IAS 36: Impairment of Assets

The International Accounting Standard 36 dealing with the impairment of assets, was approved by the IASC Board in April 1998 and became effective for annual financial statements covering periods beginning on or after July 1, 1999.

In July 1998, the approval of IAS 38: Intangible Assets, and IAS 22: Business Combinations, resulted in changes in cross-references and terminology in IAS 36. In addition, IAS 38 added a definition of "active market" to the standard. Finally, a minor wording inconsistency in Appendix A was corrected.

In April 2000, IAS 40: Investment Property, amended the scope of the standard. The amendment became operative for annual financial statements covering periods beginning on or after January 1, 2001.

Summary of IAS 36

IAS 36 addresses mainly accounting for impairment of goodwill, intangible assets and property, plant and equipment. The standard includes requirements for identifying an impaired asset, measuring its recoverable amount, recognising or reversing any resulting impairment loss, and disclosing information on impairment losses or reversals of impairment losses.

IAS 36 prescribes how an enterprise should test its assets for impairment, that is:

• the procedures that an enterprise should apply to ensure that its assets are not overstated in the financial statements
• how an enterprise should assess the amount to be recovered from an asset (the "recoverable amount")
• when an enterprise should account for an impairment loss identified by this assessment

Fundamental Requirement of IAS 36

An impairment loss should be recognised whenever the recoverable amount of an asset is less than its carrying amount (sometimes called "book value").

Other Requirements of IAS 36

• The recoverable amount of an asset is its net selling price or its value in use, whichever is higher, both based on present value calculations.
• The net selling price is the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable willing parties, less the costs of disposal.
• The value in use is the amount obtainable from the use of an asset until the end of its useful life and from its subsequent disposal. Value in use is calculated as the present value of estimated future cash flows. The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.
• An impairment loss should be recognised as an expense in the income statement for assets carried at cost and treated as a revaluation decrease for assets carried at revalued amount.
• An impairment loss should be reversed (and income recognised) when there has been a change in the estimates used to determine an asset's recoverable amount since the last impairment loss was recognised.
• The recoverable amount of an asset should be estimated whenever there is an indication that the asset may be impaired. IAS 36 includes a list of indicators of impairment to be considered at each balance sheet date. In some cases, the International Accounting Standard applicable to an asset may include requirements for additional reviews
• In determining value in use, an enterprise should apply
  • cash flow projections based on reasonable and supportable assumptions that reflect the asset in its current condition and represent management's best estimate of the set of economic conditions that will exist over the remaining useful life of the asset. Estimates of future cash flows should include all estimated future cash inflows and cash outflows except for cash flows from financing activities and income tax receipts and payments.
  • a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The discount rate should not reflect risks for which the future cash flows have been adjusted.
• If an asset does not generate cash inflows that are largely independent from the cash inflows from other assets, an enterprise should determine the recoverable amount of the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. Principles for recognising and reversing impairment losses for a cash-generating unit are the same as those for an individual asset. The concept of cash-generating units will often be used in testing assets for impairment because, in many cases, assets work together rather than in isolation. IAS 36 includes guidance and examples on how to identify the cash-generating unit to which an asset belongs and further requirements on how to measure an impairment loss for a cash-generating unit and to allocate this loss between the assets of the unit.
• An impairment loss recognised in prior years should be reversed if and only if there has been a change in the estimates used to determine recoverable amount since the last impairment loss was recognised. However, an impairment loss should only be reversed to the extent the reversal does not increase the carrying amount of the asset above the carrying amount that would have been determined for the asset (net of amortisation or depreciation) had no impairment loss been recognised. An impairment loss for goodwill should only be reversed if the specific external event that caused the recognition of the impairment loss reverses. A reversal of an impairment loss should be recognised as income in the income statement for assets carried at cost and treated as a revaluation increase for assets carried at revalued amount
• When impairment losses are recognised or reversed an enterprise should disclose certain information by class of assets and by reportable segments. Further disclosure is required if impairment losses recognised or reversed are material to the financial statements of the reporting enterprise as a whole.
• On first adoption of IAS 36, the requirements should be applied prospectively only, that is, prior periods will not be restated.