IND AS-36: Impairment of Assets- Analysis and its Testing at end of each reporting period

Background: Ind AS 36 on Impairment of Assets is in place to ensure that an entity’s assets are not carried at more than their recoverable amount. With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset.

Impairment loss is considered only when there is diminution in the value of the assets which is not temporary in nature.

Computation of Impairment Loss: Recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

If recoverable amount is more than carrying amount of an asset, then no impairment loss will be recognized.

Impairment loss = Recoverable Value- Carrying Amount

In other words, Recoverable amount shall be higher of following :-

  • Fair Value less cost of disposal
  • Value in use

Fair Value less cost of disposal

Costs of disposal are deducted while determining the fair value less cost of disposal. Examples of such costs are:

  • Legal costs
  • Stamp duty and similar taxes
  • Costs of removing the assets
  • Incremental costs for bringing the assets into the conditions for its sale
  • Other costs

Value in use

It shall be calculated on the following basis:

  • Estimated Future Cash Flow
  • Discount Rate

Time to perform the Impairment Testing: Ind AS 36 requires an entity to a perform a Impairment Testing: At each reporting date, whether there are any indicators that individual asset or CGU may be impaired. Annually for the following assets, irrespective of whether there is an indication of Impairment:

  • intangible assets with an indefinite useful life
  • intangible assets not yet available for use
  • goodwill acquired in a business combination

Testing Indicators: Ind AS 36.12 provides a non-exhaustive list of external, internal and other indicators that an entity should consider are summarised below:

a. External Indicators:

  • Significant decline in market value of assets
  • Significant changes in technological, market, economic or legal environment resulting in adverse effect on the entity
  • Market interest rate or market rates of return have increased during the year affecting the discount rate used in calculating asset’s value in use
  • Carrying amount of net assets of the entity is more than its market capitalisation
b. Internal Source of information:

  • Obsolescence or physical damage
  • Significant changes /adverse effect on the entity during the current period or expected to take place in the near future to the extent to which an asset is used or expected to be used.

Some of these changes/adverse effects include:

1. plans to discontinue or restructure the operation

2. plans to dispose of an asset

3. reassessing the useful life of an asset as finite rather than indefinite life

c. Other Indicators: For an investment in a subsidiary, joint venture or associate, the investor recognises dividend from the investment and evidence is available that

  • The carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill; or
  • The dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared
  • The fact that an active market no longer exists for a revalued intangible asset
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