ICAI Notes- Unit 7: Assets Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
    
v 
 5.213 
 
LEARNING OUTCOMES 
 
UNIT 7: ACCOUNTING STANDARD 28  
IMPAIRMENT OF ASSETS 
 
 
After studying this unit, you will be able to: 
? Define the terms ‘recoverable amount’, ‘value in use’, ‘net selling 
price’, ‘cost of disposal’, ‘impairment loss’ and other related terms.  
? Identify an asset that may be Impaired. 
? Measure the recoverable amount after computing net selling price 
and value in use 
? Recognise and measure the impairment loss 
? Identify the cash generating units 
? Compute the recoverable amount and carrying amount of a cash-
generating unit 
? Identify goodwill that whether it relates to the cash-generating unit 
? Impair the cash generating unit 
? Set out the requirements for reversing an impairment loss 
? Apply impairment provisions in case of discontinuing operations 
7.1 INTRODUCTION 
AS 28 came into effect in respect of accounting period commenced on or after  
1-4-2004 and is mandatory in nature from that date for the following:  
(i) Enterprises whose equity or debt securities are listed on a recognised stock 
exchange in India, and enterprises that are in the process of issuing equity 
or debt securities that will be listed on a recognised stock exchange in India 
as evidenced by the board of directors’ resolution in this regard. 
(ii) All other commercial, industrial and business reporting enterprises, whose 
turnover for the accounting period exceeds ` 50 crores. 
 In respect of all other enterprises, the Accounting Standard came into effect 
in respect of accounting periods commenced on or after 1-4-2005 and is 
mandatory in nature from that date. 
© The Institute of Chartered Accountants of India
Page 2


 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
    
v 
 5.213 
 
LEARNING OUTCOMES 
 
UNIT 7: ACCOUNTING STANDARD 28  
IMPAIRMENT OF ASSETS 
 
 
After studying this unit, you will be able to: 
? Define the terms ‘recoverable amount’, ‘value in use’, ‘net selling 
price’, ‘cost of disposal’, ‘impairment loss’ and other related terms.  
? Identify an asset that may be Impaired. 
? Measure the recoverable amount after computing net selling price 
and value in use 
? Recognise and measure the impairment loss 
? Identify the cash generating units 
? Compute the recoverable amount and carrying amount of a cash-
generating unit 
? Identify goodwill that whether it relates to the cash-generating unit 
? Impair the cash generating unit 
? Set out the requirements for reversing an impairment loss 
? Apply impairment provisions in case of discontinuing operations 
7.1 INTRODUCTION 
AS 28 came into effect in respect of accounting period commenced on or after  
1-4-2004 and is mandatory in nature from that date for the following:  
(i) Enterprises whose equity or debt securities are listed on a recognised stock 
exchange in India, and enterprises that are in the process of issuing equity 
or debt securities that will be listed on a recognised stock exchange in India 
as evidenced by the board of directors’ resolution in this regard. 
(ii) All other commercial, industrial and business reporting enterprises, whose 
turnover for the accounting period exceeds ` 50 crores. 
 In respect of all other enterprises, the Accounting Standard came into effect 
in respect of accounting periods commenced on or after 1-4-2005 and is 
mandatory in nature from that date. 
© The Institute of Chartered Accountants of India
 
ADVANCE ACCOUNTING  
 5.214 
This standard prescribes the procedures to be applied to ensure that the assets of 
an enterprise are carried at an amount not exceeding their recoverable amount 
(amount to be recovered through use or sale of the asset).  The standard also lays 
down principles for reversal of impairment losses and prescribes certain 
disclosures in respect of impaired assets.  An enterprise is required to assess at 
each balance sheet date whether there is an indication that an enterprise’s assets 
may be impaired.  If such an indication exists, the enterprise is required to 
estimate the recoverable amount and the impairment loss, if any, should be 
recognised in the profit and loss account. 
7.2  SCOPE 
The standard should be applied in accounting for impairment of all assets except 
1.  inventories (AS 2),  
2.  assets arising under construction contracts (AS 7), 
3. financial assets including investments covered under AS 13, and  
4.  deferred tax assets (AS 22).   
There  are chances that the provision on account of impairment losses may 
increase sickness of companies and potentially sick companies may actually 
become sick. 
7.3  ASSESSMENT 
An enterprise should assess at each balance sheet date whether there is any 
indication that an asset may be impaired. If any such indication exists, the 
enterprise should estimate the recoverable amount of the asset. An asset is 
impaired when the carrying amount of the asset exceeds its recoverable amount. 
The requirements use the term ‘an asset’ but apply equally to an individual asset 
or a cash-generating unit. In assessing whether there is any indication that an 
asset may be impaired, an enterprise should consider, as a minimum, the 
following indications: 
© The Institute of Chartered Accountants of India
Page 3


 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
    
v 
 5.213 
 
LEARNING OUTCOMES 
 
UNIT 7: ACCOUNTING STANDARD 28  
IMPAIRMENT OF ASSETS 
 
 
After studying this unit, you will be able to: 
? Define the terms ‘recoverable amount’, ‘value in use’, ‘net selling 
price’, ‘cost of disposal’, ‘impairment loss’ and other related terms.  
? Identify an asset that may be Impaired. 
? Measure the recoverable amount after computing net selling price 
and value in use 
? Recognise and measure the impairment loss 
? Identify the cash generating units 
? Compute the recoverable amount and carrying amount of a cash-
generating unit 
? Identify goodwill that whether it relates to the cash-generating unit 
? Impair the cash generating unit 
? Set out the requirements for reversing an impairment loss 
? Apply impairment provisions in case of discontinuing operations 
7.1 INTRODUCTION 
AS 28 came into effect in respect of accounting period commenced on or after  
1-4-2004 and is mandatory in nature from that date for the following:  
(i) Enterprises whose equity or debt securities are listed on a recognised stock 
exchange in India, and enterprises that are in the process of issuing equity 
or debt securities that will be listed on a recognised stock exchange in India 
as evidenced by the board of directors’ resolution in this regard. 
(ii) All other commercial, industrial and business reporting enterprises, whose 
turnover for the accounting period exceeds ` 50 crores. 
 In respect of all other enterprises, the Accounting Standard came into effect 
in respect of accounting periods commenced on or after 1-4-2005 and is 
mandatory in nature from that date. 
© The Institute of Chartered Accountants of India
 
ADVANCE ACCOUNTING  
 5.214 
This standard prescribes the procedures to be applied to ensure that the assets of 
an enterprise are carried at an amount not exceeding their recoverable amount 
(amount to be recovered through use or sale of the asset).  The standard also lays 
down principles for reversal of impairment losses and prescribes certain 
disclosures in respect of impaired assets.  An enterprise is required to assess at 
each balance sheet date whether there is an indication that an enterprise’s assets 
may be impaired.  If such an indication exists, the enterprise is required to 
estimate the recoverable amount and the impairment loss, if any, should be 
recognised in the profit and loss account. 
7.2  SCOPE 
The standard should be applied in accounting for impairment of all assets except 
1.  inventories (AS 2),  
2.  assets arising under construction contracts (AS 7), 
3. financial assets including investments covered under AS 13, and  
4.  deferred tax assets (AS 22).   
There  are chances that the provision on account of impairment losses may 
increase sickness of companies and potentially sick companies may actually 
become sick. 
7.3  ASSESSMENT 
An enterprise should assess at each balance sheet date whether there is any 
indication that an asset may be impaired. If any such indication exists, the 
enterprise should estimate the recoverable amount of the asset. An asset is 
impaired when the carrying amount of the asset exceeds its recoverable amount. 
The requirements use the term ‘an asset’ but apply equally to an individual asset 
or a cash-generating unit. In assessing whether there is any indication that an 
asset may be impaired, an enterprise should consider, as a minimum, the 
following indications: 
© The Institute of Chartered Accountants of India
 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
v
v 
v
v 
    
v 
 5.215 
 
 
External sources of information  
a. During the period, an asset’s market value has declined significantly more 
than would be expected as a result of the passage of time or normal use. 
b. Significant changes with an adverse effect on the enterprise have taken 
place during the period, or will take place in the near future, in the 
technological, market, economic or legal environment in which the 
enterprise operates or in the market to which an asset is dedicated. 
c. Market interest rates or other market rates of return on investments have 
increased during the period, and those increases are likely to affect the 
discount rate used in calculating an asset’s value in use and decrease the 
asset’s recoverable amount materially. 
d. The carrying amount of the net assets of the reporting enterprise is more 
than its market capitalization. 
Internal sources of information 
a. Evidence is available of obsolescence or physical damage of an asset. 
b. Significant changes with an adverse effect on the enterprise have taken 
place during the period, or are expected to take place in the near future, in 
the extent to which, or manner in which, an asset is used or is expected to 
be used. These changes include plans to discontinue or restructure the 
operation to which an asset belongs or to dispose of an asset before the 
previously expected date and 
c. Evidence is available from internal reporting that indicates that the 
economic performance of an asset is, or will be, worse than expected. 
An enterprise may identify other indications that an asset may be impaired and 
these would also require the enterprise to determine the asset’s recoverable 
amount. 
Indicators of Impairment 
[List is NOT exhaustive]
External sources 
Internal sources  
© The Institute of Chartered Accountants of India
Page 4


 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
    
v 
 5.213 
 
LEARNING OUTCOMES 
 
UNIT 7: ACCOUNTING STANDARD 28  
IMPAIRMENT OF ASSETS 
 
 
After studying this unit, you will be able to: 
? Define the terms ‘recoverable amount’, ‘value in use’, ‘net selling 
price’, ‘cost of disposal’, ‘impairment loss’ and other related terms.  
? Identify an asset that may be Impaired. 
? Measure the recoverable amount after computing net selling price 
and value in use 
? Recognise and measure the impairment loss 
? Identify the cash generating units 
? Compute the recoverable amount and carrying amount of a cash-
generating unit 
? Identify goodwill that whether it relates to the cash-generating unit 
? Impair the cash generating unit 
? Set out the requirements for reversing an impairment loss 
? Apply impairment provisions in case of discontinuing operations 
7.1 INTRODUCTION 
AS 28 came into effect in respect of accounting period commenced on or after  
1-4-2004 and is mandatory in nature from that date for the following:  
(i) Enterprises whose equity or debt securities are listed on a recognised stock 
exchange in India, and enterprises that are in the process of issuing equity 
or debt securities that will be listed on a recognised stock exchange in India 
as evidenced by the board of directors’ resolution in this regard. 
(ii) All other commercial, industrial and business reporting enterprises, whose 
turnover for the accounting period exceeds ` 50 crores. 
 In respect of all other enterprises, the Accounting Standard came into effect 
in respect of accounting periods commenced on or after 1-4-2005 and is 
mandatory in nature from that date. 
© The Institute of Chartered Accountants of India
 
ADVANCE ACCOUNTING  
 5.214 
This standard prescribes the procedures to be applied to ensure that the assets of 
an enterprise are carried at an amount not exceeding their recoverable amount 
(amount to be recovered through use or sale of the asset).  The standard also lays 
down principles for reversal of impairment losses and prescribes certain 
disclosures in respect of impaired assets.  An enterprise is required to assess at 
each balance sheet date whether there is an indication that an enterprise’s assets 
may be impaired.  If such an indication exists, the enterprise is required to 
estimate the recoverable amount and the impairment loss, if any, should be 
recognised in the profit and loss account. 
7.2  SCOPE 
The standard should be applied in accounting for impairment of all assets except 
1.  inventories (AS 2),  
2.  assets arising under construction contracts (AS 7), 
3. financial assets including investments covered under AS 13, and  
4.  deferred tax assets (AS 22).   
There  are chances that the provision on account of impairment losses may 
increase sickness of companies and potentially sick companies may actually 
become sick. 
7.3  ASSESSMENT 
An enterprise should assess at each balance sheet date whether there is any 
indication that an asset may be impaired. If any such indication exists, the 
enterprise should estimate the recoverable amount of the asset. An asset is 
impaired when the carrying amount of the asset exceeds its recoverable amount. 
The requirements use the term ‘an asset’ but apply equally to an individual asset 
or a cash-generating unit. In assessing whether there is any indication that an 
asset may be impaired, an enterprise should consider, as a minimum, the 
following indications: 
© The Institute of Chartered Accountants of India
 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
v
v 
v
v 
    
v 
 5.215 
 
 
External sources of information  
a. During the period, an asset’s market value has declined significantly more 
than would be expected as a result of the passage of time or normal use. 
b. Significant changes with an adverse effect on the enterprise have taken 
place during the period, or will take place in the near future, in the 
technological, market, economic or legal environment in which the 
enterprise operates or in the market to which an asset is dedicated. 
c. Market interest rates or other market rates of return on investments have 
increased during the period, and those increases are likely to affect the 
discount rate used in calculating an asset’s value in use and decrease the 
asset’s recoverable amount materially. 
d. The carrying amount of the net assets of the reporting enterprise is more 
than its market capitalization. 
Internal sources of information 
a. Evidence is available of obsolescence or physical damage of an asset. 
b. Significant changes with an adverse effect on the enterprise have taken 
place during the period, or are expected to take place in the near future, in 
the extent to which, or manner in which, an asset is used or is expected to 
be used. These changes include plans to discontinue or restructure the 
operation to which an asset belongs or to dispose of an asset before the 
previously expected date and 
c. Evidence is available from internal reporting that indicates that the 
economic performance of an asset is, or will be, worse than expected. 
An enterprise may identify other indications that an asset may be impaired and 
these would also require the enterprise to determine the asset’s recoverable 
amount. 
Indicators of Impairment 
[List is NOT exhaustive]
External sources 
Internal sources  
© The Institute of Chartered Accountants of India
 
ADVANCE ACCOUNTING  
 5.216 
Example that indicates that an asset may be impaired because of the following: 
a) cash flows for acquiring the asset, or subsequent cash needs for operating or 
maintaining it, that are significantly higher than those originally budgeted; 
b) actual net cash flows or operating profit or loss flowing from the asset that 
are significantly worse than those budgeted; 
c) a significant decline in budgeted net cash flows or operating profit, or a 
significant increase in budgeted loss, flowing from the asset; or 
d) operating losses or net cash outflows for the asset, when current period 
figures are aggregated with budgeted figures for the future. 
The concept of materiality applies in identifying whether the recoverable amount 
of an asset needs to be estimated.  
Note: If there is an indication that an asset may be impaired, this may indicate 
that the remaining useful life, the depreciation method or the residual value 
for the asset need to be reviewed and adjusted under the Accounting Standard 
10, even if no impairment loss is recognised for the asset. 
7.4 MEASUREMENT OF RECOVERABLE AMOUNT 
An impairment loss is the amount by which the carrying amount of an asset 
exceeds its recoverable amount. 
Recoverable amount is the higher of an asset’s net selling price and it’s value in 
use.  
Net selling price 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. 
Costs of disposal are incremental costs directly attributable to the disposal of an 
asset, excluding finance costs and income tax expense.The best evidence for net 
selling price is a price in the bidding sales agreement for the disposal of the 
assets or similar assets. In the absence of this, net selling price is estimated from 
the transactions for the assets in active market, if the asset has the active market. 
If there is no binding sale agreement or active market for an asset, net selling 
© The Institute of Chartered Accountants of India
Page 5


 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
    
v 
 5.213 
 
LEARNING OUTCOMES 
 
UNIT 7: ACCOUNTING STANDARD 28  
IMPAIRMENT OF ASSETS 
 
 
After studying this unit, you will be able to: 
? Define the terms ‘recoverable amount’, ‘value in use’, ‘net selling 
price’, ‘cost of disposal’, ‘impairment loss’ and other related terms.  
? Identify an asset that may be Impaired. 
? Measure the recoverable amount after computing net selling price 
and value in use 
? Recognise and measure the impairment loss 
? Identify the cash generating units 
? Compute the recoverable amount and carrying amount of a cash-
generating unit 
? Identify goodwill that whether it relates to the cash-generating unit 
? Impair the cash generating unit 
? Set out the requirements for reversing an impairment loss 
? Apply impairment provisions in case of discontinuing operations 
7.1 INTRODUCTION 
AS 28 came into effect in respect of accounting period commenced on or after  
1-4-2004 and is mandatory in nature from that date for the following:  
(i) Enterprises whose equity or debt securities are listed on a recognised stock 
exchange in India, and enterprises that are in the process of issuing equity 
or debt securities that will be listed on a recognised stock exchange in India 
as evidenced by the board of directors’ resolution in this regard. 
(ii) All other commercial, industrial and business reporting enterprises, whose 
turnover for the accounting period exceeds ` 50 crores. 
 In respect of all other enterprises, the Accounting Standard came into effect 
in respect of accounting periods commenced on or after 1-4-2005 and is 
mandatory in nature from that date. 
© The Institute of Chartered Accountants of India
 
ADVANCE ACCOUNTING  
 5.214 
This standard prescribes the procedures to be applied to ensure that the assets of 
an enterprise are carried at an amount not exceeding their recoverable amount 
(amount to be recovered through use or sale of the asset).  The standard also lays 
down principles for reversal of impairment losses and prescribes certain 
disclosures in respect of impaired assets.  An enterprise is required to assess at 
each balance sheet date whether there is an indication that an enterprise’s assets 
may be impaired.  If such an indication exists, the enterprise is required to 
estimate the recoverable amount and the impairment loss, if any, should be 
recognised in the profit and loss account. 
7.2  SCOPE 
The standard should be applied in accounting for impairment of all assets except 
1.  inventories (AS 2),  
2.  assets arising under construction contracts (AS 7), 
3. financial assets including investments covered under AS 13, and  
4.  deferred tax assets (AS 22).   
There  are chances that the provision on account of impairment losses may 
increase sickness of companies and potentially sick companies may actually 
become sick. 
7.3  ASSESSMENT 
An enterprise should assess at each balance sheet date whether there is any 
indication that an asset may be impaired. If any such indication exists, the 
enterprise should estimate the recoverable amount of the asset. An asset is 
impaired when the carrying amount of the asset exceeds its recoverable amount. 
The requirements use the term ‘an asset’ but apply equally to an individual asset 
or a cash-generating unit. In assessing whether there is any indication that an 
asset may be impaired, an enterprise should consider, as a minimum, the 
following indications: 
© The Institute of Chartered Accountants of India
 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
v
v 
v
v 
    
v 
 5.215 
 
 
External sources of information  
a. During the period, an asset’s market value has declined significantly more 
than would be expected as a result of the passage of time or normal use. 
b. Significant changes with an adverse effect on the enterprise have taken 
place during the period, or will take place in the near future, in the 
technological, market, economic or legal environment in which the 
enterprise operates or in the market to which an asset is dedicated. 
c. Market interest rates or other market rates of return on investments have 
increased during the period, and those increases are likely to affect the 
discount rate used in calculating an asset’s value in use and decrease the 
asset’s recoverable amount materially. 
d. The carrying amount of the net assets of the reporting enterprise is more 
than its market capitalization. 
Internal sources of information 
a. Evidence is available of obsolescence or physical damage of an asset. 
b. Significant changes with an adverse effect on the enterprise have taken 
place during the period, or are expected to take place in the near future, in 
the extent to which, or manner in which, an asset is used or is expected to 
be used. These changes include plans to discontinue or restructure the 
operation to which an asset belongs or to dispose of an asset before the 
previously expected date and 
c. Evidence is available from internal reporting that indicates that the 
economic performance of an asset is, or will be, worse than expected. 
An enterprise may identify other indications that an asset may be impaired and 
these would also require the enterprise to determine the asset’s recoverable 
amount. 
Indicators of Impairment 
[List is NOT exhaustive]
External sources 
Internal sources  
© The Institute of Chartered Accountants of India
 
ADVANCE ACCOUNTING  
 5.216 
Example that indicates that an asset may be impaired because of the following: 
a) cash flows for acquiring the asset, or subsequent cash needs for operating or 
maintaining it, that are significantly higher than those originally budgeted; 
b) actual net cash flows or operating profit or loss flowing from the asset that 
are significantly worse than those budgeted; 
c) a significant decline in budgeted net cash flows or operating profit, or a 
significant increase in budgeted loss, flowing from the asset; or 
d) operating losses or net cash outflows for the asset, when current period 
figures are aggregated with budgeted figures for the future. 
The concept of materiality applies in identifying whether the recoverable amount 
of an asset needs to be estimated.  
Note: If there is an indication that an asset may be impaired, this may indicate 
that the remaining useful life, the depreciation method or the residual value 
for the asset need to be reviewed and adjusted under the Accounting Standard 
10, even if no impairment loss is recognised for the asset. 
7.4 MEASUREMENT OF RECOVERABLE AMOUNT 
An impairment loss is the amount by which the carrying amount of an asset 
exceeds its recoverable amount. 
Recoverable amount is the higher of an asset’s net selling price and it’s value in 
use.  
Net selling price 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. 
Costs of disposal are incremental costs directly attributable to the disposal of an 
asset, excluding finance costs and income tax expense.The best evidence for net 
selling price is a price in the bidding sales agreement for the disposal of the 
assets or similar assets. In the absence of this, net selling price is estimated from 
the transactions for the assets in active market, if the asset has the active market. 
If there is no binding sale agreement or active market for an asset, net selling 
© The Institute of Chartered Accountants of India
 
 
 ASSETS  BASED  ACCOUNTING STANDARDS 
 
 
v
v 
v
v 
    
v 
 5.217 
 
price is based on the best information available to reflect the amount that an 
enterprise could obtain, at the balance sheet date, for the disposal of the asset in 
an arm’s length transaction between knowledgeable, willing parties, after 
deducting the costs of disposal. 
Value in Use 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. 
Estimating the value in use of an asset involves the following steps:  
a. Estimating the future cash inflows and outflows arising from continuing use 
of the asset and from its ultimate disposal; and 
b. Applying the appropriate discount rate to these future cash flows. 
Carrying amount is the amount at which an asset is recognised in the balance 
sheet after deducting any accumulated depreciation (amortisation) and 
accumulated impairment losses thereon.  
Depreciation (Amortisation) is a systematic allocation of the depreciable 
amount of an asset over its useful life. 
Depreciable amount is the cost of an asset, or other amount substituted for cost 
in the financial statements, less its residual value. 
Useful life is either: 
• The period of time over which an asset is expected to be used by the 
enterprise; or  
• The number of production or similar units expected to be obtained from the 
asset by the enterprise.  
Note 1: If there is no reason to believe that an asset’s value in use materially 
exceeds its net selling price, the asset’s recoverable amount may be taken to be 
its net selling price. This will often be the case for an asset that is held for 
disposal. Otherwise, if it is not possible to determine the selling price we take 
value in use of assets as it’s recoverable amount.  
© The Institute of Chartered Accountants of India