International Accounting Standard IAS 36, Impairment of Assets, is the first accounting standard that deals comprehensively with the impact of a decline in value in assets1. IAS 36 became operative for annual financial statements covering periods beginning on or after 1 July 19992.
Prior to the publication of IAS 36, standards such as IAS 16, Property, Plant and Equipment, IAS 28, Accounting for Investments in Associates, and IAS 31, Financial Reporting of Interests in Joint Ventures, included principles for recognising impairment losses but no detailed guidance was given on how these losses should be measured.
Financial statements exhibit reliability when amounts are stated in a prudent manner3. The objective of IAS 36 is to prescribe the procedures applied by an enterprise to ensure that each asset is not overstated beyond the amount expected to be recovered through use or sale of the asset.
Impairment is assessed as at each balance sheet date on the basis of the best set of information available to the enterprise and, subject to the application of materiality, the accounting standard will apply even if management consider that any impairment loss existing as at balance sheet date is likely to reverse subsequently.
Coverage of the Standard
IAS 36 applies in general to all tangible and intangible non-financial assets, including:
- Property, plant and equipment, irrespective of whether carried at cost or revalued amount under IAS 16;
- Goodwill arising on an acquisition, accounted for under IAS 22;
- Investments in Subsidiaries, accounted for under IAS 27;
- Investments in Associates, accounted for under IAS 28;
- Interests in Joint Ventures, accounted for under IAS 31;
- Intangible assets, accounted for under IAS 38; and
- Investment property measured at cost, under IAS 40.
IAS 36 does not apply to the following assets covered under other accounting standards4:
- Inventories (IAS 2, Inventories, measured at the lower of cost and net realisable value);
- Assets arising from construction contracts (IAS 11 requires determination of recoverable amount albeit on an undiscounted basis);
- Deferred income tax assets (IAS 12 applies);
- Assets arising from employee benefits (IAS 19 specifies that an upper limit of such assets be determined on a discounted basis broadly compatible with IAS 36);
- Financial assets included in the scope of IAS 32;
- Investment property measured at fair value (IAS 40 applies); and
- Biological assets measured at fair value (once IAS 41 becomes effective).
The main issues addressed by IAS 36 are:
- What is impairment?
- When is an asset assessed for impairment?
- What is the basis for assessing asset impairment (individual assets or groups of assets)?
- How is an impairment loss measured and accounted for in the financial statements?
- In a subsequent period how is the reversal of an impairment loss measured and accounted for in the financial statements?
- What is required to be disclosed in the financial statements about asset impairment?
- What transitional provisions apply on initial application of the accounting standard?
What is ‘impairment’?
An asset is described as impaired – and an impairment loss is recognised – to the extent that the asset’s carrying amount exceeds its recoverable amount5.
Carrying amount (CA) is the amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.
Recoverable amount (RA) is the higher of an asset’s net selling price and its value in use.
Net selling price (NSP) is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.
Value in use (VIU) 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.
Three illustrations of the definition are shown in Figure 1.