Presentation on theme: "IAS 36 Impairment of Assets"— Presentation transcript:
1 IAS 36 Impairment of Assets Submitted by – Mukesh Thakur
2 What is impairmentImpairment is diminution in the value of assets otherwise than by depreciationDepreciationThe objective is to charge the cost of asset over its useful economic lifeMatching concept is appliedImpairmentThe objective is to bring down the carrying amount to its recoverable amount.Prudence concept is applied.
3 Objective of the standard To state the carrying amount of the assets at no more than its recoverable amount.ImplicationsThe 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.
4 Scope Applies to Does not applies to Property, Plant and Equipment (IAS 16)Finance Lease of LesseeOperating Lease of LessorFinancial Assets under IAS 27, IAS 28 and IAS 31Prepaid AssetsDoes not applies toInventories (IAS 2)Assets arising out of construction contracts (IAS 11)Deferred Tax Assets (IAS 12)Assets arising from Employees Benefits (IAS 19)Financial Assets under IAS 39Investment Properties (IAS 40)Biological Assets under IAS 41Assets arising from insurer’s contractual rights (IAS 4)Non current Assets held for Sale ( IFRS 5)
5 Impairment of AssetAn 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 existsIn case of intangible assets having indefinite life,intangible asset not yet available for use andGoodwillAnnual 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.
6 If the recoverable amount of asset is less than its carrying amount Impairment TestIf the recoverable amount of asset is less than its carrying amountThe 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.
7 Example Case 1 Rs. Case 2 Cost 1000 Accumulated Depreciation 400 Carrying Amount600Recoverable Amount900The Asset is not impairedThe asset is impaired
8 Recoverable Amount is Higher of Asset’s Value in use Present Value of future cash flows expected to be derived from an assetNet Selling Price of the assetsFair value less costs to sale
9 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.
10 Impairment of Revalued Assets If fair value isIts market valueCost of disposal is negligibleImpairment not requiredCost of Disposal majorImpairment requiredOther than market value
11 Decline in the market value of assets significantly. IndicatorsExternalDecline 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.InternalObsolescence or physical damagechange in use of assetEconomic performance of asset is less than expected.
12 Decline in the market value of assets External indicatorsDecline in the market value of assetsmay indicate that the asset’s net selling price is less than its carrying amountChanges in technology, economic or legal environmentmay indicate that the value in use of an asset (or group of assets) is less than its carrying amountIncreases in interest ratesa decline in the market value of an asseta decline in present value of the future cash inflowsNets assets > market capitalisationthe carrying amount of assets may exceed theirnet selling pricevalue in use
13 ExampleFactA 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.SolutionYes, 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.
14 Determining Net selling price Net Selling Price (or NRV) isFair Value (-) cost of disposalEvidence of Fair ValueBinding sale agreementMarket price in active marketBest information available
15 Value in usePresent value of estimated cash flows expected to arise fromContinuing use of the assets andDisposal at the end of its useful life.Estimates of future cash flow should includeCash inflows from continuing use of the assetCash outflows thatAre necessarily incurred to generate cash inflows andCan 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.
16 Value in Use - Projection of Cash flow Projection of cash flows should not includeCash 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 fromA future restructuring to which the entity is not yet committed orImproving or enhancing assets performance
17 Value in Use - Projection of Cash flow Based onmanagement’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 currencyEstimate cash flow in original currencyDiscount the same using appropriate discount rateConvert the present value using spot rate at the time of calculation of value in use.
18 Discount RateDiscount rate should be Current market assessment of the time value of money and the risks specific to the assetindependent of capital structure and financing of assetpre-tax rate of interestWhen asset-specific rate not availablecapital asset pricing model, incremental borrowing rate, other market borrowing rates
19 Impairment Recognition and Treatment Recoverable amount < Carrying amountReduce carrying amount upto recoverable amount.Impairment loss Profit and Loss A/CIn case of revalued assets under IAS 16 impairment loss will be treated as revaluation decrease.If Impairment Loss > carrying amount Recognize liability if required by another standard.Depreciation will be charged on revised carrying amount.
22 Cash Generating UnitAfter 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.ExampleEast 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.
23 Cash Generating UnitAllocate of Impairment Loss to assets in following orderGoodwill allocated to the CGUOther assets on pro-rata basisCarrying amount of any asset will not be less than the highest ofIts Net selling priceIts value in use andZero
24 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 shouldRepresent the lowest level within the entity at which the goodwill is monitored for internal management purposes andNot 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.
25 Impairment of Goodwill Where financial statement includes goodwill in relation to CGU the entity shouldPerform ‘Bottom up Approach’ i.e.Identify if goodwill can be allocated to the CGU andCompare 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 andCompare recoverable amount of larger CGU to its carrying amount (including goodwill) and recognize Impairment loss.
26 Determine impairment required. ExampleX 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. CroresDetermine impairment required.AssetsABCX Ltd.Carrying Amount15010035285Recoverable Amount11510540260Goodwill
27 SolutionBottom up for A Rs. Crores Carrying Amount 150 Recoverable Amount 115 Impairment Loss (35) Top Down This 30 Crores will be adjusted with Carrying amount of Goodwill of Rs. 40 Crores. Total Impairment Loss = = 65 Crores.ABCGWXCarrying Amount1501003540325Impairment Loss in Bottom up test-(35)Carrying amount after Bottom up115290Recoverable Amount260Impairment Loss ( )30
28 Determine impairment required. ExampleX 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. CroresDetermine impairment required.AssetsABCX Ltd.Carrying Amount15010035285Recoverable Amount11510540260Goodwill
29 Bottom up for A Rs. Crores Carrying Amount 150 Recoverable Amount 115 SolutionBottom up for A Rs. CroresCarrying AmountRecoverable AmountImpairment Loss (35)Top Down for A & BCarrying Amount ( )Recoverable Amount (260 – 40)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.
30 Corporate AssetsAssets 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.
31 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.IndicatorsExternalMarket Value has increased significantly.Significant favorable change in technological market, economic or legal environment.Interest rates has been decreased.InternalSignificant favorable effect in the use of assets.Economic performance of assets is better than expected
32 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.
33 DisclosuresImpairment Losses/reversals recognised inProfit and loss account andEquity directly.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 segmentThe amount of impairment losses/reversals recognised inProfit and Loss AccountEquity directly
34 DisclosuresFor each material impairment loss recognised/reversedThe events and circumstances that led to recognition of impairment loss or reversals.The amount of Impairment Loss recognised or reversed.For each individual assetThe nature of the asset andThe segment to which the asset belongsFor each CGUA description of CGUThe segment to which CGU belongsChange 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.
35 DisclosuresIf 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.For aggregate of Impairment Losses/reversal not covered in 4 aboveThe 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.
36 Comparison with Indian GAAP IAS 36AS 28Timing of impairment reviewAt 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.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.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 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 Value less cost to sale and value in use.Similar with different terminology. Recoverable Amount is higher of Net Selling Price and value in use.
37 Reversal of Impairment Loss IAS 36AS 28Reversal of Impairment LossReversal of impairment loss on goodwill is not permitted.Impairment loss on goodwill should not be reversed unless:Impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur andSubsequent external event have occurred that reverse the effect of that event.