Impairment is determined by comparing CARRYING VALUE of the asset with it’s RECOVERABLE AMOUNT. It will be higher of Fair Value less Cost of Disposal and its Value in Use. Impairment rules apply to both Tangible and Intangible Assets.
Scope and Applicability:
It applies to all tangible, intangible and financial assets except-
Accounting Issues to be Considered:
Identification of Potential Impairment
An organization should check for the identifications of impairment to assets at the end of every reporting period. In such identification process, one should keep in mind the concept of “Materiality” and only a potential material impairment loss needs to be taken care of.
Standard lays down the indications of a potential impairment of assets. It is divided into 2 different sources namely,
> External Source of Information
> Internal Source of Information
If no identifications of impairment are traceable, then still the following assets always be tested for impairment at each reporting period:
Measurement of Recoverable Amount
The recoverable amount of an asset should be measured as a Higher Value of:
Recognition of an Impairment Loss
Impairment Loss should be treated as a Revaluation decrease under the relevant IFRS Standard.
Cash-Generating Units (CGU’s)
A Cash-Generating Unit is a smallest identifiable group of assets that generates cash inflows that are majorly independent of the cash inflows from the other assets or group of assets.
Sometimes, it become difficult to estimate the value for an individual asset, specifically in the calculation of Value in Use and Recoverable Amount, because cash inflows and cash outflows cannot be attributed to the individual assets. Thus, it generates the need of formation of CGU’s.
CGU’s should be identified constantly from time to time for the same of type of asset unless any change is identifiable.
If there is any active market exists for the output produced by the asset or group of assets, then such asset or group of assets should be identified as a Cash-Generating Unit.
Goodwill Allocation & it’s Impairment
Goodwill acquired in Business Combination generate cash flows on the basis of other acquired assets. Thus, it needs to be allocated to acquirer’s CGU or group of CGU’s that are expected to be benefitted from the synergies of combination. Goodwill allocation should:
The annual impairment test should be performed at any time during an accounting period, but must be performed at the Same Time every year.
When an impairment loss arises, goodwill is always written off first with any excess impairment allocated to other assets on Pro-Rata basis.
Allocating impairment loss to goodwill is further complicated by the choice in IFRS 3 Business Combinations to value the Non-Controlling Interest at Fair Value or at Proportionate Share of Net Assets.
Order of Allocating Impairment Loss in a CGU
Illustration on Allocation of Impairment Loss
|A CGU consists following:||$Million|
|Plant & machinery||6|
Because of Recession, Recoverable amount of CGU has been fallen to $50 Million. Allocate the Impairment Loss.
According to the above-mentioned order, impairment loss should be first charged to Goodwill and then on the Non-Current Assets on Pro-Rata Basis. Current assets will be stated at Fair Value and therefore, no impairment loss is allocated to them. After writing off Goodwill, balance of $6 million will be allocated on pro-rata over the total of $36 Million for the remaining Non-Current Assets.
|Carrying Amount||Impairment Loss||Carrying amount- Post Impairment|
|Plant & machinery||6||(1)||5|
Accounting Treatment of Impairment Loss
Now depreciation will be charged on the basis of new carrying amount after when asset will be reflected to its Recoverable Amount.
Reversal of Impairment Loss
The annual assessment to determine impairment applies to all assets, including those assets which have been impaired in the past. Thus, it could happen that recoverable amount of the asset that has been previously impaired has been higher than its current carrying amount. This will lead to the scenario of “Reversal of Impairment Loss”.
In such scenario, carrying amount should be increased to new recoverable amount by:
The asset cannot be revalued to a carrying amount that is higher than its value would have been if the asset had not been impaired originally, i.e. Depreciated Carrying Amount had the impairment not taken place. Depreciation will now be based on its new revalued amount.
An exception to this rule is for Goodwill. An impairment loss for goodwill should not be reversed in a Subsequent Period. (IAS 36: Para. 124).
Non depreciable asset with a carrying value of $500,000 having a recoverable value of $ 470,000 on December 31,2019. On December 31,2020, the recoverable amount has been increased to $ 520,000. What amount of reversal should be recognized?
$30,000 supposed to be recognized as carrying amount can be increased to amount recorded prior to the impairment.