IFRS – IAS 36: Impairment of assets

The International Accounting Standards Committee (IASC) released International Accounting Standard 36 (IAS 36) to address the topic of Impairing Assets.

The main types of assets that this standard applies to is as follows:

  • Land & Buildings
  • Machinery & Equipment
  • Investment property carried at cost
  • Intangible assets including Goodwill
  • Investments in subsidiaries, associates, and joint ventures carried at cost
  • Assets carried at amounts revalued based on IAS 16 and IAS 38

These assets must be written down, or impaired, when certain indicators are present.  Some flags that could be raised to indicate impairment would be that the carrying value was in excess of selling price, changes in technology, legal and regulatory changes, or physical damage of assets.  This standard goes into much greater detail as to what may be recoverable, and what is not and must be impaired.

To determine future cash flows, the entity must:

+Identify the CGU (Cash Generating Unit), and estimate future pricing to determine cash flows
+Allocate Goodwill to CGUs based on those that benefit most from it rather than the net asset values of those units
+Measuring VIU (Value in Use) of the CGU, based on cash flows and discount rates
+Frequency of measurement must occur at least annually
+Timing of the impairment testing must occur before the end of the reporting period
+Disclosing changes to goodwill must be made, such as new goodwill unallocated across CGUs or the movement of goodwill between CGUs

+Impairments recognized in previous periods can be recoverable based on changes in estimates to the carrying value of that asset.
+However, *Goodwill* impairments recognized in previous periods are never recoverable in future periods.

+When performing the impairment process, one must Estimate the Recoverable Amount, and use the higher of the FMV-CS (Fair Market Value minus Cost to Sell) and VIU. If the Recoverable Amount is greater than the Carrying Value of the Asset, there is no impairment. If the Recoverable Amount is less than the Carrying Value, the difference must be booked to write down the Carrying Value.

IAS are principles based standards, rather than strict rules based standards that govern international accounting. IAS standards differ from IFRS standards in that they were introduced prior to 2001, whereas IFRS were produced after this date by the IASB, or the International Accounting Standards Board. When determining the hierarchy of these, the IAS is considered to be the building blocks in which the newer and more relevant IFRS are founded and therefore IFRS is more authoritative when these conflict.

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