Impairment study of Assets as per IndAS, IAS and 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.
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:
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.
In assessing whether there is any indication that an asset may be impaired, an entity shall consider the:
The following must be done annually whether or not there are indications of impairment:
To arrive at the impairment loss, the following steps need to be followed:
Recoverable amount is the higher of the following for a CGU or asset:
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.
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:
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