IMPAIRMENT OF ASSETS UNDER IND AS 36

Impairment of Assets Under Ind AS 36 in India

Introduction

Ind AS 36, Impairment of Assets, sets out the procedures that an entity should apply to ensure that its assets are carried at no more than their recoverable amount. This standard is critical for maintaining the integrity of financial reporting in India, ensuring that the value of assets reported in financial statements is realistic and not overstated.

Key Concepts of Ind AS 36

Definition of Impairment

Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of:

• Fair Value Less Costs of Disposal (FVLCD): The price that would be received to sell an asset in an orderly transaction between market participants, less the costs of disposal.
• Value in Use (VIU): The present value of the future cash flows expected to be derived from the asset.

Scope of Ind AS 36

Ind AS 36 applies to a wide range of assets, including:

• Property, plant, and equipment (PPE)
• Intangible assets
• Goodwill
• Investments in subsidiaries, associates, and joint ventures

Indicators of Impairment

Entities must assess at each reporting date whether there are any indications that an asset may be impaired. Indicators can be external or internal:

• External Indicators: Decline in market value, adverse changes in technology, market, economic, or legal environment.
• Internal Indicators: Obsolescence, physical damage, declining asset performance, and changes in asset use.

Impairment Testing

Cash-Generating Units (CGUs)

When it is not possible to estimate the recoverable amount of an individual asset, the entity should determine the recoverable amount of the cash-generating unit (CGU) to which the asset belongs. A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of other assets or groups of assets.

Goodwill Impairment

Goodwill must be tested for impairment annually and whenever there is an indication of impairment. This is crucial as goodwill cannot be amortized under Ind AS.

Estimating Recoverable Amount

To estimate the recoverable amount, entities need to consider:

• FVLCD: This may require an active market or a binding sale agreement.
• VIU: This involves projecting future cash flows and discounting them at an appropriate rate.

Recognition and Measurement of Impairment Loss

Recognition

If the carrying amount of an asset or CGU exceeds its recoverable amount, the entity must recognize an impairment loss. The loss is recognized immediately in profit or loss.

Reversal of Impairment

An impairment loss for an asset other than goodwill can be reversed if there are indicators that the impairment may no longer exist or may have decreased. The reversal is limited to the carrying amount that would have been determined had no impairment loss been recognized.

Disclosure Requirements

Entities must disclose information that helps users of financial statements understand the events and circumstances leading to an impairment loss, as well as the amount of impairment loss recognized or reversed. Key disclosures include:

• The amount of impairment loss recognized or reversed.
• The events and circumstances leading to the recognition or reversal of the impairment loss.
• For each material impairment loss recognized or reversed, the nature of the asset, the CGU, and the reportable segment.

Challenges and Best Practices in Implementation

Challenges

• Estimating Recoverable Amounts: Determining fair value and value in use can be complex and subjective.
• Frequent Testing: Regular assessment for indicators of impairment can be resource-intensive.
• Documentation: Ensuring proper documentation for assumptions and estimates used in impairment testing.

Best Practices

• Robust Valuation Techniques: Use of well-established valuation techniques and models.
• Consistent Assumptions: Application of consistent assumptions and projections in estimating cash flows.
• Regular Reviews: Regular reviews of assets and CGUs for impairment indicators.

Ind AS 36 plays a vital role in ensuring the accuracy and reliability of financial statements by mandating the impairment testing of assets. By adhering to this standard, Indian companies can provide a true and fair view of their financial position, thus fostering greater investor confidence and market integrity. Proper implementation, continuous monitoring, and transparent disclosure are key to successfully managing asset impairments.