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What is Impairment Loss? When & why does it occur? Why it’s required to be recorded?

Ind As 36-What is Impairment of Assets?

What is the objective of Ind AS 36?

We all know that in business we used Tangible Assets and Intangible assets.

Tangible assets are fixed assets while intangible assets are like Brand value, patents, goodwill etc.

Either tangible assets or intangible assets, since we are using in the business their value degrade with the passage of time.

Recording of this degradation of value in the financial statements is very important to arrive at the true and fair view of the financial statements.

For deterioration in the value of assets   we used terms depreciation or amortization.

For fixed assets/ Tangible assets- we used the term Depreciation however in the case of an intangible asset, the term ‘amortization’ is generally used instead of ‘depreciation’. The two terms have the same meaning.

Depreciation (Amortization) is the systematic allocation of the depreciable amount of an asset over its useful life.

Many time value of assets go down by impairment

  • Because of development
  • Change in technology
  • Customer preference
  • Damage to a particular asset or
  • Because company has taken a decision of disposing the assets

The above list is illustrative only and not the exhaustive one. Many other reasons can be for value down of an asset.

Because of these decisions realizable value or value in use is lower than the carrying amount of the asset

Carrying amount –is the amount at which an asset is recognized after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon.

The recoverable amount -of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use

Value in use -is the present value of the future cash flows expected to be derived from an asset or cash-generating unit

The Objective of Ind AS 36 – is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount.

An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. The asset is described as impaired and the Standard requires the entity to recognize an impairment loss.

An impairment loss– is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount or the value in use whichever is higher.

Suppose of an Asset

Carrying amount  Rs 100.00

Recoverable amount Rs 60.00

Value in Use  Rs 70.00

Here Impairment Loss is Rs 30.00

(Rs 100 –Rs 70 (being higher of the two above).

An impairment loss shall be recognized immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for example, in accordance with the revaluation model in Ind AS 16).

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IBBI Valuator for Financial Instruments Retired Banker having an experience of 30 years in advances, Recovery and compliance. Consultant to the Banking Matters Flair to the Audit, Assurance and compliance works worked with Asset Reconstruction Company as consultant Visiting Lecturer on Bankin View Full Profile

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June 2024