GENERAL CLARIFICATIONS ON AS

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ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS
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AS 28 IMPAIRMENT OF ASSETSObjective

• To prescribe the procedures that an enterprise
  applies to ensure that its assets are carried at
  no more than their recoverable amount

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AS 28 IMPAIRMENT OF ASSETSOverview

• Scope and Definitions
• Accounting for Impairment
• Indicators
• Recognition Measurement
• Goodwill Corporate assets
• Treatment of Impairment Loss
• Reversal
• Disclosures
• High Level Comparison with IAS US GAAP
• Matters for Discussion Practical Challenges

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AS 28 IMPAIRMENT OF ASSETSScope

• Applies to all assets other than
• Inventories ( AS-2)
• Assets arising from construction contracts (AS-7)
• Financial Assets including Investments(AS-13)
• Deferred tax assets (AS-22)
• Asset i.e. Individual asset or Cash Generating
  Unit (CGU)
• May be carried at cost / revalued amount

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AS 28 IMPAIRMENT OF ASSETSScope Changes when
AS-30 becomes Mandatory

• Applies to all assets other than
• Inventories ( AS-2)
• Assets arising from construction contracts (AS-7)
• Financial Assets within the scope of AS-30
• Deferred tax assets (AS-22)
• Accounting Standard will cover
• Investment in Subsidiaries (AS-21), Associates
  (AS-23) and Joint Ventures (AS-27)

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AS 28 IMPAIRMENT OF ASSETSDefinitions

• Carrying Amount (CA)
• Recoverable Amount (RA)
• Cash Generating Units (CGU)
• Impairment loss

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AS 28 IMPAIRMENT OF ASSETSRecoverable Amount
(RA)

• Is the higher of an assets
• Net Selling Price (NSP)
• OR
• Value in use.

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AS 28 IMPAIRMENT OF ASSETSRecoverable Amount
(RA)

• Net Selling Price (NSP)
• amount obtainable in arms length transaction
  less costs of disposal
• asset is traded in an active market then the
  market price or
• the current bid price less costs of disposal
• Value in use.
• present value of estimated future cash flows from
  continuing use and ultimate disposal

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AS 28 IMPAIRMENT OF ASSETSValue in Use Cash
Flow Considerations

• Pre-tax market discount rate
• Short-term projections - maximum 5 years
• based on financial budgets approved by management
• Estimation for the asset in its current condition
  (restructuring capital expenditure on the
  assets ignored)
• Long term projections
• based on short term projections
• steady or declining growth
• growth rates exceeding long term average rates of
  the product, industry or economy discouraged

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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)

• Estimate recoverable amount for
• the individual asset or, if not possible,
• the assets cash generating unit
• Apply cash generating unit concept when the asset
  does not generate cash flows which are
  independent from other assets
• The smallest identifiable group of assets that
  generates cash flows from continuing use that are
  largely independent from other assets or groups
  of assets

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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)

• Assets may be bought/sold individually but they
  are often used in groups
• Revenue and cash arise from use of various assets
  and cannot be attributed to the individual assets
• Factors to consider
• How management monitors the enterprises
  operations
• How management makes decisions about continuing
  or disposing of the enterprise's assets and
  operations
• Segment Reporting

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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)
Example 1 A mining enterprise owns a private
railway to support its mining activities. The
private railway could be sold only for scrap
value and the private railway does not generate
cash inflows from continuing use that are largely
independent of the cash inflows from the other
assets of the mine Q What is the
cash-generating unit?
A The cash-generating unit is mine as a whole.
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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)
Example 2 A machine has suffered physical
damage but is still working, although not as well
as it used to. The net selling price of the
machine is less than its carrying amount. The
machine does not generate independent cash
inflows from continuing use. The smallest
identifiable group of assets that includes the
machine and generates cash inflows from
continuing use that are largely independent of
the cash inflows from other assets is the
production line to which the machine belongs. The
recoverable amount of the production line shows
that the production line taken as a whole is not
impaired.
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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)
Example Case 1 (Assumption) Budgets/forecasts
approved by management reflect no commitment of
management to replace the machine. Case 2
(Assumption) Budgets/forecasts approved by
management reflect a commitment of management to
replace the machine and sell it in the near
future. Cash flows from continuing use of the
machine until its disposal are estimated to be
negligible.
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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)

• Retail Store Chain
• Store X belongs to a retail store chain M.
  Purchasing, pricing, marketing, advertising and
  human resource policies (except for hiring Xs
  cashiers salesman) are decided by M. M also
  owns 5 other stores in same city as X (although
  in different neighbourhoods) and 20 other stores
  in other cities. All stores are managed in same
  way as X.
• What is CGU ?

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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)

• Plant for Intermediate Step in a Production
  Process
• A significant raw material used for plant Ys
  final production is an intermediate product
  bought from plant X of the same enterprise. Xs
  products are sold to Y at a transfer price that
  passes all margins to X. 80 of Ys final
  production is sold to customers outside of the
  RE. 60 of Xs final production is sold to Y and
  the remaining 40 is sold to customers outside of
  the RE.

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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)

• What is the CGU
• Case 1 X could sell the products it sells to Y
  in an active market. Internal transfer prices
  are higher than market prices.
• Case 2 There is no active market for the
  products X sells to Y.

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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)

• Magazine Titles
• A publisher owns 150 magazine titles (70
  purchased and 80 self created). Cash inflows from
  direct sales and advertising are identifiable for
  each magazine title. Titles are managed by
  customer segments and level of advertising income
  for a magazine title depends on range of title in
  the customer segment to which it belongs.
  Management has a policy to abandon old titles
  before the end of their economic lives and
  replace them immediately with new titles for same
  customer segment.
• What is the CGU?

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AS 28 IMPAIRMENT OF ASSETSCash Generating
Units (CGU)(Contd.)

• Building - Rented Own Use
• A manufacturing company uses half of its
  headquarter building and rents out the other half
  to third parties on a 5 year lease.
• What is the CGU?

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AS 28 IMPAIRMENT OF ASSETSAccounting for
Impairment
A
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AS 28 IMPAIRMENT OF ASSETSAccounting for
Impairment (Contd.)
A
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AS 28 IMPAIRMENT OF ASSETSFrequency and
Application of Impairment

• Frequency of Impairment Testing at each balance
  sheet date
• When an indicator is triggered
• Impairment to apply to individual assets as well
  as a Cash Generating Unit (CGU)
• Specific rules for corporate assets and goodwill.

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AS 28 IMPAIRMENT OF ASSETSIndicators of
Impairment

• External sources
• significant decline in market value
• technological, market, economic, legal
  environment
• changes in interest rates or rates of return
• net assets gt market capitalisation
• Internal sources
• evidence of obsolescence or of physical damage
• discontinuance, disposal, restructuring plans
• asset performance declining or expected to decline

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AS 28 IMPAIRMENT OF ASSETSIndicators of
Impairment - Example

• Entity S is the biggest local supermarket chain
  in a developing country.
• Recently, the global chain M, has decided to set
  up operations in the country. Entity M is well
  known world-wide, intends to establish its shops
  close to entity Ss and to offer entity Ss
  customers a wider range of products and
  international brands. Management of entity S
  expects to retain most of its customer base.
• In this example, entity Ms market entry is an
  impairment indicator. Management should perform
  impairment tests, estimating the recoverable of
  its assets, based on the best available
  information

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AS 28 IMPAIRMENT OF ASSETSIndicators of
Impairment - Example

• Entity Q produces mousetraps and has for some
  time been the market leader. Its chief
  competitor, entity R, has recently developed a
  new product that is widely acknowledged as being
  superior to that of entity Q.
• Entity Qs management has not performed an
  impairment review on its plant on the grounds
  that annual production and sales are ahead of
  budget
• Entity Q should review its plant and equipment
  for impairment. The change in the market for its
  product can have a significant impact on the
  equipments value based on the economic benefit
  to be obtained from its continued use.
• The existence of a conflicting indicator (sales
  ahead of budget) is not sufficient to negate the
  need for an impairment review.

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AS 28 IMPAIRMENT OF ASSETSIndicators of
Impairment - Example

• An entity is in the business of manufacturing
  cassette tape players. Industry forecasts
  indicated a decrease in demand for the entitys
  product over the next five years due to growth in
  demand for competing products such as MP3
  players.
• Management should consider this trend in
  assessing impairment. External trends as well as
  discrete events may indicate that an asset is
  impaired.
• Trends such as overcapacity in a particular
  industry, or a change in the demand for a product
  due to technological, market or other conditions,
  should be considered in assessing impairment.
  Managements ability and plans to reverse
  negative trends should be considered in assessing
  impairment.

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AS 28 IMPAIRMENT OF ASSETSRecognition
Measurement of Loss

• Asset to be reduced to recoverable amount only
  if
• RA lt CA
• The reduction is an impairment loss CA - RA
• Impairment loss to be recognised
• As an expense in the PL Account, immediately,
  otherwise
• As a revaluation decrease (if carried at
  revalued amount)

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AS 28 IMPAIRMENT OF ASSETSExample 1
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AS 28 IMPAIRMENT OF ASSETSRecognition
Measurement of Loss (Contd.)

• After the recognition of an impairment loss
• adjust depreciation (amortization) charge for the
  asset in future periods
• allocate the asset's revised carrying amount,
  less its residual value (if any), on a systematic
  basis over its remaining useful life.

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AS 28 IMPAIRMENT OF ASSETSBottom-Up Test
Goodwill and Corporate Assets

• Perform following steps for a bottom-up test
• Identify if goodwill or corporate asset can be
  allocated on a reasonable consistent basis to
  the CGU under review
• Compare RA of cash generating unit (CGU) to its
  CA(including goodwill or corporate asset) and
  recognise impairment loss.

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AS 28 IMPAIRMENT OF ASSETSExample

• An enterprise called ER is a wholly owned
  subsidiary and has 3 divisions (CGU) A, B and C.
  There are indications that B is impaired and ER
  has estimated its recoverable amount to be Rs.
  230cr. The value of ER has been estimated, by the
  ultimate holding company, to be Rs. 1,380cr. The
  goodwill held in the group accounts in respect of
  ER can be allocated on a reasonable and
  consistent basis.
• Cash generating unit A B C Total
• Rs. cr. Rs. cr. Rs. cr. Rs. cr.
• Net assets directly involved in the
• activities in the unit 350 150 250 750
• Goodwill 210 90 150 450
• 560 240 400 1,200
• The goodwill has been apportioned in the ratio
  that the directly attributed assets bear to each
  other. The carrying value that would be compared
  to the recoverable amount is Rs. 240cr.
  Application of the bottom-up test
• Rs. cr.
• Carrying amount 240
• Recoverable amount (230)
• Impairment loss 10

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AS 28 IMPAIRMENT OF ASSETSTop-Down Test
Goodwill and Corporate Assets

• If goodwill cannot be allocated on a reasonable
  basis then perform top down test by applying
  following steps
• Identify smallest CGU that includes the CGU under
  review and to which goodwill or corporate asset
  can be allocated on a reasonable basis
• Then compare RA of the above CGU to its CA
  (including goodwill or corporate asset) and
  recognise impairment loss.

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AS 28 IMPAIRMENT OF ASSETSTop-Down Test
Example

• Cash generating unit A B C Total
• Rs. cr. Rs. cr. Rs. cr. Rs. cr.
• Net assets directly involved in the activities
  350 150 250 750
• of the unit
• Goodwill 450
• 1,200
• Step 1
• Application of the bottom-up test B
• Rs. cr.
• Carrying amount 150
• Recoverable amount (230)
• Impairment loss
  -
• Step 2
• Application of the top-down test ER (the
  next smallest CGU)
• Rs. cr.
• Carrying amount 1,200
• Recoverable amount (1,380)

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AS 28 IMPAIRMENT OF ASSETSImpairment Loss for
a Cash Generating Unit

• Order of the allocation
• Goodwill ( if any )
• Other assets on a pro-rata basis based on the
  carrying amount

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AS 28 IMPAIRMENT OF ASSETSTreatment of
Impairment Loss for a CGU

• The carrying amount of an asset (which is part of
  CGU) should not be reduced below the highest of
• (a) its net selling price (if determinable)
• (b) its value in use (if determinable) and
• (c) zero
• Unabsorbed impairment loss allocated to other
  assets in CGU.

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AS 28 IMPAIRMENT OF ASSETSReversal of
Impairment of Loss

• Assess each year whether accumulated impairment
  loss may no longer exist or may have decreased
• Reverse if there has been a change in estimates
  (not simply because of increase in PV of cash
  flows I.e with passage of time)
• Increased amount not to exceed the carrying
  amount that would otherwise exist if no
  impairment loss had been recognised

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AS 28 IMPAIRMENT OF ASSETSReversal of
Impairment of Loss

• Allocate reversal for CGUs to
• First, pro rata to assets other than goodwill
• Second, to goodwill allocated to the CGU
• i.e., reverse order to allocation of the loss
• But, impairment losses for goodwill should not be
  reversed unless
• Loss was caused by a specific non recurring
  external event, and
• Subsequent external events have occurred that
  reverse the effect of that event

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AS 28 IMPAIRMENT OF ASSETSDisclosure

• For each class of assets, the financial
  statements should disclose
• (a) amount of impairment losses
• (b) line item(s) of the income statement in which
  those impairment losses are included
• (c) amount of reversals of impairment losses
• (d) line item(s) of the income statement in which
  those impairment losses are reversed
• (e) amount of impairment losses recognized
  directly against revaluation surplus
• (f) amount of reversals of impairment losses
  recognized directly against revaluation surplus

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AS 28 IMPAIRMENT OF ASSETSDisclosure Material
Loss or Reversal

• Enterprise should disclose
• Events and circumstances
• Amount of loss or reversal recognised
• Nature of asset/CGU
• Reported segment of asset/CGU
• CGU if grouping has changed, describe current
  and former grouping and reasons for the change in
  grouping
• Recoverable amount net selling price or value
  in use. Describe basis etc
• Main classes of assets affected by impairment
  losses or reversals
• Main events and circumstances that led to
  loss/reversal

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AS 28 IMPAIRMENT OF ASSETSComparison between
Indian v/s IAS v/s US GAAP
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AS 28 IMPAIRMENT OF ASSETSMatters for
Discussion Practical Challenges

• Impairment Indicators
• Identification of CGUs
• Cash Flow Estimation and review
• In present condition of the assets
• CGU will have assets with different useful lives
• Determining Net Selling Price
• Discount Rate

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