Published on March 6, 2014
Accounting Standard – 28 Impairment Of Assets PREPARED BY: CA. JIMMIT D MEHTA MODERATOR: SHINING STARS: A GROUP OF PROFESSIONALS
OVERVIEW Objective Applicability Indications Of Impairment Impairment – Bird’s Eye View Scope Definitions
OBJECTIVE “To prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount.”
APPLICABILITY Accounting Periods On or After 01-04-2004 - Companies which are listed or in the process of listing - Enterprises having turnover exceeding 50 crores On or After 01-04-2005 All other enterprises Corporate or NonCorporate
INDICATORS OF IMPAIRMENT External Sources: o significant decline in market value o significant changes with adverse effect due to technological, market, economic, legal environment o changes in interest rates or rates of return o net assets are more than its market capilisation These indicators to be considered as a minimum
INDICATORS OF IMPAIRMENT Internal Sources: o evidence of obsolescence or of physical damage o discontinuance, disposal, restructuring plans o assets performance declining or expected to decline These indicators to be considered as a minimum
IMPAIRMENT – BIRD’S EYE VIEW Identifying an asset that may be impaired Question: Whether at each balance sheet date, recoverable amount of each asset to be estimated? Answer: NO Question: To See whether there is any indication that an asset may be impaired? Answer: IF YES, recoverable amount to be estimated
IMPAIRMENT – BIRD’S EYE VIEW NO YES Indication of Impairment ? Can assets be assessed individually? Identify CGU YES Estimate Recoverable Amount NO NO No Impairment Is the Recoverable Amount Less than Carrying Amount? YES Account and Disclose Impairment Loss A
IMPAIRMENT – BIRD’S EYE VIEW A Identify CGU Estimate Recoverable Amount of CGU Is the Recoverable Amount Less than Carrying Amount? YES NO No Impairment Allocate Impairment Loss to Goodwill and Assets in CGU Account and Disclose Impairment Loss
SCOPE Applies to all assets other than: Inventories (AS – 2) Assets arising from construction contracts (AS – 7) Financial Assets including Investments (AS – 13) Deferred tax assets (AS – 22) Assets i.e. Individual asset or Cash Generating Unit (CGU) May be carried at cost / revalued amount
DEFINITION Impairment Loss Carrying Amount (CA) Recoverable Amount (RA) Cash Generating Units (CGU)
IMPAIRMENT LOSS It is an amount by which Carrying Amount of an assets exceeds its Recoverable Amount. CARRYING AMOUNT Carrying amount is the cost of the asset recognized in the Balance Sheet after deducting: Accumulated depreciation / amortization Accumulated impairment loss
RECOVERABLE AMOUNT It is the higher of an asset’s net selling price and its value in use. NET SELLING PRICE Sale price less costs of disposal in an arm’s length transaction. Asset traded in an active market the current bid price less costs of disposal.
VALUE IN USE Present Value of Estimated Future Cash Flows Cash Flow Projections Discount Rate
VALUE IN USE Is the present value of estimated future cash flows expected from the use of an asset & from its disposal at the end of its useful life. Cash Flow Projections o Short term – maximum 5 years, unless longer can be justified. o Based on financial budgets approved by management. o Do not include financial and taxation cash flows Long Term Projections o Based on short term projections o Steady or declining growth o Growth rates exceeding long term average rates of the product, industry or economy discouraged o Estimation for the assets in its current condition
VALUE IN USE Discount rate should be pre-tax, since cash flows are also pre-tax be independent of the entity’s capital structure reflect the time value of money and the risks related to the assets reflect weighted average cost of capital When asset specific rates are not available, following may be considered as a starting point Techniques such as CAPM Cost of borrowing Adjust the same to reflect the risks of the assets
CASH GENERATING UNIT (CGU) At the first instance, to determine impairment loss, the recoverable amount to be estimated for the individual asset If it is not possible to estimate the recoverable amount of the individual asset, to determine the recoverable amount of the cash generating unit to which the asset belongs. A cash generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets. Allocation of goodwill and corporate assets to cash generating unit
CASH GENERATING UNIT (CGU) Impairment loss for a cash generating unit to be allocated for individual assets in the following order - first to goodwill allocated to the cash generating unit, if any, and - then, to the other assets of the unit on pro-rate basis based on the carrying amount of each asset in the unit
REVERSAL OF IMPAIRMENT LOSS If there are indications, that an impairment loss no longer exists, the enterprise should estimate the recoverable amount of the asset. In case recoverable amount is higher than asset’s carrying amount, the impairment loss earlier recognized may be reversed. The increased carrying amount of an asset due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior accounting periods.
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