AS 28 – Impairment of Assets | Advanced Accounting for CA Intermediate PDF Download

Applicability of AS-28

This accounting standard became effective on April 1, 2004, and is obligatory for the following categories of entities:

• Enterprises with equity or debt securities listed on recognized stock exchanges in India or those in the process of issuing such securities and aiming for listing, as indicated by a board resolution.

  Example: A company that currently has its shares traded on the Bombay Stock Exchange falls under the purview of AS-28.

• Commercial, industrial, and business reporting entities with turnovers exceeding Rs. 50 Crores in an accounting period.

  Example: A manufacturing company with an annual turnover of Rs. 60 Crores needs to adhere to the guidelines of AS-28.

Explanation

This standard outlines the procedures to follow when an asset's value decreases, ensuring that its carrying amount does not exceed its recoverable amount. It also details how to reverse impairment losses and the necessary disclosures for impaired assets at the end of the financial year.

The standard applies to all assets except for the following:

• Inventories (covered under AS – 2)
• Assets arising from construction contracts (covered under AS – 7)
• Financial assets including investments (covered under AS – 13)
• Deferred tax assets (covered under AS – 22)

Note: The carrying amount is the book value of assets after depreciation and any revaluation. The recoverable amount is the higher of the net selling price or the value in use.

Indicators

At the end of each financial year, an enterprise must evaluate whether any asset needs to be impaired. If any indication of impairment exists, the asset must be assessed for impairment. Indicators to consider include:

External Indicators:

• Technological changes leading to a decline in asset value
• Increased market interest rates
• Legal restrictions on the use of the asset
• The carrying amount of the enterprise's assets exceeds its market capitalization

Internal Indicators:

• Physical damage to the assets
• Internal reports providing concrete evidence of poor asset performance
• Discontinuation of operations or plans for restructuring

Measurement of Recoverable Amount

Recoverable amount of an asset is defined as the higher value between its market value and its value in use. When the selling price cannot be determined, the value in use is considered as the recoverable amount.

According to ICAI, the "Recoverable amount is determined for an individual asset, unless the asset does not produce cash inflows from ongoing use that are mostly independent of those from other assets or groups of assets."

In cases where this criterion is not met, the recoverable amount is assessed for the cash-generating unit to which the asset pertains, unless certain conditions are present.

The Asset's Evaluation for Impairment

• The net selling price of an asset surpasses its carrying amount.
• The asset's value in use can be approximated to be close to its net selling price, which is determinable.

Note: An impairment loss occurs when the carrying amount of an asset exceeds its recoverable amount.

Cash Flow Projections

Cash flow projections are essential financial tools that forecast the inflow and outflow of cash over a specific period, typically up to five years. These projections are crucial for financial planning and decision-making within an organization. It is vital for management to base these projections on recent budgets or forecasts while incorporating reasonable and supportable assumptions to ensure their accuracy and reliability.

Key Components of Cash Flow Projections

• Net Cash Flow from the Continued Use of Assets: This represents the cash generated or consumed by utilizing existing assets in the business operations. It is essential to assess the efficiency of asset utilization to determine the sustainability of cash flows.
• Net Cash Flow to Be Received at the End of Sale of the Asset (Scrap Value): This refers to the cash expected to be generated from the disposal of assets at the end of their useful life. Calculating the scrap value is crucial for estimating the total cash inflows accurately.

By incorporating these two key components into cash flow projections, organizations can gain a comprehensive understanding of their financial health and make informed decisions regarding resource allocation and investment strategies.

Recognition and Measurement of Impairment Loss

If an asset's recoverable amount exceeds its carrying amount, the difference is disregarded. However, if the recoverable amount is less than the carrying amount, the variance, known as Impairment Loss, must be promptly deducted. This loss is then recognized as an expense in the Profit & Loss Account.

• When the recoverable amount surpasses the carrying amount:

• The excess is not considered in the assessment.

• If the recoverable amount is lower than the carrying amount:

• The variance, designated as Impairment Loss, is immediately expensed in the Profit & Loss Account.

Cash Generating Unit

Definition of Cash Generating Unit:
A cash generating unit represents the smallest identifiable cluster of assets that independently generates cash inflows through their ongoing utilization. These inflows are distinct from those produced by other assets or groups of assets.

Protection of Carrying Amount:
It is essential to safeguard the carrying amount of a cash generating unit, ensuring it does not fall below the higher of:

• Net Selling Price
• Value in Use

Example to Understand:
Imagine a manufacturing plant with machinery, tools, and equipment. This entire setup, collectively considered a cash generating unit, operates to produce goods. The revenue generated from selling these goods forms the cash inflows specific to this unit.

Reversal of Impairment Loss

• An organization needs to annually reassess if previously identified impairment losses are still valid or if they have reduced. This evaluation involves examining both internal and external factors to determine the recoverable amount of the asset.
• If the recoverable amount surpasses the carrying amount of the asset, the impairment loss must be reversed. This reversal is then recorded as income in the financial records. When reversing impairment loss for a cash-generating unit, it should first be allocated to the assets and then to goodwill.
• Reversal of impairment loss for goodwill is contingent upon proving that the impairment resulted from extraordinary external factors. Additionally, it must be demonstrated that subsequent events have remedied the conditions that led to the impairment.

Impairment loss for goodwill should only be reversed if it is proven that the impairment was caused by external effects of exceptional nature and the subsequent events have reversed the event which led to the impairment.

Disclosures

The following disclosures are necessary in the financial statements:

• Impairment loss recognized and reversed for each class of assets
• Amount of impairment loss set off against revaluation reserve and the amount of reversal of impairment loss credited to revaluation reserve segment reporting – AS 17
• Calculation of Revaluation Amount of each class of assets
• Assumptions used in the calculation of Recoverable Amount
• Events that lead to impairment
• Description of Cash Generating Unit