Accounting Standard - 28 Impairment of Assets: Generally Follows IAS-36 (Differs From SFAS - 144 of US GAAP)

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ACCOUNTING STANDARD - 28 IMPAIRMENT OF ASSETS

Generally follows IAS-36 ( Differs from SFAS -144 of US GAAP)
K.GURURAJ ACHARYA
CHARTERED ACCOUNTANT
PHONE: 22251618 / 22251329
acharyaguru@yahoo.com
AS-28: Impairment of Assets
acharyaguru@yahoo.com 2 of 45
IMRD Standard
Emphasizes Fair Value Accounting
Mandatory Application Date
(earlier application encouraged)

Level - I
Enterprises

wef 1.4.2004
Level - II
Enterprises
wef 1.4.2006
Level - III
Enterprises
wef 1.4.2008
Assets not subject to Impairment
Cash and Bank Balance (Financial Instruments)
Debtors (Financial Instruments)
Investment (AS-13)
Inventories (AS-2)
Construction contracts (AS-7)
Deferred Tax Assets (AS-22)
Assets subject to Impairment - Hence to be tested for IL
(AS-28:Assets carried at cost or revalued amounts :: AS-2:Inventory)

Fixed Assets
Goodwill and Other Intangibles
Assets under Finance leases in the books of lessee
Assets under Operating leases in the books of lessor
Pre-paid Assets
No Impairment Review
Impairment
conditions exist?
Identify asset/cash generating unit
Determine Net Recoverable Amount
Carrying Value > Net
Recoverable Amount
No Impairment Provision
Impairment Provision =
Carrying Value - Net
Recoverable Amount
Greater of
Follow up with
Annual Impairment
Review
Net selling
price
Value in use
Determined
by
Determined
by
Binding
sale
Active
Market
Best
Estimate
Cash
Flow
Discount
Rate
No
Yes
Yes
No
Carrying Amount = Balance Sheet value of the asset:
Cost - Accumulated Depreciation - Accumulated
Impairment Losses thereon.
Recoverable Amount (RA)
Net Selling Price or Value in Use WIH

Impairment Loss (IL) =
Carrying Amount - Recoverable Amount.

= @ if ((CA-RV)>0, (CA-RV), CA)
Definitions
Net Selling Price (NSP) =
Sale value of an asset - cost of disposal.
Sources and basis of NSP : (in preferential order)
(a) Binding sale agreement
(b) Active market
(c) Best estimate based on information
Costs of disposal are incremental costs directly
attributable to the disposal of an asset, excluding
finance costs and income tax expense.
Definitions
Value in use (VIU) =

Present Value of Estimated future Cash Flow
arising from the continuing use of an asset

PLUS

Residual price at the end of its useful life

IN RESPECT OF SMEs (L-I & II) VIU COULD
BE A REASONABLE ESTIMATE ALSO
(Vide Separate Announcement of ICAI)
Definitions
In Measuring VIU - Cash Flow should be based on
- Reasonable & supportable assumptions for remaining
useful life of asset.

- Most recent financial budgets approved by management
- Covering a maximum of 5 years, unless a longer
period can be justified.

- CF projections beyond the period covered by the recent
budgets (upto the end of an assets useful life) should
not exceed the long-term average growth rate for the
products/industries/countries in which the enterprise
operates.
Estimates of future CFs should not include CFs
from:
+ Future re-structuring to which an enterprise is not yet
committed;
+ Future capex that will improve the performance of the
asset
+ Financing activities;
+ Income tax receipts or payments.
ePre-tax rate

eReflecting Current market assessments of the time value
of money after considering specific risk for that asset

eWhen asset specific rate as above is not available then
basis would be
WACC or
Incremental Financial cost.
(Starting point only - Finally it is an independent rate and
does not have link with companys capital structure.)
Discount Rate - Should be based on
w An enterprise should assess at each B/S date
whether there is any indication that an asset may
be impaired.

w If any such indication exists, the enterprise should
estimate the RA of the asset. (Use Materiality test)

w If no indication of a potential impairment loss is
present, the enterprise is not required to make a
formal estimate of the RA
Identifying Assets that may be Impaired
gTo assess whether there is any indication that an asset may
be impaired, an enterprise should consider, as a
minimum, the following indications:

+ External Sources of Information

+ Internal Sources of Information
Identifying Assets that may be Impaired
Decrease in assets market value.

Adverse effect due to Change in Technology,
Market, Economic or legal environment.

The market interest rate and discount rate, have
decreased / increased and there is a decrease in
the assets RA.

Market Capitalization of the company < the
Carrying amount of the Net Assets.
External sources of information INCLUDE
+ Physical damage of an asset or it is time barred

+ Information regarding obsolescence of a particular asset.

+ Evidence from internal reporting that the Economic
performance of an asset is or will be worse than expected.

+ Changes or adverse effect taking place, i.e
discontinuance, Operational restructuring or Premature
disposal of an asset.
Internal sources of information INCLUDE
e If either of NSP or its VIU exceeds the assets
carrying amount, the asset is not impaired and it
is not necessary to estimate the other amount.

e When NSP is not obtainable then RA is the VIU
of the asset

e When asset is held for disposal VIU is
immaterial and RA must be based only on NSP.
Measurement of Impairment :

Ân IL should be recognised as an expense in the P&L A/c
immediately, (Except same Revalued asset).

^When IL > the carrying amount of the asset to which it
relates, an enterprise should recognise a liability iff, that is
required by another AS.

Âdjust depreciation in future periods, to allocate the
assets revised carrying amount, less its residual value (if
any), on a systematic basis over its remaining useful life.
^Recognise any related DTA/DTL as per AS-22
Recognition of Impairment Loss
Revalued assets
Based on Market Value
Test for
Impairment
Based on any other
method

Is the disposal cost negligible?
Yes:
Impairment -
Not Likely
If, No
Test for Impairment
Revaluation and Impairment (Right and duty)
e If there is any indication that an asset may be impaired,
the RA should be estimated for the individual asset.

e If it is not possible to estimate the RA of the individual
asset, an enterprise should determine the RA of the CGU
to which the asset belongs (the assets CGU).
Cash-Generating Units (CGU)
C A cash-generating unit (CGU) is the smallest
identifiable group of assets for which cash flows
can be determined independently. (A segment within
the unit)
CGU identification involves Judgement

C Impairment Provisions are made at an asset (or CGU) level
and not on an entity wide basis.
It is not permitted to set off a deficiency of a CGU with a
surplus in another CGU.
CGU determination must be done consistently.
Cash-Generating Units (CGU)
Goodwill - Impairment
Carrying amount of Goodwill does not generate cash
flows independently and, therefore, the recoverable
amount of goodwill as an individual asset cannot be
determined.

As a consequence, if there is as indication that
goodwill may be impaired, recoverable amount is
determined for the cash generating unit to which
goodwill belongs.
Corporate assets - Assets other than
goodwill that contribute to the future CFs of
both the CGU under review and other
CGUs.

Corporate assets do not generate CFs
independently and its carrying amount
cannot be fully attributed to the CGU under
review.
Bottom Up
Test
Identify whether carrying amount
of goodwill / Corporate asset can be
allocated on a reasonable &
consistent basis to the CGU under
review; and

Compare RA of the CGU under
review to its carrying amount (incl.
the carrying amount of allocated
goodwill, and/or Corporate asset, if
any) and recognise any IL
Goodwill and/or Corporate asset can be allocated
to the CGU
Identify smallest CGU that
includes CGU under review and
to which carrying amount of
goodwill can be allocated on a
reasonable & consistent basis (the
larger CGU); and

Compare RA of larger CGU to its
carrying amount (incl. the
carrying amount of allocated
goodwill) and recognise any IL
Top Down and
Bottom up
Test
Goodwill and/or Corporate asset can be allocated
to the CGU
+ An IL should be recognised for a CGU iff, its RA is less than its
carrying amount.

+ The IL should be allocated to reduce carrying amount of assets
of CGU in the following order:
- First, to goodwill allocated to the CGU (if any); and
- then, to other assets of the CGU on a pro-rata basis based
on the carrying amount of each asset in the CGU.
These reductions in carrying amounts should be treated as IL on
individual assets and recognised.
Impairment Loss (IL) for a Cash-Generating Unit
+ In allocating an IL, carrying amount of asset should
not be reduced below the highest of:
its NSP (if determinable);
its VIU (if determinable); and
Zero.

+ IL that would otherwise have been allocated to
the asset should be allocated to other assets of
the CGU on a pro-rata basis.
An enterprise should assess at each B/S date whether
there is any indication that an IL recognised for an
asset in prior accounting periods may no longer exist
or may have decreased.
If any such indication exists, the enterprise should
estimate the RA of that asset.
An enterprise should consider, as a minimum, the
following indications:
External Sources of Information
Internal Sources of Information
Reversal of an Impairment Loss (IL)
pAn IL recognised for an asset in prior accounting
periods should be reversed if there has been change in
the estimates of cash inflows, cash outflows or
discount rates used to determine the assets RA since
the last IL was recognised.

pIf this is the case, the carrying amount of asset should
be increased to its RA. That increase is a reversal of
an IL.
` The increased carrying amount of an asset due to a
reversal of an IL should not exceed the carrying amount
that would have been determined (net of amortisation or
depreciation) had no IL been recognised for the asset in
prior accounting periods.

` Reversal of an IL for an asset should be recognised as an
income immediately in the P&L A/c, unless the asset is
carried at revalued amount as per AS-10, in which case
any reversal of an IL on a revalued asset should be
credited to revaluation reserve.
Reversal of an IL for an Individual Asset
A reversal of an IL for a CGU should be allocated to
increase the carrying amount of the assets of the unit in
the following order:

+ First, assets other than goodwill on a pro-rata basis based on
the carrying amount of each asset in the unit; and

+ Then, to goodwill allocated to the CGU (if any) st certain
conditions.
These increases in carrying amounts should be treated as
reversals of IL for individual assets and recognised .
Reversal of an IL for a Cash-Generating Unit
g In allocating a reversal of an IL for a CGU under the
point above, the carrying amount of an asset should not
be increased above the lower of :

its RA (if determinable); and

the carrying amount that would have been
determined (net of amortisation or depreciation) had
no IL been recognised for the asset in prior
accounting periods.
As an exception to the requirement in Reversal of an IL,
an IL recognised for goodwill should not be reversed in a
subsequent period unless:
the IL was caused by a specific external event of an
exceptional nature that is not excepted to recur; and

subsequent external events have occurred that reverse the
effect of that event.

Reversal of an Impairment Loss for Goodwill
= If amount of IL debited to P&L A/c is not separately
disclosed, item within which it is included
= If amount of reversal of IL credited to P&L A/c is not
separately disclosed, item within which is included
= Amount of IL set off against revaluation reserve
during the period
= Amount of reversal of IL credited to revaluation
reserve during the period
Disclosure -Basic requirements for each class of assets
Disclose for each reportable segment based on
the enterprises primary format, the following:

CThe amount of IL recognised in P&L A/c and
directly in revaluation reserve during the period

CThe amount of reversal of IL recognised in
P&L A/c and directly in revaluation reserve
during the period
Disclosure - Requirement for segment reporting
= The events & circumstances that led to the recognition of
IL and reversal there of
= Amount of IL recognised or reversed
= For Individual assets: Its Nature and reportable segment
to which it belongs
= For CGU:
` Description of CGU
` Amount of IL recognised or reversal there of for
primary reportable segment
` Any change in identifying the CGU as compared to
previous estimate of the CGU
Disclosure -General
^Whether recoverable amount (RA) is NSP or
VIU

Îf RA is NSP, basis of determining the NSP

Îf RA is VIU, the Discount rate used

Âssumptions used to determine the RA. This
disclosure of assumption is not mandatory but
is encouraged to be disclosed.
Disclosure - General
_On the date of this AS becoming mandatory, an
enterprise should assess whether there is any
indication that an asset may be impaired.

_If any such indication exists, the enterprise should
determine IL, if any, in accordance with this AS.

_The IL, so determined, should be adjusted against
opening balance of revenue reserves being the
accumulated IL relating to periods prior to this AS
becoming mandatory unless the IL is on a revalued
asset.
Transitional Provisions
_Recognition of IL: Undiscounted future CF

_Measurement of IL: CV Vs. Fair value (Generally active
market price - if that is not available develop a surrogate
to FV)

_Prohibits reversal
Differs from SFAS 144 (US GAAP) in the following
points
(1) Effect of IL on DT and Income Tax

(2) Affects Net Profit Ratio (PAT/Net Sales)

(3) Affects Net Worth

(4) Affects Debt-Equity Ratio

(5) Affects TOL/TNW
Implication of Impairment Loss (IL)
(6) Affects EPS

(7) Affects Dividend declaration

(8) Would hopefully encourage more M&A

(9) Adversely affect cos where installed capacity > utilised
capacity, huge capitalization, IDC - Service companies
are least affected by the standard

(10) Affects Security margin
Disclosure of Nestle India Ltd. 2001-02
In the year 2002 ICAI had issued AS-28 including assets employed in
continuous businesses. Although, AS-28 is Mandatory from FYs
beginning 1-4-2004, it encourages early implementation which has been
subscribed by the Co..
As required by AS-28, the Co., has reviewed the potential generation of
economic benefits from fixed assets and concluded that some of the FAs
in continuing businesses are currently not foreseen to generate
adequate economic returns over their useful lives. Consequently FAs
related to Water and instant tea businesses have been written down to
their recoverable amount, being the NSP (determined based on a
valuation) and FAs relating to a part of Chocolates & Confectionary
business have been written down to their recoverable amt being the
VIU.
FAs, being building and P&M aggregating Rs. 202256 thousands,
employed in the Water Business have been written down to Rs. 30,303
thousands.
The IL (Gross Rs. 171,953 thousands; Net of deferred tax credit rs.
108,760 thousands) has been charged to the P&L A/c, as the
impairment indicator, being low consumer off-take in a highly
competitive market has risen during 2002. The IL in respect of
buildings and P&M is Rs. 34,795 thousands and Rs.137,158 thousands
respectively. Full review of the business model is being undertaken.
FAs, being P&M aggregating Rs.70,153 thousands, employed in a part
of the Chocolates & Confectionery business have been written down to
Rs. 33,773 thousands. The IL (Gross Rs.36,380 thousands; Net of
deferred tax credit Rs.23,010 thousands) has been charged to the P&L
a/c, as the impairment indicator, being low consumer off-take due to
shift in consumer preference, has arisen during 2002. Future cash flows
have been discounted by 12% to arrive at the VIU of these assets.
FAs, being Building and P&M aggregating Rs. 64,139 thousands,
employed in Instant Tea business have been impaired. The IL (Gross
Rs.64,139 thousands; Net of deferred tax credit Rs.40568 thousands)
has been charged to the General Reserve as at January 1,2002, as the
impairment indicator being continuing sluggish export market, was
already existing prior to 2002. The IL in respect of buildings & P&M is
Rs. 9,127 thousands and Rs. 55,012 thousands respectively.
Biocon Ltd. 31.3.2005 - Impairment of long-lived assets
FA are reviewed for impairment whenever events or changes in
circumstances indicate that the CA of an asset may not be recoverable.
Whenever the CA of an asset exceeds its RA, an IL is recognized in the
income statement for items of FA carried at cost. The RA the higher of
an assets NSP and VIU. The NSP is the amount obtained from the sale
of an asset in an arms length transaction while value in use is the PV of
estimated future cash flows expected to arise from the continuing use of
an asset, from its disposal at the end of its useful life. RA are estimated
for individual assets or, if not possible, for the CGU. IL can be
recognized for an asset in earlier accounting periods is reversed, to the
extent of its RA, if there has been change in the estimates of used to
determine the assets RA since the last IL was recognized.
Effective April 1, 2004, the company has adopted AS-28, Impairment of
Assets (AS 28), which has not given rise to any IL to be recognized in
the financial statements for the year ended March 31, 2005.
K.GURURAJ ACHARYA
TELFAX: 23361800
acharyaguru@yahoo.com
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Accounting Standard - 28 Impairment of Assets: Generally Follows IAS-36 (Differs From SFAS - 144 of US GAAP)

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ACCOUNTING STANDARD - 28 IMPAIRMENT OF ASSETS

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