IAS 36 full text Overview
IAS 36 Impairment of Assets requires the entity to ensure that the assets are not carried at more than their recoverable amount. The entity is required to conduct an annual impairment test with the exception of goodwill and certain intangible assets.
Tackling IAS 36 in TWO simple steps:
- Understanding Impairment of Assets.
- Accounting for Impairment of Assets.
Step 1: Understanding IAS
- IAS 36 seeks to ensure that an entity’s assets are not carried at more than their recoverable amount.
- Impairment means that asset has suffered a permanent loss in value.
- An asset is said to be impaired when its recoverable amount is (less) than its carrying amount.
IAS 36 applies to all assets except followings:
- Inventories (IAS-2).
- Revenue from contract (IFRS 15).
- Deferred tax asset (IAS 12).
- Assets from Employee benefit (IAS 19).
- Financial Asset (IAS 39).
Consolidated financial assets.
- Investment property measured at fair value (IAS-40).
- Biological Asset.
Ias 36 impairment of assets example
Applies to ALL assets including:
Financial assets classified as:
- Subsidiaries (IFRS-10).
- Associates (IAS 28).
- Joint ventures (IFRS 11).
IAS 36 Impairment indicators
- Unexpected decline in market value.
- Significant changes in technology, market , laws and recognition.
- Increase in interest rate affecting value in use of asset.
- Evidence that the asset is damaged or no longer of use to the entity.
- There are plans to discontinue or restructure the operation for which the asset is used.
- There is a reduction in the asset’s expected remaining useful life.
- Fair value is normally market value at measurement date.
- If no active market exists, it may be possible to estimate the amount that the entity obtain from the disposal (less) direct selling costs (e.g. legal costs, taxes).
- Redundancy costs are not direct selling costs.
IAS 36 value in use is the Present value of the expected future cash flows from the use of the asset discounted at a suitable discount rate or cost of capital.
- cash inflows from the use of asset.
- cash outflow necessary to generate cash inflow.
- net disposal proceeds at the end of the asset.
Does not include:
- cash inflows/outflows from financing activities.
- income tax receipts or payments.
*If either of the above amounts is higher, than the carrying value of asset, there is no impairment.
Step 2: Accounting for IAS 36 Impairment of Assets
- An entity must carry out an impairment review when there is evidence or an indication that impairment may have occurred. If such an indication exists, the entity must estimate the recoverable amount of the asset, so that to compare it with carrying amount of the asset for any impairment loss.
- The following assets must be reviewed for impairment (Impairment test Ias 36) at least annually , even when there is no evidence of impairment:
- Intangible with indefinite useful life.
- Goodwill acquired in business combination.
- The impairment loss is normally recognized immediately in Profit or loss by making:
Impairment loss ( stat. of P/L) Debit
Acc. impairment loss (Asset) Credit
- However, if there is a revaluation surplus in respect of an asset, an impairment loss is recognized in respect of that asset to the extent covered by that surplus. Thus, it is treated in the same way as a downward revaluation;
- The part of impairment not covered by surplus is recognized in Profit or loss.
- Following the recognition of impairment , the future depreciation must be based on the revised carrying amount (minus) residual value, over the remaining useful life, by making:
Statement of P/L Debit
Surplus A/c Debit
A Cash generating unit Ias 36 (CGU) is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
- When an impairment loss arises on a cash-generating unit, the impairment loss is allocated across the assets of the cash-generating unit in following order:
- first, to the goodwill; then
- to other asset in CGU on a pro-rata basis (i.e. proportion to carrying amount of the asset of the CGU).
- However, the carrying amount of an asset cannot be reduced below highest of;
- fair value (less) cost of disposal,
- value in use; and