What does the standard IAS 36 impairment of assets consist of?
These standards provide consistency in determining the carrying value of assets. It involves calculating the recoverable amount of an asset, which is the higher of its fair value less costs to sell and its value in the use of the company. If the recoverable amount is lower than the carrying value, an impairment loss is recognized, lowering the asset’s carrying value. Otherwise, no impairment loss is recognized.
Why is IAS 36 introduced?
Because the basic approach may conflict with the prudence convention, which emphasises caution in financial reporting to avoid misleading creditors an lenders.
What is the objective of IAS 36?
The essential objective of IAS 36 is to ensure that assets are not carried at a figure greater than their recoverable amount.
What is An Impairment loss?
Is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
What is the carrying amount?
Is the amount at which an asset is recognized after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon.
What is depreciation?
(amortization) is the systematic allocation of the depreciable amount of an asset over its useful life.
What is the recoverable amount?
- The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use.
What does the useful life mean?
- Useful life is either:
– the period over which an asset is expected to be used by the entity
or
– the number of production or similar units expected to be obtained from the asset by the entity.
What is the fair value?
- Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
What is the cost of disposal?
- Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expenses.
What is the value in use?
- Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
What is the cash-generating unit?
- A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
What are corporate assets?
- Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units.
What happens when the fair value exceeds the carrying amount of an asset?
If either fair value less costs of disposal or value in use exceeds the asset’s carrying amount, then the other figure need not be determined at all. If fair value less costs of disposal is unobtainable even by reliable estimate because of the absence of an active market, then the recoverable amount can be taken as equal to value in use.
Which steps need to be followed when estimating the value?
1 Estimating the future cash inflows and outflows to be derived from the continuing use of the asset and its ultimate disposal.
2 Applying the appropriate discount rate to these future cash flows.
How should future cashflow be estimated?
Future cash flows should be estimated for the asset in its current condition. It follows that estimates of future cash flows should not include estimated future cash inflows or outflows.
How can cash inflows or outflow arise?
- a future restructuring to which an entity is not yet committed, or
- future (uncommitted) capital expenditure that will improve or enhance the asset over its originally assessed standard of performance.
How is the net cash flow received determined?
The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life is determined similarly to an asset’s fair value less costs to sell.
What are challenges when determining the net cash flow received?
1 An entity uses prices prevailing at the date of the estimate for similar assets that have reached the end of their useful life and that have operated under conditions similar to those in which the asset will be used.
2 Those prices are adjusted for the effect of both future price increases due to general inflation and specific future price increases (decreases). However, if estimates of future cash flows from the asset’s continuing use and the discount rate exclude the effect of general inflation, this effect is also excluded from the estimate of net cash flows on disposal.
What is a discount rate?
The discount rate (or rates) should be a pre-tax rate) that reflect current market assessments of the time value of money and risks specific to the asset. The discount rate should not reflect risks for which future cash flow estimates have been adjusted, as this would involve double counting.
What could be starting points when determining the discount rate?
- the entity’s weighted average cost of capital is determined using techniques such as the capital asset pricing model
- the entity’s incremental borrowing rate
- other market borrowing rates.
Why are these rates adjusted?
- to reflect the way that the market would assess the specific risks associated with the projected cash flows
- to exclude risks that are not relevant to the projected cash flows.
What does the standard require?
The Standard requires that if, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount. That reduction is an impairment loss.
How should an impairment loss be recognised?
An impairment loss should be recognized immediately as an expense in the income statement unless the asset is carried at a revalued amount under another Standard.
