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ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS. Slide 2 AS 28 – IMPAIRMENT OF ASSETS Objective “ To prescribe the procedures that an enterprise applies.

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Presentation on theme: "ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS. Slide 2 AS 28 – IMPAIRMENT OF ASSETS Objective “ To prescribe the procedures that an enterprise applies."— Presentation transcript:

1 ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS

2 Slide 2 AS 28 – IMPAIRMENT OF ASSETS Objective “ To prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount ”

3 Slide 3  Scope and Definitions  Accounting for Impairment  Indicators  Recognition & Measurement  Goodwill & Corporate assets  Treatment of Impairment Loss  Reversal  Disclosures  High Level Comparison with IAS & US GAAP  Matters for Discussion – Practical Challenges AS 28 – IMPAIRMENT OF ASSETS Overview

4 Slide 4  Applies to all assets other than: Inventories ( AS-2) Assets arising from construction contracts (AS-7) Financial Assets including Investments(AS-13) Deferred tax assets (AS-22)  Asset i.e. Individual asset or Cash Generating Unit (CGU) May be carried at cost / revalued amount AS 28 – IMPAIRMENT OF ASSETS Scope

5 Slide 5  Applies to all assets other than: Inventories ( AS-2) Assets arising from construction contracts (AS-7) Financial Assets within the scope of AS-30 Deferred tax assets (AS-22)  Accounting Standard will cover: Investment in Subsidiaries (AS-21), Associates (AS-23) and Joint Ventures (AS-27) AS 28 – IMPAIRMENT OF ASSETS Scope – Changes when AS-30 becomes Mandatory

6 Slide 6  Carrying Amount (CA)  Recoverable Amount (RA)  Cash Generating Units (CGU)  Impairment loss AS 28 – IMPAIRMENT OF ASSETS Definitions

7 Slide 7  Is the higher of an asset’s : Net Selling Price (NSP) OR Value in use. AS 28 – IMPAIRMENT OF ASSETS Recoverable Amount (RA)

8 Slide 8 Net Selling Price (NSP) -amount obtainable in arm’s length transaction less costs of disposal; -asset is traded in an active market then the market price; or -the current bid price less costs of disposal Value in use. -present value of estimated future cash flows from continuing use and ultimate disposal AS 28 – IMPAIRMENT OF ASSETS Recoverable Amount (RA)

9 Slide 9  Pre-tax market discount rate  Short-term projections - maximum 5 years based on financial budgets approved by management Estimation for the asset in its current condition (restructuring & capital expenditure on the assets ignored)  Long term projections based on short term projections steady or declining growth growth rates exceeding long term average rates of the product, industry or economy discouraged AS 28 – IMPAIRMENT OF ASSETS Value in Use – Cash Flow Considerations

10 Slide 10  Estimate recoverable amount for the individual asset or, if not possible, the asset’s cash generating unit  Apply cash generating unit concept when the asset does not generate cash flows which are independent from other assets  The smallest identifiable group of assets that generates cash flows from continuing use that are largely independent from other assets or groups of assets AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)

11 Slide 11  Assets may be bought/sold individually but they are often used in groups  Revenue and cash arise from use of various assets and cannot be attributed to the individual assets  Factors to consider: How management monitors the enterprise’s operations How management makes decisions about continuing or disposing of the enterprise's assets and operations Segment Reporting AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)

12 Slide 12 Example : 1 A mining enterprise owns a private railway to support its mining activities. The private railway could be sold only for scrap value and the private railway does not generate cash inflows from continuing use that are largely independent of the cash inflows from the other assets of the mine Q: What is the cash-generating unit? AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.) A: The cash-generating unit is mine as a whole.

13 Slide 13 Example : 2 A machine has suffered physical damage but is still working, although not as well as it used to. The net selling price of the machine is less than its carrying amount. The machine does not generate independent cash inflows from continuing use. The smallest identifiable group of assets that includes the machine and generates cash inflows from continuing use that are largely independent of the cash inflows from other assets is the production line to which the machine belongs. The recoverable amount of the production line shows that the production line taken as a whole is not impaired. AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)

14 Slide 14 Example : Case 1 (Assumption): Budgets/forecasts approved by management reflect no commitment of management to replace the machine. Case 2 (Assumption): Budgets/forecasts approved by management reflect a commitment of management to replace the machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal are estimated to be negligible. AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)

15 Slide 15 Retail Store Chain Store X belongs to a retail store chain M. Purchasing, pricing, marketing, advertising and human resource policies (except for hiring X’s cashiers & salesman) are decided by M. M also owns 5 other stores in same city as X (although in different neighbourhoods) and 20 other stores in other cities. All stores are managed in same way as X. What is CGU ? AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)

16 Slide 16 Plant for Intermediate Step in a Production Process A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of the same enterprise. X’s products are sold to Y at a transfer price that passes all margins to X. 80% of Y’s final production is sold to customers outside of the RE. 60% of X’s final production is sold to Y and the remaining 40% is sold to customers outside of the RE. AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)

17 Slide 17 What is the CGU: Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices are higher than market prices. Case 2: There is no active market for the products X sells to Y. AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)

18 Slide 18 Magazine Titles A publisher owns 150 magazine titles (70 purchased and 80 self created). Cash inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed by customer segments and level of advertising income for a magazine title depends on range of title in the customer segment to which it belongs. Management has a policy to abandon old titles before the end of their economic lives and replace them immediately with new titles for same customer segment. What is the CGU? AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)

19 Slide 19 Building - Rented & Own Use A manufacturing company uses half of its headquarter building and rents out the other half to third parties on a 5 year lease. What is the CGU? AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)

20 Slide 20 Indication of Impairment ? Can Asset be assessed individually ? Identify CGU No Impairment Estimate Recoverable Amount < Carrying Amount? Calculate, Account & Disclose Impairment Loss YES NO A AS 28 – IMPAIRMENT OF ASSETS Accounting for Impairment

21 Slide 21 Identified CGU Estimate Recoverable Amount of CGU No Impairment Recoverable Amount < Carrying Amount? Allocate Impairment Loss to Goodwill & Assets in CGU Account & Disclose Impairment Loss YES NO A AS 28 – IMPAIRMENT OF ASSETS Accounting for Impairment (Contd.)

22 Slide 22  Frequency of Impairment Testing: at each balance sheet date When an indicator is triggered Impairment to apply to individual assets as well as a Cash Generating Unit (CGU)  Specific rules for corporate assets and goodwill. AS 28 – IMPAIRMENT OF ASSETS Frequency and Application of Impairment

23 Slide 23  External sources significant decline in market value technological, market, economic, legal environment changes in interest rates or rates of return net assets > market capitalisation  Internal sources evidence of obsolescence or of physical damage discontinuance, disposal, restructuring plans asset performance declining or expected to decline AS 28 – IMPAIRMENT OF ASSETS Indicators of Impairment

24 Slide 24 Entity S is the biggest local supermarket chain in a developing country. Recently, the global chain M, has decided to set up operations in the country. Entity M is well known world-wide, intends to establish its shops close to entity S’s and to offer entity S’s customers a wider range of products and international brands. Management of entity S expects to retain most of its customer base. In this example, entity M’s market entry is an impairment indicator. Management should perform impairment tests, estimating the recoverable of its assets, based on the best available information AS 28 – IMPAIRMENT OF ASSETS Indicators of Impairment - Example

25 Slide 25 Entity Q produces mousetraps and has for some time been the market leader. Its chief competitor, entity R, has recently developed a new product that is widely acknowledged as being superior to that of entity Q. Entity Q’s management has not performed an impairment review on its plant on the grounds that annual production and sales are ahead of budget Entity Q should review its plant and equipment for impairment. The change in the market for its product can have a significant impact on the equipment’s value based on the economic benefit to be obtained from its continued use. The existence of a conflicting indicator (sales ahead of budget) is not sufficient to negate the need for an impairment review. AS 28 – IMPAIRMENT OF ASSETS Indicators of Impairment - Example

26 Slide 26 An entity is in the business of manufacturing cassette tape players. Industry forecasts indicated a decrease in demand for the entity’s product over the next five years due to growth in demand for competing products such as MP3 players. Management should consider this trend in assessing impairment. External trends as well as discrete events may indicate that an asset is impaired. Trends such as overcapacity in a particular industry, or a change in the demand for a product due to technological, market or other conditions, should be considered in assessing impairment. Management’s ability and plans to reverse negative trends should be considered in assessing impairment. AS 28 – IMPAIRMENT OF ASSETS Indicators of Impairment - Example

27 Slide 27  Asset to be reduced to recoverable amount only if : -RA < CA  The reduction is an impairment loss = CA - RA  Impairment loss to be recognised: As an expense in the P&L Account, immediately, otherwise As a revaluation decrease (if carried at revalued amount) AS 28 – IMPAIRMENT OF ASSETS Recognition & Measurement of Loss

28 Slide 28 Value in Use Net Selling Price (NSP) Recoverable Amount (RA) Carrying Amount (CA1) ImpairmentCarrying Amount (CA 2 – after impairment) No AS 28 – IMPAIRMENT OF ASSETS Example 1

29 Slide 29  After the recognition of an impairment loss: adjust depreciation (amortization) charge for the asset in future periods allocate the asset's revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. AS 28 – IMPAIRMENT OF ASSETS Recognition & Measurement of Loss (Contd.)

30 Slide 30  Perform following steps for a ‘bottom-up’ test:  Identify if goodwill or corporate asset can be allocated on a reasonable & consistent basis to the CGU under review  Compare RA of cash generating unit (CGU) to its CA(including goodwill or corporate asset) and recognise impairment loss. AS 28 – IMPAIRMENT OF ASSETS ‘Bottom-Up’ Test – Goodwill and Corporate Assets

31 Slide 31 AS 28 – IMPAIRMENT OF ASSETS Example An enterprise called ER is a wholly owned subsidiary and has 3 divisions (CGU) A, B and C. There are indications that B is impaired and ER has estimated its recoverable amount to be Rs. 230cr. The value of ER has been estimated, by the ultimate holding company, to be Rs. 1,380cr. The goodwill held in the group accounts in respect of ER can be allocated on a reasonable and consistent basis. Cash generating unit ABCTotal Rs. cr. Rs. cr. Rs. cr. Rs. cr. Net assets directly involved in the activities in the unit Goodwill ,200 The goodwill has been apportioned in the ratio that the directly attributed assets bear to each other. The carrying value that would be compared to the recoverable amount is Rs. 240cr. Application of the “bottom-up” test Rs. cr. Carrying amount240 Recoverable amount(230) Impairment loss10

32 Slide 32  If goodwill cannot be allocated on a reasonable basis then perform ‘top down’ test by applying following steps:  Identify smallest CGU that includes the CGU under review and to which goodwill or corporate asset can be allocated on a reasonable basis  Then compare RA of the above CGU to its CA (including goodwill or corporate asset) and recognise impairment loss. AS 28 – IMPAIRMENT OF ASSETS ‘Top-Down’ Test – Goodwill and Corporate Assets

33 Slide 33 Cash generating unitABCTotal Rs. cr.Rs. cr.Rs. cr.Rs. cr. Net assets directly involved in the activities of the unit Goodwill 450 1,200 Step 1 Application of the “bottom-up” testB Rs. cr. Carrying amount150 Recoverable amount(230) Impairment loss - Step 2 Application of the “top-down” test ER (the next smallest CGU) Rs. cr. Carrying amount1,200 Recoverable amount(1,380) Impairment loss - AS 28 – IMPAIRMENT OF ASSETS ‘Top-Down’ Test – Example

34 Slide 34  Order of the allocation : Goodwill ( if any ) Other assets on a pro-rata basis based on the carrying amount AS 28 – IMPAIRMENT OF ASSETS Impairment Loss for a Cash Generating Unit

35 Slide 35  The carrying amount of an asset (which is part of CGU) should not be reduced below the highest of: (a) its net selling price (if determinable); (b) its value in use (if determinable); and (c) zero Unabsorbed impairment loss allocated to other assets in CGU. AS 28 – IMPAIRMENT OF ASSETS Treatment of Impairment Loss for a CGU

36 Slide 36  Assess each year whether accumulated impairment loss may no longer exist or may have decreased  Reverse if there has been a change in estimates (not simply because of increase in PV of cash flows I.e with passage of time)  Increased amount not to exceed the carrying amount that would otherwise exist if no impairment loss had been recognised AS 28 – IMPAIRMENT OF ASSETS Reversal of Impairment of Loss

37 Slide 37  Allocate reversal for CGU’s to: First, pro rata to assets other than goodwill Second, to goodwill allocated to the CGU i.e., reverse order to allocation of the loss  But, impairment losses for goodwill should not be reversed unless: Loss was caused by a specific non recurring external event, and Subsequent external events have occurred that reverse the effect of that event AS 28 – IMPAIRMENT OF ASSETS Reversal of Impairment of Loss

38 Slide 38  For each class of assets, the financial statements should disclose: (a) amount of impairment losses (b) line item(s) of the income statement in which those impairment losses are included (c) amount of reversals of impairment losses (d) line item(s) of the income statement in which those impairment losses are reversed (e) amount of impairment losses recognized directly against revaluation surplus (f) amount of reversals of impairment losses recognized directly against revaluation surplus AS 28 – IMPAIRMENT OF ASSETS Disclosure

39 Slide 39  Enterprise should disclose: Events and circumstances Amount of loss or reversal recognised Nature of asset/CGU Reported segment of asset/CGU CGU – if grouping has changed, describe current and former grouping and reasons for the change in grouping Recoverable amount – net selling price or value in use. Describe basis etc  Main classes of assets affected by impairment losses or reversals  Main events and circumstances that led to loss/reversal AS 28 – IMPAIRMENT OF ASSETS Disclosure –Material Loss or Reversal

40 Slide 40 AS 28 – IMPAIRMENT OF ASSETS Comparison between Indian v/s IAS v/s US GAAP ParticularsIASUS GAAPIndian GAAP Calculation of Value in Use Discounted Cash Flows Undiscounted Cash Flows but fair value concept is present/ measurement using discounted cash flows Similar to IAS Reversal of Impairment Loss Permitted under certain circumstances except impairment loss for Goodwill is not reversed. ProhibitedSimilar to IAS except impairment of Goodwill can also be reversed in certain situations

41 Slide 41  Impairment Indicators  Identification of CGU’s  Cash Flow Estimation and review  In present condition of the assets  CGU will have assets with different useful lives  Determining Net Selling Price  Discount Rate AS 28 – IMPAIRMENT OF ASSETS Matters for Discussion – Practical Challenges

42 Slide 42 THANK YOU


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