Accounting Standard 28 :
Impairment of Assets
· Applied in accounting for the impairment of all assets, other than:
ü inventories (AS 2);
ü assets arising from construction contracts (AS 7);
ü financial assets, including investments (AS 13);
ü deferred tax assets (AS 22).
· Recoverable amount is the higher of an asset’s net selling price and its value in use.
· Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.
· An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
· Useful life is either:
ü the period of time over which an asset is expected to be used; or
ü the number of production or similar units expected to be obtained from the asset.
· A cash generating unit is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets.
· Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash generating unit under review and other cash generating units.
· An active market is a market where:
ü the items traded are homogeneous;
ü willing buyers and sellers can normally be found at any time; and
ü prices are available to the public.
ü to assess at each balance sheet date whether there are any indication, external or internal as given in AS, that an asset may be impaired and estimate the recoverable amount of the asset.
· In measuring value in use:
ü cash flow projections should be based on assumptions that represent management’s best estimate of the set of economic conditions that will exist over the remaining useful life of the asset. Greater weight should be given to external evidence;
ü cash flow projections should be based on the most recent financial budgets/forecasts (maximum 5 years, unless longer period justified) that have been approved by management.
ü cash flow projections beyond the period covered by the most recent budgets/forecasts should be estimated by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate should not exceed the long-term average growth rate for the products, industries, or country or countries in which the enterprise operates, or for the market in which the asset is used, unless a higher rate can be justified.
· Estimates of future cash flows should include:
ü projections of cash inflows from the continuing use of the asset;
ü projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and that can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and
ü net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
· Future cash flows should be estimated for the asset in its current condition. They should not include estimated future cash inflows or outflows that are expected to arise from:
ü a future restructuring to which an enterprise is not yet committed; or
ü future capital expenditure that will improve or enhance the asset in excess of its originally assessed standard of performance.
· Estimates of future cash flows should not include:
ü cash inflows or outflows from financing activities; or
ü income tax receipts or payments.
· The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life should be the amount that is expected to be obtained from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal.
· The discount rate should be a pre tax rate that reflect current market assessments of the time value of money and the risks specific to the asset and should not reflect risks for which future cash flow estimates have been adjusted.
· An impairment loss should be recognised as an expense in the profit and loss account immediately. Impairment loss of a revalued asset should be treated as a revaluation decrease as per AS 10.
· If the estimated impairment loss is greater than the carrying amount of the asset, recognise a liability if, and only if, required by another AS.
· The depreciation/amortisation charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value on a systematic basis over its remaining useful life.
· In case of any indication of impairment, the recoverable amount should be estimated for the individual asset. If it is not possible, determine the recoverable amount of the cash-generating unit to which the asset belongs.
· If an active market exists for the output produced by an asset or a group of assets, the same should be identified as a separate cash-generating unit, even if some or all of the output is used internally. In such case management’s best estimate for future market price of output should be used:
ü in determining the value in use of this cash-generating unit, when estimating the future cash inflows that relate to the internal use of the output; and
ü in determining the value in use of other cash-generating units of the reporting enterprise, when estimating the future cash outflows that relate to the internal use of the output.
· Cash-generating units should be identified consistently from period to period for the same asset or types of assets, unless a change is justified.
· The carrying amount of a cash-generating unit should be determined consistently with the way the recoverable amount of the cash-generating unit is determined
· In testing a cash-generating unit for impairment, identify whether goodwill that relates to this unit is recognised in the financial statements. If this is the case, an enterprise should:
ü perform a ‘bottom-up’ test.
ü if, in the ‘bottom-up’ test, the carrying amount of goodwill could not be allocated on a reasonable and consistent basis to the cash-generating unit under review, the enterprise should also perform a ‘top-down’ test.
· In testing a cash-generating unit for impairment, identify all the corporate assets that relate to the cash-generating unit under review. For each identified corporate asset, apply ‘bottom-up’ test or ‘bottom-up’ and ‘top-down’ test both as required.
· Impairment loss should be recognised for a cash-generating unit if, and only if, its recoverable amount is less than its carrying amount. The impairment loss should be allocated to reduce the carrying amount of the assets of the unit in the following order:
ü first, to goodwill allocated to the cash-generating unit (if any); and
ü then, to the other assets of the unit on a pro rata basis based on the carrying amount of each asset in the unit.
· These reductions in carrying amounts should be treated as impairment losses on individual assets and recognised either in P & L account or as revaluation decrease as applicable.
· In allocating an impairment loss, the carrying amount of an asset should not be reduced below the highest of:
ü its net selling price (if determinable);
ü its value in use (if determinable); and
ü zero.
· The amount of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro rata basis.
· A liability should be recognised for any remaining amount of an impairment loss for a cash-generating unit if, required by another AS.
· At each balance sheet date, if there are indications internal or external, that an impairment loss recognised for an asset in prior accounting periods, no longer exists/has decreased, then the recoverable amount of that asset to be estimated. For the same consider the following as minimum indications:
· An impairment loss recognised for an asset in prior accounting periods should be reversed if there is a change in the estimates of cash inflows, cash outflows or discount rates used to determine the asset’s recoverable amount since the last impairment loss was recognised. The carrying amount of the asset should be increased to its recoverable amount.
· The increased carrying amount of an asset due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods.
· A reversal of an impairment loss for an asset should be recognised as income immediately in profit and loss account. In case of revalued assets, the same should be treated as a revaluation increase as per AS 10.
· After a reversal of an impairment loss, the depreciation (amortisation) charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.
· A reversal of an impairment loss for a cash-generating unit should be allocated to increase the carrying amount of the assets of the unit in the following order:
ü first, assets other than goodwill on a pro rata basis based on the carrying amount of each asset in the unit; and
ü then, to goodwill allocated to the cash-generating unit, if the requirements of reversal of impairment loss of goodwill are met.
· These increases in carrying amounts should be treated as reversals of impairment losses for individual assets and recognised accordingly.
· In allocating a reversal of an impairment loss for a cash-generating unit, the carrying amount of an asset should not be increased above the lower of:
ü its recoverable amount (if determinable); and
ü the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods.
· The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro-rata basis.
· An impairment loss recognised for goodwill should not be reversed in a subsequent period unless:
ü the impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur; and
ü subsequent external events have occurred that reverse the effect of that event.
· For each class of assets, the financial statements should disclose:
ü the amount of impairment losses recognised in the statement of profit and loss during the period and the line item(s) of the statement of profit and loss in which those impairment losses are included;
ü the amount of reversals of impairment losses recognised in the statement of profit and loss during the period and the line item(s) of the statement of profit and loss in which those impairment losses are reversed;
ü the amount of impairment losses recognised directly against revaluation surplus during the period; and
ü the amount of reversals of impairment losses recognised directly in revaluation surplus during the period.
· An enterprise that applies AS 17, should disclose the following for each reportable segment based on an enterprise’s primary format (as defined in AS 17):
ü the amount of impairment losses recognised in the statement of profit and loss and directly against revaluation surplus during the period; and
ü the amount of reversals of impairment losses recognised in the statement of profit and loss and directly in revaluation surplus during the period.
ü If an impairment loss for an individual asset or a cash-generating unit is recognised or reversed during the period and is material to the financial statements of the reporting enterprise as a whole, an enterprise should disclose the events and circumstances that led to the recognition or reversal of the impairment loss;
· the amount of the impairment loss recognised or reversed;
ü for an individual asset:
ü the nature of the asset; and
ü the reportable segment to which the asset belongs, based on the enterprise’s primary format (as per AS 17);
ü for a cash-generating unit:
ü a descripttion of the cash-generating unit;
ü the amount of the impairment loss recognised or reversed by class of assets and by reportable segment based on the enterprise’s primary format (as defined in AS 17); and
ü if the aggregation of assets for identifying the cash-generating unit has changed since the previous estimate of the cash-generating unit’s recoverable amount (if any), the enterprise should describe the current and former way of aggregating assets and the reasons for changing the way the cash-generating unit is identified;
· whether the recoverable amount of the asset (cash-generating unit) is its net selling price or its value in use;
· if recoverable amount is net selling price, the basis used to determine net selling price; and
· if recoverable amount is value in use, the discount rate used in the current estimate and previous estimate (if any) of value in use.
· If impairment losses recognised (reversed) during the period are material in aggregate to the financial statements of the reporting enterprise as a whole, an enterprise should disclose a brief descripttion of the following:
ü the main classes of assets affected by impairment losses (reversals of impairment losses) for which no information is disclosed; and
ü the main events and circumstances that led to the recognition (reversal) of these impairment losses for which no information is disclosed.
· As a transitional provision any impairment loss determined before this standard becomes mandatory should be adjusted against the opening balance of revenue reserve. Impairment losses on revalued assets to be adjusted against balance in revaluation reserve and excess, if any against the opening balance of revenue reserve.
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