AS 28 and IAS 36 deals with the impairment accounting of the fixed assets. In case the indicators for impairment do exist then the same needs to be reassessed for value and marked down if the negative indiactors do suggest so. There can be internal as well as external indiactors. The mian idea behind the introduction of this standard is that the company should not value its assets at more than the recoverable value, which is higher of the value in use or the fair value less cost of disposal of the asset. Goodwill and other intangible assets having indefinite life is being assessed for impairment separately at end of each period. (Fay & Negangard, 2017).
Recognition & measurement of impairment loss
The differential of the carrying value of the assets and the recoverable value is recognised as the impairment loss in the books. Once impairment is posted, it can be reversed in the future years based on the assessment in case the positive indicators do exists. External indicators can be like assets in books is higher than the market capitalization, marketing value of assets declined considerably or there is a change in the taste, fashion, preferences, and other negative trends or market interest rates have increased, etc. whereas internal factors can be in the nature of increased obsolescence on the asset, economic performance of the asset has decreased, the asset is lying idle and is being held for sale, or the investment in joint venture or the subsidiary is more than the investee’s assets held in books, etc. (Das, 2017) The company also needs to check on the depreciation policy, the estimated useful life, etc at the time of checking on the impairment. In case the single asset is not able to generate the revenues, we see a group or the class of assets which would be able to do so independently and it is called Cash Generating Unit (CGU).
The recoverable value is the higher of fair value less the cost of disposal and the value in use. The recoverable value may be calculated for a single asset or a CGU. (Goldmann, 2016)
The value in use if tteh fair value of the future expected cash flows discounted at a rate of interest. The cash flows should be depending upon the lastest financials considering the time value of money, the uncertainity of the cash flows and the illiquidity in the market. It should also not account for any major overhaul expenditure that may be incurred in the near future. It should be realistic and based on valid assumptions and backed by supportings. (Michaely & Jacob, 2017) Similarly, the rate of discount should be based on market conditions and the rate which the shatreholders would have expected on investing in the company. It should be based on the rate of borrowing that the company would have incurred in case the company would have bought assets from borrowed funds.
The fair value less cost of disposal should be determined in accordance with the fair value accounting as per IFRS. It should be at the arm’s length price in the binding sale agreement or in the active market or if nothing is available, then based in the DCF technique. (Meroño-Cerdán, et al., 2017)
The topic of impairment is based on assumptions and should be properly disclosed in the financials like
- the amount of impairment,
- the fair value estimation,
- the internal and external indicators relied on, etc
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, pp. 1-15.
Michaely, R. & Jacob, M., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts. Review of Financial Studies, 30(9), pp. 3176-3222.