Impairment accounting – the basics of IAS 36 Impairment of Assets
 |
18 August 2010 |
 |
ERNST & YOUNG S.R.L. |
Adresa
Strada Dr. Felix Iacob, Nr. 63-69
Cladirea Premium Plaza, Etaj 15
011033 Bucuresti, Sector 1
Telefon
+40-21-402.40.00
Fax
+40-21-310.71.93
Website
www.ey.com
IAS 36 Impairment of Assets (the standard) sets out the requirements to account for and report impairment of mostnon-financial assets. IAS 36 specifies when an entity needs to perform an impairment test, how to perform it, the recognition of any impairment losses and the related disclosures. Having said that, the application of IAS 36 is wide and its requirements may be open to interpretation.
The recent economic uncertainty has thrown a spotlight on impairment. As such, many entities have decided to reassesstheir impairment testing processes, models and assumptions.
In this introductory publication, we provide an overview of the key requirements of IAS 36 — an introduction for those who have not performed an impairment test in accordance with IAS 36 and a refresher for existing IFRS preparers. We point out areas where IAS 36 differs from US GAAP and also highlight some of the practical considerations for first-time adopters of IFRS.
For further reading, we recommend our publication IAS 36: Practical Issues, which discusses practical application issues available on ey.com/ifrs.
Impairment principle and key requirements
IAS 36 deals with impairment testing for all tangible and intangible assets, except for assets that are covered by other IFRS.
IAS 36 requires that assets be carried at no more than their recoverable amount. To meet this objective, the standardrequires entities to test all assets that are within its scope for potential impairment when indicators of impairment exist or, at least, annually for goodwill and intangible assets with indefinite useful lives.
Diagram 1 illustrates the process for measuring and recognising impairment loss under IAS 36. Some of the components in the diagram are discussed in more detail in the sections below.
Key requirements of IAS 36 illustrated in Diagram 1
The entity assesses, at each reporting date, whether there is any indication that an asset may be impaired.
• If there is an indication that an asset may be impaired, the recoverable amount of the asset (or, if appropriate, the cash generating unit (CGU)) is determined.• The recoverable amount of goodwill, intangible assets with an indefinite useful life and intangible assets that are not available for use on the reporting date, is required to be measured at least on an annual basis, irrespective of whether any impairment indicators exist.• The asset or CGU is impaired if its carrying amount exceeds its recoverable amount.• The recoverable amount is defined as the higher of the ‘fair value less costs to sell’ and the ‘value in use’.• Any impairment loss is recognised as an expense in profit or loss for assets carried at cost. If the affected asset is a revalued asset, as permitted by IAS 16 Property, Plant and Equipment (IAS 16) and IAS 38 Intangible Assets (IAS 38), any impairment loss is recorded first against previously recognised revaluation gains in other comprehensive income in respect of that asset.• Extensive disclosure is required for the impairment test and any impairment loss recognised.• An impairment loss recognised in prior periods for an asset other than goodwill is required to be reversed if there has been a change in the estimates used to determine the asset’s recoverable amount.
