4. Impairment of assets Flashcards
What is IAS 36?
Impairment of assets
What is the objective of IAS 36?
To set rules to ensure that the assets of an entity ‘are carried at no more than their recoverable amount
IAS 36 applies to all assets other than…
7 items
- Inventories
- Construction contracts
- Deferred tax assets
- Assets from employee benefits
- Financial assets in scope of IFRS 9
- Investment property measured at fair value
- Non-current assets held for sale
When is an asset impaired?
When its recoverable amount is is below the value currently shown on the statement of financial position
What is the recoverable amount taken as?
The higher of
- Fair value less cost to sell (NRV)
- Value in use
How do we measure fair value less costs to sell? (NRV)
- A binding sale agreement
- The current market price less costs of disposal (Where active market exists)
How do we measure value in use?
Determined by estimating
- Future cash inflows and outflows to be derived from the use of the asset and
- It’s ultimate disposal,
and applying a suitable discount rate to these cash flows.
What cash flows should not be included in measurement of value in use?
- Financing activities
- Income taxes
IAS 36 requires that at each reporting date the entity must assess whether there are indicators of …
Impairment
Where can indicators of impairment be derived from?
Internal sources - within entity itself
External sources - External market
What are three external sources of information for an indicator of impairment?
- Market value has declined more than expected
- Changes in PEST environment that have an adverse effect on the entity
- Interest rates increase (Increased discount rate)
What are three internal sources of information for an indicator of impairment?
- There is evidence of obsolescence of, or damage to, the asset.
- Changes in the way the asset is used have occurred or are imminent.
- Evidence is available from internal reporting indicating that the economic performance of an asset is, or will be, worse than expected.
When there is no indication of impairment then no action need be taken.
What are three exceptions to this rule
- Goodwill acquired in a business combination
- An intangible asset with an indefinite useful life
- An intangible asset not yet available for use.
IAS 36 requires annual impairment reviews for these assets irrespective of whether there is any indication of impairment.
What’s the process when an impairment review is carried out?
- The recoverable amount should be calculated
- The asset should be written down to recoverable amount and
- The impairment loss should be immediately recognised in the statement of profit or loss.
If an impairment reverses a gain taken to the revaluation surplus, then what do you do?
- The impairment will be taken first to the revaluation surplus until the revaluation gain is fully exhausted,
- then any excess is taken to the statement of profit or loss.
