IAS 36 Impairment of Assets

Scope:
IAS 36 applies to all tangible, intangible and financial assets except
 Inventories (IAS-2)
 Assets arising from construction contracts (IFRS-15/IAS-11)
 Deferred tax assets (IAS-12)
 Assets arising under IAS-19 Employee benefits
 Financial assets within the scope of IAS 32 Financial instruments, disclosure and presentation.
IAS 36 Impairment of Assets
Process of Impairment:

Identify possible impairments (external vs. internal)

●

Perform impairment review (if identified possible

●

impairments)

●
Record the impairment
IAS 36 Impairment of Assets
Indicators of Impairment :
 External sources
 A significant decline in the asset’s market value more than expected by normal use or passage of time
 A significant adverse change in the technological, economic or legal environment
 Internal sources
 Obsolescence or physical damage
 Significant changes, in the period or expected, in the way the asset is being used e.g. asset becoming idle, plans for
early disposal or discontinuing/ restructuring the operation where the asset is used
 Evidence that asset’s economic performance will be worse than expected
 Operating losses or net cash outflows for the asset
 Loss of key employee
IAS 36 Impairment of Assets
Impairment Review:

Carrying Recoverable
Compared to
Amount Amount

Higher of

Fair Value less

Value-in-Use
Costs to Sell
IAS 36 Impairment of Assets
Measuring the Recoverable Amount of the Asset:
The RECOVERABLE AMOUNT of an asset should be measured as the higher value of:
a) the asset's fair value less costs to sell; and
b) its value in use.

A. The asset's fair value less costs to sell can be achieved by following ways:
1) If there is an active market in the asset, the net selling price should be based on the market value, or on the price
of recent transactions in similar assets.
2) If there is no active market in the assets it might be possible to estimate a net selling price using best estimates of
what market participants might pay in an orderly transaction at the measurement date.
IAS 36 Impairment of Assets
Measuring the Recoverable Amount of the Asset:
B. The VALUE IN USE of an asset is measured as the present value of future cash flows expected to be derived from an
asset or cash-generating unit. The cash flows used in the calculation should be pre-tax cash flows and a pre-tax
discount rate should be applied to calculate the present value.
The calculation of value in use must reflect the following.
a) An estimate of the future cash flows the entity expects to derive from the asset
b) Expectations about possible variations in the amount and timing of future cash flows
c) The time value of money
d) The price for bearing the uncertainty inherent in the asset, and
e) Other factors that would be reflected in pricing future cash flows from the asset
The IAS goes into quite a large amount of detail about the important concept of cash-generating units. As a basic rule,
the recoverable amount of an asset should be calculated for the asset individually.
A CASH-GENERATING UNIT is the smallest identifiable group of assets for which independent cash flows can be
identified and measured.
IAS 36 Impairment of Assets
Recognition and Measurement of an Impairment Loss:
 The rule for assets at historical cost is: If the recoverable amount of an asset is lower than the carrying amount, the
carrying amount should be reduced by the difference (i.e. the impairment loss) which should be charged as an expense
in profit or loss.

 The rule for assets held at a revalued amount (such as property revalued under IAS 16) is: The impairment loss is to be
treated as a revaluation decrease under the relevant IAS.
IAS 36 Impairment of Assets
Accounting Treatment of an Impairment Loss:
An impairment loss has occurred if the recoverable amount of an asset is less than its carrying amount in the statement of
financial position. This loss should be recognized immediately:
a) The asset's carrying amount should be reduced to its recoverable amount in the statement of financial position.
b) The impairment loss should be recognized immediately in profit or loss (unless the asset has been revalued in
which case the loss is treated as a revaluation decrease).
After reducing an asset to its recoverable amount, the depreciation charge on the asset should then be based on its new
carrying amount, its estimated residual value (if any) and its estimated remaining useful life.
IAS 36 Impairment of Assets
Disclosure:
IAS 36 calls for substantial disclosure about impairment of assets. The information to be disclosed includes the following.
a) For each class of assets, the amount of impairment losses recognized and the amount of any impairment losses
recovered (i.e. reversals of impairment losses)
b) For each individual asset or cash-generating unit that has suffered a significant impairment loss, details of the
nature of the asset, the amount of the loss, the events that led to recognition of the loss, whether the recoverable
amount is fair value price less costs to sell or value in use, and if the recoverable amount is value in use, the basis
on which this value was estimated (e.g. the discount rate applied)
IAS 36 Impairment of Assets
Example:
A company that extracts natural gas and oil has a drilling platform in the Caspian Sea. It is required by legislation of the
country concerned to remove and dismantle the platform at the end of its useful life. Accordingly, the company has
included an amount in its accounts for removal and dismantling costs, and is depreciating this amount over the platform's
expected life.
The company is carrying out an exercise to establish whether there has been an impairment of the platform.
a) Its carrying amount in the statement of financial position is $3m.
b) The company has received an offer of $2.8m for the platform from another oil company. The bidder would take
over the responsibility (and costs) for dismantling and removing the platform at the end of its life.
c) The present value of the estimated cash flows from the platform's continued use is $3.3m.
d) The carrying amount in the statement of financial position for the provision for dismantling and removal is
currently $0.6m.
What should be the value of the drilling platform in the statement of financial position, and what, if anything, is the
impairment loss?