IMPAIRMENT OF ASSETS IN BUSINESS

[Yakub02]

An asset is said to be impaired when it carrying amount in the statement of financial position is above the recoverable of the asset or its cash generating unit.

From time to time an asset may have a carrying value that is greater than its fair value but this is not necessarily impairment as the situation might change in the future. Impairment means that the asset has suffered a permanent loss in value.

The objective of IAS 36 Impairment of assets is to ensure that assets are ‘carried’ (valued) in the financial statements at no more than their recoverable amount. Scope of IAS 36 IAS 36 applies to all assets, with the following exceptions that are covered by other accounting standards

:  inventories (IAS 2);

 deferred tax assets (IAS 12);

 financial assets (IFRS 9);  investment property held at fair value (IAS 40);

 non-current assets classified as held for sale (IFRS 5).

The recoverable amount of an asset is defined as the higher of its fair value minus costs of disposal, and its value in use. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Value in use is the present value of future cash flows from using an asset, including its eventual disposal. Impairment loss is the amount by which the carrying amount of an asset (or a cash-generating unit) exceeds its recoverable amount.

 

[Yakub02]

A company must make an assessment at the end of each reporting period as to whether a previously recognised impairment should be increased or may no longer exist.

If the loss no longer exists it is reversed subject to the following guidance. Any reversal:

 must be justifiable, by reference to an improvement in the indicators of impairment; and

 should not lead to a carrying amount in excess of what the carrying amount of the asset would have been without the recognition of the original impairment loss. A reversal should be:

 recognised immediately in profit or loss; unless

 the original impairment was charged to the revaluation reserve, in which case the reversal should be credited to the revaluation reserve (and reported in the same way as a revaluation in ‘other comprehensive income’ for the period).

 

[Yakub02]

Depreciation charges for future periods should be adjusted to allocate the asset’s revised carrying amount, minus any residual value, over its remaining useful life. An impairment loss that has arisen on purchased goodwill cannot be reversed.

This is because any reversal of an impairment loss to goodwill is likely to be caused by an increase in internally-generated goodwill rather than a reversal of the impairment of purchased goodwill. Internally-generated goodwill must not be reported as an asset.

For all impairments, the following disclosures should be made for each class of assets:

 The amount of impairment losses recognised in profit or loss for the period and the line item in which those items are included.

 Similar information about reversals of impairment losses recognised in profit or loss for the period.