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hello and welcome to this video in which
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i
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summarize the basic concepts of
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impairment of
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assets as described in is 36
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i am sylvia of cptbox.com the website
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with
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loads of articles videos lectures
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discussions and other materials for
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accountants so
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if you need to learn some accounting
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concept pass your exam
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or get answer to some of your questions
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you're
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very welcome to check out cpdbox.com
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so is is-36 was issued in 1998 for the
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first time
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and it has been later amended a few
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times
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its objective is to ensure that assets
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are carried at no more than their
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recoverable amount
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and to define how recoverable amount is
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determined
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the rules of is 36 apply basically to
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all assets
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of course with some exceptions like
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financial assets inventories and you can
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see the full list of exceptions on the
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screen
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and on the other hand this is the list
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of all assets that is 36 applies to
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and you need to recognize and measure
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the impairment loss on these assets in
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line with is 36
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so let's firstly look to what the
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impairment stands for
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an asset is impaired when its carrying
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amount exceeds its recoverable amount
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and carrying amount is an amount and
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which an asset is recognized after
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deducting any accumulated depreciation
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and amortization
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and accumulated impairment loss so
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that's what you see in your books or
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accounting records
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recoverable amount represent a higher of
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assets fair value less cost to sell and
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value in use
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so if carrying amount is greater than
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recoverable amount
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a difference between the two is
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impairment loss
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how shall we find out that some of our
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assets are impaired
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well each entity who wants to comply
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with ifrs has to do some work
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at the end of each reporting period so
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it's necessary to assess
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whether there is any indication either
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external or
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internal then an asset might be impaired
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and you don't need to perform testing
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each year but you do have to assess
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indicators but if there is an indication
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then you also must perform the test
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of course there are some exceptions to
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this rule for example
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intangible answers with indefinite
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useful life such as trademarks
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or goodwill and these assets basically
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needs to be tested for impairment
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annually
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what shall we consider when assessing
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indicators of impairment
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as i have already said there could be
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external and
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internal sources of potential impairment
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so
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you can see the list of external sources
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of any potential impairment on the
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screen
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and i'm quite sure that nowadays in
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these covid times there will be a lot
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of external indicators of impairment
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right
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now let's take a quick look at internal
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sources of information to look at
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things like obsolescence physical damage
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of an asset
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or significant internal changes liar
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restructuring taking place in your
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company
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might indicate that you have the assets
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impaired
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and again i warn you in this covet time
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it's also probable that you will find
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some
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indicators of impairment in internal
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sources as well
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so if you find that there are some of
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these indicators
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of impairment you need to calculate
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impairment loss
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as a difference between carrying amount
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and recoverable amount
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how do we figure out recoverable amount
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well it's greater of assets or
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cash generating units fair value less
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cost to sell
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and value in use and here i'd like to
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say that it's not
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necessary to determine both of them or
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at least not always
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just one of them might be sufficient to
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determine because if just
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one of these two amounts is higher than
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assets carrying amount
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or book value then there is no
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impairment and it's not necessary to
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estimate the outer amount so you save a
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lot of work
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also very often there is a situation
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when there is no basis for making
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reliable estimate of fair value
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especially when the asset is not traded
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in an active market
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and in this situation value in use might
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be considered
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as assets recoverable amount now let's
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explain how to determine fair value
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let's cause the cell
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and here you need to look at ifrs 13
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fair value measurement to set the fair
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value of the non-current asset
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and i have posted a summary of ifrs 13
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on this channel as well
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cost of disposal include legal costs
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same duties or similar transaction taxes
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cost of removing the asset or bring the
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asset into conditions suitable for sale
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now let's take a look at value in use
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value in use is the present value of the
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future cash flows
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expected to be derived from an asset or
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cash generating unit
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it's present value right so it's
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discounted value
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so when you want to determine the assets
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value in use
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you need to estimate the future cash
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inflows
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and outflows to be derived from
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continuing use of the asset
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and from its ultimate disposal and it's
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good to do it in a table
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so this table would list cash flows
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separately for each period mostly a year
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but it could be shorter if it's
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convenient and necessary
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and once you have your cash flows in a
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table it's necessary to select
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appropriate discount rate
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and discount these future cash flows
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using that rate
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some of the present values of cash flows
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in individual years is the value
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in use and that was very simply said but
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there might be challenges on how to
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determine future cash flows
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how to determine the appropriate rates
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and is 36 gives you
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good guidance on that you can also visit
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our website cpdbox.com
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i have published a few free articles
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dealing with this topic with examples
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on actually how to determine your cash
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flows for value in use
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and you can find the links to these
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articles in the description below this
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video
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so once you have calculated the amount
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of your impairment loss
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as a difference between assets carrying
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amount and its recoverable amount
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then you need to recognize this loss in
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the financial statements
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and the way how you recognize it depends
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on the model that you apply
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so when you apply cost model for the
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asset and
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review then the impairment loss is
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recognized immediately in profit or loss
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for example by debiting impairment loss
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account and crediting the asset perhaps
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some adjustment account
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but when you carry your assets under
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review a revalued amount
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well for example in accordance with
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revaluation model
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under is16 then any impairment loss
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shall be treated as a revaluation
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decrease in accordance with that
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standard so in this case by direct debit
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in other comprehensive income as in line
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with is 16 for evaluation model
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and credit the asset or adjustment
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account
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but if there's no revaluation surplus in
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equity or other comprehensive income
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then the impairment is debited in profit
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or loss
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immediately even if it's revaluation
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model
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and after the recognition of impairment
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loss you
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need to adjust depreciation for future
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periods
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to allocate assets revised carrying
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amount less its residual value of course
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on systematic basis over remaining
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useful life
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now sometimes it's not possible to
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determine recoverable amount for
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individual asset right
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so it's in the case when the value in
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use is perhaps
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very different from fair value less cost
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to sell and at the same time it's not
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possible to calculate value in use for
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individual
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asset because it doesn't generate cash
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flows
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independent from other assets so here we
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come to concept of cash generating unit
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and that is the smallest identifiable
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group of assets that generates
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cash inflows that are largely
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independent of cash inflows from other
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assets or groups of assets so
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analogically as for individual asset
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impairment loss for cash generating unit
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arises when its carrying amount exceeds
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recoverable amount of cash generating
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unit
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but because we are not dealing with one
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item
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but with the group of items we must
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take care to be consistent so whatever
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items you include
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in the calculation of the carrying
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amount of your cash generating unit
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you must include the same items
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for the purpose of calculating
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recoverable amount
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now when you're dealing with impairment
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laws related to cash generating units
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we often come across the issue of
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goodwill in business combinations that's
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the specific case
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and is 36 sets the rules how to test
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goodwill for
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impairment and how to allocate
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impairment loss
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when goodwill is involved so please
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check that out on our website or in is
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36
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and finally is 36 also
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deals with so-called corporate assets
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and those are assets other than goodwill
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that contribute to the future cash flows
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of both the cash generating unit under
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review and autocad generating units and
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typical examples of corporate assets are
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headquarters
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administrative building or research
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center and if you have some corporate
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assets
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and you're testing cash generating units
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for impairment
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you also have to identify these
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corporate assets that relate
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to that cash generating unit under
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review
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and include a portion of corporate's
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assets carrying
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amount into the carrying amount of that
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cash generating unit so you would
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allocate the carrying amount of
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corporate assets into the carrying
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amount of
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cash generating unit under review now
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the last topic i want to cover in this
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video is reversal of
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impairment loss when you recognize
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impairment loss in previous period
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you still need to assess whether there
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is some indication that the loss no
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longer exists or is smaller
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and again you have to assess certain
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indication from
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internal and external sources and you
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can
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see examples on the screen so if you
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find such an indication that an asset
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might no longer be
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impaired then it's necessary to estimate
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a new recoverable amount
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and only when there is a change in
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estimates used to determine assets
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recoverable amount
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then you might reverse the recognized
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impairment loss
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but you cannot reverse impairment loss
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due to changes in assets recoverable
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amount coming from
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passage of time or coming from unwinding
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the discount all right
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i'd like to mention here that you can
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never reverse
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impairment loss on goodwill never
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and other than this the reversal cannot
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result in
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increased or revised carrying amount
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higher than would be the
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original carrying amount after regular
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depreciation charge
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the interesting fact is that under u.s
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gaap you can never
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reverse impairment loss so that's the
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bigger difference between ifrs and us
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cap currently
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all right so that was a short summary of
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is 36
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impairment of assets of course there is
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much more to learn and to see and to
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calculate
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i appreciate you watching the video and
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i trust you learn a lot
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and if you still need to learn more get
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your cpds
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answers to your questions please visit
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cptbox.com
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bye
