IAS 36 Impairment of Assets
Submitted by – Mukesh Thakur
What is impairment

Impairment is diminution in the value of assets otherwise than
by depreciation
Depreciation
• The objective is to charge the
cost of asset over its useful
economic life
Impairment
• The objective is to bring down
the carrying amount to its
recoverable amount.
• Matching concept is applied
• Prudence concept is applied.
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Objective of the standard

To state the carrying amount of the assets at no more than its
recoverable amount.

Implications
 The standard has deep impact on capital intensive industries
that capitalize its assets more than the current requirement like
steel factories, fibre and glasses, textiles etc.
 This standard does also have adverse impact on poor
performing industries.
 However, there will be no impact on service industries and good
performing industries.
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Scope
Applies to
Does not applies to
Inventories (IAS 2)
Assets arising out of construction contracts (IAS 11)
Property, Plant and Equipment (IAS 16)
Deferred Tax Assets (IAS 12)
Finance Lease of Lessee
Assets arising from Employees Benefits (IAS 19)
Operating Lease of Lessor
Financial Assets under IAS 39
Financial Assets under IAS 27, IAS 28 and IAS 31
Investment Properties (IAS 40)
Prepaid Assets
Biological Assets under IAS 41
Assets arising from insurer’s contractual rights (IAS 4)
Non current Assets held for Sale ( IFRS 5)
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Impairment of Asset

An entity should assess at end of each reporting period
whether there is any indication that an asset may be impaired.

If any indication exists, the entity will estimate the recoverable
amount of the asset.
 However, the following assets will be tested annually even if no indicator of
impairment exists

In case of intangible assets having indefinite life,

intangible asset not yet available for use and

Goodwill
 Annual impairment tests for these assets can be performed at any time during
the financial year provided that the testing is performed at the same time in
subsequent periods.
 Different assets may be tested at different times of the year.
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Impairment Test

If the recoverable amount of asset is less than its carrying
amount
 The asset is impaired.
 The asset’s carrying amount will be reduced to recoverable
amount.
 Impairment Loss will be Debited and assets will be credited.

Should an impairment test be performed at interim balance
sheet date?
 Yes at each reporting date including interim balance sheet dates an entity is
required to assess whether there is any indication that assets may be impaired.
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Example
Case 1
Cost
Rs.
Case 2
1000 Cost
Rs.
1000
Accumulated Depreciation
400 Accumulated Depreciation
400
Carrying Amount
600 Carrying Amount
600
Recoverable Amount
900 Recoverable Amount
400
The Asset is not impaired
The asset is impaired
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Recoverable Amount
Asset’s Value in
use
Present Value of
future cash flows
expected to be
derived from an
asset
Net Selling Price
of the assets
Fair value less
costs to sale
Recoverable
Amount is
Higher of
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Impairment of Revalued Assets

IAS 16 states, where entity chooses revaluation model, the
revalued amount of its property, plant and equipment should
not differ materially from fair value.
 Fair value is the amount for which an asset could be exchanged between
knowledgeable willing parties in an arm’s length transaction.

IAS 36 states that an entity should reduce the carrying amount
of its assets to recoverable amount.
 Recoverable amount is higher of fair value less costs of disposal and asset’s
value in use.

Hence, whether impairment test of revalued asset is required
depends on the basis of determining fair value.
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Impairment of Revalued Assets
If fair value is
Its market
value
Cost of
disposal is
negligible
Impairment
not required
Other than
market value
Cost of
Disposal
major
Impairment
required
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Impairment
required
Indicators
External
Internal
• Decline in the market value of
assets significantly.
• Changes in technological
market, economic or legal
environment.
• Increase in interest rates.
• Net assets of entity is less
than its market capitalisation.
• Obsolescence or physical
damage
• change in use of asset
• Economic performance of
asset is less than expected.
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External indicators
Decline in the market value
of assets
• may indicate that the asset’s net
selling price is less than its carrying
amount
Changes in technology, • may indicate that the value in use of
economic
or
legal an asset (or group of assets) is less
than its carrying amount
environment
• a decline in the market value of an asset
Increases in interest rates • a decline in present value of the future
cash inflows
Nets assets > market
capitalisation
• the carrying amount of assets may exceed
their
•
•
net selling price
value in use
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Example
Fact

A branch of a business in southern gurgaon located close to a
chemical factory, was largely destroyed in an explosion. The
insurance assessors are examining the damage and
management is confident that the full cost of rebuild plus
compensation for the loss of profit will be received.
Is the asset impaired? Given that it will be replaced.
Solution

Yes, the asset is impaired as it has been destroyed. The
replacement will be a new asset. The costs of construction are
capitalised when it is built. Insurance proceed for the
rebuilding costs will be credited to income. The impairment
loss is charged in current period.
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Determining Net selling price

Net Selling Price (or NRV) is
 Fair Value (-) cost of disposal

Evidence of Fair Value
 Binding sale agreement
 Market price in active market
 Best information available
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Value in use

Present value of estimated cash flows expected to arise from
 Continuing use of the assets and
 Disposal at the end of its useful life.

Estimates of future cash flow should include
 Cash inflows from continuing use of the asset
 Cash outflows that

Are necessarily incurred to generate cash inflows and

Can be directly attributable or allocated on a reasonable
basis to assets.
 Net cash flows for the disposal of asset at the end of its useful
life.
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Value in Use - Projection of Cash flow

Projection of cash flows should not include
 Cash inflows and outflows from financing activities;
 Income tax receipts and payments
(since these are not considered in determining discount rate)

Estimated future cash flow should not include cash flows that
are expected to arise from
 A future restructuring to which the entity is not yet committed or
 Improving or enhancing assets performance
16
Value in Use - Projection of Cash flow

Based on
 management’s best estimate of economic conditions over the
remaining useful life of asset;
 most recent financial budgets or forecasts approved by
management.

These projections should cover a maximum period of five years
unless a longer period is justified.

Cash flows in foreign currency
 Estimate cash flow in original currency
 Discount the same using appropriate discount rate
 Convert the present value using spot rate at the time of
calculation of value in use.
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Discount Rate

Discount rate should be Current market assessment of the time
value of money and the risks specific to the asset
 independent of capital structure and financing of asset
 pre-tax rate of interest

When asset-specific rate not available
 capital asset pricing model, incremental borrowing rate, other
market borrowing rates
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Impairment Recognition and Treatment

Recoverable amount < Carrying amount

Reduce carrying amount upto recoverable amount.

Impairment loss
Profit and Loss A/C
 In case of revalued assets under IAS 16 impairment loss will be
treated as revaluation decrease.

If Impairment Loss > carrying amount
liability if required by another standard.

Depreciation will be charged on revised carrying amount.
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Recognize
Higher of
Assess
Impairment
conditions
Impairment
Condition
Exists?
NO
No
impairment
Review
Value in use
Net Selling Prive
YES
Identify
Assets/CGU
Binding Sale
Agreement
Determine
Recoverable
Amount
Active Market
Best Estimate
Cash Flow
No
impairment
Provision
Discount Rate
NO
Carrying Amount
>
Recoverable Amount?
Follow up with Annual
Impairment Review
YES
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Example
Cost
1,000
Accumulated depreciation
400
Carrying amount
600
Net selling price
200
Value in use
100
Recoverable amount
200
Impairment loss
400
Revised carrying amount
200
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Cash Generating Unit

After impairment test, recoverable amount should be calculated
for individual asset.

If it is not possible to estimate recoverable amount of
individual, estimate recoverable amount of Cash Generating
Unit (CGU) to which the asset belongs.
 CGU is smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows of
other assets or group of assets.

Example
East India Minerals P. Limited owns a private railway line to support its mining
activities. The private railway could only be sold for scrap value and it does not
generate cash inflows that are largely independent of the cash inflows from other
assets of mine.
Recoverable amount of CGU i.e. mine as a whole will be estimated.
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Cash Generating Unit

Allocate of Impairment Loss to assets in following order
 Goodwill allocated to the CGU
 Other assets on pro-rata basis

Carrying amount of any asset will not be less than the highest
of
 Its Net selling price
 Its value in use and
 Zero
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Impairment of Goodwill

Goodwill acquired in business combination should be
allocated, from the acquisition date to each of the acquirer's
CGU that is expected to benefit from the synergies of the
combination.
 Even if assets and liabilities of the aquiree are assigned to
those units or group of units to which the goodwill is so
allocated.

Such allocated unit should
 Represent the lowest level within the entity at which the goodwill
is monitored for internal management purposes and
 Not be larger than an operating segment as per IFRS 8.

If initial allocation is not completed before the end of financial
year in which business combination took place, it will be
completed within one annual period from the acquisition date.
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Impairment of Goodwill

Where financial statement includes goodwill in relation to CGU
the entity should
 Perform ‘Bottom up Approach’ i.e.

Identify if goodwill can be allocated to the CGU and

Compare recoverable with carrying (including goodwill)
and recognize impairment loss.
 If carrying amount of goodwill cannot be allocated on a
reasonable and consistent basis, then also perform ‘Top down
Approach’ i.e.

Identify smallest CGU on which goodwill can be allocated
and

Compare recoverable amount of larger CGU to its carrying
amount (including goodwill) and recognize Impairment
loss.
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Example

X Ltd. has 3 units A, B and C. Goodwill appearing in books is
Rs. 40 millions and cannot be identified and allocated to any
unit.
Rs. Crores
Assets
A
B
C
X Ltd.
Carrying Amount
150
100
35
285
Recoverable Amount
115
105
40
260
Goodwill

40
Determine impairment required.
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Solution
Bottom up for A
Carrying Amount
Recoverable Amount
Impairment Loss
Rs. Crores
150
115
(35)
Top Down
A
B
C
GW
X
Carrying Amount
150
100
35
40
325
Impairment Loss in Bottom up test
35
-
-
-
(35)
Carrying amount after Bottom up
115
100
35
40
290
Recoverable Amount
260
Impairment Loss (290-260)
30
This 30 Crores will be adjusted with Carrying amount of Goodwill
of Rs. 40 Crores. Total Impairment Loss = 35 + 30 = 65 Crores.
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Example

X Ltd. has 3 units A, B and C. Goodwill appearing in books is
Rs. 40 millions and can be identified and allocated to A and B.
Rs. Crores
Assets
A
B
C
X Ltd.
Carrying Amount
150
100
35
285
Recoverable Amount
115
105
40
260
Goodwill

40
Determine impairment required.
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Solution
Bottom up for A
Rs. Crores
Carrying Amount
150
Recoverable Amount
115
Impairment Loss
(35)
Top Down for A & B
Carrying Amount (115 + 100 + 40)
255
Recoverable Amount (260 – 40)
220
Impairment Loss
(35)
This Rs. 35 crores will be adjusted from goodwill of Rs. 40 crores. Remaining
goodwill of Rs. 5 crores will be carried forward. Total impairment loss = 70 Crores.
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Corporate Assets

Assets other than goodwill that contribute to the future cash
flows of CGU under review and other CGU e.g. Building of
Headquarter, EDP equipment etc.

Same treatment as goodwill.
 If carrying amount of the corporate asset can be allocated to
CGU, apply bottom up Approach.
 If carrying amount of the corporate asset cannot be allocated to
the CGU, apply both bottom up and top down test.
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Reversal of Impairment Loss

Impairment loss recognised in prior years should be reversed if
there is indication that such losses does not exists any long.

Reversal amount should be limited to earlier impairment losses
recognised as per IAS 36.
Indicators

External
Internal
• Market Value has increased
significantly.
• Significant favorable effect in
the use of assets.
• Significant favorable change in
technological
market,
economic
or
legal
environment.
• Economic performance of
assets is better than expected
• Interest rates
decreased.
has
been
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Accounting Treatment of Reversal of impairment Loss




Goodwill – Impairment Loss will not be reversed.
Revalued Assets – Reversal will be treated as revaluation
increase under IAS 16.
Other Assets – Reversal will be recognised in Profit and Loss
Account immediately.
Further depreciation will be charged on revised carrying
amount.
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Disclosures
1.
Impairment Losses/reversals recognised in
 Profit and loss account and
 Equity directly.
2.
3.
Line items in the income statement in which impairment losses
and reversals have been recognised.
Where the entity applies Segment Reporting as per ‘IFRS 8’ For
each reportable segment
 The amount of impairment losses/reversals recognised in
 Profit and Loss Account
 Equity directly
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Disclosures
4.
For each material impairment loss recognised/reversed
 The events and circumstances that led to recognition of
impairment loss or reversals.
 The amount of Impairment Loss recognised or reversed.
 For each individual asset

The nature of the asset and

The segment to which the asset belongs
 For each CGU

A description of CGU

The segment to which CGU belongs

Change in the composition of CGU, if any with reasons.
 The fact that recoverable amount of asset is its fair value less
cost of sales (NSP) or its value in use.
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Disclosures
 If recoverable amount is NSP, the basis used to determine
NSP.
 If recoverable amount is Value in use, the discount rate used in
current estimate and previous estimate of value in use.
5.
For aggregate of Impairment Losses/reversal not covered in 4
above
 The main classes of assets affected by impairment losses/
reversals.
 The main events and circumstances that led to the recognition
of impairment losses and reversals of impairment losses.
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Comparison with Indian GAAP
IAS 36
AS 28
Timing of impairment review
At each reporting date, an entity should
assess whether any indication exists that an
asset may be impaired. If any such
condition exists, the entity should
estimated Recoverable Amount.
At each Balance Sheet date, an entity
should assess whether any indication exists
that an asset may be impaired. If any such
condition exists, the entity should
estimated Recoverable Amount.
In case of Goodwill, intangible assets with
indefinite useful life, intangible assets not
yet available for use and goodwill will be
tested even if no indication exists.
In case of intangible assets with
amortization period more than 10 years
and intangible assets not yet available for
use will be tested even if no indication
exists.
Recoverable Amount is higher of Fair Similar with different terminology.
Value less cost to sale and value in use.
Recoverable Amount is higher of Net
Selling Price and value in use.
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IAS 36
AS 28
Reversal of Impairment Loss
Reversal of impairment loss on goodwill is Impairment loss on goodwill should not be
not permitted.
reversed unless:
- Impairment loss was caused by a specific
external event of an exceptional nature that is
not expected to recur and
- Subsequent external event have occurred that
reverse the effect of that event.
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Thank you
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