Understanding Impairment: Procedures, Calculations, and Reversals for Assets

Introduction

This standard delineates the procedures entities must follow to ensure that their assets are recognized at amounts no greater than their recoverable value. It also outlines conditions under which an entity should reverse an impairment loss and prescribes necessary disclosures.

Applicability of the Standard

The standard applies to all assets, with the following exceptions:

• Inventories
• Contract Assets and assets relating to costs incurred to obtain or fulfill a contract, as per Ind AS-115
• Deferred Tax Assets
• Employee Benefits Assets
• Financial Assets
• Biological Assets related to Agricultural Activity
• Deferred acquisition costs and intangible assets derived from an insurer's contractual rights under insurance agreements
• Non-Current Assets

Understanding Impairment

An asset is deemed impaired when its carrying amount surpasses its recoverable amount.

When to Test for Impairment

Entities are required to evaluate, at the end of each reporting period, whether there are indicators of impairment for any asset. If such indicators exist, the entity must estimate the recoverable amount.

For specific cases, including goodwill acquired through business combinations, indefinite life intangible assets, and intangible assets not yet in use, impairment should be tested annually, regardless of the presence of impairment indicators.

External Indicators

• Declining market value of the asset.
• Significant adverse changes in the technological, market, economic, or legal environment affecting the entity.
• Rising market interest rates.
• The carrying amount of net assets exceeds the market capitalization of the entity.

Internal Indicators

• Obsolescence or physical damage to an asset.
• Deterioration in asset performance.
• Plans to discontinue or restructure operations related to the asset.

This list is not exhaustive; entities may uncover additional indications of impairment.

Calculating Impairment Loss

If the recoverable amount is less than the carrying amount of the asset or Cash Generating Unit (CGU):

Impairment Loss = Carrying Amount – Recoverable Amount

The recoverable amount for an asset or CGU is the higher value between its fair value less costs of disposal and its value in use.

• Fair Value: The price obtainable from selling an asset or payable to transfer a liability in a regular transaction between market participants at the measurement date.
• Value in Use: The present value of expected future cash flows from utilizing the asset or CGU.

Recognition of Impairment Loss

• If no revaluation of the asset occurs, the impairment loss should be recognized as an expense in the Profit and Loss Account.
• If there has been a revaluation, it will be accounted as a reduction in the revaluation reserve.

Impairment Loss for a CGU

Initially, any goodwill assigned to the CGU should be written down, followed by a pro-rata reduction across the other assets within the CGU based on their carrying amounts.

Reversal of Impairment Loss

An impairment loss previously recognized for an asset, excluding goodwill, may be reversed if there is a positive change in the estimates used to determine the asset's recoverable amount since the last acknowledgment of impairment loss. Upon reversal, the asset's carrying amount is increased to its recoverable amount.

• A reversal for an asset, apart from goodwill, should be immediately reflected in the Profit and Loss Account.
• For revalued assets, any reversal is treated as an increase in revaluation.

It is important to note that impairment losses recorded for goodwill cannot be reversed in future periods.

Conclusion

Understanding impairment, how to assess it, calculate losses, and recognize or reverse these losses is crucial for entities in presenting a true and fair view of their financial status.