In this dynamic business environment, the real market value of the assets that a business presents in its financial statements does not stay intact.The market value of the assets might be different as compared to their carrying amount. If there are some indications about the permanent downside in the market value of the assets belonging to a company, the company would be required to provide for the impairment of such assets in compliance with the respective accounting standard i.e. Ind AS 36/IAS 36.
Accounting Standard on ‘Impairment of Assets’ aims to ensure that the reporting entity’s assets are carried at an amount not more that their corresponding recoverable amount. An entity shall conduct impairment tests to ensure if there is any indication of impairment. If yes, the entity shall determine the amount for the impairment and provide for the same in its financial statements.
Objectives of Impairment
The purpose of testing for impairment of an asset is to ensure that carrying value of the assets held by the company are not greater than their recoverable value, which is determined to be the higher of two amounts being
- Fair value less costs of disposal,or
- Value in use.
In order to ensure this objective is achieved, Ind AS 36/IAS 36 provides guidance on:
- Level for testing of impairment.
- Timing for impairment test.
- Conduct of the impairment test.
- Calculation and the recognition of the impairment loss.
Level of Review (Individual Asset or Group of Assets)
Ind AS 36/IAS 36 suggests the level of review for impairment of assets as follows:
- Whenever it is possible for an entity, its hall determine the recoverable amount of individual assets.
- However, if the same is not possible, determination of there cover able amount of entire Cash Generating Unit (CGU) to which the asset belongs may also be done.
Timing Requirement and Potential Indicators
Standard prescribes as to potential ‘indicators’ for impairment testing for some individual assets or groups of assets.
- Goodwill, intangible assets with indefinite life or intangible assets not yet available for its intended use shall be tested for impairment at least annually (if there is no clear indication of impairment).
- All other remaining assets are to be tested for impairment as and when there appears any indication that the asset may have become impaired.
Indicators for Impairment
- Downside changes in either technology, market, economic situations, or laws.
- Market interest rates shoot up.
- Net assets of the company become higher than market capitalization.
- Obsolescence or physical damage of the asset.
- Asset is resting idle, is a part of some restructuring or simply held for disposal.
- Economic performance of asset becomes worse than expectations.
In case of Subsidiary, JV or Associate:
- Carrying amount (of investment) comes out to be more than that the carrying amount of the investor’s assets,
- Dividend is more than the total comprehensive in come of the invest.
Following are the two processes for testing that the carrying value of assets do not exceed the recoverable amounts namely:
- an assessment phase and
- a testing phase, if required
- Assessment Phase:
In the assessment phase, an entity
- Determines those assets for which impairment test is to be done and its timing.
- Standard prescribes that an entity shall test individual assets wherever possible; however, in case it is not practical, entity may conduct the test at CGU Level (or groups of CGUs) to which the individual asset relates.
- Testing Phase:
In the testing phase, the entity
- Determines the recoverable amount for the assets and CGU as may be applicable.
- Compares the recoverable amount to the corresponding carrying amount.
- Provides for (or reverses, if applicable) any impairment loss, to the individual assets, or allocated among the assets forming part of the impaired CGUs for the differential amount.
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Posted by: CA Aman aggarwal
AKGVG & Associates