Pipara & Co LLP

impairment of assets

Objective

The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.

Scope
  • This Standard shall be applied in accounting for the impairment of all assets, other than:
  • inventories (see Ind AS 2, Inventories);
  • 1contract assets and assets arising from costs to obtain or fulfil a contract that are recognised in accordance with Ind AS 115, Revenue from Contracts with Customers;
  • deferred tax assets (see Ind AS 12, Income Taxes);
  • assets arising from employee benefits (see Ind AS 19, Employee Benefits);
  • financial assets that are within the scope of Ind AS 109, Financial Instruments;

 

# This Ind AS was notified vide G.S.R. 111(E) dated 16th February, 2015 and was amended vide Notification No. G.S.R. 365(E) dated 30th March, 2016 and G.S.R. 310(E) dated 28th March, 2018.

1 Substituted vide Notification No. G.S.R. 365(E) dated 30th March, 2016 and, thereafter, substituted vide Notification No. G.S.R. 310(E) dated 28th March, 2018.

  • [Refer Appendix 1];
  • biological assets related to agricultural activity within the scope of Ind AS 41 Agriculture that are measured at fair value less costs to sell ;
  • deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights under insurance contracts within the scope of Ind AS 104, Insurance Contracts; and
  • non-current assets (or disposal groups) classified as held for sale in accordance with Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.
  1. This Standard does not apply to inventories, assets arising from construction contracts, deferred tax assets, assets arising from employee benefits, or assets classified as held for sale (or included in a disposal group that is classified as held for sale) because Indian Accounting Standards applicable to these assets contain requirements for recognising and measuring these assets.
  2. This Standard applies to financial assets classified as:
    1. subsidiaries, as defined in Ind AS 110, Consolidated Financial Statements;
    2. associates, as defined in Ind AS 28, Investments in Associates and Joint Ventures; and
    3. joint ventures, as defined in Ind AS 111, Joint Arrangements. For impairment of other financial assets, refer to Ind AS 109.
  3. This Standard does not apply to financial assets within the scope of Ind AS 109, or biological assets related to agricultural activity measured at fair value less costs to sell within the scope of Ind AS 41. However, this Standard applies to assets that are carried at revalued amount (ie fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses) in accordance with other Ind ASs, such as the revaluation model in Ind AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets. The only difference between an asset’s fair value and its fair value less costs of disposal is the direct incremental costs attributable to the disposal of the asset.
  1. If the disposal costs are negligible, the recoverable amount of the revalued asset is necessarily close to, or greater than, its revalued amount. In this case, after the revaluation requirements have been applied, it is unlikely that the revalued asset is impaired and recoverable amount need not be estimated.
  2. [Refer Appendix 1]
  3. If the disposal costs are not negligible, the fair value less costs of disposal of the revalued asset is necessarily less than its fair value. Therefore, the revalued asset will be impaired if its value in use is less than its revalued amount. In this case, after the revaluation requirements have been applied, an entity applies this Standard to determine whether the asset may be impaired.
Definitions
  • The following terms are used in this Standard with the meanings specified:

Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.

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 groups of assets.

Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units.

Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.

Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.

Depreciation (Amortisation) is the systematic allocation of the depreciable amount of an asset over its useful life.2

2 In the case of an intangible asset, the term ‘amortisation’ is generally used instead of ‘depreciation’. The two terms have the same meaning.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113, Fair Value Measurement.)

An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.

The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use.

Useful life is either:

  • the period of time over which an asset is expected to be used by the entity; or
  • the number of production or similar units expected to be obtained from the asset by the entity.

Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

Identifying an asset that may be impaired
  1. Paragraphs 8–17 specify when recoverable amount shall be determined. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash-generating unit. The remainder of this Standard is structured as follows:
    1. paragraphs 18–57 set out the requirements for measuring recoverable amount. These requirements also use the term ‘an asset’ but apply equally to an individual asset and a cash- generating unit.
    2. paragraphs 58–108 set out the requirements for recognising and measuring impairment losses. Recognition and measurement of impairment losses for individual assets other than goodwill are dealt with in paragraphs 58–64. Paragraphs 65–108 deal with the recognition and measurement of impairment losses for cash- generating units and goodwill.
    3. paragraphs 109–116 set out the requirements for reversing an impairment loss recognised in prior periods for an asset or acash-generating unit. Again, these requirements use the term ‘an asset’ but apply equally to an individual asset or a cash- generating unit. Additional requirements for an individual asset are set out in paragraphs 117–121, for a cash-generating unit in paragraphs 122 and 123, and for goodwill in paragraphs 124 and 125.
  1. paragraphs 126–133 specify the information to be disclosed about impairment losses and reversals of impairment losses for assets and cash-generating units. Paragraphs 134–137 specify additional disclosure requirements for cash-generating units to which goodwill or intangible assets with indefinite useful lives have been allocated for impairment testing purposes.
    1. An asset is impaired when its carrying amount exceeds its recoverable amount. Paragraphs 12–14 describe some indications that an impairment loss may have occurred. If any of those indications is present, an entity is required to make a formal estimate of recoverable amount. Except as described in paragraph 10, this Standard does not require an entity to make a formal estimate of recoverable amount if no indication of an impairment loss is present.
  • An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
  • Irrespective of whether there is any indication of impairment, an entity shall also:
  • test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. Different intangible assets may be tested for impairment at different times. However, if such an intangible asset was initially recognised during the current annual period, that intangible asset shall be tested for impairment before the end of the current annual period.


  • test goodwill acquired in a business combination for impairment annually in accordance with paragraphs 80–99.
    1. The ability of an intangible asset to generate sufficient future economic benefits to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after it is available for use. Therefore, this Standard requires an entity to test for impairment, at least annually, the carrying amount of an intangible asset that is not yet available for use.
  • In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications:

External sources of information

  • there are observable indications that the asset’s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use.
  • significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.
  • market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.
  • the carrying amount of the net assets of the entity is more than its market capitalisation.

Internal sources of information

  • evidence is available of obsolescence or physical damage of an asset.
  • significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset

belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.3

  • evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

Dividend from a subsidiary, joint venture or associate

  • for an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from the investment and evidence is available that:
  • the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill; or

(ii)  the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared.

  1. The list in paragraph 12 is not exhaustive. An entity may identify other indications that an asset may be impaired and these would also require the entity to determine the asset’s recoverable amount or, in the case of goodwill, perform an impairment test in accordance with paragraphs 80–99.
  2. Evidence from internal reporting that indicates that an asset may be impaired includes the existence of:
    1. cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are significantly higher than those originally budgeted;
    2. actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those budgeted;
    3. a significant decline in budgeted net cash flows or operating

3 Once an asset meets the criteria to be classified as held for sale (or is included in a disposal group that is classified as held for sale), it is excluded from the scope of this Standard and is accounted for in accordance with Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.

profit, or a significant increase in budgeted loss, flowing from the asset; or

  1. operating losses or net cash outflows for the asset, when current period amounts are aggregated with budgeted amounts for the future.
  1. As indicated in paragraph 10, this Standard requires an intangible asset with an indefinite useful life or not yet available for use and goodwill to be tested for impairment, at least annually. Apart from when the requirements in paragraph 10 apply, the concept of materiality applies in identifying whether the recoverable amount of an asset needs to be estimated. For example, if previous calculations show that an asset’s recoverable amount is significantly greater than its carrying amount, the entity need not re-estimate the asset’s recoverable amount if no events have occurred that would eliminate that difference. Similarly, previous analysis may show that an asset’s recoverable amount is not sensitive to one (or more) of the indications listed in paragraph 12.
  2. As an illustration of paragraph 15, if market interest rates or other market rates of return on investments have increased during the period, an entity is not required to make a formal estimate of an asset’s recoverable amount in the following cases:
    1. if the discount rate used in calculating the asset’s value in use is unlikely to be affected by the increase in these market rates. For example, increases in short-term interest rates may not have a material effect on the discount rate used for an asset that has a long remaining useful life.
    2. if the discount rate used in calculating the asset’s value in use is likely to be affected by the increase in these market rates but previous sensitivity analysis of recoverable amount shows that:
      1. it is unlikely that there will be a material decrease in recoverable amount because future cash flows are also likely to increase (eg in some cases, an entity may be able to demonstrate that it adjusts its revenues to compensate for any increase in market rates); or
      2. the decrease in recoverable amount is unlikely to result in a material impairment loss.
  3. If there is an indication that an asset may be impaired, this may

indicate that the remaining useful life, the depreciation (amortisation) method or the residual value for the asset needs to be reviewed and adjusted in accordance with the Standard applicable to the asset, even if no impairment loss is recognised for the asset.

Fair value less costs of disposal

25-27 [Refer Appendix 1]

  1. Costs of disposal, other than those that have been recognised as liabilities, are deducted in measuring fair value less costs of disposal.

Examples of such costs are legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits (as defined in Ind AS 19) and costs associated with reducing or reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset.

  1. Sometimes, the disposal of an asset would require the buyer to assume a liability and only a single fair value less costs of disposal is available for both the asset and the liability. Paragraph 78 explains how to deal with such cases.
Value in use
  • The following elements shall be reflected in the calculation of an asset’s value in use:
  • an estimate of the future cash flows the entity expects to derive from the asset;
  • expectations about possible variations in the amount or timing of those future cash flows;
  • the time value of money, represented by the current market risk-free rate of interest;
  • the price for bearing the uncertainty inherent in the asset; and
  • other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.
  1. Estimating the value in use of an asset involves the following steps:
    1. estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and
    2. applying the appropriate discount rate to those future cash flows.
  2. The elements identified in paragraph 30(b), (d) and (e) can be reflected either as adjustments to the future cash flows or as adjustments to the discount rate. Whichever approach an entity adopts to reflect expectations about possible variations in the amount or timing of future cash flows, the result shall be to reflect the expectedpresent value of the future cash flows, ie the weighted average of all possible outcomes. Appendix A provides additional guidance on the use of present value techniques in measuring an asset’s value in use.
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