Treatment of impairment loss while preparing financial statements as per AS, IND AS & IFRS (Latest)

Impairment means weakening of Asset. As per INDAS and IFRS Standards, entities should include impairment loss in the financial statements.

The relevant Accounting Standards relating to Impairment loss are the following:-

a. INDAS 36
b. IAS 36
c. AS 28

There is no major difference between INDAS 36 and IAS 36.Therefore, the following descriptions relate to both INDAS 36 and IAS 36.

Statements of Profit and loss and other Comprehensive income, Statement of changes in Equity and Statement of Financial position are the new names of Financial Statements as per IND AS and IAS.

1. Objective

A. To test whether assets are carried at their recoverable value or not and thereby ensure that assets are carried at not more than their recoverable amount.

B. It specifies when an entity should reverse an impairment loss.

2. Scope

This Standard shall be applied in accounting for the impairment of all assets,

Other than

(a) Inventories (INDAS 2 Inventories);

(b) Contract assets and assets recognized in accordance with INDAS115 Revenue from Contracts with Customers;

(c) Deferred tax assets (INDAS 12 Income Taxes);

(d) Assets arising from employee benefits (INDAS 19 Employee Benefits);

(e) Financial assets (INDAS109 Financial Instruments);

 (f) Investment property that is measured at fair value (INDAS 40 Investment Property);

(g) Biological assets related to agricultural activity within the scope of INDAS 41 Agriculture that are measured at fair value less costs to sell;

(h) Contracts within the scope of INDAS104Insurance Contracts; and

(i) Non‑current assets (or disposal groups) classified as held for sale in accordance with INDAS105.Non‑current Assets Held for Sale and Discontinued Operations.

3. Accounting Treatment

Following paragraphs gives details of accounting treatment required as per INDAS 36 and IAS36.

I. TEST FOR IMPAIRMENT

Based on Indications.

Irrespective of whether there is any indication of impairment, impairment test should be done annually in the case of the following assets.

A. Intangible Assets has indefinite life.
B. Goodwill acquired in business combination.
C. The intangible asset that is not yet available for use.

Other assets are to be tested whenever there are indicators of Impairment.

Indicators of Impairment

A. Internal Indicators

i. Evidence of obsolescence or physical damage of an asset.
ii. Evidence of Worst economic performance of asset in present or future.
iii. Plans to discontinue or restructure the operation to which the asset belongs.
iv. Plans to dispose the asset before previously expected.

B. External evidences.

i. Significant decline in the market value of the asset.
ii. Significant negative changes in the business Environment of the entity.
iii. Changes in interest rate.
iv.Net Assets of the entity is more than its market value.

The above list of indicators are not exhaustive.

II. Find out impairment loss using the following equations

a. Impairment loss=Carrying amount less recoverable amount
b. Carrying amount=Cost less depreciation
c. Recoverable amount
(i) Value in use
(ii) Fair value less cost of disposal
Whichever is higher in respect of (i) and (ii) above
d. Value in use=Present value of future cash flows

Present value of future cash flows =estimated future cash flows from the use of asset+ scrap value at the end of its useful life.

Following factors should be included in the calculation of the cash flows with respect to value in use of the asset.

i. Net revenue.
ii. Volume growth.
iii. Major servicing.
iv. Scrap proceeds.

e. Cost of disposal means the following.

i. Legal costs
ii. Stamp duty
iii. Transaction costs
iv. Cost of removing asset
v. Direct incremental costs to bring an asset into condition for its sale.

III. RECOGNISING IMPAIRMENT LOSS

a.Other than Revalued Asset

Impairment loss should be recognized in statement of profit and loss and deduct it from the value of Asset in the statement of financial position.

b. Revalued Asset

IV. Recognition of Impairment loss shall be as follows.

--Impairment loss up to revaluation surplus is recognized in other comprehensive income and reduces the revaluation surplus.

--in excess of revaluation surplus, the balance shall be recognized as an expense in statement of profit and loss.

IV. Adjustments in the depreciation or amortization charges of future periods on the basis of impairment loss.

V. Identification of Cash Generating Unit.

 The impairment loss for an individual asset is determined and recognized as per the above procedures.

It is difficult to calculate the recoverable amount for an individual asset as this individual asset in itself without the help of other assets cannot generate the cash flows.

Therefore for the purpose of identifying cash flows, asset can be grouped into a smallest unit known as Cash Generating Unit in the business circles.

Cash Generating Unit (CGU)

Smallest group of assets for which cash flows can be determined independently but sometimes aggregation of CGUs become necessary if each of the CGUs cannot be disposed of separately even if cash flows from each CGU can be determined independently.

Steps for measurement and recognition of impairment loss of CGU

a. Identification of CGU.
b. Find Value in use.
c. Find out carrying value of good will related with CGU.
d. Find out carrying value of Corporate asset with CGU.

Corporate Asset examples

Headquarter or divisional office building and equipment, research centre etc.

e. Find out Net Selling price of CGU

f. Determine the recoverable value of CGU as follows

Higher of
Value in use (if determinable)
Net selling price (If measurable)

Zero

g. Find carrying amount of CGU as follows.

Carrying amount of all asset of CGU+ carrying value of goodwill related with CGU+ Carrying value of corporate asset with CGU

h. Determine impairment loss

Impairment loss=Carrying amount less recoverable amount

i. Allocate the impairment loss as follows

First Goodwill

Then Other assets on pro-rata basis

j. Impairment loss should be recognized in statement of profit and loss and deduct it from the value of Asset in the Statement of Financial Position.

VI. Reversal of impairment loss

a.In the event of the recoverable value of assets turn higher than their carrying values on subsequent testing for impairment, it is necessary to reverse the impairment losses provided for earlier

b. Reversal of impairment loss should be immediately recognized as income in the Statement of Profit and Loss unless asset carried at revalued amount

c.If asset is carried at revalued amount reversal of impairment loss to be treated like revaluation surplus.

d. Carrying value of the asset should be increased to the new recoverable amount

Impairment loss for goodwill should not be reversed in any case

VII. Disclosures.

a. Disclosure for each class of Assets
b. Disclosure by reportable segment
c. Other disclosures

VIII. Difference between AS 28 and INDAS36