IMPAIRMENT OF

ASSETS
IAS 36
Objective of IAS 36

• The objective of IAS 36 Impairment of assets is to ensure that assets

are ‘carried’ (valued) in the financial statements at no more than
their recoverable amount.

• An asset is said to be impaired when its recoverable amount is less

than its carrying amount in the statement of financial position.
Scope of IAS 36
IAS 36 applies to accounting for impairment of all assets except the
following:

• inventories (IAS 2: Inventories).

• Assets arising from contracts with customers that are recognised in

accordance with IFRS 15: Revenue from contracts with customers.

• investment property that is measured at fair value (IAS 40).

Definitions
• The recoverable amount of an asset is defined as the higher of its fair
value minus costs of disposal, and its value in use.
• Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date.
• Value in use is the present value of future cash flows from using an
asset, including its eventual disposal.
• Impairment loss is the amount by which the carrying amount of an
asset (or a cash-generating unit) exceeds its recoverable amount.
Stages in accounting for an impairment loss

• Stage 1: Establish whether there is an indication of impairment.

• Stage 2: If so, assess the recoverable amount.

• Stage 3: Write down the affected asset (by the amount of the
impairment) to its recoverable amount.
Indications of impairment

• An entity must carry out an impairment review when there is

evidence or an indication that impairment may have occurred.
• There may be indicators outside the entity itself (external indicators),
such as market factors and changes in the market.
• Alternatively, they may be internal indicators relating to the actual
condition of the asset or the conditions of the entity’s business
operations.
IAS 36: indicators of impairment
When assessing whether there is an indication of impairment, IAS 36
requires that, at a minimum,the following sources are considered:
External sources:
• An unexpected decline in the asset’s market value.
• Significant changes in technology, markets, economic factors or laws
and regulations that have an adverse effect on the company.
• An increase in interest rates, affecting the value in use of the asset.
• The company’s net assets have a higher carrying value than the
company’s market capitalization (which suggests that the assets are
over-valued in the statement of financial position).
Internal sources

• Evidence that the asset is damaged or no longer of use to the entity.

• There are plans to discontinue or restructure the operation for which
the asset is currently used.
• There is a reduction in the asset’s expected remaining useful life.
• There is evidence that the entity’s expected performance is worse
than expected.
Measuring recoverable amount
Measuring fair value less costs of disposal
• Fair value of an asset at a particular date is normally its current
market value. If no active market exists, it may be possible to estimate
the amount that the entity could obtain from the disposal.
• Direct selling costs normally include legal costs, taxes and costs
necessary to bring the asset into a condition to be sold. However,
redundancy and similar costs (for example, where a business is
reorganized following the disposal of an asset) are not direct selling
costs.
Measuring recoverable amount
Calculating value in use
The following elements should be reflected in the calculation of an asset’s value in
use:
• An estimate of the future cash flows the entity expects to derive from the asset
• Expectations about possible variations in the amount or timing of those future
cash flows
• The time value of money (represented by the current market risk-free rate of
interest)
• The price for bearing the uncertainty inherent in the asset
• Other factors that market participants would reflect in pricing the future cash
flows the entity expects to derive from the asset.