Ind AS 36 applies to all assets except inventories; assets arising from construction contracts; deferred tax assets; assets arising from employee benefits; financial assets; certain agricultural assets carried at fair value less cost to sell; insurance contract assets; assets held for sale.
Identifying an Asset that may be impaired
At each reporting date, review all assets to look for any indication that an asset may be impaired (its carrying amount may be in excess of the greater of its net selling price and its value in use).
Ind AS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then entity must calculate the asset's recoverable amount.The recoverable amounts of the following types of intangible assets should be measured annually whether or not there is any indication that it may be impaired.
In some cases, the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period:
- An intangible asset with an indefinite useful life.
- An intangible asset not yet available for use.
- Goodwill acquired in a business combination.
Determining Recoverable Amount
If fair value less costs to sell or value in use is more than carrying amount, it is not necessary to calculate the other amount. The asset is not impaired.If fair value less costs to sell cannot be determined, then recoverable amount is value in use.For assets to be disposed of, recoverable amount is fair value less costs to sell.
Fair Value less Costs to Sell
If there is a binding sale agreement, use the price under that agreement less costs of disposal.
If there is an active market for that type of asset, use market price less costs of disposal. Market price means current bid price if available, otherwise the price in the most recent transaction.
If there is no active market, use the best estimate of the asset's selling price less costs of disposal.
Costs of disposal are the direct added costs only (not existing costs or overhead).
Value in Use
The calculation of value in use should reflect the following elements:
- An estimate of the future cash flows the entity expects to derive from the asset in an arm's length transaction;
- 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.
Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and extrapolation for periods beyond budgeted projections.Cash flow projections should relate to the asset in its current condition.
Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or payments.In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.
For impairment of an individual asset or portfolio of assets, the discount rate is the rate the company would pay in a current market transaction to borrow money to buy that specific asset or portfolio.If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow risk.
The following would normally be considered:
- The enterprise's own weighted average cost of capital;
- The enterprise's incremental borrowing rate; and
- Other market borrowing rates.
Recognition of an Impairment Loss: An impairment loss should be recognised whenever recoverable amount is below carrying amount.The impairment loss is an expense in the Statement of Profit and Loss (unless it relates to a revalued asset where the value changes are recognised directly in equity). Depreciation for future periods should be adjusted accordingly.
Cash-Generating Units: Recoverable amount should be determined for the individual asset, if possible.If it is not possible to determine the recoverable amount (fair value less cost to sell and value in use) for the individual asset, then determine recoverable amount for the asset's cash-generating unit (CGU). The CGU is the smallest identifiable group of assets that generates cash inflows from continuing use, andthat are largely independent of the cash inflows from other assets or groups of assets.
Impairment of Goodwill: Goodwill should be tested for impairment annually.To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated should:
- Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and
- Not be larger than a segment based on either the entity's primary or the entity's secondary reporting format determined in accordance with Ind AS 108 Operating Segments.
- If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit is not impaired.
- If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise an impairment loss.
- The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:
First, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and
Then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis.
The carrying amount of an asset should not be reduced below the highest of:
- Its fair value less costs to sell (if determinable);
- Its value in use (if determinable); and
- zero.
Reversal of an Impairment Loss
Same approach as for the identification of impaired assets: assess at each Balance Sheet date whether there is an indication that an impairment loss may have decreased. If so, calculate recoverable amount.
No reversal for unwinding of discount.
The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognised.
Reversal of an impairment loss is recognised as income in the Statement of Profit and Loss.
Adjust depreciation for future periods.
Reversal of an impairment loss for goodwill is prohibited.