5. Impairment of Assets (IAS 36)

Question 1

What is the recoverable amount of an asset?

Answer 1

The recoverable amount of an asset is the value that an asset is expected to generate for a business.

The recoverable amount is the higher of the “fair value less cost to sell” of the asset and its “value in use”.

Question 2

What is an impairment expense?

Answer 2

When the carrying amount of an asset exceeds its recoverable amount, an impairment expense (or loss) is said to have occurred.

Question 3

How is an impairment expense calculated? Outline the proforma to use

Answer 3

Impairment expense is calculated as:

Carrying amount of the asset
(Less recoverable amount of the asset)

Question 4

What is the accounting treatment when an asset has suffered an impairment loss?

What is the associated journal entry?

Answer 4

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 - Non-Current Asset Cost (statement of financial position)

Question 5

What is accounting for impairment an example of?

Answer 5

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.