WELCOME WELCOME TO TO

PRESENTATION ONPRESENTATION ON Accounting Standard-28Accounting Standard-28

IMPAIRMENT OF ASSETSIMPAIRMENT OF ASSETSInstitute of Chartered Institute of Chartered Accountants of IndiaAccountants of India

OVERVIEWOVERVIEW

ApplicabilityApplicability ScopeScope ObjectiveObjective ComputationComputation Accounting Treatment Accounting Treatment DisclosureDisclosure Transitional ProvisionsTransitional Provisions

APPLICABILITYAPPLICABILITY

LEVEL 1 ENTERPRISESLEVEL 1 ENTERPRISES

LEVEL 2 ETERPRISESLEVEL 2 ETERPRISES LEVEL 3 ENTERPRISESLEVEL 3 ENTERPRISES

LEVEL 1 ENTERPRISES (LARGE)LEVEL 1 ENTERPRISES (LARGE)

APPLICABLE w.e.f APPLICABLE w.e.f 1/4/20041/4/2004

1. ALL LISTED ENTERPRISES1. ALL LISTED ENTERPRISES

2.ENTERPRISES UNDER PROCESS OF LISTING2.ENTERPRISES UNDER PROCESS OF LISTING

3.OTHER ENTERPRISES EXCEEDING TURNOVER 3.OTHER ENTERPRISES EXCEEDING TURNOVER RS.50 CRORESRS.50 CRORES

4.FINANCIAL INSTITUTION, BANKS, INSURANCE CO.4.FINANCIAL INSTITUTION, BANKS, INSURANCE CO.

5.COMMERCIAL ENTERPRISES HAVING BORROWINGS 5.COMMERCIAL ENTERPRISES HAVING BORROWINGS MORE THAN Rs.10 CRORES.MORE THAN Rs.10 CRORES.

LEVEL – II ENTERPRISESLEVEL – II ENTERPRISES (MEDIUM) (MEDIUM)

APPLICABLE w e f APPLICABLE w e f 01/04/200601/04/2006

1.TURNOVER (Rs.40LAKHS TO Rs.50CRORES)1.TURNOVER (Rs.40LAKHS TO Rs.50CRORES)2.BORROWINGS (Rs.1CRORE TO Rs.10CRORES)2.BORROWINGS (Rs.1CRORE TO Rs.10CRORES)

LEVEL – III ENTERPRISESLEVEL – III ENTERPRISES (SMALL) (SMALL)

APPLICABLE w e f APPLICABLE w e f 01/04/200801/04/2008

TO ALL REMAINING ENTERPRISESTO ALL REMAINING ENTERPRISES

AS-28 applies to all assets other than following:AS-28 applies to all assets other than following:

1.Inventories(AS-2)1.Inventories(AS-2)

2.Assets arising from construction contract 2.Assets arising from construction contract (AS-7)(AS-7)

3.Financial assets/Investments(AS-13)3.Financial assets/Investments(AS-13)

4.Defered tax assets(AS-22)4.Defered tax assets(AS-22)

SCOPESCOPE

OBJECTIVEOBJECTIVE

To identify the assets which are To identify the assets which are sick / unhealthysick / unhealthy

To ensure that enterprise assets To ensure that enterprise assets are carried at not more than are carried at not more than their recoverable amount.their recoverable amount.

Indications for ImpairmentIndications for Impairment Assessment should be made at each Assessment should be made at each Balance Sheet date whether an asset may Balance Sheet date whether an asset may be impaired on the basis of following be impaired on the basis of following factors: factors:

Internal Sources of InformationInternal Sources of Information Physical damage of an assetPhysical damage of an asset When the enterprise plans to discontinue When the enterprise plans to discontinue

or restructure the operation.or restructure the operation. Internal reporting on economic Internal reporting on economic

performance of an assetperformance of an asset

Contd….Contd….

External Sources of InformationExternal Sources of Information An asset’s market value has declined An asset’s market value has declined

significantly due to passage of time significantly due to passage of time or normal use.or normal use.

Change in technology, market, Change in technology, market, economic or legal environment in economic or legal environment in which the enterprise operates.which the enterprise operates.

Market interest rate.Market interest rate. Carrying amount of the net assets of Carrying amount of the net assets of

the enterprise is more than its the enterprise is more than its market capitalization.market capitalization.

IMPAIRMENT LOSSIMPAIRMENT LOSS

If carrying amount < = Recoverable If carrying amount < = Recoverable amount : amount :

Asset is not impairedAsset is not impaired

If carrying amount > Recoverable If carrying amount > Recoverable amount : amount : Asset is impairedAsset is impaired

Impairment Loss = Carrying Amount Impairment Loss = Carrying Amount – Recoverable Amount– Recoverable Amount

Recoverable AmountRecoverable Amount

Recoverable amount is the Recoverable amount is the higher of higher of net selling pricenet selling price and its and its value in value in use use

Net selling price = The asset’s market Net selling price = The asset’s market price less cost of disposal.price less cost of disposal.

Value in use = Present Value Factor Value in use = Present Value Factor *(estimated future net cash flows *(estimated future net cash flows arising from use of the asset arising from use of the asset

+ disposal value)+ disposal value)

Cash Generating UnitCash Generating Unit

If it is not possible to estimate cash flow of If it is not possible to estimate cash flow of an individual assets same is grouped an individual assets same is grouped under a cash-generating unit to which the under a cash-generating unit to which the asset belongs.asset belongs.

““A cash generating unit is the smallest A cash generating unit is the smallest identifiable group of assets that generates identifiable group of assets that generates cash inflow from continuing use that are cash inflow from continuing use that are largely independent of the cash inflow largely independent of the cash inflow from other assets or group of assets.” from other assets or group of assets.”

Future Cash FlowFuture Cash Flow Future cash flow should be based on Future cash flow should be based on

financial budgets/forecasts approved financial budgets/forecasts approved by management (not more than 5 by management (not more than 5 years) years)

Extrapolation of data may be used Extrapolation of data may be used beyond the period of approved budgetbeyond the period of approved budget

Steady or declining growth rate may Steady or declining growth rate may be used for the purpose of be used for the purpose of extrapolationextrapolation

Composition of Future Cash FlowComposition of Future Cash Flow

Future cash flow shall include:Future cash flow shall include: Cash inflows from continuing use of the Cash inflows from continuing use of the

assetasset Cash outflows necessarily incurred to Cash outflows necessarily incurred to

generate the cash inflows, including cash generate the cash inflows, including cash outflows to prepare the asset for useoutflows to prepare the asset for use

Net cash flows to be received for the Net cash flows to be received for the disposal of the assetdisposal of the asset

Contd….Contd….

Composition of Future Cash Flow (Contd…)Composition of Future Cash Flow (Contd…)

Future cash flow shall exclude:Future cash flow shall exclude: Cash inflows or outflows from Cash inflows or outflows from

financing activitiesfinancing activities Income tax receipts or paymentsIncome tax receipts or payments Cash flow arising from future Cash flow arising from future

restructuring except when the same restructuring except when the same is committedis committed

Cash flow arising from capital exp. Cash flow arising from capital exp. unless incurredunless incurred

Discount rateDiscount rate

May be determined considering the May be determined considering the following rates:following rates:

weighted average cost of capital to weighted average cost of capital to the enterprisethe enterprise

Enterprise’s incremental borrowing Enterprise’s incremental borrowing raterate

Other market borrowing rate Other market borrowing rate

Treatment of Impairment lossTreatment of Impairment loss 1.1. An impairment loss should be recognized An impairment loss should be recognized

against the revaluation reserve, if any, and against the revaluation reserve, if any, and balance, if any, as an expense in the P/L A/c balance, if any, as an expense in the P/L A/c

2. Impairment loss for a Cash Generating Unit 2. Impairment loss for a Cash Generating Unit should be allocated in the following ordershould be allocated in the following order

a)a) Goodwill, if any.Goodwill, if any.b)b) Balance, if any, to individual assets in Balance, if any, to individual assets in

proportion to their carrying costproportion to their carrying cost

3. After the recognition of impairment loss the 3. After the recognition of impairment loss the depreciation charge for the asset should be depreciation charge for the asset should be adjusted in future periods to allocate the adjusted in future periods to allocate the asset’s revised carrying amount, less its asset’s revised carrying amount, less its residual value, on a systematic basis over residual value, on a systematic basis over its remaining useful lifeits remaining useful life

Reversal of an impairment lossReversal of an impairment loss At any balance sheet date if management assess At any balance sheet date if management assess

that the impairment loss considered in prior that the impairment loss considered in prior accounting periods may no longer exist or accounting periods may no longer exist or decreased the loss may be reverseddecreased the loss may be reversed

Indications of a potential decrease in an Indications of a potential decrease in an impairment loss mainly mirrors the indications of impairment loss mainly mirrors the indications of a potential impairment lossa potential impairment loss

Reversal is not required if value in use increases Reversal is not required if value in use increases in subsequent year merely due to pattern of cash in subsequent year merely due to pattern of cash flow but not due to increase in the earning flow but not due to increase in the earning potential of the assetpotential of the asset

DisclosureDisclosure- The amount of impairment loss charged to The amount of impairment loss charged to

P/L for each class of asset;P/L for each class of asset;- The reversal of impairment loss The reversal of impairment loss

considered in P/L for each class of asset;considered in P/L for each class of asset;- The amount of impairment loss adjusted The amount of impairment loss adjusted

against revaluation surplus;against revaluation surplus;- The reportable segment to which the asset The reportable segment to which the asset

belongs;belongs;- The reasons for changing the Cash The reasons for changing the Cash

Generating Unit for an asset and the Generating Unit for an asset and the description of the earlier & the changed description of the earlier & the changed Cash Generating Unit;Cash Generating Unit;

- The discount rate used in reckoning of The discount rate used in reckoning of value in use. value in use.

On the date this Standard becomes On the date this Standard becomes mandatory, an enterprise should assess mandatory, an enterprise should assess whether there is any indication that an whether there is any indication that an asset may be impaired.asset may be impaired.

If any such indication exists, the If any such indication exists, the enterprise should determine impairment enterprise should determine impairment loss, if any and recognise the loss so loss, if any and recognise the loss so determined against the opening balance of determined against the opening balance of revaluation reserve/revenue reserves.revaluation reserve/revenue reserves.

TRANSITIONAL PROVISIONSTRANSITIONAL PROVISIONS

Impacts of AS-28 Impacts of AS-28

1.1.Valuation of assetsValuation of assets

No up-ward revaluation is permitted No up-ward revaluation is permitted

(Only to the extant of impairment (Only to the extant of impairment loss recognized in earlier years)loss recognized in earlier years)

2.2. Notes to Accounts Notes to Accounts

Fixed assets are valued at their Fixed assets are valued at their historical cost less depreciation no historical cost less depreciation no more required to mentionmore required to mention..

Criteria for grouping of assetsCriteria for grouping of assetsIf an active market exists for the output produced If an active market exists for the output produced by an asset or group of assets, this asset or group by an asset or group of assets, this asset or group of assets should be identified as a separate cash of assets should be identified as a separate cash generating unit, even if some or all the output is generating unit, even if some or all the output is used internally.used internally.

When the outputs are used for captive consumption When the outputs are used for captive consumption the sale value of output in an active market should the sale value of output in an active market should be considered in cash flow. Like wise value of inputs be considered in cash flow. Like wise value of inputs also considered. also considered.

Common assets on a reasonable and consistent Common assets on a reasonable and consistent basis.basis.

THANKSTHANKS

HAVE A NICE DAY!