ACCOUNTING STANDARD28 IMPAIRMENT OF ASSETS

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ACCOUNTING STANDARD-28IMPAIRMENT OF ASSETS

• PRESENTED By
  -
• Dr.
  Raj K. Agarwal
• M. Com, FCA, FCS, AICWA, LLB, Ph. D
• 
  M/s. Rakesh Raj Associates
• 
  Chartered Accountants

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AS-28 IMPAIRMENT OF ASSETS

• OVERALL VIEW
• - Applicability
• - Objective
• - Scope
• - Concept
• - Identification of asset to be impaired -
  indications
• - Recoverable amount of an asset - Net selling
  price of value in use
• - Recognition measurement of an impairment loss
• - Cash generating unit
• - Reversal of impairment loss
• - Disclosures
• - Transitional provisions
• - Certain issues

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AS-28 IMPAIRMENT OF ASSETS

• APPLICABILITY
• Accounting periods - Companies which are
• on or after 01.04.2004 listed or in the
  process
• 
  of listing
• -
  Enterprises having
• 
  turnover exceeding
• 
  50 crores
• on or after 01.04.2005 All other
  enterprises -
• 
  Corporate or non-
• 
  corporate

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AS-28 IMPAIRMENT OF ASSETS

• OBJECTIVE.
• - To ensure that the assets are carried at no
  more than recoverable amount
• - Recoverable amount not to exceed the amount to
  be recovered through use or sale of the asset
• - Impaired loss to be recognised in the financial
  statement
• - Impaired loss may be reversed in certain
  circumstances
• - To make certain disclosures for impaired
  assets.

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AS-28 IMPAIRMENT OF ASSETS

• SCOPE
• To be applied in accounting for impairment of
  all assets, other than -
• - Inventories as per (AS-2)
• - Assets arising from construction contracts as
  per (AS-7)
• - Financial assets including investments as per
  (AS-13)
• - Deferred tax assets as per (AS-22)
• Applicable to assets valued at cost or at
  revalued amount

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AS-28 IMPAIRMENT OF ASSETS

• CONCEPT
• Impairment loss - is the amount by which the
  carrying
• amount of an
  asset exceeds its
• recoverable
  amount
• Carrying amount- is the amount at which an asset
  is
• recognised in
  the balance sheet
• (W.D.V.)
• Recoverable - is the higher of an
  assets net selling
• amount price and its value in
  use

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AS-28 IMPAIRMENT OF ASSETS

• CONCEPT
• Net selling price - Sale price - costs of
• disposal in an
  arms
• length
  transaction
• Value in use - Present value of estimated
• future cash flows
  expected
• from the use of
  an asset
• from its disposal
  at the end
• of its useful
  life

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AS-28 IMPAIRMENT OF ASSETS

• Identifying an asset that may be impaired
• Whether at each balance sheet date, recoverable
  amount of each asset to be estimated ?
• To see whether there is any indication that an
  asset may be impaired
• recoverable amount to be estimated

NO
IF YES
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AS-28 IMPAIRMENT OF ASSETS

• Indications for estimating recoverable amount
• External sources
• - Decline in market value significantly
• - Significant changes with an adverse effect on
  the enterprise due to technological, market,
  economic or legal environment
• - Decrease in assets value in use due to
  adjustment in the discount rate as a result of
  increase in market interest rate or other market
  rates of ROI
• - Carrying amount of the net assets of the
  enterprise is more than its market capitalisation
  

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AS-28 IMPAIRMENT OF ASSETS

• INTERNAL SOURCES
• - Obsolescence or physical damage of an asset
• - Significant changes with an adverse effect on
  the enterprise, regarding use of asset e.g. -
  plans to discontinue or restructuring the
  operation or disposal of asset at an earlier
  date.
• - Decline in the economic performance of asset

- list is not exhaustive - concept of materiality
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AS-28 IMPAIRMENT OF ASSETS

• Recoverable amount
• Net selling price
• or
  Whichever is higher
  
• Value in use
• If either of these amounts exceeds the assets
  carrying amount, the asset is not impaired and it
  is not necessary to estimate the other amount

Whether both to be determined - No
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AS-28 IMPAIRMENT OF ASSETS

• Net Selling Price
• Selling Price - How to estimate ?
• - Binding sale agreement
• - Market price
• - Current bid price
• - Price of the most recent transaction
• - Based upon best information available

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AS-28 IMPAIRMENT OF ASSETS

• Value in use
• - Estimating the future cash inflows and outflows
  arising from continuing use of the asset and from
  its ultimate disposal
• and
• Applying the appropriate discount rate to these
  future cash flows
• - While estimating future cash flows, the
  following factors to be considered
• - effect of price increase due to general
  inflation
• - for the asset in its current condition
• - adjustment of associated risk factors
• - not to include cash inflows or outflows from
  financing activities.
• - Pre-tax inflows or outflows to be considered.

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AS-28 IMPAIRMENT OF ASSETS

• - Discount rate - To be pre tax rate
• - That reflects time value of
  money and the risks specific to the asset
  as per current market assessments unless
  risk factors have been adjusted while
  estimating future cash flows

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AS-28 IMPAIRMENT OF ASSETS

• Value in use - Certain issues
• - While estimating cash outflows, whether
  repayment of installment of borrowings (against
  those assets) and interest cost thereof, to be
  taken into account.
• - While estimating cash outflows, whether
  following costs to be taken into account -
• - Corporate office costs
• - Interest cost of working capital
• - Depreciation of assets
• - Why pre-tax cash flows are required to be
  considered?
• - Why income tax expense, which is a cash outflow
  of variable nature, is not being considered?

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AS-28 IMPAIRMENT OF ASSETS

• Recognition Measurement of an impairment loss
• If the recoverable amount of an asset is less
  than its carrying amount, the carrying amount of
  the asset should be reduced to its recoverable
  amount
• That reduction is an impairment loss
• Impairment loss to be recognised as an expense
  in the profit and loss account
• Adjustment against revaluation reserve if
  existing against the same asset
• Depreciation for future periods to be adjusted
  as per revised carrying amount

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AS-28 IMPAIRMENT OF ASSETS

• Cash Generating Units
• - At the first instance, to determine impairment
  loss, the recoverable amount to be estimated for
  the individual asset
• - If it is not possible to estimate the
  recoverable amount of the individual asset, to
  determine the recoverable amount of the cash
  generating unit to which the asset belongs.
• - 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
• - Allocation of goodwill and corporate assets to
  cash generating unit

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AS-28 IMPAIRMENT OF ASSETS

• - Impairment loss for a cash generating unit to
  be allocated for individual assets in the
  following order
• - first to goodwill allocated to the cash
  generating unit, if any, and
• - then, to the other assets of the unit on
  pro-rate basis based on the carrying amount of
  each asset in the unit

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AS-28 IMPAIRMENT OF ASSETS

• Reversal of impairment loss
• - If there are indications, that an impairment
  loss no longer exists, the enterprise should
  estimate the recoverable amount of the asset
• - In case recoverable amount is higher than
  assets carrying amount, the impairment loss
  earlier recognised may be reversed
• - The increased carrying amount of an asset due
  to a reversal of an impairment loss should not
  exceed the carrying amount that would have been
  determined (net of depreciation) had no
  impairment loss been recognised for the asset in
  prior accounting periods.

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AS-28 IMPAIRMENT OF ASSETS

• Disclosures
• - For each class of asset, the financial
  statements should disclose-
• - the amount of impairment loss and the
  reversal, if any recognised in profit and loss
  account
• - the amount of impairment loss and its
  reversal, if any, recognised against
  revaluation surplus
• - For each segment as per AS-17, separate
  information to be given
• - The events and circumstances that led to the
  recognition or reversal of the impairment loss
• - The nature and basis of recoverable amount
  determined for recognising (reversing) impairment
  loss
• - Other disclosures

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AS-28 IMPAIRMENT OF ASSETS

• Transitional Provision
• In the first year of applicability of this
  standard, if there is any impairment loss in the
  beginning of the year, the same to be recognised
  and adjusted against opening balance of revenue
  reserves or revaluation reserve as the case may
  be.

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AS-28 IMPAIRMENT OF ASSETS

• CERTAIN ISSUES
• - Most of the calculations in the standard are
  based upon estimates and projections. What is
  the reliability of the same.
• - Whether auditors are bound to rely upon
  managements estimates and projections.
• - Net selling price of a particular asset is less
  than its carrying amount but value in use of
  cash generating unit (of which this asset is a
  part) is higher. Whether asset is required to be
  impaired.
• - In case a particular asset becomes idle which
  was earlier part of cash generating unit and now
  not in use, whether its value to be determine
  separately or still as part of cash generating
  unit.
• - Impairment loss is a timing difference as per
  AS-22 and deferred tax asset may be created for
  the same subject to the principle of prudence.

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• T H A N K Y O U