FR - Accounting for transactions in financial

statements
Impairment of Assets – IAS36 – Part 1

OBJECTIVE OF IAS 36:

The objective of IAS 36 is to ensure that an entity's assets are not carried at more than their recoverable
amount. The recoverable amount refers to the value of benefits expected to be gained or derived from the asset.

IMPAIRMENT PROCESS:

- Carrying amount < Recoverable amount = No issue

- Carrying amount > Recoverable amount = Impairment

If the carrying amount of an asset is higher than the value of expected benefits, the asset is considered to be
impaired. The impairment is recorded in the form of a ‘write-down’ or a ‘write-off’.

Write-down
Write-down refers to a partial adjustment of the carrying amount, performed when the asset still has some
recoverable value left.

Write-off
Write-off refers to a complete removal of the asset from the books, performed when the recoverable amount of
the asset is zero.

RECOVERABLE AMOUNT:

IAS 36 states that the recoverable amount of an asset is the higher of:
- Fair value less costs of disposal, and
- Value in use.
Fair Value Less Costs of Disposal
Fair value less costs of disposal refers to the price for which an asset may be sold in an orderly transaction,
between market participants, adjusted for any costs necessary to make the sale possible. Fair value is the
universal selling or exit price, not specific to the reporting company.

Value in Use

Value in use is the present value of the future cash flows expected to be derived from an asset. Value in use is
computed on the basis of cash flow projections or forecasts. The forecasts should cover:

- Cash inflows from continuing use of the asset;

- Cash outflows necessary to generate these cash inflows; and
- Net cash flows from disposal of the asset.

The cash flow projections should be based on reasonable and supportable assumptions, the most recent
budgets and forecasts, and extrapolation for periods beyond budgeted projections. The projections should cover
a maximum period of five years, unless a longer period can be justified. Moreover, the cash flow projects should
exclude the impact of any uncommitted future restructurings or expenditures to enhance the asset’s
performance.

As per IAS 36, the discount rate used should be the rate that investors would require if they were to choose an
investment that would generate cash flows of amounts, timings and risk profile equivalents to those expected
from the asset. The discount rate should be pre-tax and independent of the entity’s capital structure.

ACCOUNTING ENTRIES:

The accounting entry for impairment loss is:

- Debit – Impairment expense; and

- Credit – Asset.

If the impairment reverses a previously upward revaluation, the accounting entry is:

- Debit – Revaluation reserve; and

- Credit – Asset.