Impairment of Assets (IndAS 36) Part I

What is Impairment of Assets?

It means decline in the value of Assets.

How to find assets that may be impaired?

When carrying amount of assets is more than recoverable amount.

Note. Carrying amount: Value of assets appears in the books of accounts Recoverable amount: See next point.

What is Recoverable amount?

It is amount higher of FVLCTS (Fair Value less cost to sale/disposal) or (VIU) Value in Use

FVLCTS: Selling Price of Assets in the market – Expenses requires to sell or dispose the assets.

VIU: It is Present value of the future cash flows that will made from the use of assets.

What is to be add/less in expected Future cash Flow?

Add: Inflows from continuing use of assets

Less:  Outflows requires to generate those inflows of future cash.

Add:  Net cash flow from disposal of assets (when life of asset gets end)

What to be ignored while computing expected future cash flow?

Expected future cash inflow/outflow that will arise from the plan (new plan) which has not been taken place yet. (Such plan also called as Restructuring Plan).

How to get Present Value of future expected Cash flow?

(You will get separate article on this) as of now let’s continue further.

What if there will be cash flows in foreign currency?

Convert those cash flow in the Present value using Discounting factor of foreign currency. And ten such Present value of cash flows is converted into home currency using Spot rate.

When, we don’t need to find out FVLCTS or VIU?

If either FVLCTS or VIU is more than Carrying amount of assets.

What if We don’t have FVLCTS but We do have VIU then How to find out Recoverable amount.

In such case VIU = Recoverable amount.

What if We don’t have VIU but we do have FVLCTS then Will recoverable amount same as FVLCTS?

No, It won’t. (Why – Since our intension not selling the assets immediately)

Impairment Loss = Carrying amount – Recoverable amount.

Treatment for recognizing impairment loss.

There are two ways:

1)     If asset is valued at cost model – then transfer to Profit and Loss Directly

2)     If assets is valued at revaluation model. – If there was revaluation surplus last year then to that extent Impairment loss will be transfer to the OCI (Other comprehensive Income) and balance (if any) will be transfer to the Profit and loss account.

Further if there is no revaluation surplus in last years. Then transfer whole amount of impairment loss to the P&L.

Note : After Impairment loss of assets depreciation should be charged on Revised carrying amount of the assets considering the residual value too.

When to conduct Impairment test?

Whenever there is indication that asset may be impaired.

For following 3 assets Impairment test should be done annually even if there is no indications.

1)     Intangible assets of which life can’t be defined. (Indefinite useful life)

2)     Intangible assets which are under development.

3)     Goodwill acquired in the business combination.

Indications of Impairment

1)     External Indications

·       Market value of assets declined.

·       Changes in tech with adverse effect

·       Market interest rate increased.

2)     Internal Indicators

·       Physical damage to the assets

·       Idle now

·       Life became finite from infinite

Performance of asset getting worse.