Business Impairment Loss Standard IAS 36

Question: Discuss about the Business Impairment Loss for Standard IAS 36. Answer: Impairment of assets is described in the standard IAS 36. It states about conducting an impairment test of all assets at the end of each accounting period and the accounting of the impairment loss or the reversal of such previous loss. Its importance is far understood especially after the great economical crisis that the world suffered and one of the reasons for the same was the incorrect asset values in the balance sheets of the company which makes the company look very rich. At the end of each reporting period the company should carry out impairment test of all assets but for inventories, construction contracts, deferred tax assets, financial assets, insurance contracts and non-current assets held for sale. These are covered under various other standards. Therefore apart from the above mentioned assets if it found that any asset is subject to impairment or there are indications of such impairment then an impairment loss should be recognized in the income statement and the balance sheet of the company (ifrs.org., 2014). An impairment is said to have occurred if the carrying amount of an asset is greater than its actual amount recoverable. Recoverable amount is further calculated as higher of the fair value of the asset less the cost of selling the asset and the value in use- i.e. the net present value of the future cash flows of the assets. Once the amount that can be recovered is found out then the difference between the two amounts is termed as impairment loss. The said amount is shown as an operating expense in the profit and loss account and the same is further reduced from the particular assets value in the balance sheet. Conducting an impairment test is not an easy task. As per the said IAS, it demands for considering both internal and external factors. Factors such as the market value of the asset has fallen substantially, instability in the political and economical scenario, the sudden increase in the market interest rate which entails to have a negative impact on the economy or the net asset value of the company is much more than its actual market capitalization. Factor such as technological obsolescence of the asset of the company, any asset is held for sale or the companys performance has drastically fallen down is known as internal factors (Ec.europa.eu, 2010). Therefore if the management after conducting the test for impairment are of the opinion that the asset should be impaired then the said should be accounted for so that actual amount of the asset is reflected. This helps the investors, customers and the shareholders of the company to know what the actual position of the company is. The balance sheet therefore actually shows the true picture of the companys asset position. However if the amount of impairment of individual assets is not possible to be determined then the impairment of the cash generating unit to which the asset belongs to is conducted. A unit which ha a number of assets and has the capability to generate cash flows independently is termed as a cash generating unit. But while impairing a cash generating unit the impairment of goodwill takes place at the first and then the rest of the assets are impaired on a pro-rata basis (ey.com, 2014). IAS 36 also talks about the reversal of impairment loss. Just like external and factors indicate an impairment of the assets similarly it also indicates whether the previous impairment should be reversed or not. If the conditions are such then the assets value is increased to the extent the asset would have been valued at had such an impairment not taken place in the past. But the only asset which cannot be reversed is goodwill. The reversal is recorded as an income in the profit and loss account and the asset is increased by the reversal amount (Dagwell et.al. 2012). Disclosure of the said impairment in the notes to financial statements is duly defined in IAS 36. They are as under: For each class of the assets, following disclosures are important: The amount of impairment loss that has been calculated and recognized in the profit and loss account and the line item(s) of the statement of comprehensive income in which the impairment loss is recorded. The amount of impairment loss reversed and recognized in the income statement of the company and the line item(s) of the statement of comprehensive income in which the impairment loss reversal is recorded. The impairment loss of revalued assets which are recognized in the other comprehensive income during the period. The impairment loss reversal of the revalued assets which is recognized in the other comprehensive income during the period (com, 2016) . In case an entity does segmental reporting then the following disclosures are a mandatory: The impairment loss which is recorded in the income statement and in the equity during the accounting period. The impairment loss amount which is reversed and recorded in the income statement and in the equity during the accounting period. If the asset being impaired is of material nature then the below mentioned disclosures are necessary: The reasons because of which impairment of asset occurred. The amount of impairment For single assets the entity is required to disclose the nature of the asset and in case it does segmental reporting as per IFRS 8, then the segment to which the impaired asset belongs to is also required to be mentioned in the disclosures of the said standard (accaglobal.com, 2014). For a cash generating unit being impaired, disclosures with regards the nature of the CGU and the amount of impairment recognized or reversed of the assets in the CGU (Thornton, 2014). Thus on a concluding note impairment of assets is of utmost importance so that the company does not portray or display a rosy picture of their assets to the public. Thus to safeguard the interest of the owners and the shareholders and be able to understand the true worth of the company such an impairment test and recording of the same is a must. References: Dagwell, R., Wines, G., Lambert, C., (2012), Corporate Accounting in Australia, Pearson: Australia ey.com, (2014), Impairment Accounting the basics of IAS 36 , Impairment of Assets, Available at https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf (Accessed 19th September 2016) Ec.europa.eu, (2010), International Accounting Standard 36- Impairment of Assets, Available at https://ec.europa.eu/internal_market/accounting/docs/consolidated/ias36_en.pdf (Accessed 19th September 2016) ifrs.org., (2014), IAS 36- Impairment of Assets, Available at https://www.ifrs.org/IFRSs/Documents/Technical-summaries-2014/IAS%2036.pdf (Accessed 19th September 2016) investopedia.com, (2016), Impairment, Available at https://www.investopedia.com/terms/i/impairment.asp (Accessed 19th September 2016) Thornton, G., (2014), Impairment of Assets- A Guide to applying IAS 36 in practice, Available at file:///C:/Users/E-ZONE/Downloads/IAS%2036%20Impairment%20of%20Assets%20-%20A%20guide%20to%20applying%20IAS%2036%20in%20practice.pdf (Accessed 19th September 2016)