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Impairment of Assets – IAS36 – Part 2

SCOPE OF IAS 36:

IAS 36 applies to all assets present in the statement of financial position, except:

- Inventories (IAS 2);

- Investment property at fair value (IAS 40);
- Financial assets (IAS 39 and IFRS 9);
- Construction contract assets (IAS 11);
- Deferred tax assets (IAS 12);
- Assets held for sale (IFRS 5);
- Agricultural assets at fair value (IAS 41);
- Employee benefits (IAS 19); and
- Insurance contract assets (IFRS 4).

Although the list of exclusions appears comprehensive, nevertheless, IAS 36 still applies to the majority of
assets, including property, plant and equipment; intangible assets; and investment property carried at cost.

IMPAIRMENT REVIEW:

IAS 36 requires an entity to assess any indicators of impairment at the end of each reporting period. If the
indicators suggest any impairment, only then must an entity perform a formal impairment test. The recoverable
amount of an asset should be compared to its carrying value in order to determine the impairment amount.

Mandatory Impairment Review

IAS 36 makes it mandatory for certain assets to be annually tested for impairment, regardless of the indicators.
These assets include:
- Goodwill;
- Intangible assets with indefinite useful lives; and
- Intangible assets not yet available for use.

INDICATORS OF IMPAIRMENT:

According to IAS 36, indicators of impairment may come from two sources:

1. Internal sources and

2. External Sources.

Internal Sources

Examples of internal sources of impairment include:

- Obsolescence or physical damage;

- Changes in usage of an asset; and
- Poor economic performance.

External Sources

Examples of external sources of impairment include:

- Sudden decline in market value;

- Adverse economic, technological or legal changes;
- Increase in interest rates; and
- Reduction in market capitalisation.