finance

Understanding Ind AS 36: Key Insights on Asset Impairment Testing

Understanding Ind AS 36: Impairment of Assets

Ind AS 36 addresses the impairment of assets, ensuring that assets are not recorded above their recoverable amount. Annual impairment tests are required for goodwill and specific intangible assets, while other assets must be tested when indications of impairment arise. An impairment loss is recognized only when there is a permanent decline in the asset's value.

Computation of Impairment Loss

An impairment loss is recognized when the recoverable amount of an asset falls below its carrying amount. This results in the asset's carrying amount being adjusted down to its recoverable amount.

  • Impairment Loss Formula: [ \text{Impairment Loss} = \text{Recoverable Amount} - \text{Carrying Amount} ]

The recoverable amount is determined as the higher of:

  1. Fair Value less costs of disposal
  2. Value in use

Fair Value Less Costs of Disposal

When calculating the fair value less costs of disposal, the following costs should be deducted:

  • Legal fees
  • Stamp duties and similar taxes
  • Costs associated with asset removal
  • Incremental costs for preparing the asset for sale
  • Other relevant costs

Value in Use

The value in use is calculated based on:

  • Estimated future cash flows
  • Appropriate discount rates

Timing for Impairment Testing

Ind AS 36 mandates that entities perform impairment testing at each reporting date to identify indicators of impairment for individual assets or Cash Generating Units (CGUs). In addition, certain assets require annual testing regardless of indicators:

  • Intangible assets with an indefinite useful life
  • Intangible assets not yet in use
  • Goodwill from business combinations

Indicators for Impairment Testing

Ind AS 36.12 contains a non-exhaustive list of indicators, categorized as follows:

External Indicators

  1. A significant drop in the market value of the asset
  2. Substantial changes in the technological, market, economic, or legal landscape adversely affecting the entity
  3. Increases in market interest rates or rates of return impacting the discount rate for the asset’s value in use
  4. The carrying amount of the entity's net assets exceeds its market capitalization

Internal Indicators

  1. Evidence of obsolescence or physical damage
  2. Significant operational changes or adverse effects expected in the near future that alter the asset's usage

Examples of such changes include:

  • Plans to discontinue or restructure operations
  • Intentions to sell an asset
  • Revaluation of the asset's useful life from indefinite to finite

Other Indicators

For investments in subsidiaries, joint ventures, or associates, impairment indicators may include:

  • The carrying amount of the investment in separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including related goodwill.
  • The declared dividend exceeds the total comprehensive income of the subsidiary, joint venture, or associate for the period.
  • The absence of an active market for a revalued intangible asset.

Conclusion

Understanding Ind AS 36 and its requirements for impairment testing is crucial for ensuring that assets are accurately represented in financial statements. Regular assessments based on both external and internal indicators help maintain the integrity of asset valuations, promoting transparent financial reporting.