part of a restructuring or held for disposal
  • worse economic performance than expected
  • for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee’s assets, or a dividend exceeds the total comprehensive income of the investee

These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset may be impaired may indicate that the asset’s useful life, depreciation method, or residual value may need to be reviewed and adjusted. [IAS 36.17]

CA Divya Thakkar
Chartered accountant | IIM Bangalore 7+years of experience in Consultancy, Investment Banking, Ecommerce & IT Industry. Expert in IFRS, USGAAP, INDAS & US Regulatory requirement. Currently working with Deloitte Touche & Company in Risk ,Finance & Control advisory. Worked in Companies like Barclays Bank, HCL Technologies Ltd & BazaarCart.

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