1. IAS 36 Impairment of Assets
Submitted by – Mukesh Thakur

2. 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
Matching concept is applied
Impairment
The 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.
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.

4. Scope Applies to Does not applies to
Property, Plant and Equipment (IAS 16)
Finance Lease of Lessee
Operating Lease of Lessor
Financial Assets under IAS 27, IAS 28 and IAS 31
Prepaid Assets
Does not applies to
Inventories (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 39
Investment Properties (IAS 40)
Biological Assets under IAS 41
Assets arising from insurer’s contractual rights (IAS 4)
Non current Assets held for Sale ( IFRS 5)

5. 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.

6. If the recoverable amount of asset is less than its carrying amount
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.

7. Example Case 1 Rs. Case 2 Cost 1000 Accumulated Depreciation 400
Carrying Amount
600
Recoverable Amount
900
The Asset is not impaired
The 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 asset
Net Selling Price of the assets
Fair 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 is
Its market value
Cost of disposal is negligible
Impairment not required
Cost of Disposal major
Impairment required
Other than market value

11. Decline in the market value of assets significantly.
Indicators
External
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.
Internal
Obsolescence or physical damage
change in use of asset
Economic performance of asset is less than expected.

12. Decline in the market value of assets
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, economic or legal environment
may indicate that the value in use of an asset (or group of assets) is less than its carrying amount
Increases in interest rates
a decline in the market value of an asset
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

13. 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.

14. 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

15. 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.

16. 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

17. 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.

18. 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

19. 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 Recognize liability if required by another standard.
Depreciation will be charged on revised carrying amount.

20. Impairment Provision = Carrying Amount – Recoverable Amount
Higher of
Assess
Impairment
conditions
Impairment
Condition
Exists?
Net Selling Prive
Value in use No
impairment
Review NO
YES
Identify
Assets/CGU
Binding Sale
Agreement
Active Market
Best Estimate
Determine
Recoverable
Amount
Cash Flow
Discount Rate No
impairment
Provision NO
Carrying Amount
>
Recoverable Amount?
Follow up with Annual
Impairment Review
Impairment Provision =
Carrying Amount – Recoverable Amount
YES

21. Example
Cost ,000
Accumulated depreciation
Carrying amount
Net selling price
Value in use
Recoverable amount
Impairment loss
Revised carrying amount

22. 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.

23. 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

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 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.

25. 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.

26. Determine impairment required.
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
Determine impairment required.
Assets A B C
X Ltd.
Carrying Amount
150
100 35
285
Recoverable Amount
115
105 40
260
Goodwill

27. Solution
Bottom 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. A B C GW X
Carrying Amount
150
100 35 40
325
Impairment Loss in Bottom up test -
(35)
Carrying amount after Bottom up
115
290
Recoverable Amount
260
Impairment Loss ( ) 30

28. Determine impairment required.
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
Determine impairment required.
Assets A B C
X Ltd.
Carrying Amount
150
100 35
285
Recoverable Amount
115
105 40
260
Goodwill

29. Bottom up for A Rs. Crores Carrying Amount 150 Recoverable Amount 115
Solution
Bottom up for A Rs. Crores
Carrying Amount
Recoverable Amount
Impairment Loss (35)
Top Down for A & B
Carrying 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 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.

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.
Indicators
External
Market Value has increased significantly.
Significant favorable change in technological market, economic or legal environment.
Interest rates has been decreased.
Internal
Significant 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. Disclosures
Impairment Losses/reversals recognised in
Profit and loss account and
Equity 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 segment
The amount of impairment losses/reversals recognised in
Profit and Loss Account
Equity directly

34. Disclosures
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.

35. 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.
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.

36. 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.
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 36
AS 28
Reversal of Impairment Loss
Reversal 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 and
Subsequent external event have occurred that reverse the effect of that event.

38. Thank you