Impairment: Identifying an Impaired Asset under IAS 36

What Constitutes Impairment?

The basic requirement for IAS 36 – Impairment of Assets, is that assets must be assessed to whether there’s an indication they may be impaired.

An entity should assess at the end of each reporting period whether there is any indication of impairment.

To impair means to weaken or damage.  Being accountants, when we refer to something being impaired, we mean its value.

An asset is said to be impaired when its carrying amount is greater than its recoverable amount.

Under IAS 36 an impairment loss is ‘the amount by which the carrying amount of an asset (or a cash-generating unit) exceeds its recoverable amount.’

The recoverable amount of the asset is the higher of its fair value less costs of disposal and its value in use.

The carrying amount of the asset is the amount at which the asset is recorded in the financial statements after deducting any accumulated depreciation and impairment losses.

Evidence of Impairment

Impairment reviews must be carried out when there is any evidence or indication that an impairment may have occurred.

Also, at the end of each year the entity should assess whether there is any indication of impairment.

If there is any evidence of impairment, the entity must estimate the recoverable amount of the asset, which it will then use to assess if the asset is impaired.

There’s no requirement for an entity to estimate the recoverable amount if there is no evidence of impairment.

Even if there is no evidence of impairment, an entity must test intangible assets with indefinite useful lives and goodwill annually.

These tests can be carried out at any time during the year but must be tested at the same time each year.

Intangible Assets

Also, different intangible assets may be tested for impairment at different times, and new intangible assets which are recognised in the year must also be tested before the end of the year.

If you notice either the fair value less cost of disposal, or the value in use of an item exceeds the carrying amount, the asset is not impaired, so no need to calculate the other amount.

Information to Assess Impairment

When assessing whether assets may be impaired, an entity will consider both:

  • external sources of information and
  • internal sources of information

External Sources

The external information that should be considered which may indicate impairment include:

  • Decline in asset value: more so than normal wear and tear
  • Changes in the entity’s environment; technological, market, economic or legal conditions.
  • Increase in market interest rate, this will affect the asset’s value in use.
  • Carrying amount of net assets: If this is greater than the market capital of a company, there may be impairment.

Internal Sources

The internal information that should be considered which may indicate impairment include:

  • Evidence of obsolescence or physical damage
  • Changes to the asset’s use, including
    • Asset becoming idle
    • Plan to discontinue or restructure the operation to which the asset belongs
    • Plan to dispose of the asset before previously expected date
    • Reassessing the useful life as finite rather than infinite
    • Poor performance

Annual Impairment Tests

Some assets must be checked for impairment at least annually, even if there is no actual evidence of impairment:

  • an intangible asset with an indefinite useful life
  • goodwill acquired in a business combination.