IAS 36 IMPAIRMENT OF

ASSETS
SUMMARY OF IAS 36
 Objective

• To ensure that assets are carried at no more

than their recoverable amount, and to define
how recoverable amount is calculated.
 Scope
IAS 36 applies to all assets except:
• inventories (see IAS 2)
• assets arising from construction contracts (see
IAS 11)
• deferred tax assets (see IAS 12)

• assets arising from employee benefits (see IAS

19)
• financial assets (see IAS 39)
 Scope
• investment property carried at fair value
(see IAS 40)
• certain agricultural assets carried at fair
value (see IAS 41)
• insurance contract assets (see IFRS 4)
• assets held for sale (see IFRS 5)
 Key Definitions

• Impairment: An asset is impaired when its carrying

amount exceeds its recoverable amount.
• Carrying amount: the amount at which an asset is
recognized in the balance sheet after deducting
accumulated depreciation and accumulated impairment
losses
• Recoverable amount: The higher of an asset's fair value
less costs to sell (sometimes called net selling price) and
its value in use:
• Fair value: The amount obtainable from the sale of an
asset in a bargained transaction between
knowledgeable, willing parties.
 Key Definitions
• Value in use: The discounted present value of estimated future cash
flows expected to arise from:
• the continuing use of an asset, and from
• its disposal at the end of its useful life.
 Asset impairment
• Carrying amount compared with
recoverable amount.
• Recoverable amount is the higher of fair
value less cost to sell and value in use..
 Identifying an Asset That May Be
Impaired

• At each balance sheet date, review all assets to

look for any indication that an asset may be
impaired (its carrying amount may be in excess
of the greater of its net selling price and its value
in use). IAS 36 has a list of external and internal
indicators of impairment. If there is an indication
that an asset may be impaired, then you must
calculate the asset's recoverable amount.
 The recoverable amounts

• The recoverable amounts of the following types of

intangible assets should be measured annually whether
or not there is any indication that it may be impaired. In
some cases, the most recent detailed calculation of
recoverable amount made in a preceding period may be
used in the impairment test for that asset in the current
period:
• an intangible asset with an indefinite useful life.
• an intangible asset not yet available for use.
• goodwill acquired in a business combination.
Carrying value of tangible and intangible (non-current) assets
Stages of an impairment test
 Indications of Impairment

• External sources:
• market value declines
• negative changes in technology, markets, economy, or laws
• increases in market interest rates
• company stock price is below book value
• Internal sources:
• obsolescence or physical damage
• asset is part of a restructuring or held for disposal
• worse economic performance than expected
• These lists are not intended to be exhaustive. Also, must consider
materiality. Further, an indication that an asset may be impaired may
indicate that the asset's useful life, depreciation method, or residual value
may need to be reviewed and adjusted.
 Determining Recoverable Amount

• If fair value less costs to sell or value in

use is more than carrying amount, it is not
necessary to calculate the other amount.
The asset is not impaired.
• If fair value less costs to sell cannot be
determined, then recoverable amount is
value in use.
• For assets to be disposed of, recoverable
amount is fair value less costs to sell.
 Fair Value Less Costs to Sell

• If there is a binding sale agreement, use the price under

that agreement less costs of disposal.
• If there is an active market for that type of asset, use
market price less costs of disposal. Market price means
current bid price if available, otherwise the price in the
most recent transaction.
• If there is no active market, use the best estimate of the
asset's selling price less costs of disposal.
• Costs of disposal are the direct added costs only (not
existing costs or overhead).
 Value in Use

• The calculation of value in use should reflect the

following elements:
• an estimate of the future cash flows the entity
expects to derive from the asset in an arm's
length transaction;
• expectations about possible variations in the
amount or timing of those future cash flows;
• the time value of money, represented by the
current market risk-free rate of interest;
• the price for bearing the uncertainty inherent in
the asset; and
 Recognition of an Impairment Loss

• An impairment loss should be recognized

whenever recoverable amount is below
carrying amount.
• The impairment loss is an expense in the
income statement (unless it relates to a
revalued asset where the value changes
are recognized directly in equity).
• Adjust depreciation for future periods.
Cash-generating units (CGU) (Continued)

• CGU as the smallest identifiable group of assets that

generates cash inflows that are largely independent
of the cash inflows of other assets or groups of assets.
 Cash-generating units (CGU)

• Where the recoverable amount cannot be estimated

for individual assets, it should be estimated for
groups of assets that generate income streams that
are largely independent of each other. These are
referred to as cash-generating units (CGUs).
Where an impairment review of a CGU is required, it
should cover all its tangible assets, intangible assets
and attributable goodwill. The carrying value of each
CGU containing the assets and goodwill being
reviewed should be compared with the higher of its
value in use or fair value less costs to sell (if fair value
less costs to sell can be measured reliably)
• A cash-generating unit to which goodwill has been allocated shall be
tested for impairment at least annually by comparing the carrying
amount of the unit, including the goodwill, with the recoverable
amount of the unit:
• If the recoverable amount of the unit exceeds the carrying amount of
the unit, the unit and the goodwill allocated to that unit is not
impaired.
• If the carrying amount of the unit exceeds the recoverable amount of
the unit, the entity must recognize an impairment loss.
• The impairment loss is allocated to reduce the carrying amount of
the assets of the unit (group of units) in the following order:
• first, reduce the carrying amount of any goodwill allocated to the
cash-generating unit (group of units); and
• then, reduce the carrying amounts of the other assets of the unit
(group of units) pro rata on the basis.
• The carrying amount of an asset should not be reduced below the
highest of:
• its fair value less costs to sell (if determinable);
• its value in use (if determinable); and
• zero.
• If the preceding rule is applied, further allocation of the impairment
loss is made pro rata to the other assets of the unit (group of units).
• A cash generating unit has been assessed
for impairment and determined an
impairment loss of taka 12,000. The
carrying amounts of the assets were as
follows:
Buildings:500,000
Equipment:300,000
Land:250,000
Fittings:150,000
• Fair value less cost to
sell of the assets was
as follows: Buildings 497,000

Equipment 298,000

Land 245,000

Fittings
• Give the journal entries to reflect the
recognition of impairment loss.
• Suppose remaining economic life of Building,
equipment and fittings were 10, 8 and 5 years
respectively with zero salvage value.
Company follows straight line method of
deprecation. At the end of next year there is a
reversal of impairment loss of taka 5000.
Allocate the reversal assuming that individual
recoverable amount of the unit can not be
determined.
 Reversing an impairment loss

A reversal of an impairment loss reflects an

increase in the estimated service potential of an
asset, either from use or from sale, since the date
when an entity last recognised an impairment loss
for that asset. An entity should identify the change
in estimate that causes the increase in estimated
service potential. Examples of changes in
estimates include:
 Reversing an impairment loss
(Continued)
(a) a change in the basis for recoverable amount
(i.e. whether recoverable amount is based on
fair value less costs to sell or value in use);
(b) if the recoverable amount was based on value
in use, a change in the amount or timing of
estimated future cash flows or in the discount
rate; or
(c) if the recoverable amount was based on fair
value less costs to sell, a change in the estimate
of the components of fair value less costs to sell
(IAS 36 para 115).
 Reversal of an Impairment Loss

• Same approach as for the identification of impaired

assets: assess at each balance sheet date whether there
is an indication that an impairment loss may have
decreased. If so, calculate recoverable amount.
The increased carrying amount due to reversal should not
be more than what the depreciated historical cost would
have been if the impairment had not been recognised.
• Reversal of an impairment loss is recognized as income
in the income statement.
• Adjust depreciation for future periods.
• Reversal of an impairment loss for goodwill is prohibited.
 Disclosure

• Disclosure by class of assets:

• Impairment losses recognized in the income statement
• Impairment losses reversed in the income statement
• Which line items of the income statement
• Disclosure by segment:
• primary segments only (usually product line or industry)
• impairment losses recognized
• impairment losses reversed
 Other disclosures

• If an individual impairment loss (reversal) is material

disclose: [IAS 36.130]
• events and circumstances resulting in the impairment
loss.
• amount of the loss.
• individual asset: nature and segment to which it relates.
• Cash generating unit: description, amount of impairment
loss (reversal) by class of assets and segment.
• if recoverable amount is fair value less costs to sell,
disclose the basis for determining fair value.
• if recoverable amount is value in use, disclose the
discount rate.
• If impairment losses recognised (reversed) are material
in aggregate to the financial statements as a whole,
disclose: [IAS 36.131]
• main classes of assets affected
• main events and circumstances
• Disclose detailed information about the estimates used
to measure recoverable amounts of cash generating
units containing goodwill or intangible assets with
indefinite useful lives. [IAS 36.134-35]
• On January 1, 2006 X Ltd. acquired and installed an item
of plant for use in the manufacturing process. When
acquired the item of plant cost Taka 900,000 and had
estimated useful life of 10 years with a residual value of
Taka 10,000. They use straight method for charging
depreciation.
• On January 1, 2008, the review of manufacturing plant
found that as the item of plant had incurred significant
damage, the plant is likely to be impaired. As a result of
the damage the engineering department estimated the
following on that date:
• Fair value: 400,000
• Annual cash flow for the remaining life: Taka
83,000
• Repair and Maintenance per year: Taka 2000
• Discount rate: 12%
• Cost to sell: Taka 10,000
• Calculate the impairment loss (if any) both under
the IASB and FASB standard.