Impairment of Assets

IAS 36

Chapter 4
IAS 36: Impairment of Assets

Objective:
To set rules to ensure that the assets of an entity are carried at no more
than their recoverable amount (i.e. value to the business)
Write down the CV if CV > Recoverable Amount

Impairment:
A fall in the value of an asset so that it’s recoverable amount is now less
than its carrying amount in SFP
 Indicators of Impairment

Indications of impairment are checked for, at each reporting date:

External Indicators
• Decline in asset’s market value (more than expected)
• Adverse impact of Technological, economic or legal environment of the business
• Interest rates have increased (decreasing asset’s value in use)

Internal Indicators
• Evidence of obsolescence of or damage to the asset
• Changes in the way the asset is used have occurred or are imminent
• Internal reporting indicates that economic performance of an asset is, or will be, worse
than expected
Impairment of Assets

• Net Realizable Value • Estimating PV of future cash inflows

• A binding sale agreement (including disposal) less outflows
• The current market price less costs of • Financing activities/income taxes are
disposal (where an active market exists) excluded
Excluded Assets
Example
Annual Impairment Reviews

• Presence of MATERIAL indicator of an impairment leads to an

Impairment Review

• An exception to the above rule; following assets require ANNUAL

impairment reviews:
Goodwill acquired in a business combination
An intangible asset with an indefinite useful life
An intangible asset not yet available for use (development phase)
Recognition and measurement of an impairment

1. Calculate the recoverable amount

2. Write down the asset to recoverable amount
3. Recognize the impairment loss in the SPL
Exception: If the impairment reverses a previous gain taken to the
revaluation reserve (disclose it in “Other Comprehensive Income”)
Example
 Reversal of Impairment loss

The calculation of impairment losses is based on predictions of what may happen in the future.
Sometimes, actual events turn out to be better than predicted. If this happens, the recoverable
amount is re-calculated and the previous write-down is reversed.
- Impaired assets should be reviewed at each reporting date to see whether there are indications
that the impairment has reversed.
- A reversal of an impairment loss is recognised immediately as income in profit or loss. If the
original impairment was charged against the revaluation surplus, it is recognised as other
comprehensive income and credited to the revaluation surplus.
- The reversal must not take the value of the asset above its depreciated historical cost, i.e.
the amount it would have been if the original impairment had never been recorded. The
depreciation that would have been charged in the meantime must be taken into account.
- The depreciation charge for future periods should be revised to reflect the changed carrying
amount.
Indicators of Impairment Reversal