In this page we are going to talk about the impairment of long lived assets
WHAT IS IMPAIRMENT OF ASSETS?
An asset is said to be impaired, when the entity is not able to recover its carrying amount. Carrying amount is the value of the asset as recorded in the balance sheet net of depreciation or impairment loss.
HOW IS IMPAIRMENT RECOGNIZED?
As per ASPE, the carrying amount is said to be not recoverable and impairment is said to exist if the carrying amount exceeds both the un-discounted cash flows plus the disposable value. Here the sum of un-discounted cash flows plus the disposable value is the recoverable amount.
Here goes the formula to test the impairment of a long lived asset.
Carrying Amount > Recoverable Amount (un-discounted cash flows + disposable value)
(Note: Here the disposable value represents the value at which the asset can be finally disposed off after its useful life)
If the above test proves to be positive, then the impairment is said to exist.
As per IFRS, the recoverable amount is slightly different, it is not the sum of disposal value plus undiscounted cash flows, but the higher of
A) Value in use (discounted cash flows + Disposable value of the Asset ( after netting it off with cost of disposal of asset)
B (Fair value asset - cost to sell the asset)
In the above example, the recoverable amount of an asset is calculated by comparing the highest of value of asset when in use and the fair value of the asset. The other exception is that the cost of disposing off the asset is usually deducted from the disposable value and also the fair value to determine the recoverable amount.
In order to test the impairment under IFRS, the higher of the value A and B is taken which is the recoverable amount. This amount is then compared with the carrying amount and if it is found to be lower than the carrying amount, the impairment is said to exist.
HOW IS IMPAIRMENT MEASURED?
As per ASPE
Carrying Amount - Fair Value = Impairment loss
As per IFRS
Carrying Amount - Recoverable Amount = Impairment loss
(Note: As you would have already noticed, the impairment is tested and calculated differently for both IFRS and ASPE).
HOW IS THE IMPAIRED ASSET WRITTEN DOWN?
Under ASPE, the asset is written down to its fair value
Under IFRS, the asset is written down to its recoverable amount
New carrying value of the asset = old carrying value - impairment loss (ASPE & IFRS)
HOW OFTEN DO WE NEED TO TEST FOR IMPAIRMENT?
As per IFRS, impairment test has to be done for all assets every single year to check if there is any indication of impairment . Whereas under ASPE, the test of impairment is done for the assets only when the factors indicate that there may be an impairment (an example of indication is technological obsolescence and introduction of new version of the asset in the market, major restructuring happening in the organization which does not make use of the asset, physical damage to the asset like fire or other accidents)
Intangibles with indefinite life need not be tested for impairment every year
Goodwill, if it is acquired by business combination has to be tested for impairment even if there are no indications of impairment.
(Note: Goodwill arises on business combinations, when the acquiring company pays more money than the net assets of the business being acquired. As goodwill does not generate cash on its own or can be sold off to the outsider, the goodwill generated from any business combination is usually allocated to the cash generating units which is getting benefited from the said business combination. The test of impairment test is then done on the cash generating unit and not the goodwill).
According to IFRS, the impairment test can be done at anytime during the year. It need not necessarily be the year end. It can be done any time before the year end.However, the test has to be done consistently on the same month every year.
Journal entry to record impairment loss
Impairment Loss Dr
Asset/ Equipment Cr
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