1.8 Impairment of Assets

Impairment of assets refers to the recognition and measurement of a decrease in the carrying amount of an asset when its recoverable amount is lower than its carrying amount. The impairment assessment is necessary when there are indications that an asset may be impaired, such as a significant decline in the asset’s value, changes in the market or economic conditions, or obsolescence.

The key standard governing impairment of assets is IAS 36 (International Accounting Standard 36), which provides guidance on the recognition, measurement, and disclosure of impairment losses for assets. Here are some important points regarding the impairment of assets:

1. Impairment Indicators: Entities are required to regularly assess whether there are any indications of impairment for their assets. These indicators can be both external (e.g., changes in market prices, legal or regulatory changes) and internal (e.g., obsolescence, asset damage, significant changes in the asset’s usage or business plans).
2. Recoverable Amount: The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. Fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction, less the costs of disposal. Value in use is the present value of the future cash flows expected to be derived from the asset.
3. Impairment Test: If there is an indication of impairment, the entity compares the asset’s carrying amount with its recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.
4. Measurement of Impairment Loss: The impairment loss is calculated as the difference between the carrying amount of the asset and its recoverable amount. The impairment loss is recognized as an expense in the income statement, except for certain assets where the impairment loss is allocated to specific components of the asset.
5. Reversal of Impairment Loss: An impairment loss recognized for an asset can be reversed if there is a change in the estimates used to determine the asset’s recoverable amount. However, the reversal is limited to the amount that would have been recognized if no impairment loss had been recognized in prior periods.

IAS 36 also provides specific guidance for impairment testing of goodwill, investment properties, financial assets, and assets held for sale. Additionally, it requires disclosure of the carrying amounts, impairments, and recoverable amounts of impaired assets.