IMPAIRMENT OF ASSETS
UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS(IFRS)-A VIEW
While some of our professional brothers will be updating their knowledge to be ready for the implementation of IFRS from the next financial year the need of the hour is to share what we learn among ourselves. This time I would like to discuss Impairment of Assets to the extent I have understood it.
The objective of this standard is to set out a process to ensure that assets are not carried in the books of account at a value which is in excess of its recoverable amount. Recoverable amount here represents an amount to be recovered through use or sale of a particular asset. Now the question arises why there is need for accounting of impairment of an asset when we have already a mechanism called deprecation in place which takes care of depletion in value of an asset due to wear and tear, age, obsolescence etc. The reason can be that the depreciation is a planned process of writing down of an asset whereas impairment takes care of the changes taken place post acquisition of an asset effecting assets value either ways, it can be reduction as well as increase in the value of an asset. This makes impairment of an asset an important accounting tool enabling us to adjust the value of an asset on regular basis to make accounting more true and fair, reliable and transparent.
IAS 36 does not apply to:-
* IAS 2 Inventories
* IAS 11 Assets arising from construction contract
* IAS 12 Deferred tax assets
* IAS 19 Assets arising from employee benefits
* IAS 39 Financial assets within the scope of this standard
* IAS 40 Investment property measured at fair value
* IAS 41 Certain biological assets
* IFRS 4 Non-current assets (or disposable groups) classified as held for
sale in accordance with this standard.
* IFRS 5 Assets that are held for sale
IAS 36 does apply to (among other assets)
- Machinery and equipments
- Intangible assets including goodwill
- Investment property carried at cost
- Investments in subsidiaries, associates, and joint ventures.
International Accounting Standard 36 (IAS 36), precisely impairment is a process of continuous revaluation of assets to account for any loss or gain in the value of an asset where carrying amount of an asset in the books of account is greater than its recoverable amount whether through its continuous use or by selling it. A simple example can be change in technology limiting the use of an asset to a lesser period than planned. IAS 36 helps us to understand the process of measuring and accounting of loss or gain due to impairment. The reasons behind impairment can be:-
· Changes in regulation and business climate
· Decline in usage rate
· Technology changes
· Forecasts of a significant decline in the long-term profitability of the asset
Whenever there are enough indications or events confirming impairment loss of an asset due to above reasons that particular asset needs to be tested for impairment and adjustments need to be carried out in the books of account, however, in the case of under mentioned assets the process has to be carried out on annual basis whether there is any indication of impairment or not.
· intangible assets with indefinite useful lives
· intangible assets not yet available for use
· goodwill acquired in a business combination
The process of impairment test may not be carried out at the year end but has to be carried out same time once a year. Thus different assets or cash generating units can be tested for impairment at different times during a year. Intangible assets recognized during the year need to be tested for impairment at the close of the year.
Measuring and recognition of impairment loss in line with the above process is required to be carried out to adjust values of effected assets. Where recoverable value of an asset is less than the value being carried in the books of account in that case the carrying amount needs to be brought down by debiting the difference to income and expenditure account. But in case of assets being carried at revalued amount the loss due to impairment will be considered as revaluation decrease and accordingly adjusted. As a result of impairment if the loss is greater than the carrying amount of particular asset a liability may be recognized but only if it is requirement of another Standard. Depreciation to be charged on the assts after recognition of impairment loss need to be on the revised carrying value. In the case of cash generating assets, if there is loss due to impairment the same needs to be recognized by identifying the carrying amount of a particular asset but if it is not possible to identify a particular individual asset then the carrying value of that particular cash-generating unit may be calculated to which the asset belongs.
Recovering Impairment Loss: In case recoverable amount increases and is considered to be greater than the carrying amount, then in certain cases the asset is stated at a higher value by crediting the impairment gain to the income of the year. It is important to note that reversal of impairment loss of an asset, other than goodwill, need to be recognized only to the extent which in no case is in excess of its original pre-impaired value less subsequent depreciation. Thus while reversing impairment loss the first step should be to establish the pre-impaired value of the asset less subsequent depreciation. Second step should be to calculate the difference between the value calculated as per step first and the carrying amount of the asset. Finally impairment loss can be reversed to the extent of value difference as calculated under step second. In the case of reversal of impairment loss of cash generating assets the reversal is done on pro-rata basis with the carrying amount of the assets, excluding goodwill. In the case of goodwill reversal of impairment loss is not allowed.
Impairment and effects on the financial statements:-
- Income Statement of previous years will not be adjusted
- Current year’s Income statement will include a loss/ gain due to impairment revaluations.
- In case impairment loss or gain is recognized on assets being carried on revalued assets the adjustments will affect revaluation reserve.
- Impairment losses recognized or recovered need to be disclosed separately for each class of asset with the line item in the income and expenditure statement in which the impairment losses are adjusted. Any adjustment of impairment of losses or recoveries directly adjusted to equity needs separate disclosure.
- The following information need to be disclosed in case impairment loss/reversal is of significant value.
Ø The events and circumstances leading to the impairment loss
Ø Amount of loss
Ø In case of individual asset is effected, the nature and segment of that asset.
Ø If it relates to cash generating unit, the description of the amount of impairment loss/reversal by class of assets and segment needs to be disclosed.
Ø The method used for calculation of fair value less cost to sell.
Ø Basis of calculation of value in use along with discounted rate should be disclosed.
- Where loss or recovery of loss due to impairment is material with regard to the financial statement, the main class of assets effected along with the events/circumstances that led to current situation need to be disclosed.
- Detailed information about the estimates used to measure the recoverable amounts of the cash-generating units that contain goodwill or intangible assets with an indefinite useful life should also be set out.
DILIP K RAINA –Chartered Accountant
B.Com; FCA (ICAI); PGDFM; PGDCA; DBM; Cert.IFRS (ICAEW); Microsoft Certified Professional for Dynamics (MCP).