Ind AS 36: Impairment of Assets Quiz

Impairment of Assets under Indian Accounting Standard 36 (Ind AS 36)

Indian Accounting Standard (Ind AS) 36, titled "Impairment of Assets," outlines the process for recognizing and measuring impairment losses of assets when they are no longer expected to generate the same level of future cash flows or value as originally anticipated. In this standard, companies must assess the carrying amount of their assets, identify any impairment indicators, and measure the impairment loss if it exists.

Recognizing Impairment

Ind AS 36 requires that an entity assesses whether there is any indication that an asset may be impaired. Indicators include, but are not limited to:

• Significant changes in technology, market conditions, or in the business environment that adversely affect the future cash flows of the asset.
• A significant decrease in the asset's market value relative to its carrying amount.
• A negative change in the economic environment in which the entity operates, or in the market in which the asset is used, that affects the asset's performance.

If an impairment indicator exists, the entity must perform an impairment assessment.

Impairment Assessment

There are two methods for assessing impairment under Ind AS 36:

1. Incremental cash flow method: This method involves estimating future cash flows, discounting them to determine their present value, and comparing this present value to the asset's carrying amount. If the carrying amount is greater than the present value, an impairment loss exists.

2. Recoverable amount: The recoverable amount is calculated as the higher of the asset's fair value less costs to sell (FVLCS) or its value in use (VU). If the carrying amount is greater than the recoverable amount, an impairment loss exists.

Measurement of Impairment

1. For assets held for sale: The impairment loss is measured as the lower of the fair value less costs to sell and the carrying amount.

2. For all other assets: The impairment loss is measured as the excess of the carrying amount over the recoverable amount.

Recognition of Impairment Loss

An impairment loss must be recognized in profit or loss when it first occurs. Impairment losses recognized in prior periods are not reversed in later periods, unless there is a change in the facts and circumstances that justifies reversing the impairment.

The impairment loss is recognized in the profit and loss account, and the carrying amount of the asset is reduced accordingly.

Exempted Assets & Exclusions

Some assets are exempted from Ind AS 36, such as:

• Assets that are measured at fair value through profit or loss.
• Financial assets held at fair value through profit or loss.
• Business combinations.
• Lease liabilities.
• Goodwill and other intangible assets recognized in a business combination.

Conclusion

Ind AS 36 sets out comprehensive guidelines for recognizing and measuring impairment losses in an entity's assets. By following these guidelines, companies can provide a true and fair view of their financial position, while also ensuring that they meet their accounting and disclosure obligations.

Understanding Ind AS 36 is essential for any entity that wishes to comply with the accounting standards in India. By implementing the standard carefully, companies can avoid misstating their financial position and gain insights into their asset performance, thereby optimizing their asset management and decision-making processes.