5. Impairment of Assets (IAS 36) Flashcards
What is the recoverable amount of an asset?
The recoverable amount of an asset is the value that an asset is expected to generate for a business.
The recoverable amount of an asset is the higher of:
1. It’s value less costs of disposal; and
2. It’s value in use - defined as the present value of the future cash flows expected to flow from the use of the asset.
What is an impairment loss?
When the carrying amount of an asset exceeds its recoverable amount, an impairment loss is said to have occurred.
You will not be expected to calculate value in use in Accounting but may be required to calculate fair value less costs of disposal, recoverable amount and the amount of any impairment loss.
How is an impairment loss calculated?
Impairment loss is calculated as:
Carrying amount of the asset
Less recoverable amount of the asset
What is the accounting treatment when an asset has suffered an impairment loss?
What is the associated journal entry?
When an asset has suffered an impairment loss, the carrying amount of the asset should be reduced by the amount of the impairment loss and the impairment loss is charged immediately to profit or loss:
Debit - Impairment expense (statement of profit or loss)
Credit - Carrying amount of asset (statement of financial position)
For assets that have been revalued, accounting for an impairment loss is more complicated, but this is not included in the ‘Accounting’ syllabus.
What is accounting for impairment an example of?
Accounting for impairment is an example of prudence being applied in financial accounting as it ensures that assets are not overstated. Determining whether an asset has been impaired and calculating the recoverable amount of the asset are areas in which the accountant must apply judgement.
When is a business required to assess for indication of impairment?
Where could indications of impairment come from?
At the end of each reporting period, a business is required to assess if there is any indication that an asset may be impaired (IAS 36: para 9) Indications of impairment could come from internal or external sources of information.
Give three external indicators of impairment.
External indicators of impairment:
1. A fall in the asset’s market value that is more than is expected as a result of passage of time or normal use.
2. A significant change in the technological, market, legal or economic environment of the business in which the assets are employed.
3. The carrying amount of the entity’s net assets being more than its market capitalisation.
Give three internal indicators of impairment.
Internal indicators of impairment:
1. Evidence of obsolescence or physical damage.
2. Adverse changes in the use to which the asset is put.
3. Evidence from internal reports that the economic performance of an asset is, or will be, worse than expected.
(IAS 36: para 12)
Why does assessing whether an asset is impaired require significant judgement by an accountant?
Assessing whether an asset is impaired is a matter of significant judgment by an accountant.
Accounting for an impairment loss has the dual effect of decreasing the carrying amount of assets and increasing expenses, which in turn reduces profit.
Generally, a business will want to avoid making impairment adjustments or will try to minimise the amount of any impairment as it has a detrimental impact on the financial statements.
A professional accountant must ensure that they are aware of the indicators of impairment and can accurately calculate and account for impairment losses.
You will not be required to judge whether an impairment has occurred in the ‘Accounting’ exam but do need to be aware of the key indicators and be able to account for an impairment loss.
How does the recognition of an impairment loss affect the useful life or residual value?
When an impairment loss is recognised, the asset’s remaining useful life and residual value should also be reviewed and revised if appropriate.
