IAS 36 Impairement of Assets

IAS 36 – Impairment of Assets
When does impairment occur?
Impairment occurs when the value of an asset has decreased

significantly
and the asset is no longer worth what it was previously valued at on
the balance sheet.
Impairment can happen to both tangible and intangible assets.

Tangible assets can include
 property,
 plant, and
 equipment,
while intangible assets can include
 patents,
 trademarks,
 goodwill, and
 software.
When an impairment occurs,
the company is required to recognize the impairment loss
in its financial statements.
The impairment loss is the

difference between
the carrying amount of the asset and its recoverable amount.
The recoverable amount is the higher of

the asset's fair value
less And
costs to sell its value in use.
The recognition of an impairment loss
reduces
the carrying amount of the asset on the balance sheet,
which
reduces the company's total assets and
may also reduce its net income for the period.
AIM OF IAS 36
The aim of this standard is to ensure that assets of the entity
‘are carried at no more than their
recoverable amount’ (IAS 36, para 1)
IAS 36 not applicable on the following:

• Inventories (IAS 2)
• Construction contracts (IAS 11)
• Deferred tax assets (IAS 12)
• Financial assets included in the scope of IFRS 9
• Investment property measured at fair value (IAS 40)
• Non-current assets are classified as held for sale (IFRS 5).
WHEN IS THE ASSET SAID TO BE IMPAIRED?

An asset is said to be impaired if it’s carrying value is greater than the recoverable
amount.
The recoverable amount is said to be the higher of fair value less costs to sell
(NRV) or value in use.
Value in use is defined as the present value of future cash flows to be derived
from the use of the asset until its final disposal.
STEPS FOR IMPAIREMENT:

1. Identify the asset: Determine which asset is being impaired. The asset
could be a tangible or intangible asset, or a group of assets.
2. Determine the carrying amount: Calculate the carrying amount of the
asset. This is the value at which the asset is recorded on the balance sheet.
3. Estimate the recoverable amount: Determine the recoverable amount of
the asset. This is the higher of the asset's fair value less costs to sell or its
value in use.
4. Compare the carrying amount to the recoverable amount: Compare the
carrying amount to the recoverable amount. If the carrying amount is
higher than the recoverable amount, then the asset is impaired.
5. Recognize the impairment loss: If the asset is impaired, recognize the
impairment loss in the income statement. The impairment loss should be
equal to the difference between the carrying amount and the recoverable
amount.
6. Adjust the carrying amount: Adjust the carrying amount of the asset to its
recoverable amount. This new carrying amount will be used to calculate
future depreciation or amortization.
It is important to note that IAS 36 requires companies to regularly assess the

carrying amount and recoverable amount of their assets. If there are indications
of impairment, the company must perform an impairment test and recognize any
impairment losses.
Asset Value in Reason
statement of
financial position
C
INDICATORS OF IMPAIRMENT:
INTERNAL INDICATORS EXTERNAL INDICATORS
Evidence of assets indicates that economic Changes in the technological, economical,

performance is worse than expected. market, legal environment having an adverse
impact on the company.
Evidence of obsolescence or damage to the Interest rates have increased, thus increasing
asset. the discount rate used in calculating the asset’s
value in use.
Change in the way the asset is used. The asset’s market value has declined more
than expected.
(carrying value > market value of asset)
Loss of key employees.
Operating losses or net cash outflow relating to
the asset.
The following amounts were recorded in the books of Indicate LLP prior to impairment review on
1/1/20X9:
$m
Goodwill 20
Land 45
Buildings 30
Technology 7
The recoverable amount of the unit is expected to be $65 million and it is estimated that the
technology is now worthless.
Show the impact of the impairment as on 1/1/20X9.
CASH GENERATING UNIT (CGU’s)
A CGU is defined as 'the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets' (IAS 36, para 6).
The carrying value of CGU is compared to that of its recoverable amount.
Just like normal impairment, if the CV of an asset > recoverable amount of an asset, then it is said to
be impaired. Similarly, in a CGU, if the carrying amount of all assets in a CGU > recoverable amount
of all assets in a CGU, then the CGU is said to be impaired.
Allocation of CGU impairment in this order:

1. Any specific asset mentioned is worthless.
2. Purchased goodwill
3. The other assets (including other intangible assets) in the CGU on a pro-rata basis based on the
carrying amount of each asset in the CGU.
Note:
• Do not pro rata to cash, trade receivables, inventory or other current assets.
• No individual asset should be written down below its recoverable amount.
QUIZ
1. Which TWO of the following could be an indication that an asset is
impaired according to IAS
36 Impairment of Assets?
A. Decrease in market interest rates
B. Damage caused to the asset
C. Management intention to reorganize the business
D. Increase in market values for the asset
2. Berry LLP has a cash generating unit (CGU) suffers a huge decline in income due to reduced
demand for its products. An impairment review was carried out, and the recoverable amount of
the cash generating unit was determined at $150m. The assets of the CGU had the following
carrying amounts immediately prior to the impairment:
Goodwill 20
Intangibles 80
Property, plant and equipment 40
Inventory 40
Trade receivables 20
Total 200
The inventory and receivables are considered to be included at their recoverable amounts.
What is the carrying amount of the intangibles once the impairment loss
has been allocated?
A. 60
B. 10
C. 50
D. 40

IAS 36 Impairement of Assets

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IAS 36 – Impairment of Assets

When does impairment occur?

Impairment occurs when the value of an asset has decreased

Impairment can happen to both tangible and intangible assets.

The impairment loss is the

The recoverable amount is the higher of

IAS 36 not applicable on the following:

WHEN IS THE ASSET SAID TO BE IMPAIRED?

STEPS FOR IMPAIREMENT:

It is important to note that IAS 36 requires companies to regularly assess the

INTERNAL INDICATORS EXTERNAL INDICATORS

Evidence of assets indicates that economic Changes in the technological, economical,

The carrying value of CGU is compared to that of its recoverable amount.

Allocation of CGU impairment in this order:

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