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ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS

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1 ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS

2 AS 28 – IMPAIRMENT OF ASSETS Objective
“ To prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount” An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the enterprise to recognize an impairment loss. This accountings standard is more like a guidance note

3 AS 28 – IMPAIRMENT OF ASSETS Overview
Scope and Definitions Accounting for Impairment Indicators Recognition & Measurement Goodwill & Corporate assets Treatment of Impairment Loss Reversal Disclosures High Level Comparison with IAS & US GAAP Matters for Discussion – Practical Challenges An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the enterprise to recognize an impairment loss.

4 AS 28 – IMPAIRMENT OF ASSETS 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) Asset i.e. Individual asset or Cash Generating Unit (CGU) May be carried at cost / revalued amount Investments in: subsidiaries, as defined in IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries; associates, as defined in IAS 28, Accounting for Investments in Associates; and (c) joint ventures, as defined in IAS 31, Financial Reporting of Interests in Joint Ventures; are financial assets but are excluded from the scope of IAS 32. Therefore, IAS 36 applies to such investments.

5 AS 28 – IMPAIRMENT OF ASSETS Scope – Changes when AS-30 becomes Mandatory
Applies to all assets other than: Inventories ( AS-2) Assets arising from construction contracts (AS-7) Financial Assets within the scope of AS-30 Deferred tax assets (AS-22) Accounting Standard will cover: Investment in Subsidiaries (AS-21), Associates (AS-23) and Joint Ventures (AS-27) Investments in: subsidiaries, as defined in IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries; associates, as defined in IAS 28, Accounting for Investments in Associates; and (c) joint ventures, as defined in IAS 31, Financial Reporting of Interests in Joint Ventures; are financial assets but are excluded from the scope of IAS 32. Therefore, IAS 36 applies to such investments.

6 AS 28 – IMPAIRMENT OF ASSETS Definitions
Carrying Amount (CA) Recoverable Amount (RA) Cash Generating Units (CGU) Impairment loss Investments in: subsidiaries, as defined in IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries; associates, as defined in IAS 28, Accounting for Investments in Associates; and (c) joint ventures, as defined in IAS 31, Financial Reporting of Interests in Joint Ventures; are financial assets but are excluded from the scope of IAS 32. Therefore, IAS 36 applies to such investments.

7 AS 28 – IMPAIRMENT OF ASSETS Recoverable Amount (RA)
Is the higher of an asset’s : Net Selling Price (NSP) OR Value in use. In determining an asset's value in use, IAS 36 requires that a company should use, among other things: (a) cash flow projections based on reasonable and supportable assumptions that: (i) reflect the asset in its current condition; and (ii) represent management's best estimate of the set of economic conditions that will exist over the remaining useful life of the asset; and (b) a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The discount rate should not reflect risks for which future cash flows have been adjusted. Question: Should we take help of TS for calculation of Net Selling Price and/or value in use Is active market included in definition for Net Selling Price relevant in India

8 AS 28 – IMPAIRMENT OF ASSETS Recoverable Amount (RA)
Net Selling Price (NSP) amount obtainable in arm’s length transaction less costs of disposal; asset is traded in an active market then the market price; or the current bid price less costs of disposal Value in use. present value of estimated future cash flows from continuing use and ultimate disposal In determining an asset's value in use, IAS 36 requires that a company should use, among other things: (a) cash flow projections based on reasonable and supportable assumptions that: (i) reflect the asset in its current condition; and (ii) represent management's best estimate of the set of economic conditions that will exist over the remaining useful life of the asset; and (b) a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The discount rate should not reflect risks for which future cash flows have been adjusted. Question: Should we take help of TS for calculation of Net Selling Price and/or value in use Is active market included in definition for Net Selling Price relevant in India

9 AS 28 – IMPAIRMENT OF ASSETS Value in Use – Cash Flow Considerations
Pre-tax market discount rate Short-term projections - maximum 5 years based on financial budgets approved by management Estimation for the asset in its current condition (restructuring & capital expenditure on the assets ignored) Long term projections based on short term projections steady or declining growth growth rates exceeding long term average rates of the product, industry or economy discouraged

10 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)
Estimate recoverable amount for the individual asset or, if not possible, the asset’s cash generating unit Apply cash generating unit concept when the asset does not generate cash flows which are independent from other assets The smallest identifiable group of assets that generates cash flows from continuing use that are largely independent from other assets or groups of assets

11 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
Assets may be bought/sold individually but they are often used in groups Revenue and cash arise from use of various assets and cannot be attributed to the individual assets Factors to consider: How management monitors the enterprise’s operations How management makes decisions about continuing or disposing of the enterprise's assets and operations Segment Reporting

12 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
Example : 1 A mining enterprise owns a private railway to support its mining activities. The private railway could be sold only for scrap value and the private railway does not generate cash inflows from continuing use that are largely independent of the cash inflows from the other assets of the mine Q: What is the cash-generating unit? It is not possible to estimate the recoverable amount of the private railway because the value in use of the private railway cannot be determined and it is probably different from scrap value. Therefore, the enterprise estimates the recoverable amount of the cash-generating unit to which the private railway belongs, that is, the mine as a whole. A: The cash-generating unit is mine as a whole.

13 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
Example : 2 A machine has suffered physical damage but is still working, although not as well as it used to. The net selling price of the machine is less than its carrying amount. The machine does not generate independent cash inflows from continuing use. The smallest identifiable group of assets that includes the machine and generates cash inflows from continuing use that are largely independent of the cash inflows from other assets is the production line to which the machine belongs. The recoverable amount of the production line shows that the production line taken as a whole is not impaired.

14 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
Example : Case 1 (Assumption): Budgets/forecasts approved by management reflect no commitment of management to replace the machine. Case 2 (Assumption): Budgets/forecasts approved by management reflect a commitment of management to replace the machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal are estimated to be negligible. Case 1 The recoverable amount of the machine alone cannot be estimated since the machine's value in use: (a) may differ from its net selling price; and (b) can be determined only for the cash-generating unit to which the machine belongs the production line. The production line is not impaired, therefore, no impairment loss is recognized for the machine. Nevertheless, the company may need to reassess the depreciation period or the depreciation method for the machine. Perhaps, a shorter depreciation period or a faster depreciation method is required to reflect the expected remaining useful life of the machine or the pattern in which economic benefits are consumed by the company. Case 2 The machine's value in use can be estimated to be close to its net selling price. Therefore, the recoverable amount of the machine can be determined and no consideration is given to the cash-generating unit to which the machine belongs (the production line). Since the machine's net selling price is less than its carrying amount, an impairment loss is recognized for the machine.

15 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
Retail Store Chain Store X belongs to a retail store chain M. Purchasing, pricing, marketing, advertising and human resource policies (except for hiring X’s cashiers & salesman) are decided by M. M also owns 5 other stores in same city as X (although in different neighbourhoods) and 20 other stores in other cities. All stores are managed in same way as X. What is CGU ?

16 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
Plant for Intermediate Step in a Production Process A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of the same enterprise. X’s products are sold to Y at a transfer price that passes all margins to X. 80% of Y’s final production is sold to customers outside of the RE. 60% of X’s final production is sold to Y and the remaining 40% is sold to customers outside of the RE.

17 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
What is the CGU: Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices are higher than market prices. Case 2: There is no active market for the products X sells to Y.

18 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
Magazine Titles A publisher owns 150 magazine titles (70 purchased and 80 self created). Cash inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed by customer segments and level of advertising income for a magazine title depends on range of title in the customer segment to which it belongs. Management has a policy to abandon old titles before the end of their economic lives and replace them immediately with new titles for same customer segment. What is the CGU?

19 AS 28 – IMPAIRMENT OF ASSETS Cash Generating Units (CGU)(Contd.)
Building - Rented & Own Use A manufacturing company uses half of its headquarter building and rents out the other half to third parties on a 5 year lease. What is the CGU?

20 AS 28 – IMPAIRMENT OF ASSETS Accounting for Impairment
Indication of Impairment ? Can Asset be assessed individually ? Identify CGU No Impairment Estimate Recoverable Amount < Carrying Amount? Calculate, Account & Disclose Impairment Loss YES NO A

21 AS 28 – IMPAIRMENT OF ASSETS Accounting for Impairment (Contd.)
Identified CGU Estimate Recoverable Amount of CGU No Impairment Recoverable Amount < Carrying Amount? Allocate Impairment Loss to Goodwill & Assets in CGU Account & Disclose Impairment Loss YES NO A

22 AS 28 – IMPAIRMENT OF ASSETS Frequency and Application of Impairment
Frequency of Impairment Testing: at each balance sheet date When an indicator is triggered Impairment to apply to individual assets as well as a Cash Generating Unit (CGU) Specific rules for corporate assets and goodwill.

23 AS 28 – IMPAIRMENT OF ASSETS Indicators of Impairment
External sources significant decline in market value technological, market, economic, legal environment changes in interest rates or rates of return net assets > market capitalisation Internal sources evidence of obsolescence or of physical damage discontinuance, disposal, restructuring plans asset performance declining or expected to decline

24 AS 28 – IMPAIRMENT OF ASSETS Indicators of Impairment - Example
Entity S is the biggest local supermarket chain in a developing country. Recently, the global chain M, has decided to set up operations in the country. Entity M is well known world-wide, intends to establish its shops close to entity S’s and to offer entity S’s customers a wider range of products and international brands. Management of entity S expects to retain most of its customer base. In this example, entity M’s market entry is an impairment indicator. Management should perform impairment tests, estimating the recoverable of its assets, based on the best available information

25 AS 28 – IMPAIRMENT OF ASSETS Indicators of Impairment - Example
Entity Q produces mousetraps and has for some time been the market leader. Its chief competitor, entity R, has recently developed a new product that is widely acknowledged as being superior to that of entity Q. Entity Q’s management has not performed an impairment review on its plant on the grounds that annual production and sales are ahead of budget Entity Q should review its plant and equipment for impairment. The change in the market for its product can have a significant impact on the equipment’s value based on the economic benefit to be obtained from its continued use. The existence of a conflicting indicator (sales ahead of budget) is not sufficient to negate the need for an impairment review.

26 AS 28 – IMPAIRMENT OF ASSETS Indicators of Impairment - Example
An entity is in the business of manufacturing cassette tape players. Industry forecasts indicated a decrease in demand for the entity’s product over the next five years due to growth in demand for competing products such as MP3 players. Management should consider this trend in assessing impairment. External trends as well as discrete events may indicate that an asset is impaired. Trends such as overcapacity in a particular industry, or a change in the demand for a product due to technological, market or other conditions, should be considered in assessing impairment. Management’s ability and plans to reverse negative trends should be considered in assessing impairment.

27 AS 28 – IMPAIRMENT OF ASSETS Recognition & Measurement of Loss
Asset to be reduced to recoverable amount only if : RA < CA The reduction is an impairment loss = CA - RA Impairment loss to be recognised: As an expense in the P&L Account, immediately, otherwise As a revaluation decrease (if carried at revalued amount) At the time of calculation of impairment loss, whether the revaluations reserve to be adjusted asset wise?

28 AS 28 – IMPAIRMENT OF ASSETS Example 1
Value in Use Net Selling Price (NSP) Recoverable Amount (RA) Carrying Amount (CA1) Impairment Carrying Amount (CA 2 – after impairment) 900 1100 1000 No 800 100 960 920 40 CA2 – after impairment

29 AS 28 – IMPAIRMENT OF ASSETS Recognition & Measurement of Loss (Contd
After the recognition of an impairment loss: adjust depreciation (amortization) charge for the asset in future periods allocate the asset's revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

30 AS 28 – IMPAIRMENT OF ASSETS ‘Bottom-Up’ Test – Goodwill and Corporate Assets
Perform following steps for a ‘bottom-up’ test: Identify if goodwill or corporate asset can be allocated on a reasonable & consistent basis to the CGU under review Compare RA of cash generating unit (CGU) to its CA(including goodwill or corporate asset) and recognise impairment loss. ‘Bottom-up' test, that is, the company should: (i) identify whether the carrying amount of goodwill can be allocated on a reasonable and consistent basis to the cash-generating unit under review; and (ii) then, compare the recoverable amount of the cash-generating unit under review to its carrying amount (including the carrying amount of allocated goodwill, if any) and recognize any impairment loss in accordance with this Standard.

31 AS 28 – IMPAIRMENT OF ASSETS Example
An enterprise called ER is a wholly owned subsidiary and has 3 divisions (CGU) A, B and C. There are indications that B is impaired and ER has estimated its recoverable amount to be Rs. 230cr. The value of ER has been estimated, by the ultimate holding company, to be Rs. 1,380cr. The goodwill held in the group accounts in respect of ER can be allocated on a reasonable and consistent basis. Cash generating unit A B C Total Rs. cr. Rs. cr. Rs. cr. Rs. cr. Net assets directly involved in the activities in the unit Goodwill ,200 The goodwill has been apportioned in the ratio that the directly attributed assets bear to each other. The carrying value that would be compared to the recoverable amount is Rs. 240cr. Application of the “bottom-up” test Rs. cr. Carrying amount Recoverable amount (230) Impairment loss 10

32 AS 28 – IMPAIRMENT OF ASSETS ‘Top-Down’ Test – Goodwill and Corporate Assets
If goodwill cannot be allocated on a reasonable basis then perform ‘top down’ test by applying following steps: Identify smallest CGU that includes the CGU under review and to which goodwill or corporate asset can be allocated on a reasonable basis Then compare RA of the above CGU to its CA (including goodwill or corporate asset) and recognise impairment loss.

33 AS 28 – IMPAIRMENT OF ASSETS ‘Top-Down’ Test – Example
Cash generating unit A B C Total Rs. cr. Rs. cr. Rs. cr. Rs. cr. Net assets directly involved in the activities of the unit Goodwill 1,200 Step 1 Application of the “bottom-up” test B Rs. cr. Carrying amount 150 Recoverable amount (230) Impairment loss Step 2 Application of the “top-down” test ER (the next smallest CGU) Carrying amount 1,200 Recoverable amount (1,380) Impairment loss

34 AS 28 – IMPAIRMENT OF ASSETS Impairment Loss for a Cash Generating Unit
Order of the allocation : Goodwill ( if any ) Other assets on a pro-rata basis based on the carrying amount

35 AS 28 – IMPAIRMENT OF ASSETS Treatment of Impairment Loss for a CGU
The carrying amount of an asset (which is part of CGU) should not be reduced below the highest of: (a) its net selling price (if determinable); (b) its value in use (if determinable); and (c) zero Unabsorbed impairment loss allocated to other assets in CGU.

36 AS 28 – IMPAIRMENT OF ASSETS Reversal of Impairment of Loss
Assess each year whether accumulated impairment loss may no longer exist or may have decreased Reverse if there has been a change in estimates (not simply because of increase in PV of cash flows I.e with passage of time) Increased amount not to exceed the carrying amount that would otherwise exist if no impairment loss had been recognised

37 AS 28 – IMPAIRMENT OF ASSETS Reversal of Impairment of Loss
Allocate reversal for CGU’s to: First, pro rata to assets other than goodwill Second, to goodwill allocated to the CGU i.e., reverse order to allocation of the loss But, impairment losses for goodwill should not be reversed unless: Loss was caused by a specific non recurring external event, and Subsequent external events have occurred that reverse the effect of that event

38 AS 28 – IMPAIRMENT OF ASSETS Disclosure
For each class of assets, the financial statements should disclose: (a) amount of impairment losses (b) line item(s) of the income statement in which those impairment losses are included (c) amount of reversals of impairment losses (d) line item(s) of the income statement in which those impairment losses are reversed (e) amount of impairment losses recognized directly against revaluation surplus (f) amount of reversals of impairment losses recognized directly against revaluation surplus For each class of assets, the financial statements should disclose: the amount of impairment losses recognized in the income statement during the period and the line item(s) of the income statement in which those impairment losses are included; the amount of reversals of impairment losses recognized in the income statement during the period and the line item(s) of the income statement in which those impairment losses are reversed; (c) the amount of impairment losses recognized directly in equity during the period; and (d) the amount of reversals of impairment losses recognized directly in equity during the period. The information required to be disclosed may be presented with other information disclosed for the class of assets. For example, this information may be included in a reconciliation of the carrying amount of property, plant and equipment, at the beginning and end of the period. A company that applies IAS 14, Segment Reporting, should disclose the above information for each reportable segment based on the primary format (as defined in IAS 14).

39 AS 28 – IMPAIRMENT OF ASSETS Disclosure –Material Loss or Reversal
Enterprise should disclose: Events and circumstances Amount of loss or reversal recognised Nature of asset/CGU Reported segment of asset/CGU CGU – if grouping has changed, describe current and former grouping and reasons for the change in grouping Recoverable amount – net selling price or value in use. Describe basis etc Main classes of assets affected by impairment losses or reversals Main events and circumstances that led to loss/reversal

40 AS 28 – IMPAIRMENT OF ASSETS Comparison between Indian v/s IAS v/s US GAAP
Particulars IAS US GAAP Indian GAAP Calculation of Value in Use Discounted Cash Flows Undiscounted Cash Flows but fair value concept is present/ measurement using discounted cash flows Similar to IAS Reversal of Impairment Loss Permitted under certain circumstances except impairment loss for Goodwill is not reversed. Prohibited Similar to IAS except impairment of Goodwill can also be reversed in certain situations AS 10 also refers to the same principle that IAS 36 is based on: Para 19: The gross book value of a fixed asset should be either historical cost or a revaluation computed in accordance with this Standard. Para 24: Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realizable value and shown separately in the financial statements. Para 25: Fixed asset should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal. Para 28: The revaluation in financial statements of a class of assets should not result in the net book value of that class being greater than the recoverable amount of assets of that class.

41 AS 28 – IMPAIRMENT OF ASSETS Matters for Discussion – Practical Challenges
Impairment Indicators Identification of CGU’s Cash Flow Estimation and review In present condition of the assets CGU will have assets with different useful lives Determining Net Selling Price Discount Rate

42 THANK YOU AS 10 also refers to the same principle that IAS 36 is based on: Para 19: The gross book value of a fixed asset should be either historical cost or a revaluation computed in accordance with this Standard. Para 24: Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realizable value and shown separately in the financial statements. Para 25: Fixed asset should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal. Para 28: The revaluation in financial statements of a class of assets should not result in the net book value of that class being greater than the recoverable amount of assets of that class.


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