Download Quick Reference on Accounting Standard (AS) 28 Impairment of Assets
The objective of AS 28 is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. The asset is described as impaired if its carrying amount exceeds the amount to be recovered through use or sale of the asset and AS 28 requires the enterprise to recognise an impairment loss in such cases. It should be noted that AS 28 deals with impairment of all assets unless specifically excluded from the scope of the Standard.
Impairment Loss (Expensed in P/L) = Carrying Amount less Recoverable Amount
Carrying Amount, Recoverable Amount (Higher of)
- Net Selling Price- Estimated Sales proceeds less costs of disposal
- Value in use– 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
SMCs and non-company SMEs falling in Level II and Level III are allowed to measure the ‘value in use’ on the basis of reasonable estimate thereof instead of using the present value technique.
Indicators of impairment
An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired.
- Decline in market value of asset
- Change in technology and market conditions
- Increase in market interest rates leading to a decline in the present value of future cash flows arising from the asset
- Carrying amount of net assets of the enterprise is more than market capitalisation
- Decline in performance of the asset
- Obsolescence or damage of asset
- Continued negative cash flows arising from asset
Impairment loss of a revalued asset should be treated as a revaluation decrease under AS 10.
When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an enterprise should recognise a liability if, and only if, that is required by another Accounting Standard.
After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.
If there is an indication that an asset may be impaired, recoverable amount shall be estimated for individual asset.
If it is not possible to estimate the recoverable amount of the individual asset, the entity shall determine the recoverable amount of the cash generating unit to which the asset belongs (the asset’s cash generating unit).
A cash generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.
An impairment loss should be recognised for a cash-generating unit, if and only if, its recoverable amount is less than its carrying amount.
Allocation of impairment loss to goodwill and corporate assets
If no goodwill exists, impairment loss is allocated to assets comprising the cash-generating unit on pro-rata basis based on the carrying amount of each asset in that unit.
If goodwill exists and is allocable to cash-generating unit, an enterprise should perform a ‘bottom-up’ test, that is, the enterprise should identify whether the carrying amount of goodwill can be allocated on a reasonable and consistent basis to the cash-generating unit under review and 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 recognise any impairment loss.
If goodwill exists and is not allocable to cash-generating unit, then entity should identify larger cash-generating unit that includes the cash-generating unit under review to which goodwill is allocable in order to determine carrying amount of cash-generating unit. This is called ‘top-down approach’. This is in addition to ‘bottom-up’ test. Thereafter, impairment loss is identified and allocated to goodwill first and then to other assets.
The impairment loss is first allocated to goodwill and then to other assets of the cash-generating unit on a pro rata basis based on the carrying amount of each asset in that unit. The ‘bottom-up’ test should be performed even if none of the carrying amount of goodwill can be allocated on a reasonable and consistent basis to the cash-generating unit under review.
The ‘bottom-up’ test and ‘top down’ tests are equally applicable for corporate assets.
While allocating impairment loss, the carrying amount within cash-generating unit should not be reduced below the highest of (a) net selling price (if determinable) (b) value in use (if determinable) and (c) zero. The amount of impairment loss that would otherwise have been allocated to the asset should be allocated to other assets of the cash-generating unit on a pro rata basis. After this, a liability should be recognised for any remaining amount of an impairment loss for a cash-generating unit, only if that is required by another Accounting Standard.
Reversal of an Impairment Loss
An enterprise should assess at each balance sheet date whether there is any indication that an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased. If any such indication exists, the enterprise should estimate the recoverable amount of that asset. The carrying amount of the asset should be increased to its recoverable amount as a reversal of impairment loss.
The increased carrying amount of an asset due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods.
A reversal of an impairment loss for an asset should be recognised as income immediately in the Statement of Profit and Loss, unless the asset is carried at revalued amount in accordance with another Accounting Standard in which case any reversal of an impairment loss on a revalued asset should be treated as a revaluation increase under that Accounting Standard.
Reversal of an impairment loss for a cash-generating unit should be allocated to increase the carrying amount of the assets of the unit in the following order:
(a) first, assets other than goodwill on a pro-rata basis based on the carrying amount of each asset in the unit; and
(b) then, to goodwill allocated to the cash-generating unit (if any), if the two requirements in the last bullet point below are met.
These increases in carrying amounts should be treated as reversals of impairment losses for individual assets.
In allocating a reversal of an impairment loss for a cash-generating unit the carrying amount of an asset should not be increased above the lower of: (a) its recoverable amount (if determinable); and (b) the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods. The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the cash-generating unit on a pro-rata basis.
As an exception, an impairment loss recognised for goodwill should not be reversed in a subsequent period, unless: (a) the impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur; and (b) subsequent external events have occurred that reverse the effect of that event.