AS 28 Impairment of Assets Summary Notes PDF. In the previous article, we have given AS 17 Segment Reporting and AS 18 Related Party Disclosures. Today we are providing the complete details of accounting standard – 28 impairment of assets I;e objective, scope, definitions, Application of the equity method, Exemptions from applying the equity method, Discontinuing the use of the equity method, Recognition and Measurement of an Impairment Loss, Impairment Loss for a Cash-Generating Unit etc. You can also download AS 28 impairment of assets notes by ICAI at the end of this article.
Accounting Standard (AS) – 28 Impairment of Assets
The objective of this Standard is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and this Standard requires the enterprise to recognize an impairment loss.
This Standard should be applied in accounting for the impairment of all assets, other than:
- inventories (see AS 2, Valuation of Inventories);
- assets arising from construction contracts (see AS 7, Construction Contracts);
- financial assets, including investments that are included in the scope of AS 13, Accounting for Investments; and
- deferred tax assets (see AS 22, Accounting for Taxes on Income).
The following terms are used in this Standard with the meanings specified:
1) Recoverable amount is the higher of an asset’s net selling price and its value in use.
2) Value in use 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.
Provided that in the context of Small and Medium-sized Companies and Small and Medium-sized Enterprises (SMEs) (Levels II and III non corporate entities), as defined in Appendix 1 to this Compendium, the definition of the term ‘value in use’ would read as follows:
“Value in use 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, or a reasonable estimate thereof. ”
3) Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.
4) Costs of disposal are incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense.
5) An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
6) Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.
7) Depreciation (Amortisation) is a systematic allocation of the depreciable amount of an asset over its useful life.
8)Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.
9) Useful life is either:
- the period of time over which an asset is expected to be used by the enterprise; or
- the number of production or similar units expected to be obtained from the asset by the enterprise.
10) A cash-generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.
11) Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash generating unit under review and other cash generating units.
12) An active market is a market where all the following conditions exist :
- the items traded within the market are homogeneous;
- willing buyers and sellers can normally be found at any time; and
- prices are available to the public.
Identifying an Asset that may be Impaired
An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash-generating unit. An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset.
In assessing whether there is any indication that an asset may be impaired, an enterprise should consider, as a minimum, the following indications:
External sources of information
(a) during the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use;
(b) significant changes with an adverse effect on the enterprise have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the enterprise operates or in the market to which an asset is dedicated;
(c) market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially;
(d) the carrying amount of the net assets of the reporting enterprise is more than its market capitalization;
Internal sources of information
(e) evidence is available of obsolescence or physical damage of an asset;
(f) significant changes with an adverse effect on the enterprise have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include plans to discontinue or restructure the operation to which an asset belongs or to dispose of an asset before the previously expected date; and
(g) evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.
Under the equity method, on initial recognition the investment in an associate or a joint venture is recognized at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the investee’s profit or loss is recognised in the investor’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences.
Application of the equity method
An entity with joint control of, or significant influence over, an investee shall account for its investment in an associate or a joint venture using the equity method except when that investment qualifies for exemption.
Exemptions from applying the equity method
An entity need not apply the equity method to its investment in an associate or a joint venture if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception if all the following apply:
(a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not applying the equity method.
(b) The entity’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets).
(c) The entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization, for the purpose of issuing any class of instruments in a public market.
(d) The ultimate or any intermediate parent of the entity produces consolidated financial statements available for public use that comply with Ind AS s.
Discontinuing the use of the equity method
An entity shall discontinue the use of the equity method from the date when its investment ceases to be an associate or a joint venture as follows:
(a) If the investment becomes a subsidiary, the entity shall account for its investment in accordance with Ind AS 103, Business Combinations, and Ind AS 110.
(b) If the retained interest in the former associate or joint venture is a financial asset, the entity shall measure the retained interest at fair value. The fair value of the retained interest shall be regarded as its fair value on initial recognition as a financial asset in accordance with Ind AS 109. The entity shall recognize in profit or loss any difference between:
- the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture; and
- the carrying amount of the investment at the date the equity method was discontinued.
(c) When an entity discontinues the use of the equity method, the entity shall account for all amounts previously recognized in other comprehensive income in relation to that investment on the same basis as would have been required if the investee had directly disposed of the related assets or liabilities.
Recognition and Measurement of an Impairment Loss
If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount. That reduction is an impairment loss.
An impairment loss should be recognised as an expense in the statement of profit and loss immediately, unless the asset is carried at revalued amount in accordance with another Accounting Standard (see Accounting Standard (AS) 10, Accounting for Fixed Assets), in which case any impairment loss of a revalued asset should be treated as a revaluation decrease under that Accounting Standard.
An impairment loss on a revalued asset is recognized as an expense in the statement of profit and loss. However, an impairment loss on a revalued asset is recognized directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed the amount held in the revaluation surplus for that same asset.
When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an enterprise should recognise a liability if, and only if, that is required by another Accounting Standard.
After the recognition of an impairment loss, the depreciation (amortization) charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.
If an impairment loss is recognized, any related deferred tax assets or liabilities are determined under Accounting Standard (AS) 22, Accounting for Taxes on Income.
Impairment Loss for a Cash-Generating Unit
An impairment loss should be recognized for a cash-generating unit if, and only if, its recoverable amount is less than its carrying amount. The impairment loss should be allocated to reduce the carrying amount of the assets of the unit in the following order:
- first, to goodwill allocated to the cash-generating unit (if any); and
- then, to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset in the unit. These reductions in carrying amounts should be treated as impairment losses on individual assets.
In allocating an impairment loss under paragraph 87, the carrying amount of an asset should not be reduced below the highest of:
- its net selling price (if determinable);
- its value in use (if determinable); and
- zero. The amount of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro-rata basis.
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