Saturday Brain Storming Thought (100) 13/02/2021


Impairment Loss

Impairment loss is the amount by which the carrying amount of an asset or cash generating unit exceeds it’s recoverable amount

The amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and accumulated impairment losses

The loss will reduce income in the income statement and reduce total assets on the balance sheet

An impairment loss records an expense in the current period which appears on the income statement and simultaneously reduces the value of the impaired asset on the balance sheet

Impairment meaning in accounting

It describes a reduction in the value of a company asset, either fixed or intangible, so as to reflect a decline in the quality, quantity or market value of the asset

Impairment charge

It is used to describe for writing off worthless goodwill

They again became prevalent during the great recession, as the weak economy and faltering stock market forced more goodwill charge offs and increase concerns about corporate balance sheets

Recoverable Amount

It is the higher of an assets fair value less costs of disposal

Value in use

It is the present value of the future cash flows expected to be derived from an asset or cash generating unit

Indication of Impairment – External Sources

1) market value declines

2) negative changes in technology, markets, economy or laws

3) increases in market interest rates

4) net assets off the company higher than market capitalisation

Indication of Impairment – Internal Sources

1) obsolescence or physical damage

2) asset is idle, part of a restructuring or held for disposal

3) worse economic performance than expected

4) for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investees assets, or a dividend exceeds the total comprehensive income of the investee

Considerations in discount rate for calculating impairment losses

1) the entitys own weighted average cost of capital

2) the entitys incremental borrowing rate

3) other market borrowing rates

Impairment Recognition

An impairment loss is recognized and accused through a general entry to record and reevaluate the assets value

Impairment Measurement

Business assets that have suffered a loss in value are given two tests to measure and recognize the amount of loss

1) recoverability test
It evaluates if an assets undiscounted future cash flows are less than the assets book value, when cash flows are less, the loss is measured

2) measurement test
It uses the difference between the assets market value and book value to calculate the amount of impairment loss

Loss Restoration

Fixed asset values can be revised to reflect an increase or decrease in value, upward revisions can recover earlier impairment loss

Comprehensive Income

The change in a company’s owner’s equity (net assets) due to transactions and other events and circumstances from non-owner sources

Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized

Revaluation Surplus

An increase in assets value should not be reported on the income statement, instead an equity account is credited called revaluation surplus

Impairment loss is not applicable for

1) assets arising from employee benefits

2) construction contracts
3) deferred tax assets

4) financial assets or instruments

5) investment property measured at fair value

6) assets classified as held for sale

Advantages of Impairment

1) impairment charges provide investors and analysts with different ways to assess a company’s management and decision making track record

2) managers who write off or write down assets because of impairment might not have made good investment decisions or lacked the vision before making that kind of investment

3) many business failures are heralded by a fall in the impairment value of assets

4) such disclosures act as early warning signals to creditors and investors

Disadvantages of Impairment

1) it is generally difficult to know the measurement value that must be used to ascertain the impairment amount

2) there is no detailed guidance on the treatment of impaired assets

Impairment loss reversion

An impairment loss may only be reversed if there has been a change in the estimates used to determine the assets recoverable amount since the impairment loss had been recognized

Disclosures required in financial statements

1) impairment loss recognized and reversed for each class of assets

2) amount of impairment loss set off against revaluation reserve and amount of reversal of impairment loss credited to revaluation reserve segment reporting

3) calculation of revaluation amount of each class of assets

4) assumptions used in the calculation of recoverable amount

5) events that leads to impairment

6) description of cash generating unit

Impairment of Goodwill

Goodwill should be tested for impairment annually (IAS 36.96)


It is an intangible asset that is associated with the purchase of one company by another

Goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process

Goodwill may be hidden value, something extra that purchaser pays willingly for

Goodwill may be overpament for the investment will bring more returns or profits in the future

Test goodwill for impairment

Goodwill is not an asset that you can sell to someone else seperatly

Compare the carrying amount of your cash generating unit including goodwill with its recoverable amount

1) first, you reduce any goodwill to zero

2) if there’s some impairment loss left, you allocate it to the individual asset with cash generating unit on pro-rata basis

3) you should never reverse any impairment loss related to goodwill

Income approach – test for goodwill impairment

Discounting estimated future cash flows to a single current value

Market approach – test for goodwill impairment

Examining the assets and liabilities of companies in the same industry

Impact of goodwill impairment

1) impact on balance sheet
Goodwill reduces from Rs X to Rs Y

2) impact on income statement
An impairment charge of Rs (X – Y) is recorded, reducing net earnings by Rs (X – Y)

3) impact on cash flow statement
The impairment charge is a non cash expense and added back into cash flow operations

The only change to cash flow would be if there were a tax impact, but that would generally not be the case, as impairments are generally non tax-deductible

Non-Cash Expenses

It appear on an income statement because according principles require them to be recorded despite not actually being paid with cash

The most common example of a non-cash expense is depreciation, where the cost of an asset is spread out over time even though the cash expense occurred all at once

Compiled by:-

Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer