1. What is impairment of assets and how it is different from depreciation / amortization?

What is Impairment?
The impairment of a fixed asset can be described as an abrupt decrease in fair
value due to physical damage, changes in existing laws creating a permanent
decrease, increased competition, poor management, obsolescence of technology,
etc. In case of a fixed-asset impairment, the company needs to decrease its book
value in the balance sheet and recognize a loss in the income statement.

All assets, either tangible or intangible, are prone to impairment. A tangible asset
can be property, plant and machinery, furniture and fixtures, etc. whereas intangible
asset can be goodwill, patent, license, etc.

Impairment vs. Amortization/Depreciation

Though both terms may seem similar, impairment relates more to a sudden and
irreversible decrease in the value of an asset, for example, the breakdown of a
machine due to an accident.

Generally, amortization/depreciation is believed to be a systematic decrease in the

book value of an intangible asset, based on the planned amortization plan. The
total write-off is usually spread across the complete life of the asset, also
considering its expected resale value.

2. What is reversal of impairment loss?

Reversal of Impairment Loss
An enterprise at the end of each financial year should review whether the previously
recognized impairment loss continue to exist or whether it has been decreased. The
enterprise must access the various external and internal indicators as to access the
recoverable amount of the asset. If the recoverable amount of the asset is more than the
carrying amount, then the impairment loss has to be reversed and it has to be treated as
income in the books of accounts.
The reversal of impairment loss previously recognized for a cash generating unit has to be
allocated first to the assets, then goodwill. Impairment loss for goodwill should only be
reversed if it is proved that the impairment was caused by external effects of exceptional
nature and the subsequent events have reversed the event which lead to the impairment.
 When there is indication that an impairment loss recognised for an asset (other than a revalued
asset) in earlier accounting periods no longer exists or may have decreased, such reversal of
impairment loss is recognised in the Statement of Profit and Loss, to the extent the amount was
previously charged to the Statement of Profit and Loss.
The reversal of impairment loss previously recognized for a cash generating unit has to be
allocated first to the assets, then goodwill.

3. What are internal and external indicators of impairment? List down few.
Indicators of Impairment Test

It is imperative for the companies to assess the external environment and look for
the indicators below to decide when to impair assets. Given below are just of the
some of the indicators relevant for impairment:

External factors:

 Drastic change in economic or legal factors affecting the company or its

assets
 Significant fall in the market price of the asset
 Muted demand for a medium-term period due to global macroeconomic
conditions

Internal factors:

 Asset as a part of a restructuring or held for disposal

 Obsolescence or physical damage of the asset
 Inability to bring in post-merger synergy benefits that were expected earlier
 Worse economic performance than what is expected

4. How impairment testing is done? (you are supposed to explain different methods)
Impairment of Long-Lived Assets

GAAP. This requires a two-step impairment test model:

 Step 1. The asset carrying amount is first compared with the undiscounted cash-flows it is
expected to generate. If the carrying amount is lower than the undiscounted cash-flows, no
impairment loss is recognized and Step 2 is not necessary. If the carrying amount is higher than
the undiscounted cash-flows then Step 2 quantifies the impairment loss.
 Step 2. An impairment loss is measured as the difference between the carrying amount and fair
value. Fair value is defined as the price that would be received to sell an asset or that would be
paid to transfer a liability in an orderly transaction between market participants at the
measurement date.

Impairment of Goodwill

GAAP. Goodwill is tested for impairment on a reporting-unit level. There is again a two-step
approach for testing for impairment under GAAP:

 Step 1. The fair value and the carrying amount of the reporting unit, including goodwill, are
compared. If the fair value of the reporting unit is less than the carrying amount, Step 2 is
completed to determine the amount of the goodwill impairment loss, if any.
 Step 2. Goodwill impairment is measured as the excess of the carrying amount of goodwill over
its implied fair value. The implied fair value of goodwill — calculated in the same manner that
goodwill is determined in a business combination — is the difference between the fair value of the
reporting unit and the fair value of the various assets and liabilities included in the reporting unit.

Any loss recognized is not permitted to exceed the carrying amount of goodwill. The impairment
charge is included in operating income.

https://www.aicpastore.com/content/media/producer_content/newsletters/articles_2009/cpa/mar/intesting.
jsp

5. How to measure impairment loss? (explain with the help of an example – not from any annual report, create
your own illustration)

Recognition and Measurement of Impairment Loss

If the recoverable amount of the asset is more than the carrying amount then the difference
amount must be ignored, but if the recoverable amount of the asset is less than the carrying
amount then the difference termed as Impairment Loss should be written off immediately
and should be treated as an expense to Profit & Loss Account.

Example
Your company owns a fleet of 200 articulated diesel buses. Environmentalists are pressing the
government to require public transit companies to switch to hybrid buses. You expect to earn
$12 million from the buses each year for next 5 years. There is a 50% chance that the new
laws will be passed which will reduce your revenues from the fleet by 30%. The carrying value
of your fleet is $55 million and your company’s cost of capital is 12%. Find out if there is any
impairment loss, if you company follows US GAAP.

In the first step of the impairment test, you need to compare the sum of expected
undiscounted cash flows with the carrying value of the fleet. Expected cash flows per year is
$10.2 million (=0.5 × $12 million + 0.5 × 12 million × (1 – 0.3)). Total expected undiscounted
cash flows over the remaining useful life of the asset are $51 million ($10.2 million × 5).
Because the carrying value is higher than the sum of cash flows, the asset is impairment.

In the second step, you need to find out the actual amount of the impairment expense which
equals the difference between the fair value of the asset and its carrying value. The present
value of expected cash flows, which in this case works out to $36.77 million, is a good
indicator of fair value. Impairment loss that must be recognized equals $18.33 million (=$55
million - $36.77 million).

EXAMPLE- https://quickbooks.intuit.com/ca/resources/profit-loss/record-impairment-loss/

6. What disclosures are required in the ‘notes to accounts’ with regards to impairment testing as per Ind AS
38?
The key disclosure requirements are the following:
• The amounts of impairments recognised and reversed and the events and circumstances that were the
cause thereof
• The amount of goodwill per CGU or group of CGUs
• The valuation method applied: FVLCS or VIU and its approach in determining the appropriate
assumptions, including the growth and discount rate used
• A sensitivity analysis, when a reasonably possible change in a key assumption would result in an
impairment, including the ‘headroom’ in the impairment calculation and the amount by which the
assumption would need to change to result in an impairment.

Disclosures
The following disclosures are required in the financial statements:
a. Impairment loss recognized and reversed for each class of assets
b. Amount of impairment loss set off against revaluation reserve and amount of reversal of
impairment loss credited to revaluation reserve segment reporting – AS 17)
c. Calculation of Revaluation Amount of each class of assets
d. Assumptions used in the calculation of Recoverable Amount
e. Events that lead to impairment
f. Description of Cash Generating Unit

https://www.caclubindia.com/articles/ind-as-38-intangible-assets-29232.asp
7. Implication of inadequate disclosures. (Hint – explain in terms of earnings management. You need to know
what is earnings management to answer Q7)
Earnings management is the use of accounting techniques to produce financial
reports that present an overly positive view of a company's business activities and
financial position. Many accounting rules and principles require company
management to make judgments following these principles. Earnings management
takes advantage of how accounting rules are applied and creates financial statements
that inflate earnings, revenue, or total assets.
A change in accounting policy, however, must be explained to financial statement
readers, and that disclosure is usually stated in a footnote to the financial statements.
The disclosure is required because of the accounting principle of consistency.
Financial statements are comparable if the company uses the same accounting
policies each year, and any change in policy must be explained to the financial report
reader. As a result, this type of earnings manipulation is usually uncovered.