IMPAIRMENT OF ASSETS - IAS 36

IAS 36 most commonly applies to:

 Assets such as Property, Plant and Equipment (PPE) accounted for in accordance
with IAS 16 Property, Plant and Equipment.

 Intangible assets accounted for in accordance with IAS 38 Intangible assets.

KEY WORDS:

 IMPAIRMENT
 CARRYING AMOUNT
 RECOVERABLE AMOUNT

1. An IMPAIRMENT of a non-current asset means LOSS as a result of the carrying amount

of a NCA (Non-current asset) EXCEEDING its recoverable amount.

CA > RA

2. CARRYING AMOUNT is also known as Net Book Value. It is the NCA(Non-Current

Asset) at cost less Accumulated Depreciation up to the date of the impairment test.

3. The RECOVERABLE AMOUNT of an asset is the HIGHER of

 its fair value less costs to sales (FVLCTS) and
 its value in use (VIU).

4. FVLCTS is the amount obtainable from the sale of an asset in an arm’s length transaction
less disposal costs.

5. VIU is calculated by discounting the future cash flows expected to be derived from the
asset to their present value.

6. An impairment exercise is conducted annually or as and when required (in the case of
business purchase) to ensure that assets are not stated at more than they are worth to a
business.

7. Where carrying amount is more than recoverable amount, there is an impairment loss.

8. Impairment loss is charged against profits in the INCOME STATEMENT and the
carrying amount of the NCA is entered in the STATEMENT OF FINANCIAL
POSITION (BALANCE SHEET)( after deducting the impairment loss..)In case of no
 impairment loss ,there will be no change in the carrying amount in the SOFS(Balance
Sheet)
9. If in a previous year, there was an impairment loss and in the current year an appreciation
for a NCA (a Revaluation reserve is created), the impairment loss can only be reversed if
there has been an increase in the asset’s service potential and a change in the estimates
used to determine the asset’s recoverable amount.

10. CAUSES OF IMPAIRMENT:

 External causes;
a) Significant decline in the market value of the asset (due to increase
competition)
b) Significant changes in the technological, market, legal or economic
environment in which the business operates.
c) An increase in market interest rate or market rates of return on investments
likely to affect the discount rate used in the calculation of VALUE IN USE.

 Internal causes;
a) The NCA becomes idle.
b) Plans to discontinue or restructure the operations to which the asset belongs.
c) Plans to dispose of an asset before the previously expected date.

11. INTERACTIVE QUESTION ON IMPAIRMENT

A Company has three non-current assets, the details of which are as follows:

ASSET 1 ($m) ASSET 2 ($m) ASSET 3 ($m)

Carrying amount 160 240 280
Value in use 300 210 214
Fair value less costs to sell 120 180 220

REQUIRED:

Explain whether any of the three assets is impaired and, if so, calculate the impairment loss.

12. MULTIPLE CHOICE QUESTION (P3 MCQQ9-HSC 9706/32-OCT/NOV 2013)

A Company is carrying out an impairment review of its plant and machinery. The following
information is revealed.

1. Original cost of plant

and machinery $ 50000. Accumulated depreciation $ 15000
 2. Undiscounted value
of future cash flows from using the machinery $ 60000. Present value of future cash
flows from using the machinery $ 40000.

3. Sales proceeds from

disposing of the plant and machinery $ 48000. Cost of disposing of plant and
machinery $ 10000.

At what value should the plant and machinery be shown in the statement of financial
position?

A $ 35000 B $ 38000 C $ 40000 D $ 50000

(Source:ICAEW)