IMPAIRMENT OF

ASSET
Definition
• Impairment is a fall in the market value of an asset so that the
recoverable amount is now less than the carrying amount in the
statement of financial position.

• The carrying amount is the amount at which the asset is recognized in

the statement of financial position after deducting accumulated
depreciation.
Basic Principle
• There is an established principle that an asset shall not be carried at
above the recoverable amount.

• An entity shall write down the carrying amount of an asset to the

recoverable amount if the carrying amount is not recoverable in full.
Basic Principle
• If the carrying amount is higher than the recoverable amount, the asset
is judged to have suffered an impairment loss.

• The asset shall therefore be reduced by the amount of the impairment

loss.
Accounting for Impairment
• Indication of possible impairment
• Measurement of the recoverable amount
• Recognition of impairment loss
Indication of Impairment
• An entity shall assess at each reporting date whether there is any
indication that an asset may be impaired.

• If any such indication exists, the entity shall estimate the recoverable
amount of the asset.
Indication of Impairment
• Irrespective of whether there is an indication of impairment, an entity
shall test an intangible asset with an indefinite useful. Life or an
intangible asset not yet available for use for impairment annually by
comparing the carrying amount with the recoverable amount.
External Sources
• 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.

• Significant change in the technological, market, legal, or economic

environment of the business in which the asset is employed.
External Sources
• 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.

• The carrying amount exceeds the fair value of the net assets.
Internal Sources
• Evidence of obsolescence or physical damage of an asset.

• Significant change in the manner or extent in which the asset is used

with an adverse effect on the entity

• Evidence that the economic performance of an asset will be worse

than expected.
Measurement of Recoverable Amount

• The recoverable amount of an asset is the fair value less cost of

disposal or value in use, whichever is higher.
Fair Value less cost of disposal
• Fair value of an asset is the price that would be received to sell the
asset in an orderly transaction between market participants.
• Cost of disposal is an incremental cost directly attributable to the
disposal of an asset. Example: legal cost, stamp duty, cost of removing
the asset and direct cost in bringing the asset into condition for sale.
Value in Use
• Value in Use is measured as the present value or discounted value of
future net cash flows (inflows minus outflows) expected to be derived
from an asset.
Composition of estimates of future cash flows
• Projections of cash inflows from the continuing use of the asset.

• Projections of cash outflows necessarily incurred to generate the cash

inflows form the continuing use of the asset.

• Net cash flows received on the disposal of the asset at the end of the
useful life in an arm’s length transaction.
Reversal of an Impairment Loss
• PAS 36, paragraph 114, provides that an impairment loss recognized
for an asset in prior years shall be reversed if there has been a change
in the estimate of the recoverable amount.

• PAS 36, paragraph 117, provides that “the increased carrying amount
of an asset due to 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 the prior years.