NATIONAL UNIVERSITY

JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

IMPAIRMENT OF ASSETS
CCONCEPTUAL FRAMEWORK AND REPORTING STANDARD
PREPARED BY: Aquino, Tanya Pia L.
REVIEWED BY:

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EXCLUSIVE FOR ACCOUNTANCY STUDENTS OF NATIONAL UNIVERSITY ONLY
PAS 36
Indication of Impairment
- An entity shall assess at each reporting date whether there is any indication that an
asset may be impaired.
- An entity shall test an intangible asset with an indefinite useful life or intangible asset
not yet available for use for impairment annually by comparing the carrying amount
with the recoverable amount.

External sources
a. Significant decrease or decline in the market value of the asset as a result of passage of
time or normal use or a new competitor entering the market.
b. Significant change in the technological, market, legal or economic environment of the
business in which the asset is employed.
This could be as simple as a change in customer taste.
c. An increase in the interest rate or market rate of return on investment which will likely
affect the discount rate used in calculating the value in use.
d. The carrying amount of net assets of the entity is more than the “market capitalization.”
In other words, the carrying amount exceeds the fair value of the net assets.
The market capitalization simply means the fair value of the net assets of the entity.

Recognition of Impairment loss

- If recoverable amount of an asset is less that the carrying amount, an impairment loss
has occurred.

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JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

- The impairment loss shall be recognized immediately by reducing the asset’s carrying
amount to its recoverable amount.
- The impairment loss is recognized in profit or loss and presented separately in the
income statement.

Machinery 60,000,000
Accumulated depreciation 20,000,000
Carrying amount 40,000,000

Computation of impairment loss

Carrying amount 40,000,000

Recoverable amount 35,910,000
Impairment loss 4,090,000

Reversal of an impairment loss

if the recoverable amount of an asset that has previously been impaired turns out
to be higher than the current carrying amount, the carrying amount of the asset shall be
increased to new recoverable amount.

However, PAS 36, paragraph 117, provides that the increased carrying amount of
an asset due to a reversal of an impairment loss shall not exceed the carrying amount that
would have been determined, had no impairment loss been recognized for the asset in
prior years.

The reversal of the impairment loss shall be recognized immediately in the

income statement as gain on reversal of impairment loss.

Carrying amount with impairment on December 31, 2020

Machinery 8,000,000
Accumulated depreciation – December 31, 2019
(1,600,000 + 1,200,000)
2,800,000

Adjusted carrying amount – December 31, 2019 5,200,000

Depreciation for 2020 (5,200,000 / 8) 650,000

Carrying amount – December 31, 2020 per book

with impairment
4,550,000

Cash generating unit with goodwill

Goodwill does not generate cash flows independently from other assets or group
of assets, and therefore, the recoverable amount of goodwill as an individual asset cannot
be determined.

As a consequence, if there is an indication that goodwill may be impaired,

recoverable amount is determined for the cash generating unit to which goodwill belongs.

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JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Determination of impairment

PAS 36, paragraph 90, provides that a cash generating unit to which goodwill has
been allocated shall be tested for impairment at least annually by comparing the carrying
amount of the unit, including the goodwill, with the recoverable amount.

a. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit
and the goodwill allocated to that unit shall be regarded as not impaired.
b. If the carrying amount of the unit exceeds the recoverable amount of the unit, the
entity must recognize an impairment loss.

Reversal of impairment loss on goodwill

PAS 36, paragraph 124, explicitly provides that an impairment loss recognized for
goodwill shall not be reversed in a subsequent period.

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JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

SOURCES:
Author. (200x). Book Title

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