IAS 36 - Impairment of Assets

The objective of IAS 36 is to ensure that an asset is stated at not more than its recoverable amount in the SOFP.

IAS 36 applies to the following assets:

Land, building, machinery and equipment
Investment property (carried at cost)
Intangible assets
Definition of impairment:
An asset is impaired when its carrying amount (net
book value) is higher than its recoverable amount.

Internal Source of Impairment External Source of Impairment

(Inside the business) (In the industry)
1) Physical damage, obsolete 1) market value declines
2) Asset held for disposal or asset is idle 2) negative changes in technology, markets,
economy, or law
3) increases in market interest rates
4) net assets of the company higher than
market capitalisation (market value of shares)
Recoverable amount
the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use

Cash Generating Unit

Fair value less costs to sell 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 (a few assets taken
Fair value: Amount received when selling an asset together.)
Cost to sell: any costs incurred necessary to sell the asset

Selling the assets Using the assets

what the assets will generate alltogether
throughout its remaining lifed if we
what the assets will generate alltogether if we sell them
continue using them, rather than selling. A
instead of using them
discount rate is used to adjust future value
to present value.

Impairment of one Asset Impairment of a group of Assets known as Cash Generating Unit

Dr SOPL or Revaluation Reserve Dr SOPL or Revaluation Reserve

Cr Asset Cr AssetS (in which order)
1) Goodwill
(***As given in notes) 2) Other assets on pro-rata basis
Example: Impairment Loss of $ 30,000
Assets Book Value Allocated to Book value after imp.
1) Goodwill 10 -10 0
2) Equipment 50 -5 45
3) Land and Building 150 -15 135
210 -30 180