Impairment of Assets: Assessment and Recognition of Asset Impairment in
Financial Statements
Introduction
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
Asset impairment is a key aspect impacting financial results of companies. Untimely
recognition of impaired assets can distort the true financial position. International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)
mandate impairment testing and accounting for impaired assets.
This report aims to provide a comprehensive understanding of asset impairment accounting
concepts. It discusses impairment indicators, measurement methods and testing procedures as
per accounting standards. Real-world examples illustrate the concepts discussed.
The report includes the following sections:
- Definition and scope of asset impairment
- Impairment indicators and triggering events
- Measurement of recoverable amount
- Allocation of impairment losses
- Impairment testing procedures
- Presentation and disclosure requirements
- Case studies on impairment assessments
The objective is to gain insights on impairment principles and evaluation of their application
in practice. This will aid in complying with accounting requirements for asset impairment
losses.
Definition and Scope of Asset Impairment
As per IAS 36 and ASC 360, impairment is the amount by which carrying amount of an asset
exceeds its recoverable amount. Carrying amount is the asset value per books after deducting
accumulated depreciation/amortization.
Recoverable amount is defined as higher of fair value less costs to sell and value in use.
Impairment losses are recognized when carrying amount exceeds recoverable amount.
Scope of IAS 36 includes goodwill, intangibles with indefinite lives, property, plant &
equipment and certain financial assets as per IFRS 9/ASC 326. Investments in associates,
joint ventures are covered in separate standards.
Impairment Indicators and Triggering Events
Presence of any of the below indicators requires assessment of recoverable amount:
- Significant decline in market value beyond expected normal level
- Evidence of obsolescence or physical damage to asset
- Significant adverse changes in technology, markets, economy, laws affecting how asset is
used.
- Worse economic performance/asset utilization than expected at acquisition.
- Plans to discontinue/restructure operations asset belongs to.
External/internal information about impairment indicators triggers impairment testing rather
than occurrence of a single event.
Measurement of Recoverable Amount
Recoverable amount as higher of value in use and fair value less costs of disposal is estimated
for individual assets, unless cash generating unit level is appropriate.
Value in Use
- Estimated future cash flows from use and disposal.
- Cash flows based on management budgets/forecasts for next 5 years.
- Extrapolation uses steady or declining growth rate for subsequent years.
- Pre-tax discount rate applied to calculate present value.
Fair Value less Costs to Sell
- Based on market price or valuation model if quoted price unavailable.
- Costs include disposal, transport, legal costs directly attributable to disposal.
Allocation of Impairment Losses
Any excess of carrying value over recoverable amount is impairment loss which is allocated
as follows:
- Firstly reduce goodwill allocated to CGU, if any.
- Then reduce other assets of CGU on pro-rata basis using relative carrying amounts. But
asset value cannot be reduced below higher of fair value less costs to sell, value in use or
zero.
Reversals of impairment loss (not goodwill) need to be recognized if recoverable amount
increases in subsequent periods due to changes in estimates.
Impairment Testing Procedures
Formal impairment assessment involves:
- Identify cash generating units based on independent cash inflows.
- Determine carrying amount of CGU by allocating related assets and liabilities.
- Calculate recoverable amount and compare with carrying amount.
- Recognize impairment loss if carrying exceeds recoverable amount.
- Sensitivity analysis for key assumptions like growth rates, discount rates.
Testing is done annually for goodwill, indefinite life intangibles and whenever impairment
indicators exist. Recoverable amount estimates require judgment.
Presentation and Disclosure Requirements
Impairment losses are presented in statement of profit and loss under separate line item.
Disclosures include:
- Impairment loss amounts during period by class of assets
- Events/circumstances leading to impairment being recognized
- CGU level recoverable amount determined
- Discount rates, growth rates used as key assumptions
- Sensitivity analysis of changes in assumptions
The aim is to provide transparency on significant estimates and judgments around
impairment.
Case Studies on Impairment Assessments
Case 1:
A manufacturing company acquired a specialized machine 5 years ago for $1 million. Due to
technological changes, the production is being halted. The machine's fair value is estimated at
$400,000.
Impairment loss of $600,000 will be recognized being the difference of carrying amount ($1
million) and recoverable amount of $400,000 which is fair value less costs to sell in this case.
Case 2:
A hotel business has indicated impairment triggers due to decline in occupancy rates post
COVID-19 pandemic. The recoverable amount of the CGU estimated using value in use is
$10 million against its carrying value of $12 million. Impairment loss of $2 million will be
recognized.
This report discussed impairment accounting concepts as per relevant standards to facilitate
compliance. Real-life examples demonstrated application of concepts discussed.
Conclusion
In conclusion, this report provided comprehensive understanding of key principles for
recognizing and measuring asset impairment losses as per accounting standards. Regular
assessment is required to ensure assets are not carried at amounts exceeding recoverable
values. Complying with impairment accounting brings transparency through suitable
presentation and disclosures in financial statements.
