Impairment Of Assets

The concept of impairment is concerned with a permanent decline in the value of the asset. This is the situation wherein the cash flows that are being generated from an asset or the benefits that are generated from an asset would reduce. This is determined through a very specific periodic assessment of time. In case, there is an impairment of assets, then the difference that exists between the fair value of an asset and the carrying value of the same asset in the books of accounts will have to be written off or be charged in the profit and loss account (Accounting tools, 2016).

The assets are never carried out at their book values since that would lead to reporting of the assets at the wrong amounts in the balance sheet. An asset is something that is of value to the company and can be sold in case it is of no use to the company any more or if the company is facing cash shortage due to which it will have to sell that asset. Suppose, an asset is being reported at $10,000 in the books of accounts but the fair value of the same is $5,000, then the company is under an impression that it would fetch $10,000 if sold in the market but in reality it would fetch only $5,000. Hence, these assets have to be reported at their fair values. The fair value of an asset is the higher of value in use or the fair value.

The accounting standard number IAS 36 is the standard that is not applicable on the assets that have been listed below:

·         Inventories

·         Assets that arises from the construction of the contracts

·         Assets that arises from the employee benefits

·         Financial assets

·         The investment property that has been carried out at its fair value

·         The non-current assets that are held for sale

·         Agricultural assets

·         Insurance contract assets

Hence, this standard applies to the following assets:

·         Land

·         Goodwill

·         Investments in the subsidiaries, associates and the joint ventures that have been carried at cost

·         Machinery and equipment

·         Buildings

·         Intangible assets

·         The assets that have been carried at their revalued amounts as per IAS 36 and 38 (Accounting tools, 2016). 

The following are the various steps that have to be taken for the purposes of this accounting standard:

• Identification of the asset that has to be impaired: in the end of the period of reporting, the entity is reporting to assess whether there is any identification of an asset to be impaired. There is an impairment loss in case, if the carrying value of the asset is less than the fair value of the asset.
• Determination of the recoverable amount: the fair value of the asset less the costs of the disposal or the value in use exceeds the carrying amount, then it is not necessary to calculate the amount. In such a case, an asset is treated to have been impaired.
• Then there is a calculation of the value in use less the costs of disposal. The fair value of an asset is always determined as per the IFRS 13 which is related with the measurement of the fair value. The costs of the disposal is the direct method of added up costs (Accounting explained, 2016).
• The calculation of the value in use comprises of the following:
• The estimated future value of the various cash flows that the entity expected to derive from the asset
• The expectation all about the possible variations in the amounts or the timings of the future cash flows
• The time value of the money which is represented by the risk free rate of return (IAS plus, 2016).
• The prices of the uncertainty that is somewhat inherent in that asset

The main step in this is the identification of the various factors that leads an asset to be impaired. There are many of the conditions through which the same could be ascertained, the first being the changes in the conditions of the markets, any new legislations or a reduction in the functionality of the asset. Then there is a calculation of the fair market value of the asset. An asset can never be recognised without having an approximate fair value. This is the value that an asset would fetch in case, it is sold in the open market. This is also recognised as the future cash flows of the assets that would generate the business operations till foreseeable period of time.

The impairment losses ca either go through the cost model or through the revaluation model which depends upon the debited amount that was changed through the new or the adjusted fair market valuation. Even in case of the impairment results, there is a small taxation benefit for the company. The realisation of the impairment is quite bas for the company as a whole. This mainly represents that there is a requirement of an increased reinvestment (MCA, 2016).

The following are the disclosures that are required to be made:

• There are disclosures by assets which includes the impairment losses to be stated in the statement of profit or loss, the lines in which line items of the comprehensive statement, the impairment losses that have been calculated on the revalued assets, impairment losses on the revalued assets that have been reversed in the statement of comprehensive income.
• The other disclosures include the events and the circumstances that have caused the impairment losses, the amount of the loss, the individual assets on which the impairment has been calculated, the cash generating unit, in case the recoverable amount is fair value less the costs of disposal, then the level of hierarchy that has been followed for the purposes of measuring the fair value, in case, the recoverable amount has been determined on the basis of the value in use or on the basis of the fair values less the costs of the disposal, then the discount rate. The main classes of the assets that have been affected by the impairment loss and the main events and the circumstances that has caused the same (IFRS, 2016). 

The following are the relevant calculations:

References:

Accountingexplained.com. (2016). Impairment of Fixed Assets | Definition | Examples | Journal Entries. [online] Available at: https://accountingexplained.com/financial/non-current-assets/impairment-of-assets [Accessed 19 Sep. 2016].

Accountingtools.com. (2016). Fixed Asset Impairment Accounting - AccountingTools. [online] Available at: https://www.accountingtools.com/impairment-loss-accounting [Accessed 19 Sep. 2016].

Accountingtools.com. (2016). Impairment Definition - AccountingTools. [online] Available at: https://www.accountingtools.com/definition-impairment [Accessed 19 Sep. 2016].

https://www.mca.gov.in/. (2016). Indian Accounting Standard (Ind AS) 36. [online] Available at: https://www.mca.gov.in/Ministry/pdf/Ind_AS36.pdf [Accessed 19 Sep. 2016].

Iasplus.com. (2016). IAS 36 — Impairment of Assets. [online] Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 19 Sep. 2016].

IFRSbox. (2016). Lecture #2: How To Calculate Impairment Loss - IFRSbox. [online] Available at: https://www.ifrsbox.com/ifrs-in-1-day/sample-chapter-222/ [Accessed 19 Sep. 2016].