IAS 36 - Impairment of Assets

Introduction

• IAS 36 ensures assets are not carried at more than their recoverable amount to prevent overstatement in financial statements.

Assets Excluded from IAS 36

• Inventories under IAS 2
• Contract assets under IFRS 15
• Deferred tax assets under IAS 12
• Employee benefit assets under IAS 19
• Financial assets under IFRS 9
• Investment property at fair value under IAS 40
• Biological assets under IAS 41
• Insurance contracts under IFRS 17
• Non-current assets held for sale under IFRS 5

Definition of Impairment

• An asset is impaired if its carrying amount (CA) exceeds its recoverable amount (RA).
• Impairment Loss = Recoverable Amount (RA) - Carrying Amount (CA)

Key Definitions

• Carrying Amount (CA): Amount after deducting depreciation/amortization and impairment losses.
• Recoverable Amount (RA): Higher of an asset's fair value less costs of disposal and its value in use.
• Fair Value Less Costs of Disposal: Market-based measurement; includes direct costs like legal fees, removal costs.
• Value in Use: Present value of future cash flows from the asset using a pre-tax discount rate.

When to Test for Impairment

• Assess at the end of each reporting period if assets are impaired using external/internal indicators.
• Annual impairment test required for:
  • Intangible assets with indefinite useful lives
  • Intangible assets not ready for use
  • Goodwill acquired in a business combination

External and Internal Indicators

• External: Market decline, changes in technology/economy, interest rates, market capitalization.
• Internal: Obsolescence, physical damage, restructuring plans, declining performance.

Calculating Recoverable Amount

• Not always necessary to calculate both fair value less costs of disposal and value in use.
• Use value in use if fair value can't be measured, or if no indication that value in use is materially higher.

Cash Flows for Value in Use

• Included: Inflows from use, necessary outflows for maintenance.
• Excluded: Inflows/outflows from other assets, liabilities, future enhancements, or financing activities.

Present Value Calculation

• Estimate future cash flows, discount with a current market risk-free rate, adjust for uncertainties.

Recognition and Measurement of Impairment Loss

• Calculate impairment loss when CA > RA.
• Post-impairment, calculate depreciation using new depreciable amount over remaining useful life.

Example of Impairment Calculation

• Steps to determine impairment and journal entries for asset valuation.

Reversal of Impairment Loss

• Occurs when RA exceeds CA, with restrictions on reversal amount.
• Goodwill impairment losses cannot be reversed.
• Recalibrate depreciation post-reversal using new carrying amount.

Disclosure Requirements

• Disclose impairment losses/reversals, including amounts, circumstances, asset nature, and segment details.
• Disclose fair value or value in use basis for RA calculation.

Example of Impairment Reversal

• Process to determine and document reversal of impairment loss with journal entries.

These notes provide a structured overview of IAS 36, focusing on key concepts, procedures, and examples related to asset impairment in financial statements. They encompass definitions, measurement criteria, testing times, and guidelines for recognizing, reversing, and disclosing impairment losses.