IFRS Disclosure IAS 36 Impairment of Assets
IFRS Disclosure IAS 36 Impairment of Assets:Objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset.
If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.
IFRS Disclosure IAS 36 Impairment of Assets: Requirements
IAS 36 Impairment of Assets (the standard) sets out the requirements to account for and report impairment of most non-financial assets. IAS 36 specifies when an entity needs to perform an impairment test, how to perform it, the recognition of any impairment losses and the related disclosures. Having said that, the application of IAS 36 is wide and its requirements may be open to interpretation. The recent economic uncertainty has thrown a spotlight on impairment.
As such, many entities have decided to reassess their impairment testing processes, models and assumptions. In this introductory publication, we provide an overview of the key requirements of IAS 36 — an introduction for those who have not performed an impairment test in accordance with IAS 36 and a refresher for existing IFRS prepares. We point out areas where IAS 36 differs from US GAAP and also highlight some of the practical considerations for first-time adopters of IFRS.
IFRS Disclosure IAS 36 Impairment of Assets :Impairment principle and key requirements
IAS 36 deals with impairment testing for all tangible and intangible assets, except for assets that are covered by other IFRS. IAS 36 requires that assets be carried at no more than their recoverable amount. To meet this objective, the standard requires entities to test all assets that are within its scope for potential impairment when indicators of impairment exist or, at least, annually for goodwill and intangible assets with indefinite useful lives.
IFRS Disclosure IAS 36 Impairment of Assets:Key requirements- Key requirements of IAS 36.
The entity assesses, at each reporting date, whether there is any indication that an asset may be impaired.
- If there is an indication that an asset may be impaired, the recoverable amount of the asset is determined.
- The recoverable amount of goodwill, intangible assets with an indefinite useful life and intangible assets that are not available for use on the reporting date, is required to be measured at least on an annual basis, irrespective of whether any impairment indicators exist.
- The asset or CGU is impaired if its carrying amount exceeds its recoverable amount.
- The recoverable amount is defined as the higher of the ‘fair value less costs to sell’ and the ‘value in use’.
- Any impairment loss is recognised as an expense in profit or loss for assets carried at cost. If the affected asset is a revalued asset, as permitted by IAS 16 Property, Plant and Equipment (IAS 16) and IAS 38 Intangible Assets (IAS 38), any impairment loss is recorded first against previously recognised revaluation gains in other comprehensive income in respect of that asset.
- Extensive disclosure is required for the impairment test and any impairment loss recognised.
- An impairment loss recognised in prior periods for an asset other than goodwill is required to be reversed if there has been a change in the estimates used to determine the asset’s recoverable amount.
IFRS Disclosure IAS 36 Impairment of Assets:Disclosures
Disclosures IAS 36 requires extensive disclosures in respect of the impairment tests performed and impairments recognised. The disclosures are even more extensive for goodwill than for the impairment of other assets. The key disclosure requirements are the following:
- The amounts of impairments recognised and reversed and the events and circumstances that were the cause thereof
- The amount of goodwill per CGU or group of CGUs
- The valuation method applied: FVLCS or VIU and its approach in determining the appropriate assumptions
- The key assumptions applied in the valuation, including the growth and discount rate used
- A sensitivity analysis, when a reasonably possible change in a key assumption would result in an impairment, including the ‘headroom’ in the impairment calculation and the amount by which the assumption would need to change to result in an impairment.
IFRS Disclosure IAS 36 Impairment of Assets- First-time adopters
First-time adopters of IFRS First-time adopters of IFRS are required by IFRS 1 First-Time Adoption of International Financial Reporting Standards, to test all goodwill carried in the balance sheet at the date of transition for impairment when business combinations occurring prior to transition have not been retrospectively restated, regardless of whether there are any indications of impairment. For other assets, first-time adopters should perform an impairment test under IAS 36 if there is any indication at the date of transition that the respective assets are impaired.
IFRS Disclosure IAS 36 Impairment of Assets -Care needs to be taken
Care need to be taken to appropriately assess for impairment when business combinations have been retrospectively restated. Any impairment loss at the date of transition will be recorded as an adjustment to retained earnings.
These impairment tests are based on conditions that exist at transition date. If an entity recognises or reverses an impairment loss at transition date, the disclosures required are the same as those that the entity would have made had it recognised those impairment losses or reversals in the period beginning with the date of transition to IFRS.
IFRS Disclosure IAS 36 Impairment of Assets -First-time adopters
IAS 36 may bring with it many changes in practice in the way the entity will need to deal with impairment of assets. Entities that are anticipating adopting IFRS should carefully assess the impact of IAS 36 to avoid any surprises when adoption is required. The rigours and extent of impairment testing may well result in the need for additional independent expertise to assist with the required valuations. Table 1 includes suggested actions that entities should consider when adopting IFRS.
IFRS Disclosure IAS 36 Impairment of Assets- Conclusion
Conclusion Impairments are a key element of the financial reporting process, whether or not an entity is a first-time adopter of IFRS. The process of assessing impairment may be complex and time consuming. It is essential that the owners of the process, typically the finance team, plan early and have access to the right skills such as business modelling and forecasting.
Selection of the most appropriate approach, model and assumptions may be dependent on having sufficient knowledge of the operational and financial prospects of the business and the industry in which it operates. Therefore, senior executives should be involved to provide support, input and critically review outcomes
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IFRS Disclosure IAS 36 Impairment of Assets
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