AS 28 – Impairment of Assets

AS – 28 deals with the impairment of assets i.e the carrying amount of the assets should not be more than the recoverable amount of the assets. This calculation has to be done at the end of each financial year.

Applicability

This standard came into effect as on 1st April 2004, and is mandatory in nature for the following assessee:

a. Enterprises whose equity or debts securities are already listed in the recognised stock exchange in India. It is also applicable for those enterprises who are already in the process of issuing equity or debt securities and to listed in the recognised stock exchange in India as evidenced by the board of resolution in this regard.

b. Any commercial, industrial and business reporting enterprises having turnover of more than Rs. 50 Crores in an accounting period.

Explanation

This standard lays down the procedures that need to be followed when there is a reduction in the value of the assets so as to ensure that the carrying amount of the assets does not exceed the recoverable amount. This standard also specifies the reversal of the impairment losses and the disclosures to be made in respect of the impaired assets at the end of the Financial Year.

The standard is applied on all assets except the following: a. Inventories (Covered in AS – 2) b. Assets arising under Construction Contracts (Covered on AS – 7) c. Financial Assets including Investments (Covered in AS – 13) d. Deferred Tax Assets (Covered in AS -22) Note: Carrying amount means the book value of the assets after the depreciation and any other revaluation done by the enterprises. Recoverable amount is the net selling value or value in use whichever is higher.

Indicators

An enterprise should assess at the end of the financial year that whether any asset needs to be impaired. If there is any such indication that the assets need to be impaired then the impairment of assets is required. There are few indicators which the enterprise has to take into consideration to assess the impairment, these are:

External Indicators

• Change in technology leading to the decline in value of the asset
• Increased market interest rate
• Restriction on the use of the asset due to the legal matters
• The carrying amount of the assets of the reporting enterprises is more than its market capitalization

Internal Indicators

• Physical damage of the assets
• Concrete evidence from the internal reports about the poor performance of the asset
• Discontinuity of operations or plans of restructuring

Measurement of Recoverable Amount

As defined earlier, recoverable amount of asset is higher of market value or value in use. In case the selling price is undeterminable then the value in use must be taken as the recoverable amount.

As per ICAI, “Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows from continuing use that are largely independent of those from other assets or group of assets.

If this is the case, recoverable amount is determined for the cash generating unit to which the asset belongs, unless either:

• The asset’s net selling price is higher than its carrying amount.
• The asset’s value in use can be estimated to be close to its net selling price and net selling price can be determined.”

Note: An impairment loss is the amount when the carrying amount of the asset increases the recoverable amount of the assets.

Cash Flow Projections

Cash flow projections should be based on the recent budgets or forecasts and should be for a maximum of 5 years. The management should take reasonable and supportable assumptions for making the cash flow.

The cash flow projections should include the following 2 points:

• Net cash flow from the continuing use of the assets
• Net cash flow to be received at the end of sale of the asset (Scrap Value)

Recognition and Measurement of Impairment Loss

If the recoverable amount of the asset is more than the carrying amount then the difference amount must be ignored, but if the recoverable amount of the asset is less than the carrying amount then the difference termed as Impairment Loss should be written off immediately and should be treated as an expense to Profit & Loss Account.

Cash Generating Unit

A cash generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets. The carrying amount of cash generating unit should not be reduced below the highest of: a. Net Selling Price b. Value in Use

Reversal of Impairment Loss

An enterprise at the end of each financial year should review whether the previously recognized impairment loss continue to exist or whether it has been decreased. The enterprise must access the various external and internal indicators as to access the recoverable amount of the asset.

If the recoverable amount of the asset is more than the carrying amount, then the impairment loss has to be reversed and it has to be treated as income in the books of accounts. The reversal of impairment loss previously recognized for a cash generating unit has to be allocated first to the assets, then goodwill.

Impairment loss for goodwill should only be reversed if it is proved that the impairment was caused by external effects of exceptional nature and the subsequent events have reversed the event which lead to the impairment.

Disclosures

The following disclosures are required in the financial statements:

• Impairment loss recognized and reversed for each class of assets
• Amount of impairment loss set off against revaluation reserve and amount of reversal of impairment loss credited to revaluation reserve segment reporting – AS 17)
• Calculation of Revaluation Amount of each class of assets
• Assumptions used in the calculation of Recoverable Amount
• Events that lead to impairment
• Description of Cash Generating Unit.