The objective of IAS 36 is to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). When the carrying amount of an asset is reduced to its recoverable amount then reduction in the asset’s value is an impairment loss.
Recognition and Measurement of an Impairment Loss
Carrying value is the amount at which an asset is shown in the statement of financial position reduced by accumulated depreciation and accumulated impairment losses. This can reasonably be taken to equate to the net book value of the asset in the statement of financial position.
Cash Generating Unit
This is a separately identifiable group of assets
The recoverable amount of an asset or a cash-generating unit is the higher of its fair or resale value less future costs to sell and its present value to the company when used by the company.
Fair value is the value at which an asset could be exchanged between knowledgeable and willing parties in an arm’s length transaction. 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.
The statement provides guidance in respect of this:
Value in use
Value in use is the present or discounted value of estimated future cash flows expected to be derived from an asset or a cash-generating unit. This is usually calculated using discounted cash flow techniques. In considering this the entity should consider the following:
Indications of Impairment
At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount). IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated.
Reversal of an Impairment Loss
An entity shall reverse impairment loss if there is any indication that an impairment loss for an asset other than goodwill recognized in prior periods
The Impairment Review
The impairment review involves comparing the asset’s carrying amount with the recoverable amount. It is conducted in three steps:
Ascertain the asset’s carrying amount – its net book value.
Compare carrying amount with the asset’s recoverable amount. The recoverable amount will be the higher of the asset’s fair value less costs to sell and the asset’s value in use.
If the carrying value is greater than the recoverable amount then the asset is impaired. It must be written down to its recoverable amount in the statement of financial position. The amount of the impairment is recognised as an expense in the statement of financial position.
At the start of the year, a company had some machines valued at $25 000. Depreciation on plant is charged at 20 % using the reducing balance method. Following an impairment review, the fair value of machines is $21 200 and its value in use is $22 800. At which value should machinery be shown in the year end statement of financial position?
Net Book Value (Carrying amount) = 25 000 – (20/100*25 000) = $ 20 000
Fair value = $ 21 200
Value in use = $ 22 800
Recoverable amount = Higher between Fair value and value in use = $ 22 800
Machinery in SOFP = Lower between Carrying amount and recoverable amount = $ 20 000
If carrying amount is greater than the recoverable amount, the difference is recorded as an Impairment loss in the income statement.
A company has three different non-current assets. The directors have the following valuations of these assets to carry out the impairment review.
fair value less costs to sell
value in use