IND AS 36- Impairment of Assets
What is
Impairment?
Why IND AS 36
was introduced?
Which assets be traced for impairment and how
frequently?
What be the criteria for-
Recognition of
Impairment?
Reversal of
Impairment?
Meaning of
Impairment:
In
general terms impairment is a scenario when realizable value of an asset is
found less than the book value said asset.
There
could be many reasons responsible for such asset value depletion/impairment
such as obsolescence/physical damage of asset, technological advancement
leading to downturn of old machinery and many more.
Objective of
introducing IND AS 36:
-
To prescribe a method that an entity
can opt for to ensure that its assets are not carried at more than their
recoverable amount i.e. higher of fair value less cost of disposal or value in
use.
-
For purpose of this the value in use
refers to nothing but the present value of expected cashflow of asset.
Assets to be tracked for Impairment and frequency to trace effect of impairment:
All of the below mentioned assets must be traced at least annually and otherwise whenever there exists any such indication, for impairment purpose:
- Intangible assets with indefinite useful life;
-
Intangible asset not yet available
for use;
-
Goodwill acquired in business
combination.
Recognition
criteria for Impairment:
Asset is said to be impaired, when the recoverable amount of asset happens to be less than the book value.
What do we mean by recoverable amount? Recoverable
amount is nothing but higher of below 2 values of an asset under consideration:
2.
Fair value less cost of disposal-
Which is nothing but the difference between expected value realizable from an
asset and that of the cost incurred /to be incurred for disposal of said asset.
However, note that in circumstances wherein only one
of the aforementioned values is identifiable, then check if the said value is
higher than the asset book value? If yes, then there is no need to find the
other value, reason being there is no possible impairment in given
circumstances since the available value itself is higher than the book value of
given asset.
Once the amount of impairment loss has been evaluated, the same be recorded as below:
1. Impairment of asset, never re-valued in past: The entire amount of impairment loss be recognized in Profit & loss statement;
2.
Impairment of asset, re-valued in
past:
a.
Past revaluation resulted in Surplus:
Then amount of impairment loss shall be either less than /equals to/more than
the amount of surplus so created. If impairment loss is less than/equals to
surplus, the entire amount of loss be recognized in Other Comprehensive Income
statement so as to set off past surplus. However, in case where impairment loss
is more than the past surplus, then amount of loss equivalent to surplus be
recognized in Other Comprehensive Income statement and balance be recorded in
Profit & loss statement;
b.
Past revaluation resulted in
depletion: Then recognize full amount of impairment loss directly in Profit
& loss statement only.
Note: At time of recognition of impairment loss, if
there exist multiple fixed & intangible assets, then the impairment loss be
very first recognized/set off against goodwill (if any), then against other
fixed and intangible assets in their respective value proportion.
Reversal of
Impairment loss, earlier recognized:
Although, once impairment has been recognized, still the entity needs to continually monitor said asset if there exist any circumstances indicative of further impairment or that if the recoverable value has risen back above so as to reverse earlier recognized impairment loss.
However, even though if there exist probability for reversal of impairment, still the amount/quantum of impairment loss recognized towards to goodwill can never be reversed.
Also, the balance amount of impairment loss recognized
towards other asset of fixed/intangible nature be reversed only to a limited
extent and not in entirety.
Extent of reversal permissible:
If at all the recoverable value of an impaired asset has again risen more than its book value, then amount of reversal permitted be calculated as below:
Reversal= Asset book value that would have existed had no impairment taken place
(-)
Current value of asset, post impairment
and depreciation if any
This amount of reversal be straight up recorded in profit & loss statement.
Conclusion:
It is crucial for every entity that while drafting financial statements, they make sure that all the values as are disclosed in financials are truthful. The same applies to the asset valuation as well. So, they must make sure that asset is valued as per grounds laid down under relevant accounting standards as applicable to said entity.
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