Impairment of assets (Ind AS 36)

The Objective of Ind AS 36 is to ensure that assets are carried at not more than at recoverable value. The standard also specifies when an entity should reverse an impairment loss and provide disclosures while preparing and presenting the financial statements.

This standard shall not apply to:

• Inventories
• Contracts that are recognized in accordance with Ind AS 115
• Deferred Tax Assets
• Financial Assets
• Non Current Assets classified for sale in accordance with Ind AS 105
• Biological Assets related to agricultural activity
• Assets arising from the employee benefits.

Therefore, IAS 36 applies to (among other assets):

• Land
• Buildings
• Machinery and equipment
• Investment property carried at cost
• Intangible assets
• Goodwill
• Investments in subsidiaries, associates, and joint ventures carried at cost
• Assets carried at revalued amounts under IAS 16 and IAS 38

Impairment loss

Impairment Loss = Recoverable Value – Carrying Amount

Recoverable amount of an asset is less than it carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

If recoverable amount is more than carrying amount of an asset, then no impairment loss will be recognized. Recoverable amount shall be higher of the following:

• Fair Value less cost of disposal
• Value in use

Fair Value less cost of disposal

Costs of disposal are deducted while determining the fair value less cost of disposal. Examples of such costs are:

• Legal costs
• Stamp duty and similar taxes
• Costs of removing the assets
• Incremental costs for bringing the assets into the conditions for its sale
• Other costs

Value in use.

It shall be calculated on the following basis:

• Estimated Future Cash Flow
• Discount Rate

Indications of impairment [IAS 36.12]

External Sources:

• Market value declines
• Negative changes in technology, markets, economy, or laws
• Increases in market interest rates
• Net assets of the company higher than market capitalisation

Internal Sources:

• Obsolescence or physical damage
• Asset is idle, part of a restructuring or held for disposal
• Worse economic performance than expected
• For investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee’s assets, or a dividend exceeds the total comprehensive income of the investee.