Impairment of assets IAS 36

School: Assoc. of Chartered Certified Accountants - Course: ACCOUNTING BM001-3-1- - Subject: Accounting

Impairment of assets Objectives of IAS 36: Impairment of assets The objective is to set out rules to ensure that the assets of an entity are carried at no more than their recoverable amount (i.e value of the business). IAS 36 applies to all assets with the exception of the following: Inventory (IAS 2) Construction contracts (IAS 11) Deferred tax assets (IAS 12) Assets arising from employee benefits Financial assets included in the scope of IAS 32 Investment property measured at fair value (IAS 40) Non-current assets classified as held for sale (IFRS 5) The main accounting issues to consider are therefore as follows. (a)How is it possible to identify when an impairment loss may have occurred? (b)How should the recoverable amount of the asset be measured? (c)How should an 'impairment loss' be reported in the accounts? Identifying a potentially impaired asset An entity should assess at the end of each reporting period whether there are any indications of impairment to any assets. The concept of materiality applies, and only material impairment needs to be identified. If there are indications of possible impairment, the entity is required to make a formal estimate of the recoverable amount of the assets concerned. IAS 36 suggests how indications of a possible impairment of assets might be recognised. The suggestions are based largely on common sense. (a) External sources of information (i) A fall in the asset's market value that is more significant than would normally be expected from passage of time over normal use. (ii) A significant change in the technological, market, legal or economic environment of the business in which the assets are employed. (iii) An increase in market interest rates or market rates of return on investments likely to affect the discount rate used in calculating value in use. (iv) The carrying amount of the entity's net assets being more than its market capitalisation. (b)Internal sources of information: evidence of obsolescence or physical damage, adverse changes in the use to which the asset is put, or the asset's economic performance Even if there are no indications of impairment, the following assets must always be tested for impairment annually. (a) An intangible asset with an indefinite useful life (b) Goodwill acquired in a business combination. Impairment An asset is impaired if its recoverable amount is below the value currently shown on the statement of financial position (i.e. the asset's current carrying value(CV)). Recoverable amount is taken as the higher of: Fair value less costs to sell, and Value in use. Measurement of recoverable amount Measurement of fair value less costs to sell Measurement may be by way of: A binding sales agreement The current market price less costs of disposal (where an active market exists). 2Measurement of value in use Value in use is determined by estimating future cash inflows and outflows to be derived from the use of the asset and its ultimate disposal, and applying a suitable discount rate to these cash flows. it can as well be defined as the present value of estimated future cash flows (inflows minus outflows) generated by the asset, including its estimated net disposal value (if any) at the end of its expected useful life.