Impairment of Assets

Question 1

What is IAS 36?

Answer 1

IAS 36 relates to the impairment of assets which is described as:
An asset is impaired if it’s recoverable amount is below it’s carrying value.

Question 2

What is an assets recoverable amount?

Answer 2

Recoverable amount is the higher of:
Fair Value less costs to sell (open market)
Present cash value in use.

Question 3

When must an impairment review be carried out?

Answer 3

Impairment review must be carried out on:
Any intangible with an indefinite useful life.
Goodwill on acquisition of a business.
On indication of impairment.

Question 4

What may be internal indicators of Impairment?

Answer 4

Internal indicators of impairment include, but are not limited to:
Damages to the asset
Changes in the assets use.
Re-organisation of the business.
Net cash outflows.
Loss of Key staff

Question 5

What may be External indicators of impairment?

Answer 5

External indicators of impairment include but are not limited to:
Decline in market value fo the asset.
Changes in industry or the economic environment
Changes in regulation/legislation.

Question 6

What are the accounting entries to record an impairment against a specific asset?

Answer 6

To record impairment against a specific asset:
DR - SPL - to the line where asset deepen is normally posted.
CR - PPE - reducing the carrying value of the asset.

Question 7

What are the entries if an impaired asset has previously been revalued?

Answer 7

If impaired asset has previously been revalued:
DR - Revaluation surplus relating to the asset
CR - PPE as before.

Question 8

Does anything else need to be included in the statements in relation to impairment of assets?

Answer 8

Where an impairment is included in the statements the notes must include the following:
The value of the impairment/loss
The Specific asset the impairment relates to
The Line in the SPL that the impairment loss is recorded against.

Question 9

Can impairment be reversed?

Answer 9

Reversal of impairment, where anticipated impairment turns out better than expected:
Reversed immediately in the SPL
If impairment was recorded against revaluation surplus then the reversal is recognised as other comprehensive income.
A reversal cannot increase the asset value above the original carrying amount.

Question 10

What are cash generating units?

Answer 10

Cash Generating units are the smallest identifiable groups of assets for which independent cash flows are identifiable.

Question 11

How is impairment applied to cash generating units?

Answer 11

Assets are grouped together to give total carrying value.
Impairment is then allocated:
1. Against specifically impaired assets
2. Against purchased goodwill
3. Pro rata to remaining assets based on carrying amount.
NOTE No individual asset can be restated to below it’s recoverable amount.