IAS 36- Impairment of assets- Part 1

In our previous blogs, we discussed methods of fair value measurement and various concepts associated with fair value of asset and liability. With the help of the concepts discussed, one should ensure that an exit price is based on market participants’ assumptions and entity-specific factors are not considered while measuring fair value.

In this blog, we’ll discuss on IAS 36: Impairment of assets. IAS 36 is an accounting standard that helps companies ensure their assets are not valued higher than what they can actually recover from using or selling them. When an asset’s recorded value exceeds its recoverable amount (the higher of fair value less costs to sell or the value in use), it is said to be impaired. The standard requires companies to test assets for impairment regularly, especially for goodwill and certain intangible assets, and to reduce the asset’s value, if required, by recognizing an impairment loss. This ensures that financial statements reflects a realistic value of the company’s assets and give a true and fair picture of its financial position.

In short, IAS 36 protects users of financial reports from overstated asset values, promoting transparency and reliability in the financial reporting.

The core principle of IAS 36 is that an entity’s assets are carried at no more than their recoverable amount.

Recoverable amount is the higher of the amount to be realised through the asset’s use or sale. Where the carrying value exceeds the recoverable value, the asset is said to be overvalued and is required to be written down to the asset’s recoverable value. This write down from carrying value to recoverable value is called as impairment loss. However, if recoverable value is higher than the carrying value, then asset is not restated at higher amount than it’s carrying value.

Definitions

An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.

If Recoverable amount is greater than carrying value of an asset or a CGU, then there is NO impairment.

Frequency of impairment testing

An asset is impaired when its carrying amount exceeds its recoverable amount. 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. However, frequency for impairment testing shall be as

The ability of an intangible asset to generate sufficient future economic benefits to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after it is available for use. Therefore, this Standard requires an entity to test for impairment, at least annually, the carrying amount of an intangible asset that is not yet available for use.

If impairment indication arises after annual impairment testing, entity is required to perform impairment testing once again upon based on indications.

Level of impairment testing

At what level impairment testing is to be performed?  

We hope this blog helps you to understand that entity should ensure that its assets are carried at no more than their recoverable amount, and it shall follow applicable conditions of impairment and frequency at which impairment testing should be done depending upon- nature of asset or CGU and external or internal indicators.

In our next blog we will discuss on other concepts of impairment of asset, where we’ll discuss over concept of cash generating unit (CGU), and method to be followed to calculate impairment loss.

Thank you for reading this article. Stay tuned for more simplified insights on accounting standards!

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