IAS 36 Impairment of Assets - Summary

This article will help you quickly recap IAS 36 without missing the essentials.

Scope

Which assets need to be impaired under IAS 36?

All the assets are impaired under IAS 36 except those specifically excluded by the standard. IAS 36 applies to land, buildings, machinery and equipment, investment property carried at cost, intangible assets, goodwill, investments in subsidiaries, associates, and joint ventures carried at cost, and assets carried at revalued amounts under IAS 16 and IAS 38.

Which assets are excluded from IAS 36?

The following assets are excluded from IAS 36: [IAS 36.2]

• inventories (IAS 2)
• deferred tax assets (IAS 12)
• assets arising from employee benefits (IAS 19)
• financial assets (IFRS 9)
• investment property carried at fair value (IAS 40)
• agricultural assets carried at fair value (IAS 41)
• insurance contract assets (IFRS 4)
• non-current assets held for sale (IFRS 5)

Impairment

What is the concept of Impairment under IAS 36?

Impairment loss is the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

What is Carrying Amount?

Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses. I short it is the book value of the asset. If this amount is greater that the recoverable amount, the asset is impaired.

What is Recoverable Amount

Recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use. Conceptually, a rational owner would utilize an asset in a way that maximizes its benefits whether it is by selling that asset or by using that asset. Therefore the higher of value in use (the value obtained by using that asset) and fair value less costs of disposal (the value obtained by selling that asset) is the amount expected to be recovered from that asset (recoverable amount)

What exactly is the value in use?

Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit by using it.

What is Fair Value less cost to Sell?

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Cost is disposal is the cost of disposing the asset which must be deducted from the asset's fair value.

Impairment Testing

What is Impairment testing?

Impairment testing means computing the recoverable amount of the asset or cash-generating unit. [para 8]

When should an asset be tested for impairment?

The following assets should be tested for impairment annually [para 10]:

• an intangible asset with an indefinite useful life,
• an intangible asset not yet available for use, or
• goodwill acquired in a business combination

All other assets should be tested for impairment upon indication of impairment.

What are the indications of impairment?

IAS 36 requires assessment of at least the following indications [para 12]:

External Indicators

• Decline in Asset Value: The asset's value has dropped more than expected due to time or normal use.
• Adverse Changes: Negative changes in the entity’s environment (technology, market, economy, or legal) have occurred or are expected soon.
• Interest Rate Impact: Rising market interest rates are likely to lower the asset's recoverable amount by affecting its value.
• Entity Value: The entity's total assets are worth more on the books than its market value.

Internal Indicators

• Obsolescence or Damage: The asset shows signs of being outdated or physically damaged.
• Usage Changes: Significant changes in how the asset is used have occurred or are expected, such as idling, plans to discontinue or restructure, or shortening its useful life.
• Poor Performance: Internal reports suggest the asset's economic performance is worse than expected.

Measuring the recoverable amount

How to compute the recoverable amount?

Recoverable amount is the higher of "Fair Value less cost to sell" and "value in use" but it is not always necessary to compute both amounts.

• If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to calculate the other amount. The asset is not impaired. [IAS 36.19]
• If fair value less costs of disposal cannot be determined, then recoverable amount is value in use. [IAS 36.20]
• For assets to be disposed of, recoverable amount is fair value less costs of disposal. [IAS 36.21]

How to compute Fair Value less cost to sell?

Fair Value

Fair Value is determined in accordance with IFRS 13 Fair Value Measurement

Cost of Disposal

Examples of costs of disposal to be deducted are legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale.

However, termination benefits (as?defined in IAS?19) and costs associated with reducing or reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset.

How to Compute Value in Use?

Value in use of an asset or Cash Generating Unit is computed as follows [Para 31]:

• estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and
• discounting the cahs flows using the appropriate discount rate.

The following factors may either be built in to the discount rate or in the cash flows, but should not be double-counted [Para 30 & 32]:

• expectations about possible variations in the amount or timing of those future cash flows;
• the price for bearing the uncertainty inherent in the asset;
• other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.

Effective Date

Since when is IAS 36 effective?

IAS 36, after its revision, is effective for annual periods beginning on or after 31 March 2004. The most recent ammendments were effective for annual periods beginning on or after 1 January 2014.

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