Accounting Standard - 28 Impairement of Assets

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Accounting Standard – 28 (AS – 28)

Impairment of Assets

By: Jayesh Ratadia

2Saturday, November 21, 2009

☺ Objective

☺ What is Impairment

☺ Indicators of Impairment

☺ Impairment – Bird’s Eye View

☺ Scope and Definitions

☺ Frequency and Application of Impairment

☺ Recognition and Measurement

☺ Goodwill and Corporate assets

☺ Treatment of Impairment Loss

☺ Reversal

☺ Disclosures

☺ Relaxations to SMC

☺ Other Accounting Standards where AS-28 is referred

☺ Comparison between IFRS, US GAAP and Indian GAAP

Overview

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Objective

“ To prescribe the procedures that an enterprise applies to ensure that

its assets are carried at no more than their

recoverable amount”


Impairment Loss

☺ It is the amount by which the Carrying Amount of an asset exceeds its Recoverable Amount.

What is Impairment

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External sources

☺ significant decline in market value

☺ Significant changes with adverse effect due to technological, market, economic, legal environment

☺ changes in interest rates or rates of return

☺ net assets are more than the its market capitalisation

Internal sources

☺ evidence of obsolescence or of physical damage

☺ discontinuance, disposal, restructuring plans

☺ asset performance declining or expected to decline

Indicators of Impairment

These indicators have to be considered as a minimum


Indication of

Impairment ?

Can Asset be assessed

individually ?

Identify

CGU

No

Impairment

Estimate

Recoverable Amount

Is the Recoverable Amount

Less than Carrying

Amount?

Account and

Disclose Impairment Loss

YES

YES

YES

NO

NO

NO

A

Impairment – Bird’s Eye View

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Impairment – Bird’s Eye View (Contd…)

Identified

CGU

Estimate Recoverable

Amount of CGU

No

Impairment

Is the Recoverable Amount

Less than Carrying Amount?

Allocate Impairment Loss to Goodwill

and Assets in CGU

Account and Disclose

Impairment Loss

YES

NO

A


Applies to all assets other than:

☺ Inventories (AS - 2)

☺ Assets arising from construction contracts (AS - 7)

☺ Financial Assets including Investments (AS - 13)

☺ Deferred tax assets (AS - 22)

Asset i.e. Individual asset or Cash Generating Unit (CGU)

☺ May be carried at cost / revalued amount

Scope

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☺ Impairment loss

☺ Carrying Amount (CA)

☺ Recoverable Amount (RA)

☺ Cash Generating Units (CGU)

Definitions


Carrying amount is the cost of the asset recognised in the Balance Sheet after deducting:

☺Accumulated depreciation / amortisation

☺Accumulated impairment loss

Carrying Amount (CA)

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Is the higher of an asset’s:

☺ Net Selling Price (NSP)

☺ amount obtainable in arm’s length transaction less costs of disposal (except reorganising, finance and tax costs)

☺ asset is traded in an active market the current bid price less costs of disposal (except reorganising, finance and tax costs)

☺ Value in use.

☺ present value of estimated future cash flows from continuing use of the asset in current condition and ultimate disposal

☺ Cash Flow Projections

☺ Discount Rate

Recoverable Amount (RA)


☺ Is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

☺ Projections

☺ Short term - maximum 5 years, unless longer can be justified

☺ Based on financial budgets approved by management

☺ Do not include financial and taxation cash flows

☺ Long term projections

☺ based on short term projections

☺ steady or declining growth

☺ growth rates exceeding long term average rates of the product, industry or economy discouraged

☺ Estimation for the asset in its current condition (restructuring and capital expenditure on the assets ignored)

Value in Use

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Discount rate should

☺ be pre-tax, since cash flows are also pre-tax

☺ Be independent of the entity’s capital structure

☺ reflect the time value of money and the risks related to the assets

☺ reflect Weighted average cost of capital (WACC)

When asset specific rates are not available, following may be considered as a starting point

☺ Techniques such as CAPM

☺ Cost of borrowing

☺ Adjust the same to reflect the risks of the asset

Value in Use


☺ The smallest identifiable group of assets that generates cash flows from continuing use that are largely independent fromother assets or groups of assets

☺ Estimate RA for the individual asset. If this is not possible, then estimate RA of the asset’s cash generating unit

☺ Apply cash generating unit concept when the asset does not generate cash flows which are independent from other assets

Cash Generating Units (CGU)

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☺ Assets may be bought/sold individually but they are often used in groups

☺ Revenue and cash arise from use of various assets and cannot be attributed to the individual assets

☺ Factors to consider:

☺ How management monitors the enterprise’s operations

☺ How management makes decisions about continuing or disposing of the enterprise's assets and operations

☺ Segment Reporting

Cash Generating Units (CGU) (Contd…)


☺Frequency of Impairment Testing: at each reporting date

☺ When an indicator is triggered

☺ Impairment to apply to individual assets as well as a Cash Generating Unit (CGU)

☺Specific rules for Corporate Assets and Goodwill.

Frequency and Application of Impairment

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960401000960960920

9001001000900800900

1000No100011001100900

Carrying Amount

(CA 2 – after impairment)Impairment

Carrying Amount (CA1)

Recoverable Amount

(RA)

Net Selling Price (NSP)

Value in Use

Recognition and Measurement of Loss

Asset to be reduced to recoverable amount only if RA is less than CA

The reduction is an impairment loss = CA - RA

Impairment loss to be recognised:

☺ As an expense in the P&L Account, immediately, otherwise

☺ As a revaluation decrease (if carried at revalued amount)


After the recognition of an impairment loss:

☺ adjust depreciation (amortization) charge for the asset in future periods

☺ allocate the asset's revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

Recognition and Measurement of Loss

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☺ Perform following steps for a ‘bottom-up’ test:

☺ Identify if goodwill or corporate asset can be allocated on a reasonable and consistent basis to the CGU under review

☺ Compare RA of cash generating unit (CGU) to its CA (including goodwill or corporate asset) and recognise impairment loss.

‘Bottom-Up’ Test – Goodwill and Corporate Assets


‘Bottom-Up’ Test - Example

An enterprise called ER is a wholly owned subsidiary and has 3 divisions (CGU) A, B and C. There are indications that B is impaired and ER has estimated its recoverable amount to be Rs. 230cr. The value of ER has been estimated, by the ultimate holding company, to be Rs. 1,380cr. The goodwill held in the group accounts in respect of ER can be allocated on a reasonable and consistent basis.

Cash generating unit A B C Total

Rs. cr. Rs. cr. Rs. cr. Rs. cr.

Net assets directly involved in the

activities in the unit 350 150 250 750

Goodwill 210 90 150 450

560 240 400 1,200

The goodwill has been apportioned in the ratio that the directly attributed assets bear to each other. The carrying value that would be compared to the recoverable amount is Rs. 240cr. Application of the “bottom-up” test

Rs. cr.

Carrying amount 240

Recoverable amount (230)

Impairment loss 10

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☺ If goodwill cannot be allocated on a reasonable basis then perform ‘top down’ test by applying following steps:

☺ Identify smallest CGU that includes the CGU under review and to which goodwill or corporate asset can be allocated on a reasonable basis

☺ Then compare RA of the above CGU to its CA (including goodwill or corporate asset) and recognise impairment loss.

‘Top-Down’ Test – Goodwill and Corporate Assets


Cash generating unit A B C TotalRs. cr. Rs. cr. Rs. cr. Rs. cr.

Net assets directly involved in the

activities of the unit 350 150 250 750

Goodwill 4501,200

Step 1

Application of the “bottom-up” test B

Rs. cr.

Carrying amount 150

Recoverable amount (230)

Impairment loss -Step 2

Application of the “top-down” test ER (the next smallest CGU)

Rs. cr.

Carrying amount 1,200

Recoverable amount (1,380)

Impairment loss -

‘Top-Down’ Test – Example

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The carrying amount of an asset (which is part of CGU) should not be reduced below the highest of:

(a) its net selling price (if determinable);

(b) its value in use (if determinable); and

(c) zero

Unabsorbed impairment loss allocated to other assets in CGU.

Treatment of Impairment Loss for a CGU


☺ Assess each reporting date (look for indicators) whether accumulated impairment loss may no longer exist or may have decreased

☺ Reverse if there has been a change in estimates (not simply because of increase in PV of cash flows i.e. with passage of time)

☺ Increased amount not to exceed the carrying amount thatwould otherwise exist if no impairment loss had been recognised

Reversal of Impairment of Loss

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Allocate reversal for CGU’s to:

☺ First, pro rata to assets other than goodwill

☺ Second, to goodwill allocated to the CGU

☺ i.e., reverse order to allocation of the loss

But, impairment losses for goodwill should not be reversed unless:

☺ Loss was caused by a specific non recurring external event, and

☺ Subsequent external events have occurred that reverse the effect of that event

Reversal of Impairment of Loss


For each class of assets, the financial statements should disclose:

☺ amount of impairment losses

☺ line item(s) of the income statement in which those impairment losses are included

☺ amount of reversals of impairment losses

☺ line item(s) of the income statement in which those impairment losses are reversed

☺ amount of impairment losses recognized directly against revaluation surplus

☺ amount of reversals of impairment losses recognized directly against revaluation surplus

Disclosure

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Enterprise should disclose

☺ Events and circumstances

☺ Amount of loss or reversal recognised

☺ Nature of asset/CGU

☺ Reported segment of asset/CGU

☺ CGU – if grouping has changed, describe current and former grouping and reasons for the change in grouping

☺ RA – net selling price or value in use. Describe basis etc

Main classes of assets affected by impairment losses or reversals

Main events and circumstances that led to loss/reversal

In case AS - 17 is applicable, details of segment wise impairment / reversal and also that against revaluation reserve required.

Disclosure –Material Loss or Reversal


A reasonable estimate of ‘value in use’ is allowed,

instead of using present value technique

Relaxations to SMC

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☺AS - 19 Leases – A leased asset also needs to tested for impairment

☺AS - 24 Discontinuing Operations – Since AS-24 does not prescribe measurement principles, hence assets of discontinuing operations need test for impairment

☺AS - 25 Interim Financial Reporting – However detailed exercise not required

☺AS - 26 Intangible Assets – Future economic benefit to be assessed using principles in AS-28

☺AS - 27 Joint Ventures – For transactions between a venturer and JV

Other Accounting Standards where AS-28 is referred


Scope

☺IAS 36 is applicable to financial assets classified as investment in subsidiaries, associates and joint ventures in stand-alone accounts. However, it does not apply to Investment property and biologicalassets. Under Indian GAAP, (AS - 13) takes care of impairment provision for investments.

Reversal of Impairment losses

☺Not allowed under IFRS and US GAAP

IFRS vs US GAAP vs Indian GAAP

Accounting Standard - 28 Impairement of Assets

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