Objective Ind AS 36 Impairment of Assets ?

The main objective of this Standard is to prescribe the method that an entity is applying for ensuring that its assets are not carried at more than their recoverable amount (i.e., the higher of fair value, fewer costs of disposal, and value in use). Except for goodwill and certain intangible assets for which an annual impairment test is required.

An asset which is carried at more than its recoverable value if its carrying amount exceeds the amount to be recovered through the use or sale of the investment. In such a case, the asset is described as impaired, and the Standard requires the entity for recognizing an impairment loss.

The Standard can also be specified when an entity should be reversing an impairment loss and prescribes disclosures.

RELEVANT DEFINITIONS for Ind AS 36 Impairment of Assets

The following are the main terms which are used in this standard:

1. Carrying amount is the amount which is considered as an asset which can be recognized after the deduction of any accumulated depreciation (amortization) and accumulated impairment losses thereon.
2. A cash-generating unit can be the smallest identifiable group of assets that are generating cash inflows which can be largely independent of the cash inflows from other several assets or groups of assets.
3. Corporate assets are those assets that are other than goodwill that contribute to the cash-generating unit’s future cash flows under review and other cash-generating teams.
4. Disposal costs are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expenses.
5. Depreciable amount is the value of an asset or other amount substituted for cost in the financial statements, less its residual value.
6. Depreciation (Amortization) is the systematic allocation of the depreciable amount of an asset over its useful life.
7. Fair amount is the price that can be received for selling an asset or paying for transferring a liability in an orderly manner between market participants at the particular measurement of date.
8. An impairment loss is the value by which the carrying amount of an asset or a cash-generating units which is exceeding its recoverable amount.
9. The amount which is recoverable of an asset or a cash-generating unit is higher than its fair value, has fewer disposal costs, and is significance in use.
10. Useful life is either:

a) The time over which an asset is expected to be used by the entity.

b) The no. of production or similar units can be expected, which can be obtained from the asset of an entity.

Value which is in use is the present value of the future cash flows, which is expected to be derived from an asset or cash-generating unit.

Refer IND AS 36 as per MCA

IDENTIFYING AN ASSET THAT MAY BE IMPAIRED

Identifying an asset that may be impaired general:

An investment can be damaged when its carrying amount is exceeding its recoverable amount.

At the ending of each reporting period, an entity shall assess whether there can be an indication that an asset can be impaired. If any such sign is existing, then the entity is required to estimate the recoverable amount of the investment.

Indications of impairments in Ind AS 36 Impairment of Assets:

An assessment whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications:

An external source of Information Ind AS 36 as per Deloitte

The following are external sources of information that may indicate that an asset is impaired:

a) During the time, an asset’s market value can be declined significantly more than it would be expected as a result of the everyday use or passage of time.

b) Various significant changes which are having an adverse effect on the entity have taken place during the period or will take place shortly in the legal environment, technological, the market in which the entity is operating, or in the market for which an asset has been dedicated.

c) Market interest rates or further market rates of return on which investments have been increased during the period. These increases are likely to be affecting the discount rate, which are used in the calculation of an asset’s amount in use and decrease the asset’s recoverable amount materially.

d) The carrying value of the net assets of the entity is more than its market capitalization.

Internal source of Information Ind AS 36 as per Deloitte

The following are internal sources of information that may indicate that an asset is impaired:

a) Evidence can be available for the obsolescence or physical damage of an asset.

b) Significant changes which can be having an adverse effect on the entity have taken place during the period or are expected to occur shortly, in the extent to which or manner in which an asset can be used or can be scheduled for been used.

These changes can be included as the asset which is becoming idle, plans which can be discontinued or restructured the operation to which an investment has belonged, methods for disposing of a purchase before the previously expected date, and reassessment of the useful life of an asset as finite rather than indefinite.

c) Evidence can be available from internal reporting that is also indicating that the economic performance of an asset can be worse than it is expected. Such evidence might include:

(i) Cash flows for the assets which is acquired or subsequent cash needed for operating or maintaining it can be significantly higher than those which are originally budgeted.

(ii) Operating profit or loss or Actual net cash flows which are flowing from the asset are significantly worse than those budgeted.

(iii) There can be a significant reduction in operating profit or budgeted net cash flows or can be a substantial increase in budgeted loss flowing from the asset.

(iv) Net cash outflows or operating losses for the asset when current period amounts are aggregated with budgeted amounts for the future.

Dividend from a subsidiary can be jointly controlled by an entity or associate.

For an investment in a subsidiary which can be jointly controlled entity or associate, the investor can also recognize a dividend from the investment, and evidence that is available can be:

(i)   The carrying value of the investment can be separated from the financial statements, which are exceeding the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill.

(ii)  The dividend that is exceeding the subsidiary’s total comprehensive income, which is jointly controlled by an entity or associate in the period the dividend is declared.

The above list cannot be exhaustive. An entity might be identifying other indications that an asset might be impaired. These would also be required by the entity to determine the asset’s recoverable amount or perform an impairment test in the case of goodwill.

Suppose market interest rates or other market rates of return on investments have increased during the period. In that case, an entity isn’t required for making a formal estimation of an asset’s recoverable value in the following circumstances:

a) If the discount rate which is used in calculation of the asset’s value in use is unlikely can be affected with the increase in these market rates. For example, if there is an increase in short-term interest rates might not be having a material effect on the discount rate which are used for an asset that are having a long useful life which is remained; or

b) If the discount rate is used for the calculation of the asset’s value in use which is likely to be affected by the increase in these market rates. Still, previous analysis, which is the sensitivity of recoverable amount, shows that:

(i) It is unlikely that there would be a material which would be decreased in recoverable amount because future cash flows can be also likely increased, e.g., in some cases, an entity might be able to demonstrate that it adjusts its revenues to compensate for any increase in market rates.

(ii) The reduction in recoverable amount is unlikely can be resulted in a material impairment loss.

REQUIREMENT FOR ANNUAL REVIEW Ind AS 36 Impairment of Assets

Items which are required to be tested for impairment at least annually as per Ind AS 36  KPMG

Irrespective of whether there can be an indication of impairment, an entity is required to test the following items for impairment at least annually:

a) An indefinite helpful life of an intangible asset.

b) Intangible assets unavailable for use.

c) Goodwill which has been acquired in a business combination for impairment.

Intangible assets can be required for being tested for impairment at least annually

An indefinite useful life of an intangible asset and intangible assets not yet available for use to be tested for impairment

a) Annually.

b) Whenever there is any indication, at the end of a reporting period, that asset might be impaired by the comparison of its carrying amount with its recoverable amount, which is irrespective of whether there can be an indication that might be impaired.

This impairment can be tested, which can be performed at any time during an entire year which provides it’s performed at the same time every year and whenever there is any indication that the asset may be impaired at the end of a reporting period.

Different intangible assets might be tested for impairment at other times. However, if such intangible asset was initially recognized during the current annual period, that intangible asset should be tested for the impairment before the end of the current annual period.

However, the most current detailed calculation of such an asset’s recoverable value can be made in a preceding period which may be used in the impairment test for that asset in the current period, which also provides all of the following criteria are met:

a) If the intangible asset doesn’t generate cash inflows by the continuation of the use that are highly independent of those from other assets or groups of assets and therefore it is tested for impairment as the part of the cash-generating unit for which it is belonging, the assets and liabilities which are made up that unit haven’t changed significantly since the most recent recoverable amount that can be calculated.

b) The most recent recoverable amount that have been calculated, which is resulted in an amount that is exceeding the asset’s carrying amount by a substantial margin.

c) Based on an analysis of events and various circumstances that have been changed since the most current recoverable amount calculation, the likelihood that a recent recoverable amount determination would be less than the asset’s carrying amount is remote.

Goodwill in Ind AS 36 Impairment of Assets as per ICAI

CGUs to which goodwill has been allocated-

A cash-generating unit for which goodwill has been allocated is tested for impairment both:

a) Annually.

b) Whenever there is a signal that the unit may be impaired, by comparing the unit’s carrying amount, including the goodwill, with the recoverable amount of the unit. If the unit’s recoverable amount is exceeding the carrying value of the unit, the unit and the goodwill can be allocated to that the unit should be regarded as it is not impaired. If the carrying value of the unit exceeds the unit’s recoverable amount, the entity recognizes an impairment loss following the requirement of this standard.

Timing of impairment tests-

The annual impairment test for a unit of cash-generating for which goodwill has been allocated might be performed at any point of time during an annual period provided for the test, which is performed at the same time of every year. Different cash-generating units can be tested for impairment at other times.

However, suppose some or all goodwill allocated to a cash-generating unit was acquired in a business combination during the current annual period. In that case, that unit shall be tested for impairment before the end of the current annual period  in Ind AS 36 Impairment of Assets.

Individual assets can be tested before CGU for which goodwill has been allocated-

Suppose the assets constituting the CGU to which goodwill has been allocated are tested for impairment simultaneously as the unit containing the charity. In that case, they shall be tested for impairment before the team managing the goodwill.

Similarly, suppose the CGUs is constituting a group of CGUs for which goodwill has been allocated and have been tested for impairment at the same time as the group of units containing the charity. In that case, the individual units shall be tested for impairment before the group of units having the goodwill.

When an impairment testing of a CGU for which goodwill has been allocated, there might be an indication of impairing an asset within the unit containing the goodwill. Under such circumstances, the entity can test its acquisition for impairment first and recognizes any impairment loss for that asset tested before for impairment, the cash-generating unit, which contains the goodwill.

Similarly, there can be an indication of an impairment of a cash-generating unit within a group of units which might be containing the goodwill. Under such circumstances, the entity can test the cash-generating unit for impairment first. It recognizes any impairment loss for that unit before testing the group of units to which the goodwill is allocated.

Rolling forward detailed calculations from a preceding period-

The most current precise analysis which was made in a previous period of the recoverable amount of a cash-generating unit for which goodwill have been allocated might be used for impairing the test of that unit according to the current period which have been provided for all of the following criteria are met:

a) The assets and liabilities which are making up the unit which have not changed significantly since the most current recoverable amount calculation.

b) The most current recoverable amount calculation can be resulted in an amount that exceeded the unit’s carrying amount by a substantial margin.

c) It is based on the analysis of an event that have occurred and circumstances that are changed since the calculation of the most recent recoverable amount, the likelihood that are currently recoverable amount which in determination would be less than the current carrying amount of the unit is remote.

CGUs to which it have not been possible for allocating goodwill-

When goodwill is related to a CGU but has not been allocated for that unit, the unit should be tested for impairing whenever there is an indication that the team might be impaired by the comparison of the unit’s carrying amount, which is excluding any goodwill, with its recoverable amount. Any impairment loss is recognized following the requirement of this standard.

Suppose a CGU, as described above, is included in its carrying amount an intangible asset that is having an indefinite useful life or is unavailable for use, and that investment can be tested for impairing only as the part of the CGU. In that case, the unit is also to be tested for impairment annually.

MEASUREMENT OF RECOVERABLE AMOUNT

Recoverable amount:

The amount of an asset which is recoverable or a CGU is higher than its fair value, has fewer disposal costs, and its important in use in Ind AS 36 Impairment of Assets.

Various Circumstances in which it is not necessary to calculate both an asset’s fair value fewer costs of disposal and its particular value in use:

• If one of these amounts are exceeding the asset’s carrying amount, the assets are not impaired, and it isn’t necessary for estimating the other amount.
• If there is no particular basis for making a reliable estimation of fair value fewer disposal costs, the recoverable amount can be measured by reference to a value in use alone.
• In some other cases, estimation, averages, and computational shortcuts might provide reasonable approximations of the detailed computations which is illustrated in this Standard) determining fair value, fewer costs of disposal, or value in use.

Circumstances in which recoverable amount can be determined in the context of CGU:

A recoverable amount that can be determined for an individual asset unless the asset that is not generating cash inflows that can be largely independent of those from other assets or groups of assets. If in this case, the recoverable amount can be determined for the cash-generating unit to which the asset belongs unless either:

a) The asset’s fair value fewer costs of disposal is higher than its carrying amount.

b) The value of the asset in use can be estimated to be close to its fair value, fewer costs of disposal and fair value fewer costs of disposal can be determined.

Some of the indicators are aimed at individual assets rather than the CGU of which they are a part. For example, a decline in the value of an asset or evidence that it is obsolete or damaged. Such indicators may also imply that a wider review of the business or CGU is required.

However, this is not always the case. E.g., if there is a slump in property prices and the market value of the entity’s new head office falls below its carrying value, this would constitute an indicator of impairment and trigger a review. At the individual asset level, as fair value less cost of disposal is below carrying amount; this might indicate that a write-down is necessary.

However, Ind AS 36 Impairment of Assets is the building’s recoverable amount may have to be considered in the context of a CGU of which it is a part. It is an example of a situation where it may not be necessary to re-estimate an asset’s recoverable amount because it may be evident that the CGU has suffered no impairment. In short, it may be irrelevant to the recoverable amount of the CGU that it contains a head office whose market value has fallen.