BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets
IAS 36 IMPAIRMENT OF ASSETS
CHAPTER 1
IAS 36 Impairment of assets
1.0 Definitions
Impairment is a fall in the value of an asset, so that its recoverable amount is now
less than its carrying value (amount) in the statement of financial position.
Carrying amount is the net value at which the asset is included in the statement of
financial position (ie after deducting any accumulated depreciation and any
accumulated impairment losses).
e.g.
CA of PPE
= Cost/revalued amount – Acc. Dep – Acc. Impairment loss
2.0 Objectives of IAS 36
(a) Identifying an impairment loss
(b) Measuring its recoverable amount of the asset
(c) Recognising or reversing any resulting impairment loss
(d) Disclosing information on impairment losses or reversals in the statement of
financial position.
3.0 Identifying a potentially impaired asset
An entity should consider external and internal sources of information to assess
whether there is any indication that an asset may be impaired. IAS 36 suggests the
following:-
(a) External sources of information
(i) A fall in the asset’s market value that is more significant than expected.
e.g. during global financial crisis.
(ii) A significant change in the technological, market, legal or economic
environment of the business in which the assets are employed.
(iii) An increase in market interest rates or market rates of return on
investments likely to affect the discount rate used in calculating value
in use. i.e. market interest rates increase, VIU will decrease
(iv) The carrying amount of the entity’s net assets being more than its
market capitalisation. i.e. NA > MC
NA = A - L
MC = No. of shares outstanding x share price
(b) Internal sources of information.
(i) Evidence of obsolescence or physical damage of the asset.
e.g. damaged by fire/flood
(ii) Adverse changes in the way an asset is used.
e.g. asset becoming idle (not being used)
(iii) Evidence from internal reporting that indicates the economic
performance of an asset is worse than expected.
e.g. actual capacity lower than expected capacity
1
, BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets
Why and when an impairment review should be carried out
Why
An impairment review is required to ensure that assets are carried in the SOFP at no
more than their recoverable amount.
When
An entity shall assess at the end of each reporting period whether there is any
indication that an asset may be impaired. If any such indication exists, the entity
shall estimate the recoverable amount of the asset.
Even if there are no indications of impairment, the following assets must always be
tested for impairment annually.
(a) An intangible asset with an indefinite useful life
(b) Goodwill acquired in a business combination
4.0 Measuring the recoverable amount of the asset
IAS 36 requires recoverable amount to be measured at the higher of
(i) the asset’s fair value less costs of disposal (net selling price) and
(ii) its value in use (VIU).
Fair value less costs of disposal
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (See IFRS 13 Fair Value Measurement.)
Costs of disposal (costs to sell/Selling costs)
Costs of disposal are incremental costs directly attributable to the disposal of an
asset or cash-generating unit, excluding finance costs and income tax expense.
Costs of disposal include sales transaction costs such as
(i) legal expenses
(ii) stamp duty and similar transaction taxes
(iii) costs of removing the asset and direct incremental costs to bring an asset into
condition for its sale.
Value in use
The value in use is measured as the present value of estimated future cash flows
(inflows less outflows) generated by the asset, including its estimated net disposal
value (if any) at the end of its expected useful life.
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IAS 36 IMPAIRMENT OF ASSETS
CHAPTER 1
IAS 36 Impairment of assets
1.0 Definitions
Impairment is a fall in the value of an asset, so that its recoverable amount is now
less than its carrying value (amount) in the statement of financial position.
Carrying amount is the net value at which the asset is included in the statement of
financial position (ie after deducting any accumulated depreciation and any
accumulated impairment losses).
e.g.
CA of PPE
= Cost/revalued amount – Acc. Dep – Acc. Impairment loss
2.0 Objectives of IAS 36
(a) Identifying an impairment loss
(b) Measuring its recoverable amount of the asset
(c) Recognising or reversing any resulting impairment loss
(d) Disclosing information on impairment losses or reversals in the statement of
financial position.
3.0 Identifying a potentially impaired asset
An entity should consider external and internal sources of information to assess
whether there is any indication that an asset may be impaired. IAS 36 suggests the
following:-
(a) External sources of information
(i) A fall in the asset’s market value that is more significant than expected.
e.g. during global financial crisis.
(ii) A significant change in the technological, market, legal or economic
environment of the business in which the assets are employed.
(iii) An increase in market interest rates or market rates of return on
investments likely to affect the discount rate used in calculating value
in use. i.e. market interest rates increase, VIU will decrease
(iv) The carrying amount of the entity’s net assets being more than its
market capitalisation. i.e. NA > MC
NA = A - L
MC = No. of shares outstanding x share price
(b) Internal sources of information.
(i) Evidence of obsolescence or physical damage of the asset.
e.g. damaged by fire/flood
(ii) Adverse changes in the way an asset is used.
e.g. asset becoming idle (not being used)
(iii) Evidence from internal reporting that indicates the economic
performance of an asset is worse than expected.
e.g. actual capacity lower than expected capacity
1
, BBFA2023 Advanced Financial Accounting CHAPTER 1 IAS 36 Impairment of assets
Why and when an impairment review should be carried out
Why
An impairment review is required to ensure that assets are carried in the SOFP at no
more than their recoverable amount.
When
An entity shall assess at the end of each reporting period whether there is any
indication that an asset may be impaired. If any such indication exists, the entity
shall estimate the recoverable amount of the asset.
Even if there are no indications of impairment, the following assets must always be
tested for impairment annually.
(a) An intangible asset with an indefinite useful life
(b) Goodwill acquired in a business combination
4.0 Measuring the recoverable amount of the asset
IAS 36 requires recoverable amount to be measured at the higher of
(i) the asset’s fair value less costs of disposal (net selling price) and
(ii) its value in use (VIU).
Fair value less costs of disposal
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (See IFRS 13 Fair Value Measurement.)
Costs of disposal (costs to sell/Selling costs)
Costs of disposal are incremental costs directly attributable to the disposal of an
asset or cash-generating unit, excluding finance costs and income tax expense.
Costs of disposal include sales transaction costs such as
(i) legal expenses
(ii) stamp duty and similar transaction taxes
(iii) costs of removing the asset and direct incremental costs to bring an asset into
condition for its sale.
Value in use
The value in use is measured as the present value of estimated future cash flows
(inflows less outflows) generated by the asset, including its estimated net disposal
value (if any) at the end of its expected useful life.
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