Key Definitions

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

Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use

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

Indications of Impairment

External sources:

• market value declines
• negative changes in technology, markets, economy, or laws
• increases in market interest rates
• net assets of the company higher than market capitalisation

Internal sources:

• obsolescence or physical damage
• asset is idle, part of a restructuring or held for disposal
• worse economic performance than expected
• for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee's assets, or a dividend exceeds the total comprehensive income of the investee

These lists are not intended to be exhaustive.Further, an indication that an asset may be impaired may indicate that the asset's useful life, depreciation method, or residual value may need to be reviewed and adjusted

Impairment of goodwill

Goodwill should be tested for impairment annually.

To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, ir

irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated shall: [IAS 36.80]

• represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and
• not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.

A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit:

• If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit is not impaired
• If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise an impairment loss.

The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:

• first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and
• then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis.

The carrying amount of an asset should not be reduced below the highest of:

• its fair value less costs of disposal (if measurable)
• its value in use (if measurable)
• zero.

If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units).

Advantages and disadvantages of this standard to investors

Advantages

The advantages of impairment of assets are explained in the following points:

• Impairment charges, if correctly applied, provide the analysts and investors with different ways to assess company management and its decision taking track record. Managers who write off or write down assets because of impairment have not made god investment choices.
• Many business failures are heralded by a fall in the impairment value of assets. Such disclosures act as early warning signals to creditors and investors.

Disadvantages

The disadvantages of asset impairment are explained in the following points:

• It can be, sometimes, quite difficult to determine the measure of value which should be used while assessing an impairment. The most common options include current market value, current cost, NRV, or the sum of future net cash flows from the income-producing unit.
• The detailed guidance on accounting for impairment of assets is little, like when to recognize impairment, how to measure impairment, and how to disclose impairment.