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Impairment study of Assets as per IndAS, IAS and IFRS

Impairment Study of Assets as per IndAS / IAS / IFRS:

The Objective of Ind AS 36 is to ensure that assets are carried at not more than at recoverable value. The standard also specifies when an entity should reverse an impairment loss and provide disclosures while preparing and presenting the financial statements.

IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely independent of those from other assets.

Impairment study of Assets as per IndAS, IAS and IFRS

The core principle in IAS 36 is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount of the asset to its recoverable amount, and recognise an impairment loss. IAS 36 also applies to groups of assets that do not generate cash flows individually (known as cash-generating units).

Ind-AS 36 was introduced as the Indian Accounting Standards equivalent for IAS 36 (IFRS), covering Impairment of Assets. Under the erstwhile Indian GAAP, very few companies in India carried out impairment testing; but with the introduction of Ind AS, it becomes much more relevant and widespread. In this article, we summarise the applicability, requirements and methodologies used in applying Ind AS 36, with a practical approach to impairment assessment and testing.

An impairment loss is recognised immediately in profit or loss (or in comprehensive income if it is a revaluation decrease under IAS 16 or IAS 38). The carrying amount of the asset (or cash-generating unit) is reduced. In a cash-generating unit, goodwill is reduced first; then other assets are reduced pro rata. The depreciation (amortisation) charge is adjusted in future periods to allocate the asset’s revised carrying amount over its remaining useful life.

An impairment loss for goodwill is never reversed. For other assets, when the circumstances that caused the impairment loss are favourably resolved, the impairment loss is reversed immediately in profit or loss (or in comprehensive income if the asset is revalued under IAS 16 or IAS 38). On reversal, the asset’s carrying amount is increased, but not above the amount that it would have been without the prior impairment loss. Depreciation (amortisation) is adjusted in future periods.

APPLICABILITY OF IND AS 36, IMPAIRMENT OF ASSETS

This standard must be applied in accounting for the impairment of all assets, unless they are specifically excluded from its scope. Assets to which IND AS 36 is commonly applied are:

  • Investment in Subsidiaries, Joint Ventures and Associates,
  • Plant, property and Equipment,
  • Intangible Assets including Goodwill

To assess impairment of assets or intangible assets, a CGU approach is used i.e. recoverable amount is assessed for each cash-generating unit (CGU) and compared with the carrying amount of the CGU, then drilled down to asset level.

INDICATORS OF IMPAIRMENT AS PER IND AS 36

In assessing whether there is any indication that an asset may be impaired, an entity shall consider the:

  • Internal indicators such as obsolescence or physical damage of an asset, under-performance of an asset compared to expectations, reassessing the useful life of an asset as finite rather than indefinite, etc.
  • External Indicators such as changes in regulations, adverse effects in the technological, economic or legal environment, increase in market interest rates, etc.

The following must be done annually whether or not there are indications of impairment:

  • Impairment testing of intangible assets with an indefinite useful lives and intangible assets not yet available for use
  • Impairment testing of goodwill and/or intangible assets acquired in a business combination

IMPAIRMENT METHODOLOGY 

To arrive at the impairment loss, the following steps need to be followed:

  1. Estimating Recoverable Amount (RA)
  2. Comparing Recoverable Amount (RA) and Carrying Amount (CA)
  3. Recognising Impairment Loss

Estimating Recoverable Amount

Recoverable amount is the higher of the following for a CGU or asset:

  • Fair value less costs of disposal (FVLCOD)
  • Value in use (VIU)

It is not always necessary to determine both an asset's FVLCOD and VIU. If either of these amounts exceeds the asset's carrying amount, the asset is not impaired.

Fair Value less Costs of Disposal (FVLCOD)

  • Fair Value is the amount obtainable from the sale of an asset or CGU in an arm's length transaction between knowledgeable, willing parties.
  • Fair value estimate takes market participants' perception of the price of an asset into account. FVLCOD would consider future developments only if they are publicly known, supportable and are considered by other market participants as well.
  • Examples of costs of disposal 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.

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. VIU is usually estimated by using the Discounted Cash Flow (DCF) method, in the following steps:

  1. Estimating the future cash inflows and outflows derived from continuing use of the asset
  2. Estimating the terminal period cash flows or cash flows from its ultimate disposal, as applicable
  3. Applying the appropriate discount rate to those future cash flows

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