Ind AS 36: Impairment of Assets – A Comprehensive Guide

Ind AS 36 is an accounting standard that deals with the impairment of assets. It provides guidelines for recognizing and measuring impairment losses on assets and determining when assets need to be tested for impairment. Here’s a detailed explanation of Ind AS 36:

Scope and Objective:

Ind AS 36 applies to all types of assets, except for certain financial assets and assets covered by other accounting standards. It is also applicable to assets that are covered under “Ind as 16 Property, Plant and Equipment“. The objective of Ind AS 36 is to ensure that assets are carried at no more than their recoverable amount, which is the higher of their fair value less costs to sell, or their value in use.

Recognition of Impairment:

An asset is considered impaired when its carrying amount exceeds its recoverable amount. The carrying amount refers to the asset’s cost less any accumulated depreciation or impairment losses. The recoverable amount is the higher of the asset’s fair value less costs to sell or its value in use.

Measurement of Impairment:

If an asset is impaired, the impairment loss is recognized. The impairment loss is calculated as the difference between the asset’s carrying amount and its recoverable amount. The impairment loss is recognized in the statement of profit and loss unless the asset is carried at a revalued amount, in which case the impairment loss is recognized as a revaluation decrease.

Determine the Carrying Amount:

The carrying amount of an asset is its cost less any accumulated depreciation or amortization, as well as any accumulated impairment losses recognized in previous periods.

Determine the Recoverable Amount:

The recoverable amount is the higher of an asset’s fair value less costs to sell or its value in use.

Fair Value:

This refers to the estimated amount that an entity could obtain from the sale of the asset in an arm’s length transaction, after deducting any costs directly associated with the sale. In simple words, we take Fair value less costs to sell.

Value in Use:

Value in use is the present value of the estimated future cash flows expected to be derived from the asset. It involves estimating future cash flows, considering factors such as expected sales volumes, prices, costs, and discount rates.

Compare Carrying Amount with Recoverable Amount:

Compare the carrying amount of the asset with its recoverable amount. If the carrying amount exceeds the recoverable amount, the asset is considered impaired.

Testing for Impairment:

Assets that are subject to potential impairment should be tested for impairment regularly or whenever there is an indication of impairment. The impairment testing involves comparing the asset’s recoverable amount with its carrying amount. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.

Impairment of Cash-Generating Unit (CGU):

A Cash-Generating Unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. It is a concept used in impairment testing under IND AS 36.

By grouping assets into CGUs, IND AS 36 allows for a more focused assessment of impairment, taking into account the specific cash flows generated by those assets. This approach recognizes that assets may not always operate in isolation and that their value and future cash flows may depend on their integration within a particular cash-generating framework.

When assessing the impairment of assets, IND AS 36 requires an entity to determine the recoverable amount of a CGU. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use. The value in use is calculated by discounting the estimated future cash flows expected to be generated by the CGU.

The identification of a CGU is important because impairment testing is performed at the CGU level rather than at the individual asset level. If the carrying amount of a CGU exceeds its recoverable amount, an impairment loss is recognized.

The impairment loss is recognized as an expense in the statement of profit and loss (income statement) unless it relates to a revalued asset, in which case it is recognized as a revaluation decrease. The carrying amounts of the impaired assets are reduced, and the impairment loss is directly allocated to those assets.

Reversal of Impairment:

If the recoverable amount of an asset increases in subsequent periods, the previously recognized impairment loss may be reversed, but only to the extent that the asset’s carrying amount does not exceed its recoverable amount.

If there is a change in the circumstances that led to the recognition of the impairment loss, and the recoverable amount of the CGU increases in subsequent periods, the impairment loss can be reversed, subject to certain conditions. The reversal of impairment is recognized as income in the statement of profit and loss.

Disclosures:

It’s important to note that the measurement of impairment requires the use of estimates and judgment, as it involves assessing future cash flows and determining appropriate discount rates. Entities should exercise caution and consider all relevant factors in determining the impairment loss, ensuring the accuracy and reliability of the measurement. Ind AS 36 requires entities to disclose information about impaired assets, including:

• Amount of impairment loss recognized.
• Methods and assumptions used in determining the recoverable amount
• Amount of reversals of impairment losses (If any).

In summary, Ind AS 36 provides guidance on how to recognize, measure, and disclose impairment losses on assets. It ensures that assets are carried at their recoverable amount and that any impairment losses are recognized in a transparent and consistent manner. Compliance with Ind AS 36 enables entities to accurately reflect the true value of their assets in their financial statements.

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