Why recognize impairment loss

IAS 36 was reissued in March and applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March , and for all other assets prospectively from the beginning of the first annual period beginning on or after 31 March To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined.

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses. Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date see IFRS 13 Fair Value Measurement.

Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit. At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired i.

IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated. The recoverable amounts of the following types of intangible assets are measured annually whether or not there is any indication that it may be impaired. In some cases, the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period: [IAS These lists are not intended to be exhaustive.

Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and extrapolation for periods beyond budgeted projections. Cash flow projections should relate to the asset in its current condition — future restructurings to which the entity is not committed and expenditures to improve or enhance the asset's performance should not be anticipated. Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or payments.

In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. The discount rate should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that investors would require if they were to choose an investment that would generate cash flows equivalent to those expected from the asset. For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity would pay in a current market transaction to borrow money to buy that specific asset or portfolio.

If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow risk. An asset is impaired if its projected future cash flows are less than its current carrying value.

Another indicator of potential impairment occurs when an asset is more likely than not to be disposed prior to its original estimated disposal date. Asset accounts that are likely to become impaired are the company's accounts receivable , goodwill , and fixed assets.

Long-term assets , such as intangibles and fixed assets, are particularly at risk of impairment because the carrying value has a longer span of time to become impaired. Assets are tested for impairment on a periodic basis to ensure the company's total asset value is not overstated on the balance sheet. According to generally accepted accounting principles GAAP , certain assets, such as goodwill, should be tested on an annual basis.

GAAP also recommends that companies take into consideration events and economic circumstances that occur between annual impairment tests in order to determine if it is "more likely than not" that the market value of an asset has dropped below its carrying value. An impairment loss should only be recorded if the anticipated future cash flows are unrecoverable.

The journal entry to record an impairment is a debit to a loss, or expense, account and a credit to the related asset. A contra asset impairment account, which holds a balance opposite of the associated asset account, may be used for the credit in order to maintain the historical cost of the asset on a separate line item. In this situation, the net of the asset, its accumulated depreciation, and the contra asset impairment account reflect the new carrying cost. Upon recording the impairment, the asset has a reduced carrying cost.

In future periods, the asset will be reported at its lower carrying cost. This is in compliance with conservative accounting principles. Any increase in value is recognized upon the sale of the asset.

Standard GAAP practice is to test fixed assets for impairment at the lowest level where there are identifiable cash flows. For example, an auto manufacturer should test for impairment for each of the machines in a manufacturing plant rather than for the high-level manufacturing plant itself.

However, if there are no identifiable cash flows at this low level, it's allowable to test for impairment at the asset group or entity level. If an asset group experiences impairment, the adjustment is allocated among all assets within the group. This proration is based on the current carrying cost of the assets. A capital asset is depreciated on a regular basis in order to account for typical wear and tear on the item over time.

The amount of depreciation taken each accounting period is based on a predetermined schedule using either straight line or one of multiple accelerated depreciation methods. Depreciation differs from impairment, which is recorded as the result of a one-time or unusual drop in the market value of an asset. When a capital asset is impaired, the periodic amount of depreciation is adjusted moving forward.

Retroactive changes are not required for adjusting the previous depreciation already taken. Other Standards have made minor consequential amendments to IAS This website uses cookies to support your browsing experience, including cookies for signing in to your IFRS account and analytics cookies. You can view the full list of cookies in our privacy policy. Phrase search. Word search. About us Who we are. Our structure. Working in the public interest.

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