IAS 36 Impairment of Assets: Principles, Factors and Calculation

This article explains the main principle of IAS 36, which relates to an asset that must be reported in the financial statements with an amount that is the highest of the recovered amount, its use or sale. It discusses the external and internal factors that affect impairment and the way through which an asset is stated to be impaired. The article also provides desired calculations and journal entries for accounting.

ACCOUNTING 1
ACCOUNTING

ACCOUNTING 2
Part A:
The main principle of the IAS 36 relates with an asset that must be reported in the financial
statements with an amount which is the highest of the recovered amount, its use or sale. An
asset is stated to have been impaired when the carrying value of the asset is more than its
recoverable amount. In such cases, the company is duty bound to report the asset at its
recoverable amount and also recognise the loss of impairment. The IAS 36 is applicable to
the group of the assets that does not generate in the cash flows individually. These are also
termed as the cash generating units (IFRS, 2019). The amount recovered in respect of the
asset is stated to be the highest of the fair value of the asset less the costs of disposal. This is
also termed as the net selling price and its value in use. Before the amendments were made in
the IFRS 13 which relates with the measurement of the fair value, this was known as the fair
value less the costs to sell.
The fair value is the price which an asset would fetch if it is sold in the open market. In case
of a liability, this is the liability, this is the price at which the liability would be transferred in
an orderly fashion between the participants of the market as on the date of measurement.
The value in use is the sum total of all of the future cash flows that are expected to be derived
from that asset or from the cash generating unit.
The way through which an asset is stated to be impaired include the following.
As on the date of reporting, the company would be required to assess if there exists an
indication of whether an asset is impaired or not. This is the higher of the carrying value than
its recoverable amount. The IAS 36 lays down many of the external and internal factors that
affect impairment. In case, there exists an indication that an asset could be impaired, then the
recoverable amount of that asset will have to be calculated.

ACCOUNTING 3
The amount which is recoverable is calculated done an annual basis for the intangible assets
an intangible that has an indefinite useful life, goodwill which exists due to the business
combination and an intangible which is not available for use.
In many of the cases, there has to be a detailed calculation which has to be made of the
amount that would be recovered and the same would be made in the preceding period that
could be used in the test of impairment for that particular in the current period.
The external factors which includes the indications of an impairment include the facts when
there is a decline in the market values, when there are some negative changes in the
technology, market, economy or laws, when there is an increase in the interest rates in the
market and when the net assets of the company are higher than the sum total of the number of
shares multiplied by the value of each share.
The internal factors include when there is a physical damage, when the asset has been sitting
idle as the part of restructuring and other such factors. The above stated list is just illustrative.
In case, there is any indication that the useful life of the asset, then this shows that either the
method of depreciation or the residual value will have to be reviewed and adjustment needs
to be made accordingly.
The recoverable amount is calculated bye considering the fair value and then deducting the
costs of disposal or when the value which is in use is more than the carrying value of an asset,
then it becomes compulsory to calculate other such amounts and in such a case, an asset is
stated to have been impaired.
In case, the fair value less the costs of disposal is not capable of being determined, then the
recoverable amount becomes the value in use.
For the assets that needs to be disposed of, the recoverable amount becomes the fair value
less the costs of disposal.

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The costs of the disposal are all of the direct added costs and does not include the existing
costs or the overheads. The fair value of an asset is computed using IFRS 13 which deals with
the measurement of fair value.
In terms of value in use, it should show the estimated future cash flows that would flow in to
the entity. This would include the time value of money which is again represented by the
current risk free rate of market, the price for the bearing of the inherent in that asset. There
are many other factors such as illiquidity would show the pricing in the future cash flows.
The projections of the cash flows depends upon some reasonable estimates and also must be
based on some assumptions. The assumptions could include the budgets, forecasts along with
the budgeted projections.
The accounting standard assumes that the budget and the forecast would not go beyond the
period of 5 years. The management further must be able to ascertain the reasonableness of the
various assumptions that have been used since that must show the reasons of differences
between the past cash flow projections and the actual amounts of the cash flows.
All of the projections of the cash flows must include the restructuring to which the company
is committed to along with the various expenses so as to improve or hence the performance of
the asset. The future amounts of the cash flows must not include the inflows or the outflows
from the activities of financing or the receipts or the payment of the income taxes (IAS plus,
2019).
Part B:
The following are the desired calculations and journal entries:
Account Carrying
Impairme
Carrying

ACCOUNTING 5
Amount
nt
loss/(profi
t)
Amount
after
impairme
nt
Factory
2,1
4,700
1
6,028
1,
98,672
2,14
,700
0
.73
1,98,6
72.18
Patent
4
9,000 3,658 45,342
49
,000
0
.17
45342.0
4276
Building
3
1,000 2,314 28,686
31
,000
0
.11
28685.7
8215
Inventory
1
3,000 0 13,000
Goodwill
1
1,000 11000 -
2,94,70
0.00
1
.00
2,72,7
00.00
Total CA
3,18,7
00.00
33,0
00.00
2,85,
700.00
Value in use
2,85,7
00.00
Fair value
less costs of
disposal
2,06,6
86.00
Higher of value in use and fair value
less costs of disposal

ACCOUNTING 6
Recoverable
amount
2,85,7
00.00
Journal entry:
Impairment
loss
33,0
00.00
To
Goodwill
11,0
00.00
To
Factory
16,0
27.82
To
Patent
3,6
57.96
To
Building
2,3
14.22

ACCOUNTING 7
References:
Iasplus.com. (2019). IAS 36 — Impairment of Assets. [online] Available at:
https://www.iasplus.com/en/standards/ias/ias36 [Accessed 27 Jan. 2019].
Ifrs.org. (2019). IFRS. [online] Available at: https://www.ifrs.org/issued-standards/list-of-
standards/ias-36-impairment-of-assets/ [Accessed 27 Jan. 2019].