ACCOUNTING STANDARD-28 IMPAIRMENT OF ASSETS
AS-28 IMPAIRMENT OF ASSETS
OVERALL VIEW
- Applicability
- Objective
- Scope
- Concept
- Identification of asset to be impaired - indications
- Recoverable amount of an asset - Net selling price of value in use
- Recognition & measurement of an impairment loss
- Cash generating unit
- Reversal of impairment loss
- Disclosures
- Transitional provisions
- Certain issues
AS-28 IMPAIRMENT OF ASSETS
APPLICABILITY
Accounting periods : - Companies which are
on or after 01.04.2004 listed or in the process
of listing
- Enterprises having
turnover exceeding
50 crores
on or after 01.04.2005 : All other enterprises -
Corporate or non-
corporate
OBJECTIVE.
- To ensure that the assets are carried at no more than recoverable amount
- Recoverable amount not to exceed the amount to be recovered through use or sale of the asset
- Impaired loss to be recognised in the financial statement
- Impaired loss may be reversed in certain circumstances
- To make certain disclosures for impaired assets.
AS-28 IMPAIRMENT OF ASSETS
SCOPE
* To be applied in accounting for impairment of all assets, other than :-
- Inventories as per (AS-2)
- Assets arising from construction contracts as per (AS-7)
- Financial assets including investments as per (AS-13) - Deferred tax assets as per (AS-22)
* Applicable to assets valued at cost or at revalued amount
AS-28 IMPAIRMENT OF ASSETS
CONCEPT
Impairment loss - is the amount by which the carrying amount of an asset exceeds its
recoverable amount
Carrying amount- is the amount at which an asset is recognised in the balance sheet (W.D.V.)
Recoverable - is the higher of an asset’s net selling amount price and its value in use
AS-28 IMPAIRMENT OF ASSETS
CONCEPT
Net selling price - Sale price - costs of disposal in an arm’s length transaction
Value in use - Present value of estimated future cash flows expected from the use of an asset &
from its disposal at the end of its useful life
AS-28 IMPAIRMENT OF ASSETS
Identifying an asset that may be impaired
Whether at each balance sheet date, recoverable amount of each asset to be estimated ?
To see whether there is any indication that an asset may be impaired
recoverable amount to be estimated
AS-28 IMPAIRMENT OF ASSETS
NO
IF YES
Indications for estimating recoverable amount External sources
- Decline in market value significantly
- Significant changes with an adverse effect on the enterprise due to technological, market, economic or legal environment - Decrease in assets value in use due to adjustment in the
discount rate as a result of increase in market interest rate or other market rates of ROI
- Carrying amount of the net assets of the enterprise is more than its market capitalisation
AS-28 IMPAIRMENT OF ASSETS
INTERNAL SOURCES
- Obsolescence or physical damage of an asset
- Significant changes with an adverse effect on the enterprise, regarding use of asset e.g. - plans to
discontinue or restructuring the operation or disposal of asset at an earlier date.
- Decline in the economic performance of asset
AS-28 IMPAIRMENT OF ASSETS
-
list is not exhaustive
- concept of materiality
Recoverable amount
Net selling price
or Whichever is higher
Value in use
If either of these amounts exceeds the asset’s carrying
amount, the asset is not impaired and it is not necessary to estimate the other amount
AS-28 IMPAIRMENT OF ASSETS
Whether both to be determined - No
Net Selling Price
Selling Price - How to estimate ? - Binding sale agreement
- Market price
- Current bid price
- Price of the most recent transaction
- Based upon best information available
AS-28 IMPAIRMENT OF ASSETS
Value in use
- Estimating the future cash inflows and outflows arising from continuing use of the asset and from its ultimate disposal
and
Applying the appropriate discount rate to these future cash flows
- While estimating future cash flows, the following factors to be considered
- effect of price increase due to general inflation - for the asset in its current condition
- adjustment of associated risk factors
- not to include cash inflows or outflows from financing activities.
- Pre-tax inflows or outflows to be considered.
AS-28 IMPAIRMENT OF ASSETS
- Discount rate - To be pre tax rate
- That reflects time value of
money and the risks
specific to the asset as
per current market assessments
unless risk factors have been
adjusted while estimating
future cash flows
AS-28 IMPAIRMENT OF ASSETS
Value in use - Certain issues
- While estimating cash outflows, whether repayment of installment of borrowings (against those assets) and interest cost thereof, to be taken into account.
- While estimating cash outflows, whether following costs to be taken into account :-
- Corporate office costs
- Interest cost of working capital - Depreciation of assets
- Why pre-tax cash flows are required to be considered?
- Why income tax expense, which is a cash outflow of variable nature, is not being considered?
AS-28 IMPAIRMENT OF ASSETS
Recognition & Measurement of an impairment loss
* If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its
recoverable amount
* That reduction is an impairment loss
* Impairment loss to be recognised as an expense in the profit and loss account
* Adjustment against revaluation reserve if existing against the same asset
* Depreciation for future periods to be adjusted as per revised carrying amount
AS-28 IMPAIRMENT OF ASSETS
Cash Generating Units
- 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
AS-28 IMPAIRMENT OF ASSETS
- 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
AS-28 IMPAIRMENT OF ASSETS
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 recognised 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 recognised for the asset in prior
accounting periods.
AS-28 IMPAIRMENT OF ASSETS
Disclosures
-
For each class of asset, the financial statements should disclose:-- the amount of impairment loss and the reversal, if any recognised in profit and loss account
- the amount of impairment loss and its reversal, if any, recognised against revaluation surplus
- For each segment as per AS-17, separate information to be given
- The events and circumstances that led to the recognition or reversal of the impairment loss - The nature and basis of recoverable amount
determined for recognising (reversing) impairment loss
- Other disclosures
AS-28 IMPAIRMENT OF ASSETS
Transitional Provision
In the first year of applicability of this
standard, if there is any impairment loss in the beginning of the year, the same to be
recognised and adjusted against opening balance of revenue reserves or revaluation reserve as the case may be.
AS-28 IMPAIRMENT OF ASSETS
CERTAIN ISSUES
-
Most of the calculations in the standard are based uponestimates and projections. What is the reliability of the same.
- Whether auditors are bound to rely upon management’s estimates and projections.
- Net selling price of a particular asset is less than its carrying amount but value in use of cash generating unit (of which this asset is a part) is higher. Whether asset is required to be
impaired.
- In case a particular asset becomes idle which was earlier part of cash generating unit and now not in use, whether its value to be determine separately or still as part of cash generating unit.
- Impairment loss is a timing difference as per AS-22 and
deferred tax asset may be created for the same subject to the principle of prudence.
