IAS 36 – Impairment Of Assets | Humayun Atif (CMA, CPA)

What is Impairment?

Impairment is the fall in the value of an asset and hence IAS 36 Impairment of Assets seeks to ensure that assets are not carried at more than their recoverable amount (i.e., the higher of fair value less costs of disposal and value in use).

Scope: It applies to

• land & buildings as per IAS 16
• machinery and equipment as per IAS 16
• assets carried at revalued amounts under IAS 16
• investment property carried at cost as per IAS 40
• intangible assets as per IAS 38
• goodwill as per IAS 38
• investments in subsidiaries, associates, and joint ventures carried at cost

IAS 36 does not apply to

• Inventories;
• Assets arising from construction contracts;
• Deferred tax assets;
• Assets arising from employee benefits;
• Financial assets within the scope of IAS 39
• Investment property that is measured at fair value;
• Biological assets related to agricultural activity within the scope of IAS 41;
• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Definitions

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

Carrying amount: the amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and accumulated impairment losses.

Fair value: 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.

Impairment Test

IAS 36 requires that at the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired. If there is an indication that an asset may be impaired, then the asset’s recoverable amount must be calculated.

IAS 36 recommends testing assets for Impairment which can be based on certain factors and sources such as:

• Decline in market value
• Negative changes in technology, economy, or laws
• Fluctuation in market interest rates
• Obsolescence or physical damage
• Asset is idle, part of a restructuring, or held for disposal
• Worse economic performance than expected

If fair value less costs of disposal or value in use is more than the carrying amount, it is not necessary to calculate the other amount. The asset is not impaired. Please note that fair value is determined in accordance with IFRS 13- Fair Value Measurement.

Recognition of an impairment loss

An impairment loss is recognized whenever the recoverable amount is below the carrying amount. The impairment loss is recognized as an expense (unless it relates to a revalued asset where the impairment loss is treated as a revaluation decrease). Adjust depreciation for future periods.

A company must assess at each balance sheet date whether an asset is impaired. Even if there is no indication of any impairment, certain assets should be tested for impairment, for example, an intangible asset that has an indefinite useful life.

Impairment of goodwill under IAS 36

• Goodwill should be tested for impairment annually.
• Reversal of impairment of goodwill is prohibited.

IAS 36 Disclosures

Disclosure by class of assets:

• impairment losses recognized/reversed in profit or loss
• impairment losses on revalued assets recognized in other comprehensive income
• impairment losses on revalued assets reversed in other comprehensive income
• disclosure by reportable segment
• impairment losses recognized
• impairment losses reversed

ABOUT THE AUTHOR

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, Oracle Certified, CA Articles from Big4

Atif is passionate about Business, Tech, and the written word. He is the author of the book ‘IFRS Made Easy’. He is a Tax and IFRS coach and the founder of accountingblogger.com