AS-28
This query is : Resolved
29 November 2009
What is meant by "Bottom-up" & "Top-Down" approach as per AS 28.
23 December 2009
Someone pls clarify..
14 July 2024
In the context of AS 28 - Impairment of Assets, "bottom-up" and "top-down" approaches refer to two different methodologies for assessing impairment losses on assets. These approaches help organizations determine whether an asset's carrying amount exceeds its recoverable amount, which is the higher of its fair value less costs of disposal (FVLCD) and its value in use (VIU).
### Bottom-Up Approach:
**Definition:** The bottom-up approach involves identifying individual assets or cash-generating units (CGUs) and assessing each one separately for impairment.
- **Process:**
- **Identify Individual Assets or CGUs:** Each asset or CGU (group of assets that generate cash flows that are largely independent) is assessed individually to determine if there are any indicators of impairment.
- **Estimate Recoverable Amount:** For assets showing impairment indicators, estimate the recoverable amount (FVLCD or VIU).
- **Compare Carrying Amount:** Compare the carrying amount of each asset or CGU to its estimated recoverable amount.
- **Recognize Impairment Loss:** Recognize impairment losses for individual assets or CGUs where the carrying amount exceeds the recoverable amount.
- **Usage:** The bottom-up approach is typically used when there are significant differences in the economic characteristics of assets within a class or when there is specific evidence of impairment for individual assets or CGUs.
### Top-Down Approach:
**Definition:** The top-down approach involves aggregating the carrying amounts of groups of assets or CGUs and comparing them to the aggregated recoverable amounts.
- **Process:**
- **Aggregation of Assets or CGUs:** Assets or CGUs are grouped together based on shared characteristics such as location, use, or economic environment.
- **Estimate Aggregate Recoverable Amount:** Estimate the aggregate recoverable amount for each group of assets or CGUs.
- **Compare Aggregate Carrying Amount:** Compare the aggregate carrying amount of the grouped assets or CGUs to their aggregate recoverable amount.
- **Recognize Impairment Loss:** If the aggregate carrying amount exceeds the aggregate recoverable amount, recognize impairment losses for the group of assets or CGUs.
- **Usage:** The top-down approach is typically used when individual assessment of assets is impractical or when there is no specific evidence of impairment for individual assets, but there are indications of impairment at the group level.
### Key Differences:
- **Focus:** Bottom-up focuses on individual assets or CGUs, while top-down focuses on groups or classes of assets.
- **Complexity:** Bottom-up can be more complex and time-consuming due to individual assessments, whereas top-down provides a broader overview.
- **Applicability:** Choice between bottom-up and top-down depends on the nature and circumstances of the assets, practicality of assessment, and availability of information.
### Conclusion:
AS 28 allows entities to choose between bottom-up and top-down approaches based on their specific circumstances and the nature of their assets. These approaches ensure that impairment losses are properly assessed and recognized, thereby reflecting the true economic value of assets in the entity's financial statements. Each approach has its merits and is applied based on practical considerations and the availability of relevant information.
### Bottom-Up Approach:
**Definition:** The bottom-up approach involves identifying individual assets or cash-generating units (CGUs) and assessing each one separately for impairment.
- **Process:**
- **Identify Individual Assets or CGUs:** Each asset or CGU (group of assets that generate cash flows that are largely independent) is assessed individually to determine if there are any indicators of impairment.
- **Estimate Recoverable Amount:** For assets showing impairment indicators, estimate the recoverable amount (FVLCD or VIU).
- **Compare Carrying Amount:** Compare the carrying amount of each asset or CGU to its estimated recoverable amount.
- **Recognize Impairment Loss:** Recognize impairment losses for individual assets or CGUs where the carrying amount exceeds the recoverable amount.
- **Usage:** The bottom-up approach is typically used when there are significant differences in the economic characteristics of assets within a class or when there is specific evidence of impairment for individual assets or CGUs.
### Top-Down Approach:
**Definition:** The top-down approach involves aggregating the carrying amounts of groups of assets or CGUs and comparing them to the aggregated recoverable amounts.
- **Process:**
- **Aggregation of Assets or CGUs:** Assets or CGUs are grouped together based on shared characteristics such as location, use, or economic environment.
- **Estimate Aggregate Recoverable Amount:** Estimate the aggregate recoverable amount for each group of assets or CGUs.
- **Compare Aggregate Carrying Amount:** Compare the aggregate carrying amount of the grouped assets or CGUs to their aggregate recoverable amount.
- **Recognize Impairment Loss:** If the aggregate carrying amount exceeds the aggregate recoverable amount, recognize impairment losses for the group of assets or CGUs.
- **Usage:** The top-down approach is typically used when individual assessment of assets is impractical or when there is no specific evidence of impairment for individual assets, but there are indications of impairment at the group level.
### Key Differences:
- **Focus:** Bottom-up focuses on individual assets or CGUs, while top-down focuses on groups or classes of assets.
- **Complexity:** Bottom-up can be more complex and time-consuming due to individual assessments, whereas top-down provides a broader overview.
- **Applicability:** Choice between bottom-up and top-down depends on the nature and circumstances of the assets, practicality of assessment, and availability of information.
### Conclusion:
AS 28 allows entities to choose between bottom-up and top-down approaches based on their specific circumstances and the nature of their assets. These approaches ensure that impairment losses are properly assessed and recognized, thereby reflecting the true economic value of assets in the entity's financial statements. Each approach has its merits and is applied based on practical considerations and the availability of relevant information.
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