IAS 36: Impairment of Assets and Testing Their Carrying Amount

IAS 36 in a nutshell

• an asset may not be carried above its recoverable amount — the higher of fair value less costs of disposal and value in use;
• goodwill, intangible assets with an indefinite useful life and intangible assets not yet available for use are tested annually; other assets — when there are indicators of impairment;
• an impairment loss on goodwill is not reversed; for other assets it is reversed, but not above the carrying amount that would have existed without the impairment.

Example

Equipment: carrying amount UZS 900 million. Fair value less costs of disposal — UZS 600 million, value in use (discounted cash flows) — UZS 700 million. The recoverable amount is UZS 700 million, the impairment loss of UZS 200 million goes to profit or loss; depreciation is then calculated from UZS 700 million.

Who needs this in Uzbekistan

IFRS accounting is mandatory for public interest entities — from 1 January of the year following the year of inclusion in the Register (Presidential Resolution PP-282) — and for companies that have voluntarily adopted IFRS.

The idea of the standard

An asset should not be carried in the financial statements at more than the amount the company can recover from using or selling it. If there is an excess, the carrying amount is reduced and the difference is recognised as a loss.

Impairment under IAS 36 protects users of the financial statements from an illusion of well-being, where the balance sheet looks strong thanks to assets that have in fact lost their value.

Indicators of impairment

At each reporting date, the company assesses whether there are indications that an asset may be impaired. The sources of these signals are external and internal.

External — a fall in market value, a deterioration in the market or technological environment, rising interest rates. Internal — physical damage, idle capacity, plans to discontinue use, performance worse than expected.

• a significant decline in market value
• adverse changes in the industry or technology
• higher cost of financing
• physical obsolescence or damage
• plans to discontinue or restructure operations
• actual results worse than planned

Recoverable amount

Recoverable amount is the higher of two values: fair value less costs of disposal and value in use. The logic is simple — the company will choose the more advantageous scenario.

Value in use is calculated as the present value of the future cash flows from the asset. This is where most assumptions are made, and they are what require justification and disclosure.

Cash-generating units

Many assets do not generate cash flows on their own: a machine in a workshop, a building, part of the infrastructure. In that case impairment is tested at the level of the smallest group of assets that generates independent cash inflows.

Defining the boundaries of such a unit is a matter of professional judgement. The test result depends on how the boundaries are drawn, so the approach must be consistent.

Recognising and reversing the loss

An impairment loss is recognised when the carrying amount exceeds the recoverable amount, and is charged to profit or loss for the period or reduces the revaluation surplus if the asset was previously revalued.

The standard allows a previously recognised loss to be reversed when circumstances change, but with limitations. No reversal is permitted for goodwill.

• comparing carrying amount with recoverable amount
• recognising the loss in the financial statements
• adjusting subsequent depreciation
• assessing whether a reversal is possible in future periods

Disclosures

The notes disclose the amounts of losses recognised, the circumstances that led to the impairment, the key assumptions of the calculation and the approaches to determining recoverable amount.

Boilerplate disclosures are a frequent audit finding. Without a description of the assumptions, users cannot assess how reliable the test result is.

Leader Audit's practice

In our audits we regularly find that the impairment test is either not performed at all or done as a formality — with assumptions that are inconsistent with the company's budgets and plans.

We help set up the procedure: identify cash-generating units, develop the calculation methodology, prepare support for the assumptions and the disclosures. We work with companies throughout Uzbekistan.