by Ind AS 36, Impairment of Assets, provides guidelines for identifying, measuring, recognising, and disclosing impairment losses relating to assets. The standard ensures that assets are not carried in financial statements at values higher than their recoverable amounts. When the carrying amount of an asset exceeds the amount expected to be recovered through its use or sale, the asset is considered impaired, and an impairment loss is recognised.
Ind AS 36 improves the reliability and transparency of financial statements by preventing overstatement of assets. It helps investors, creditors, and other stakeholders obtain accurate information about the financial position and performance of an entity. The standard is based on the principles of IAS 36 – Impairment of Assets and brings Indian accounting practices closer to international financial reporting standards.
Meaning of Impairment of Assets
Impairment of assets refers to a reduction in the recoverable value of an asset when its carrying amount exceeds the amount that can be recovered through its use or sale. In simple terms, an asset is impaired when its recorded value in the books of accounts is higher than its actual economic value.
Under Ind AS 36, an entity must identify whether an asset has suffered impairment by comparing its carrying amount with its recoverable amount. If the carrying amount is greater than the recoverable amount, the difference is recognised as an impairment loss in the financial statements.
Impairment may occur due to various reasons such as technological changes, market decline, physical damage, poor performance, economic conditions, or changes in business operations. For example, a machine may lose value due to outdated technology, or a building may decline in value due to market conditions.
The purpose of impairment accounting is to ensure that assets are not overstated and financial statements present a true and fair view of the entity’s financial position.
Definitions under Ind AS 36
- Impairment Loss
Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. It represents the reduction in the value of an asset due to impairment.
- Carrying Amount
Carrying amount is the value at which an asset is recognised in the financial statements after deducting accumulated depreciation, amortisation, and impairment losses.
- Recoverable Amount
Recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use. It represents the maximum amount expected to be recovered from an asset.
- Fair Value Less Costs of Disposal
Fair value less costs of disposal refers to the amount that an entity can obtain from selling an asset in an orderly transaction after deducting the costs necessary for disposal.
- Value in Use
Value in use is the present value of future cash flows expected to be generated from the continued use of an asset and its disposal at the end of its useful life.
- Cash Generating Unit (CGU)
A cash generating unit is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets.
- Corporate Assets
Corporate assets are assets other than goodwill that contribute to the future cash flows of more than one cash generating unit. Examples include head office buildings and shared facilities.
- Goodwill
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognised.
Objectives of Ind AS 36 – Impairment of Assets
- To Ensure Assets Are Not Overstated
The primary objective of Ind AS 36 is to ensure that assets are not carried in financial statements at amounts higher than their recoverable values. An asset is considered impaired when its carrying amount exceeds the amount expected to be recovered through its use or sale. The standard requires entities to identify impairment indicators and recognise impairment losses when necessary. This prevents overstatement of assets and ensures that financial statements present a true and fair view of the entity’s financial position. It improves reliability and accuracy of reported asset values for stakeholders.
- To Provide Guidelines for Impairment Testing
Ind AS 36 aims to provide systematic guidelines for conducting impairment tests of assets. It establishes procedures for identifying impairment indicators, determining recoverable amounts, and calculating impairment losses. The standard requires entities to assess assets regularly and recognise reductions in value when required. These guidelines ensure consistency in the impairment assessment process across different organisations. By following a structured approach, entities can accurately evaluate whether assets have lost value and ensure that financial statements reflect the actual economic condition of assets held by the organisation.
- To Improve Accuracy of Financial Reporting
Ind AS 36 helps improve the accuracy and reliability of financial reporting by requiring entities to recognise impairment losses whenever asset values decline. Without impairment testing, assets may continue to be reported at outdated or unrealistic values. The standard ensures that financial statements reflect current economic conditions and provide meaningful information to users. Accurate asset valuation helps investors, creditors, and management evaluate the financial performance and position of an entity. It also reduces the risk of misleading financial information caused by overvalued assets.
- To Determine Recoverable Amount of Assets
An important objective of Ind AS 36 is to establish principles for determining the recoverable amount of assets. The recoverable amount is the higher of fair value less costs of disposal and value in use. This measurement helps entities estimate the amount that can be recovered from an asset through use or sale. By comparing recoverable amount with carrying amount, entities can identify impairment losses accurately. This objective ensures that asset values reported in financial statements represent realistic economic benefits expected from their continued use or disposal.
- To Provide Uniform Accounting Treatment
Ind AS 36 aims to establish uniform accounting principles for impairment of assets. Before the introduction of impairment standards, entities followed different approaches for recognising asset value reductions. The standard provides consistent rules for impairment identification, measurement, recognition, and disclosure. Uniform application improves comparability between financial statements of different organisations. Investors, analysts, and other stakeholders can evaluate financial performance more effectively when similar accounting practices are followed. This objective strengthens transparency and promotes confidence in financial reporting practices among various users.
- To Improve Transparency Through Disclosures
Ind AS 36 focuses on improving transparency by requiring entities to disclose important information regarding impairment losses. Entities must disclose details such as the amount of impairment loss recognised, affected assets, events causing impairment, and methods used for calculating recoverable amounts. These disclosures help financial statement users understand the reasons behind asset value reductions. Transparent reporting improves accountability and allows investors and creditors to evaluate the impact of impairment on financial performance. This objective ensures that stakeholders receive complete and meaningful information for economic decision-making.
- To Protect Interests of Investors and Creditors
Ind AS 36 protects the interests of investors, creditors, and other stakeholders by ensuring that assets are reported at appropriate values. Overstated assets may create a misleading impression of an entity’s financial strength and performance. By requiring impairment recognition, the standard provides realistic information about asset values and future economic benefits. Investors can make better decisions based on reliable financial statements, while creditors can properly assess the financial position and repayment capacity of the entity. Thus, Ind AS 36 supports informed decision-making and enhances stakeholder confidence.
- To Align Indian Accounting with International Standards
One of the major objectives of Ind AS 36 is to align Indian accounting practices with international financial reporting requirements. The standard is based on IAS 36, which provides globally accepted principles for impairment accounting. This alignment improves the comparability and credibility of financial statements prepared by Indian entities. International investors and organisations can better understand and analyse financial information reported under Ind AS. It also encourages foreign investment, improves global acceptance of Indian financial reporting, and strengthens the overall quality of accounting practices followed in India.
Scope of Ind AS 36 – Impairment of Assets
- Assets Covered Under Ind AS 36
Ind AS 36 applies to various categories of assets where there is a possibility of impairment. It covers property, plant and equipment, intangible assets, goodwill, investment property measured under the cost model, and investments in subsidiaries, associates, and joint ventures in separate financial statements. The standard requires entities to assess whether these assets are impaired and recognise impairment losses when necessary. By covering different types of assets, Ind AS 36 ensures that financial statements present assets at appropriate values and prevent overstatement of economic resources controlled by the entity.
- Property, Plant and Equipment
Ind AS 36 applies to property, plant and equipment when there are indications that their carrying amount may not be recoverable. Assets such as buildings, machinery, vehicles, and equipment are tested for impairment whenever impairment indicators exist. The entity compares the carrying amount of these assets with their recoverable amount to determine whether impairment loss should be recognised. This ensures that tangible assets are not reported at values higher than their economic benefits. The standard helps maintain accuracy and reliability in reporting long-term physical assets used in business operations.
- Intangible Assets Covered Under Ind AS 36
Ind AS 36 applies to intangible assets such as patents, trademarks, copyrights, software, and licences. These assets may lose value due to technological changes, market competition, or reduced future benefits. The standard requires entities to assess intangible assets for impairment and recognise losses when their carrying amount exceeds recoverable amount. Certain intangible assets with indefinite useful lives and those not yet available for use require annual impairment testing. This ensures that intangible assets are presented at realistic values and reflect their actual contribution to future economic benefits.
- Goodwill and Impairment Testing
Ind AS 36 specifically covers impairment testing of goodwill arising from business combinations. Goodwill does not generate cash flows independently, so it is allocated to cash generating units expected to benefit from the combination. Entities must test goodwill for impairment annually and whenever impairment indicators exist. Any impairment loss recognised for goodwill cannot be reversed in future periods. The inclusion of goodwill within the scope ensures that acquired benefits are not overstated in financial statements and that the impact of business combinations is reported accurately and transparently.
- Cash Generating Units (CGUs)
Ind AS 36 applies to cash generating units when individual assets cannot generate independent cash inflows. A cash generating unit is the smallest group of assets that generates cash inflows largely independent of other assets. Impairment testing is performed at the CGU level when it is not possible to determine the recoverable amount of individual assets. This approach ensures accurate identification and measurement of impairment losses. CGU-based testing is particularly important for goodwill and corporate assets because their benefits are usually connected with multiple business operations.
- Corporate Assets Under Ind AS 36
Corporate assets such as head office buildings, research centres, and shared facilities are also covered under Ind AS 36. These assets contribute to the cash flows of multiple cash generating units and cannot always be allocated directly to individual assets. The standard requires entities to test corporate assets for impairment by allocating them to appropriate CGUs or groups of CGUs. This ensures that impairment losses are identified correctly and that shared resources are reflected at appropriate values in financial statements. It improves accuracy in measuring the recoverable amount of related assets.
- Assets Excluded from the Scope of Ind AS 36
Ind AS 36 does not apply to certain assets because their impairment is covered by other accounting standards. Examples include inventories under Ind AS 2, deferred tax assets under Ind AS 12, financial assets under Ind AS 109, assets arising from employee benefits under Ind AS 19, and biological assets measured at fair value under Ind AS 41. These exclusions ensure that each category of asset follows the most appropriate accounting treatment. The separation of standards avoids duplication and provides clear guidance for different types of financial reporting issues.
Disclosure Requirements under Ind AS 36 – Impairment of Assets
- Disclosure of Impairment Loss Recognised
Ind AS 36 requires entities to disclose the amount of impairment loss recognised during the reporting period. The disclosure should specify whether the impairment loss has been recognised in the Statement of Profit and Loss or adjusted against revaluation surplus when applicable. This information helps users of financial statements understand the impact of asset value reductions on the entity’s financial performance. Proper disclosure of impairment losses improves transparency and enables investors, creditors, and other stakeholders to evaluate the effect of asset impairment on the financial position of the organisation.
- Disclosure of Assets Affected by Impairment
Entities must disclose details of the assets for which impairment losses have been recognised. The disclosure should identify the class of assets affected, such as property, plant and equipment, intangible assets, goodwill, or cash generating units. This helps users understand which assets have experienced a decline in value and the significance of such impairment. Providing information about affected assets improves the quality of financial reporting and allows stakeholders to assess the operational and financial reasons behind reductions in asset values.
- Disclosure of Events and Circumstances Leading to Impairment
Ind AS 36 requires entities to disclose the events and circumstances that resulted in the recognition of impairment losses. These may include technological changes, market declines, economic conditions, physical damage to assets, poor business performance, or changes in the manner of asset usage. Such disclosures provide users with an understanding of why impairment occurred and how external or internal factors affected asset values. This improves transparency and helps stakeholders evaluate management decisions and future financial risks associated with impaired assets.
- Disclosure of Recoverable Amount
When an impairment loss is recognised, entities must disclose the recoverable amount of the affected asset or cash generating unit. The recoverable amount is determined as the higher of fair value less costs of disposal and value in use. Disclosure of recoverable amount provides information about the basis used for measuring impairment. It enables users to understand the valuation process and assess the assumptions applied by management. This requirement improves reliability and ensures that impairment calculations are supported by appropriate financial information and measurement methods.
- Disclosure of Measurement Basis Used
Ind AS 36 requires entities to disclose whether the recoverable amount has been determined based on fair value less costs of disposal or value in use. If value in use is used, entities should provide information about key assumptions, discount rates, and cash flow projections applied in the calculation. If fair value is used, relevant valuation methods should be disclosed. These disclosures allow users to evaluate the reliability of impairment measurements and understand the factors influencing asset valuation decisions made by management.
- Disclosure of Cash Generating Units (CGUs)
Entities must provide disclosures relating to cash generating units when impairment testing is performed at the CGU level. The disclosure should include the description of the CGU, the amount of impairment loss recognised, and the basis used for determining recoverable amount. For goodwill impairment, entities must disclose the allocation of goodwill to CGUs or groups of CGUs. These disclosures help users understand how assets generating independent cash flows are evaluated and how impairment losses are allocated within the organisation.
- Disclosure of Goodwill and Intangible Assets
Ind AS 36 requires detailed disclosures for impairment testing of goodwill and intangible assets with indefinite useful lives or those not yet available for use. Entities must disclose the carrying amount of goodwill, the basis of impairment testing, and significant assumptions used in determining recoverable amounts. Since goodwill cannot be tested independently, disclosures regarding related cash generating units are important. These requirements provide users with information about future economic benefits expected from acquired businesses and help assess the risks associated with intangible assets.
Importance of Ind AS 36 – Impairment of Assets
- Ensures Accurate Valuation of Assets
Ind AS 36 is important because it ensures that assets are not shown at values higher than their recoverable amounts. It requires entities to identify impairment indicators and compare the carrying amount of assets with their recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss is recognised. This approach prevents overstatement of assets and provides a realistic view of the financial position of an entity. Accurate asset valuation helps investors, creditors, and management understand the true economic value of resources controlled by the organisation.
- Improves Reliability of Financial Statements
Ind AS 36 improves the reliability of financial statements by ensuring that asset values reflect current economic conditions. Without impairment testing, assets may continue to be reported at outdated values, which can mislead users of financial information. The standard requires entities to recognise losses when assets lose their value, resulting in more accurate reporting of financial performance. Reliable financial statements help stakeholders make better decisions and increase confidence in the information provided by companies. Thus, Ind AS 36 contributes to the preparation of transparent and dependable financial reports.
- Prevents Overstatement of Assets
A major importance of Ind AS 36 is that it prevents the overstatement of assets in financial statements. When the value of an asset declines due to technological changes, market conditions, physical damage, or poor performance, the standard requires recognition of impairment losses. This ensures that assets are not carried at unrealistic values. Preventing overstatement protects investors and creditors from making decisions based on incorrect financial information. It also improves the credibility of financial statements by ensuring that reported asset values represent expected future economic benefits accurately.
- Promotes Consistency in Accounting Practices
Ind AS 36 promotes consistency by providing a uniform framework for identifying, measuring, and recognising impairment losses. Before the implementation of impairment standards, different entities followed different methods for assessing asset value reductions. The standard establishes common principles that improve comparability between financial statements of different organisations. Consistent accounting treatment allows investors, analysts, and regulators to evaluate companies more effectively. It also reduces confusion and enhances the overall quality of financial reporting by ensuring that similar impairment situations are treated in a similar manner across entities.
- Enhances Transparency Through Disclosures
Ind AS 36 improves transparency by requiring entities to disclose detailed information about impairment losses and related assessments. Companies must disclose the reasons for impairment, affected assets, recoverable amounts, valuation methods, and assumptions used in calculations. These disclosures provide stakeholders with a better understanding of asset value changes and their impact on financial performance. Transparent reporting increases accountability and allows investors and creditors to evaluate risks associated with asset impairment. It also strengthens trust in financial statements by providing complete information about important accounting decisions.
- Helps in Better Decision-Making
Ind AS 36 provides useful financial information that supports better decision-making by management, investors, creditors, and other stakeholders. Accurate recognition of impairment losses helps management identify underperforming assets and take corrective actions. Investors can evaluate the financial health and future prospects of an organisation more effectively. Creditors can assess the security of assets and the financial stability of the entity. By providing realistic information about asset values, Ind AS 36 supports efficient resource allocation and improves the quality of economic decisions made by users of financial statements.
- Supports International Financial Reporting Practices
Ind AS 36 aligns Indian accounting practices with international standards, particularly IAS 36 on impairment of assets. This alignment improves the global comparability and acceptance of financial statements prepared by Indian entities. International investors and organisations can better understand and evaluate financial information reported under Ind AS. Compliance with global accounting principles enhances investor confidence, encourages foreign investment, and improves the reputation of Indian businesses in international markets. Therefore, Ind AS 36 plays an important role in integrating Indian financial reporting with global accounting practices.
- Strengthens Stakeholder Confidence
Ind AS 36 strengthens the confidence of investors, shareholders, lenders, auditors, and regulatory authorities by ensuring accurate and transparent reporting of asset values. Proper impairment testing reduces the possibility of misleading financial information caused by overstated assets. Stakeholders receive a clearer understanding of the entity’s financial position, risks, and future economic benefits. This improves trust in corporate reporting and supports better relationships between businesses and their stakeholders. By ensuring accountability and reliability, Ind AS 36 contributes to stronger corporate governance and sustainable financial management.
Limitations of Ind AS 36 – Impairment of Assets
- Complexity in Identifying Impairment Indicators
One major limitation of Ind AS 36 is the difficulty in identifying impairment indicators. The standard requires entities to assess whether internal or external factors indicate a possible decline in asset value. However, determining whether such indicators exist often requires professional judgement. Factors like market changes, technological developments, economic conditions, and business performance may not always be easy to evaluate. Different entities may interpret the same circumstances differently, resulting in variations in impairment assessment. This complexity increases the difficulty of applying Ind AS 36 consistently across organisations and industries.
- Dependence on Management Judgement
Ind AS 36 involves significant reliance on management judgement while estimating recoverable amounts, future cash flows, growth rates, and discount rates. Management must make assumptions about future economic conditions and business performance, which may involve uncertainty. Different assumptions can lead to different impairment results for similar assets. Excessive dependence on judgement may reduce comparability and reliability of financial statements. Although professional judgement is necessary in accounting, subjective estimates under Ind AS 36 may create opportunities for bias and affect the accuracy of reported impairment losses.
- Difficulty in Estimating Recoverable Amount
The calculation of recoverable amount is a challenging aspect of Ind AS 36. It requires determining the higher value between fair value less costs of disposal and value in use. Estimating future cash flows, market values, and disposal costs can be complex, especially for unique or specialised assets. Changes in assumptions may significantly affect the impairment calculation. The uncertainty involved in valuation makes impairment testing a difficult process. This limitation can affect the accuracy of asset values reported in financial statements and may require expert valuation support.
- Increased Accounting and Administrative Costs
Application of Ind AS 36 increases the accounting and administrative burden on organisations. Entities must regularly monitor impairment indicators, perform impairment tests, calculate recoverable amounts, and maintain detailed documentation. Large organisations with multiple assets and cash generating units may require significant time and resources to complete impairment assessments. The need for professional valuation experts and financial analysts further increases compliance costs. Small and medium-sized entities may find these requirements challenging due to limited financial resources and technical expertise available for implementing complex impairment procedures.
- Uncertainty in Future Cash Flow Estimates
Ind AS 36 requires entities to estimate future cash flows while calculating value in use. However, future cash flows depend on uncertain factors such as market demand, economic conditions, competition, and business strategies. These estimates may not always be accurate because future events are difficult to predict. Incorrect assumptions about future performance can result in incorrect impairment calculations. This uncertainty creates challenges in achieving reliable measurement of asset recoverable amounts and may affect the credibility of financial statements prepared under the standard.
- Difficulty in Testing Goodwill for Impairment
Testing goodwill for impairment is one of the major limitations of Ind AS 36. Goodwill does not generate independent cash flows and must be allocated to cash generating units for impairment testing. Determining the appropriate CGU and allocating goodwill requires significant judgement. The complexity increases when businesses operate through multiple divisions or geographical areas. Since goodwill impairment losses cannot be reversed, incorrect assessments may have a permanent impact on financial statements. This makes goodwill impairment testing a challenging area under Ind AS 36.
- Challenges in Determining Cash Generating Units
Ind AS 36 requires impairment testing at the cash generating unit level when individual assets do not generate independent cash inflows. However, identifying the smallest group of assets that generates independent cash flows can be difficult. Business operations are often interconnected, making it challenging to separate cash flows between different units. Different interpretations of CGU identification may lead to different impairment outcomes. This limitation affects consistency and comparability of financial reporting, especially for large organisations with complex operational structures and multiple business segments.
- Limited Reversal of Impairment Losses
Although Ind AS 36 permits reversal of impairment losses in certain situations, there are limitations on such reversals. Impairment losses recognised for goodwill cannot be reversed, even if the value of goodwill increases in the future. For other assets, reversal is allowed only when there is evidence that the recoverable amount has increased. These restrictions may prevent financial statements from fully reflecting improvements in asset values. The limitation ensures prudence but may sometimes result in carrying amounts that do not completely represent current economic conditions.
- Complexity in Disclosure Requirements
Ind AS 36 requires extensive disclosures relating to impairment losses, valuation methods, assumptions, and recoverable amounts. While these disclosures improve transparency, preparing them can be complex and time-consuming. Entities must provide detailed explanations regarding impairment calculations and significant judgements used in assessments. The extensive disclosure requirements increase reporting responsibilities and may require additional professional expertise. Smaller entities may face difficulties in meeting these requirements effectively. Therefore, complexity in disclosure is considered a limitation of implementing Ind AS 36.
- Difficulty in Comparing Impairment Assessments
Although Ind AS 36 aims to improve comparability, differences in assumptions and valuation methods may still reduce comparability between entities. Companies may use different estimates for discount rates, growth rates, and future cash flows while calculating recoverable amounts. These differences can result in different impairment losses even for similar assets. Therefore, financial statement users may find it difficult to compare impairment results across organisations. This limitation arises because the standard allows reasonable judgement and estimation in areas where precise measurement is not always possible.
Illustrations on Impairment of Assets (Ind AS 36)
Illustration 1: Calculation of Impairment Loss
Question: A Ltd. has a machine with a carrying amount of ₹10,00,000. Due to technological changes, the recoverable amount of the machine is estimated at ₹7,50,000. Calculate the impairment loss.
Solution:
Carrying Amount of Asset = ₹10,00,000
Recoverable Amount = ₹7,50,000
Impairment Loss = Carrying Amount – Recoverable Amount
= ₹10,00,000 – ₹7,50,000
= ₹2,50,000
Accounting Treatment:
Impairment Loss Account Dr. ₹2,50,000
To Machine Account ₹2,50,000
Result: The machine will be shown in the balance sheet at ₹7,50,000 after recognising the impairment loss.
Illustration 2: Impairment Test Based on Recoverable Amount
Question: B Ltd. owns a building with a carrying amount of ₹50,00,000. The fair value less costs of disposal is ₹42,00,000 and the value in use is ₹45,00,000. Determine the recoverable amount and impairment loss.
Solution:
Fair Value Less Costs of Disposal = ₹42,00,000
Value in Use = ₹45,00,000
Recoverable Amount = Higher of Fair Value Less Costs of Disposal and Value in Use
= Higher of ₹42,00,000 and ₹45,00,000
= ₹45,00,000
Impairment Loss:
= Carrying Amount – Recoverable Amount
= ₹50,00,000 – ₹45,00,000
= ₹5,00,000
Result: Impairment loss of ₹5,00,000 will be recognised in the financial statements.
Illustration 3: Impairment of Cash Generating Unit (CGU)
Question: A company has a Cash Generating Unit (CGU) with the following assets:
- Plant: ₹30,00,000
- Machinery: ₹20,00,000
- Goodwill: ₹10,00,000
Total Carrying Amount = ₹60,00,000
The recoverable amount of the CGU is ₹45,00,000. Calculate impairment loss.
Solution:
Carrying Amount of CGU = ₹60,00,000
Recoverable Amount = ₹45,00,000
Impairment Loss = ₹60,00,000 – ₹45,00,000
= ₹15,00,000
The impairment loss will first be allocated to goodwill.
Goodwill = ₹10,00,000
Remaining Loss:
= ₹15,00,000 – ₹10,00,000
= ₹5,00,000
The remaining loss will be allocated proportionately to plant and machinery.
Result:
Goodwill impairment = ₹10,00,000
Other assets impairment = ₹5,00,000
Illustration 4: Reversal of Impairment Loss
Question: A machine was originally valued at ₹20,00,000. An impairment loss of ₹5,00,000 was recognised earlier. After improvement in market conditions, the recoverable amount increases to ₹18,00,000. Calculate the reversal of impairment loss.
Solution:
Original Carrying Amount = ₹20,00,000
After impairment:
= ₹20,00,000 – ₹5,00,000
= ₹15,00,000
New Recoverable Amount = ₹18,00,000
Increase in Value:
= ₹18,00,000 – ₹15,00,000
= ₹3,00,000
Result: Impairment loss reversal of ₹3,00,000 can be recognised.
Note: The reversal cannot increase the asset value beyond the carrying amount that would have existed without impairment.
Illustration 5: Value in Use Calculation
Question: A company expects cash inflows from an asset as follows:
Year 1: ₹2,00,000
Year 2: ₹2,50,000
Year 3: ₹3,00,000
The present value of these future cash flows is calculated at ₹6,00,000. The asset has a carrying amount of ₹8,00,000. Determine impairment loss.
Solution:
Value in Use = ₹6,00,000
Assume Fair Value Less Costs of Disposal = ₹5,50,000
Recoverable Amount = Higher of:
Value in Use = ₹6,00,000
Fair Value Less Costs of Disposal = ₹5,50,000
Recoverable Amount = ₹6,00,000
Impairment Loss:
= ₹8,00,000 – ₹6,00,000
= ₹2,00,000
Result: Impairment loss of ₹2,00,000 will be recognised.
Illustration 6: Impairment Testing of Intangible Asset
Question: A company has a patent recorded at ₹15,00,000. Due to technological advancement, the recoverable amount of the patent is estimated at ₹9,00,000. Calculate impairment loss.
Solution:
Carrying Amount = ₹15,00,000
Recoverable Amount = ₹9,00,000
Impairment Loss:
= ₹15,00,000 – ₹9,00,000
= ₹6,00,000
Accounting Treatment:
Impairment Loss Account Dr. ₹6,00,000
To Patent Account ₹6,00,000
Result: The patent will be reported at ₹9,00,000 after impairment recognition.
