Accounting Standard 28 (AS 28) Impairment of Assets By: Jayesh Ratadia

Overview

Objective What is Impairment Indicators of Impairment Impairment Birds Eye View Scope and Definitions Frequency and Application of Impairment Recognition and Measurement Goodwill and Corporate assets Treatment of Impairment Loss Reversal Disclosures Relaxations to SMC Other Accounting Standards where AS-28 is referred Comparison between IFRS, US GAAP and Indian GAAP
2

Saturday, November 21, 2009

Objective

To prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount

Saturday, November 21, 2009

What is Impairment
Impairment Loss
It is the amount by which the Carrying Amount of an asset

exceeds its Recoverable Amount.

Saturday, November 21, 2009

Indicators of Impairment
External sources significant decline in market value Significant changes with adverse effect due to technological, market, economic, legal environment changes in interest rates or rates of return net assets are more than the its market capitalisation Internal sources evidence of obsolescence or of physical damage discontinuance, disposal, restructuring plans asset performance declining or expected to decline
These indicators have to be considered as a minimum
Saturday, November 21, 2009 5

Impairment Birds Eye View

Can Asset be assessed individually ? YES Estimate Recoverable Amount NO Identify CGU

YES Indication of Impairment ?

A
NO NO No Impairment Is the Recoverable Amount Less than Carrying Amount? YES Account and Disclose Impairment Loss
6

Saturday, November 21, 2009

Impairment Birds Eye View

Identified CGU Estimate Recoverable Amount of CGU

(Contd)

NO

Is the Recoverable Amount Less than Carrying Amount? YES Allocate Impairment Loss to Goodwill and Assets in CGU

No Impairment
Saturday, November 21, 2009

Account and Disclose Impairment Loss

7

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

Saturday, November 21, 2009

Definitions
Impairment loss Carrying Amount (CA) Recoverable Amount (RA) Cash Generating Units (CGU)

Saturday, November 21, 2009

Carrying Amount (CA) Carrying amount is the cost of the asset recognised in the Balance Sheet after deducting: Accumulated depreciation / amortisation Accumulated impairment loss

Saturday, November 21, 2009

10

Recoverable Amount (RA)

Is the higher of an assets: Net Selling Price (NSP) amount obtainable in arms length transaction less costs of disposal (except reorganising, finance and tax costs) asset is traded in an active market the current bid price less costs of disposal (except reorganising, finance and tax costs) Value in use. present value of estimated future cash flows from continuing use of the asset in current condition and ultimate disposal Cash Flow Projections Discount Rate

Saturday, November 21, 2009

11

Value in Use
Is the present value of estimated future cash flows expected to

arise from the continuing use of an asset and from its disposal at the end of its useful life.
Projections

Short term - maximum 5 years, unless longer can be justified Based on financial budgets approved by management Do not include financial and taxation cash flows
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 Estimation for the asset in its current condition (restructuring and capital expenditure on the assets ignored)
Saturday, November 21, 2009 12

Value in Use
Discount rate should be pre-tax, since cash flows are also pre-tax Be independent of the entitys capital structure reflect the time value of money and the risks related to the assets reflect Weighted average cost of capital (WACC) When asset specific rates are not available, following may be considered as a starting point Techniques such as CAPM Cost of borrowing Adjust the same to reflect the risks of the asset

Saturday, November 21, 2009

13

Cash Generating Units (CGU)

The smallest identifiable group of assets that generates

cash flows from continuing use that are largely independent from other assets or groups of assets
Estimate RA for the individual asset. If this is not possible, then

estimate RA of the assets cash generating unit

Apply cash generating unit concept when the asset does not

generate cash flows which are independent from other assets

Saturday, November 21, 2009

14

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 enterprises operations How management makes decisions about continuing or disposing of the enterprise's assets and operations Segment Reporting

Saturday, November 21, 2009

15

Frequency and Application of Impairment

Frequency of Impairment Testing: at each reporting 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.

Saturday, November 21, 2009

16

Recognition and Measurement of Loss

Asset to be reduced to recoverable amount only if RA is less than 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)
Carrying Net Recoverable Amount Selling Carrying Amount Value Price Amount (CA 2 after in Use (NSP) (RA) (CA1) Impairment impairment) 900 900 920 1100 800 960 1100 900 960 1000 1000 1000 No 100 40 1000 900 960
17

Saturday, November 21, 2009

Recognition and Measurement of Loss

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.

Saturday, November 21, 2009

18

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 and 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.

Saturday, November 21, 2009

19

Bottom-Up Test - 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

Net assets directly involved in the activities in the unit Goodwill

A Rs. cr. 350 210 560

B Rs. cr. 150 90 240

C Rs. cr. 250 150 400

Total Rs. cr. 750 450 1,200

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 240 Recoverable amount (230) Impairment loss 10
Saturday, November 21, 2009 20

10

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.

Saturday, November 21, 2009

21

Top-Down Test Example

Cash generating unit Net assets directly involved in the activities of the unit Goodwill Step 1 Application of the bottom-up test Carrying amount Recoverable amount Impairment loss Step 2 Application of the top-down test ER Carrying amount Recoverable amount Impairment loss
Saturday, November 21, 2009

A B Rs. cr. Rs. cr. 350 150

C Rs. cr. 250

Total Rs. cr. 750 450 1,200

B Rs. cr. 150 (230) (the next smallest CGU) Rs. cr. 1,200 (1,380) 22

11

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.

Saturday, November 21, 2009

23

Reversal of Impairment of Loss

Assess each reporting date

(look for indicators) 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

Saturday, November 21, 2009

24

12

Reversal of Impairment of Loss

Allocate reversal for CGUs 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

Saturday, November 21, 2009

25

Disclosure
For each class of assets, the financial statements should disclose: amount of impairment losses line item(s) of the income statement in which those impairment losses are included amount of reversals of impairment losses line item(s) of the income statement in which those impairment losses are reversed amount of impairment losses recognized directly against revaluation surplus amount of reversals of impairment losses recognized directly against revaluation surplus

Saturday, November 21, 2009

26

13

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 RA 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 In case AS - 17 is applicable, details of segment wise impairment / reversal and also that against revaluation reserve required.
Saturday, November 21, 2009 27

Relaxations to SMC

A reasonable estimate of value in use is allowed, instead of using present value technique

Saturday, November 21, 2009

28

14

Other Accounting Standards where AS-28 is referred

AS - 19 Leases A leased asset also needs to tested for

impairment
AS - 24 Discontinuing Operations Since AS-24 does not

prescribe measurement principles, hence assets of discontinuing operations need test for impairment
AS - 25 Interim Financial Reporting However detailed

exercise not required

AS - 26 Intangible Assets Future economic benefit to be

assessed using principles in AS-28

AS - 27 Joint Ventures For transactions between a venturer
Saturday, November 21, 2009

and JV

29

IFRS vs US GAAP vs Indian GAAP

Scope
IAS 36 is applicable to financial assets classified as investment in

subsidiaries, associates and joint ventures in stand-alone accounts. However, it does not apply to Investment property and biological assets. Under Indian GAAP, (AS - 13) takes care of impairment provision for investments. Reversal of Impairment losses
Not allowed under IFRS and US GAAP

Saturday, November 21, 2009

30

15